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谢国忠

谢国忠博客:只说出心中真相

 
 
 

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麻省理工学院经济学博士

个性介绍: 1960年出生于上海,1983年毕业于上海同济大学路桥系,1987年获麻省理工学院土木工程学硕士,1990年获麻省理工学院经济学博士。同年加入世界银行,担任经济分析员。在世行的五年时间,谢国忠所参与的项目涉及拉美、南亚及东亚地区,并负责处理该银行于印尼的工商业发展项目,以及其他亚太地区国家的电讯及电力发展项目。1995年,加入新加坡的Macquarie Bank,担任企业财务部的联席董事。1997年加入摩根士丹利,任亚太区经济学家,2006年9月辞去该职务。

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on effective stimulus   

2008-12-09 10:14:14|  分类: 言论 |  标签: |举报 |字号 订阅

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On effective stimulus有效的刺激方案


The following was written Dec 1 and is in the current issue of CaijingMagazine. The current actions by central banks and governments arefirst for financial stabilization and second for boosting growth. Thepolicy actions continue to ignore that the main problem is excessiveindebtedness and only debt reduction could bring back normality. Thedebt reduction can be achieved either through bankruptcy or inflation.Cutting interest rate or boosting liquidity support for financialinstitutions couldn't solve the problem.


Fiscal stimulusalleviates the problem by allowing debtors to earn income to pay offdebts gradually, i.e., turning private debt into public debt graduallylike in Japan. Fiscal stimulus would work less effectively elsewherethan in Japan. American and Chinese companies don't want to keep excesslabor like in Japan. Hence, fiscal stimulus can't stop unemploymentrising quickly. The political pressure would grow sharply in China andthe US to solve the problems as quickly as possible.



Themost effective policy to end the current problem is for the Fed andChina's PBoC to print money to distribute among their peoples evenly.The money can be used to pay down debts in the US and buy properties inChina. The appropriate amount is probably similar to per capita income.As long as Rmb and dollar are tied during the monetization process,stability can be maintained. Andy



Caijing Magazine

8 Dec 2008

Andy Xie


On effective stimulus点击查看译文



China'sannouncement of ¥4 trillion fiscal stimulus was received positively bythe market. Together with the announced intention of the incoming ObamaAdministration for a big fiscal stimulus, possibly over $500 billion,market bounced on the economic recovery hope. From the recent lows onNov 20 S&P 500 bounced 19% and Hang Seng Index 15% within seventrading sessions. The optimism on the prospects for China and the US'sfiscal stimulus played a major role in the market recovery. Interestrate cuts and the bailout of the Citigroup were of secondaryimportance. In a credit crisis fiscal stimulus is far more effectivethan cutting interest rate.



Cutting interest rate worksthrough encouraging borrowing. Liquidity is a euphemism for short-termdebt. Greenspan's magic-rapid economic response to his rate decisionswas a bubble phenomenon. His rate decisions changed debt demand forasset speculation. Through its impact on asset prices he moved theeconomy. Economic theory says that monetary policy works throughchanging demand for debt in the real economy. Asset prices move withmonetary policy in anticipation of the change to future economicactivities. The magnitude of such asset price movement wouldn't be bigenough to affect economic activities. When the magnitude of asset pricechange in response to monetary policy is big enough to determineeconomic activities, it is a bubble. I have written this point indifferent versions numerous times in the past ten years to emphasizethat Greenspan's magic was a bubble. For the diehard Greenspanworshippers out there, wake up and smell the coffee!



Whena credit bubble bursts, cutting interest rate is a stabilizing force.It decreases the interest payment for debtors and the incidence ofbankruptcies. However, it couldn't recharge economic activities throughincreasing debt demand. A far better approach is to print money anddistribute it evenly among people. When a credit bubble bursts, debtorsneed a write-off. It can be done through bankruptcy or inflation.Distributing printed money evenly among people causes the leastdistortion to achieve a general debt reduction through inflation.



TheUS households have too much debt versus their income. They need awrite-off and spend less in the future. If the Fed prints $30 thousandper capita and distributes it to everyone American citizen, it wouldtotal $ 9 trillion versus $14 trillion of household debt. Somehouseholds don't have debts and can hang onto the money. Others willpay down their mortgages or credit card debts. Of course, there will beinflation and dollar depreciation. As long as the printing is done in atransparent fashion, there wouldn't be overshooting. The US realeconomy has about $34 trillion in debt. If the Fed prints $9 trillion,the general price level should rise by 26% and the dollar down by 21%.Both would be reasonable prices to pay for solving the problems.



Thecurrent monetary policy is (1) cutting interest rate to help debtorsstay alive and (2) bailing out failing financial institutions or realeconomy businesses with capital injections and debt guarantees. The Fedhas committed $8 trillion for the later. These approaches don't solveproblems and reward bad companies. It decreases economic efficiency,and causes unpredictable inflation in future. Keeping interest rate solow may revive commodity speculation, causing great harm to a weakeconomy. The Fed should rethink its policy.



Cuttinginterest rate in China has less positive and more negative impact thanin the US. It is totally false to claim that lowering interest ratewould boost consumption. Lowering interest rate may decrease incentivesfor saving, as returns on bank deposits decline, and boost debt demandfor financing consumption. The former is offset by the negative incomeeffect from lowering interest rate. The later is minimal in China.Chinese consumer credit is virtually non-existent. It is wishfulthinking to hope for this effect in cutting interest rate.



China'sinterