If you print a trillion, I’ll print a trillion – and other instances of behavior leading the world toward high inflation and political instability

I didn’t make this title up, but it’s so clever I wish I had. Andy Xie, the Former Morgan Stanley Asia economist used this as the sub-header in a column in today’s Caixin editorial. Xie doesn’t buy the G-20 rhetoric that all is fine in the land of foreign exchange and trade. He sees the money printing, the currency volatility and the protectionist bluster as creating political instability.

The world seems full of smoke ahead of a world currency war. The weapon of choice is quantitative easing, a.k.a. QE. If you print a trillion, I’ll print a trillion. Of course, he and she will too. No change in exchange rates after a trillion? Let’s do it again, QE2. If you listen to people like Geithner, the end of the world is quite near. Rich people everywhere are buying gold for a little peace of mind, not just the Chinese. They are literally trucking it by the ton or two home. When currency values vanish in a QE melee, at least the rich have the gold to stay rich.

If you listen to American pundits, politicians or government officials, it’s all China’s fault. China is far from perfect. Its currency policy certainly isn’t. But it is not the cause for the world’s ills. The U.S. is by far the biggest source of uncertainty and the initiator of the QE war.  Its elite created the biggest financial bubble since 1929, even removing regulations designed to prevent it, and left the U.S. economy in shambles after its burst. The same people want to find a quick cure to hold onto their power. Unfortunately, there is no quick cure.

The U.S. has cut interest rates to zero and run up the budget deficit to 10 percent of GDP. It’s a shock-and-awe Keynesian policy. But, after a few quarters of strong growth, the economy is turning down again, and the unemployment remains close to 10 percent. And this figure would be much higher, close to 20 percent like Spain’s, if it included the underemployed and those who have stopped looking for work.

The stimulus has failed.

How should one interpret the result? If you were Paul Krugman, you would say it wasn’t enough. Of course, if 20 percent of GDP in budget deficit and another round of QE still don’t work, he would say not enough again. You can never prove Krugman wrong. Such a smart fellow.

I take Xie’s point here. When I pointed to the 20-year depression in eastern Germany despite massive stimulus or the 20-year depression in Japan despite large stimulus, high deficits and mounting public sector debt, I got the "but they never stuck to their guns. They needed to really jam it on. And they have not done so" chorus from some readers. On Japan, even my friend Marshall Auerback takes me to task, as the Japanese have been very ‘stimulus on, stimulus off, stimulus on’ over the past two decades. What are we to make of this?

My take: Krugman did say the Obama administration’s economic policy wasn’t going to get it done from the start. He also predicted the likely response (see here):

I see the following scenario: a weak stimulus plan, perhaps even weaker than what we’re talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly. And then Mitch McConnell says “See, government spending doesn’t work.”

OK. I said the same thing at the time. And yes the Obama Administration blundered in over-promising 8% unemployment, which makes it hard to now say stimulus did help prevent a Depression. Eventually, though, you have to concede to the political reality – one which you predicted, that Mitch McConnell could convincingly say “See, government spending doesn’t work.” It’s just not credible to go back to the well for more of the same.

So what do you do?  You change tack. Like Xie, I say you admit that it will take longer for the economy to recover from a massive credit bubble and that stimulus, while warranted, is not going to ever be enough in and of itself. These things will take time. But wasn’t this always the right way of seeing this?  In my view, it is counter-productive to say otherwise because voters will lose faith.

Xie points out that the US economy was "in a misallocated state." We had a huge over-investment in financial services and real estate, over-consumption and a lack of savings. The goal should be correcting this. I cannot support stimulus if its only goal is to prolong this. When you have the Federal Reserve chasing rates down to zero for an "extended period" and government officials explicitly saying they want to prop up asset prices artificially, you know that stimulus is not designed to correct the "misallocated state." It is designed to perpetuate it, lengthening and worsening the economic pain.

But instead of trying to successfully steer the US to a new economic paradigm, America is now turning to option #3, protectionism – pointing the finger at China and saying "That’s the bad guy." As Xie says:

The third interpretation is that it’s China’s fault. Yes, China’s exports to the U.S. rose sharply during its stimulus-inspired pickup, i.e., the stimulus partly went to China. But, whose fault is it? Apple makes all the iPhones in China, because it costs under US$ 20 each, even after the massive wage increase for Chinese workers. Apple’s gross margins are 30 times the processing cost that goes to China. Maybe Apple is an extreme example. But, the fact is that China’s exports to the US are American goods that retail for 3-4 times of the factory-gate prices. American companies want to make the goods in China to satisfy the stimulus-inspired demand.

People like Geithner would argue that China should raise the currency to force American companies to move production back to the U.S. I suppose that that is how the whole yuan appreciation idea may work. But, at what exchange rate would the American companies want to do it? American wages are ten times China’s. Should China increase its currency value ten times?

Of course, the American pundits wouldn’t put it that way. They would talk about China’s trade or current account surplus and the rising forex reserves, the prima facie evidence of currency manipulation. I don’t want to deny that the rising forex reserves are a problem that China must tackle with. But, it is a separate issue from the US economy. The solution isn’t yuan appreciation either.

If the US didn’t have a deficit with China, it still would have a deficit with ninety other countries. The problem is not just China; it is also the low household savings rate. When the household savings level increases, the current account deficit decreases. So, what you would see if the household sector increased its net saving is a reduction in the current account deficit. I’ve covered this ground. Why aren’t American politicians focusing on this – something they can actually fix?

I don’t see the US backing away from the protectionist rhetoric unless we see a dramatic change in the economy. Tariffs are where it’s headed right now.

In the meantime, let’s just print a trillion more dollars and see if that does the trick.

Source: QE: The Numberless Oblivion – Andy Xie, Caixin Online

  1. Chad S. says


    Nice post. For starters, the problem is that there is no solution to Ponzi finance except to unwind it, hopefully in as orderly fashion as possible so the collateral damage is minimized on the real economy. But that means doing a couple of things in my mind:

    1. Mark to market discovery of toxic financial assets.
    2. Bank restructurings, debt to equity swaps, resolution authority, etc.
    3. Eliminating further Fed actions.
    4. Helping the household sector deleverage by payroll tax cut funded stimulus that bypasses the asset allocators in congress.
    5. Repatriation tax holiday at 5% dividends received deduction tax rate for corporate foreign earnings held abroad (30% of profits), similar to what was done in 2004, which would increase tax revenues, increase internal funds for domestic investment, and further ease credit concerns.
    6. RD tax credits and infrastructure spending on projects outside the purview of the private sector to employ stale workers, especially in construction.

    Those are just off the top of my head, but we basically to get to the source. In such a case, I estimate that households could delever with nominal disposable income growing at 4-6% over the next 5-10 years. But that requires nominal GDP growing at 4-6% with some inflation, which only seems doable if we unlock this logjam in the business-consumer feedback loop. As it is, businesses are only going to do two things under the current environment: 1) tap into emerging Asia growth and 2) rely on expanded profit margins make up for flat domestic revenues and cushion the impact of rising input costs that are not passed through to delevergaing consumers.

    In this instance, I see much merit in the MMT approach, except for their unwillingness to disavow central planning in the allocation of resources x-civil infrastructure.

  2. Positroll says

    Interesting, but …

    “When I pointed to the 20-year depression in eastern Germany despite massive stimulus…”
    Sorry, the East Germany story is [mostly] not about “stimulus”, but about rebuilding a whole country that was wrecked by 6 years of war, huge reparations that had to be paid to the USSR, another 40 years of communism and the disintegration of their main trading partner (USSR). It was about reconstruction and re-training, and the fruits are only showing now (unemployment in the east finally coming down below the 1 mio mark). Comparing these investments to the current stimulus in the US isn’t helpfull.

    “If the US didn’t have a deficit with China, it still would have a deficit with ninety other countries.”
    But it would be a lot smaller, as their 90 currencies would rise.

    “The problem is not just China; it is also the low household savings rate.”
    ImO, the bigger problem is that
    1) the US hasn’t had a coherent industrial policy for the last decades.
    2) US enterprises try to compete with China on the basis of pay rates (instead of high quality products produced by well trained workers), which in turn reduces the savings potential.
    Both factors together led to ever increasing outsourcing, with the result that now there is almost no industry left that could be stimulated …

    So what could be done? Short term – no clue. Long term:
    1) More vocational training programs instead of no-use degrees from no-name colleges.
    Less collge debt => more savings.
    2) Rearrange the tax structure to make outsourcing less interesting.
    3) Heavy investment in infrastructure: HSR along the coasts, electrification of 5 east – west railroads for transport of goods, insulation of houses, paid for by taxes on oil / gas (yes, I know …)
    4) …?
    5) Profit!!! ;-)

    1. Edward Harrison says

      Positroll, Krugman makes this argument about Eastern Germany but it’s not correct. The problem in the east was restructuring as you have identified in your comments: ” was about reconstruction and re-training, and the fruits are only showing now.”

      This is EXACTLY what the problem is in the US. It’s not just about aggregate demand as Keynesians purport. There are serious, serious misallocations of resources in the US. The US needs to reconstruct its infrastructure and move to a society less geared toward financial services, real estate and excess consumption and more toward higher value added design and manufacturing, especially in technology and energy technology.

      If the US DID have a coherent industrial strategy, we would be moving in this direction right now. The Germans had one and did move in that direction. This has been beneficial to both east and west in the face of severe export competition and fairly high wages. However, as you noted, it took two decades to get there. The US will not require two decades because the infrastructure deficits are not anywhere near as severe:


      But it won’t happen overnight regardless of the level of stimulus.

      1. Positroll says

        So we are basically in agreement, then … though, if the current Tea Party Movement is successful, it might well take another 2 decades for the US to recover imO …
        Also, for the US I’d add space industries to your list. In my view, NASA would have been the obvious recepient for stimulus money – but maybe I’m just to much of a sci-fi buff …


        P.S. I wonder whether you have read this book:
        It made me appreciate the German model a lot more …
        cf. also https://www.salon.com/books/feature/2010/08/25/german_usa_working_life_ext2010
        (though I would vehemently challenge the authors claim that German universities don’t contribute to gdp, just because they are financed via tax …)

      2. cobacoba98 says

        “…financial services, real estate and excess consumption and more toward higher value added design and manufacturing, especially in technology and energy technology.”

        1) Why did we invest in houses instead of factories? The Chinese lent us trillions of dollars. We spent it on government and houses. Why didn’t investors invest in factories? Hint: would you invest in a factory in California or China? Well, the artificially low Yuan and cheap labor in China says China. The regulations in CA also say China. So China it is. How are you going to change this through government policy? It isn’t going to work.

        2) Everything made in the USA is already super value-added, or it would already be in China.

  3. Susijumala says

    Dear mr Harrison,

    I have realised this blaming game, especially China being a bad guy has risen into topics and western world is trying to put pressure on China to allow more balanced growth. Intimidation happened: “We must do QE2 if you don’t behave!” But can the US really do QE2? I know mr. Bernanke repeats like a mummified corpse from his chambers QE2 will force deflation to back up. What deflation? Hasn’t mr. Bernanke been outside his chamber lately? https://markets.ft.com/markets/commodities.asp if you find deflation there, and specifically check how prices have been developing since this QE2 speculation started I am quite sure this is not a fundamental example of deflation rising.

    Blaming game has been tried also on consumers. As this link’s topic says it quite truthfully https://www.telegraph.co.uk/finance/personalfinance/savings/8028884/Savers-told-to-stop-moaning-and-start-spending.html

    Interest rates are brought down to nearly non-existent almost everywhere in western world, but consumers are still reluctant to restart spending by borrowing roulette game going on. My theory, and correct me if you think I’m wrong, is that with QE2 the inflation will skyrocket through the roof and people are more or less forced to borrow money to keep themselves alive. I’m afraid Fed cannot withdraw their intimidation (the QE2) anymore as it most likely would cause massive sell-off and panic on the markets. However, if this is happening mr. Bernanke can come out again and say: “I told you we needed more stimulus, see what’s happening now?”

    If it was just possible, people in the western world needed to hop in cryotanks and set unfreezing starting a century later. By then I believe BRIC’s and every other country in the world have managed to catch-up our price levels, we had balance and could allow free trading once again. It’s the unbalanced economy prevents it (the economy) from working.

    1. Edward Harrison says

      Inflation will not skyrocket with QE2 because you need credit growth to increase and the output gap to close. The fuel for inflation is there in the form of an illiquid Fed balance sheet which makes it difficult for them to sell assets again.

      1. Susijumala says

        Dear mr Harrison,

        will there be enough credit growth? How do the western countries solve this problem: https://www.aviva.com/europe-pensions-gap/intro.html

        I am aware this report concerns only European countries. If you take a closer look and get the same I got there, we’re not even closely out of the woods. Is this report (by Aviva) just another fear-mongering statement or is it pre-staging for wild inflation? As on previous link I do not see much danger of inlation (the commodities) but I am rather worried more about (hyper)inflation.

        We saw what comes with currency battles combined with hyperinflation (Germany, between world wars) and I am concerned the fact there are so many similiarities happening our current world.

        As you can obviously see, I am worried about the real inflation, maybe not hyper. There is no point rushing into gold, it’s too late for folks. Is there anything else people can grab upon, except the requiem?

        Thanks in advance. Yours,
        Henri Myllyniemi

        1. Positroll says

          Please leave this ridiculous talk of hyperinflation out of the story. As I said somewhere else:

          … I was always stunned how that many American economists / journalists could talk about hyperinflation in Germany without acknowledging the historic situation:
          Under the Versaille treaty, Germany lost almost 1/3 of its territory (including some of the most fertile areas) and all its colonies; in addition, the Rhineland – and later the Ruhr area were occupied. Huge reparations had to be paid, in Gold or coal. Then in 1921, just before the Ruhrkampf, Germany lost a good junk of Upper Silesia (the other big industrial area of the time besides the Ruhr) to Poland (producing roughly 25% of German coal at the time) … In Germany of 1922-23 there was almost nobody left to tax, as the main industrial areas (Ruhr, Rhineland, Saar, Silesia) were lost or occupied (and producing for the French / Poles), the traditional markets (former Austrian Empire) were lost , trade was down (as most French and English were unwilling to buy anything produced by the “Huns”), personal fortunes had been mostly destroyed during the war years and nobody was willing to give Germany any major loans.
          Despite all that, the German government decided to support the general strike in the Ruhr area by paying the lost wages of more than 2 million workers. Only way to do it: print lot’s of money …

          To sum up, it takes extreme circumstances to get to hyperinflation and the current situation is light-years away from that: After Versailles, Germany was basically still fighting the war, though with economic means, and was (before it finally gave in) ready to ruin its economy in the process.
          In Zimbabwe, the leader is just barking mad and gives a shit about the broader economy, as long as his cronies can still get along and he can “purify” his country from colonialist influeces.
          Simply taking on too much debt only can lead to inflation like in Argentinia, with 10-20% per year as a worst case scenario. Bad enough, but nowhere like Weimar, where in November 1923, US$ 1 bought you more than 4 trillion Marks and people burned the lower denominated bills to heat their houses … (the inflation rate topped at >10 billion %)

        2. Edward Harrison says

          Positroll is right. I would leave talk of hyperinflation alone. You can look at Japan and see that the conditions for hyperinflation just aren’t met. See here for a discussion of why:


  4. cobacoba98 says

    Chinese wages may be 10 times lower than American wages, but what counts is productivity – how many units the labor can produce. American productivity is far higher than China’s.

    China should have been more of a free trader than a mercantilist in past decades. For example, forcing foreign companies to invest in China to sell to the China market versus simply allowing the products to be imported. They could have bought the imports with their US dollars instead of treasuries. In one case, Chinese car companies wanted to buy US made auto parts. The government of China made sure those were taxed as automobiles and not simply parts. That made the companies have to buy domestic Chinese parts instead.

    By the way, the Chinese government owns 800 billion dollars of fannie and freddie bonds. That’s about 800 bucks a head for every Chinese citizen. Does anyone think that is an investment those people would have normally made? Well, the Chinese money lowered our effective interest rates by 1% for mortgage buyers. Lower interest rates = higher home prices, additional consumption in housing, and the mess we are in now.

    The US should stop the currency war with a simple plan: tax foreign state entities who purchases US bonds. If you say its to “stop hot money” all of the Asian governments who love their cheap currencies really have nothing to say. LOL.

  5. plops says

    perhaps we should have mandatory 10% deductions from payrolls for pensions or savings …

    perhaps rates should be 4% to encourage savings based on real positive rates …

    perhaps the law should be enforced vis-a-vis banks actions …

    perhaps policy makers should have some common sense

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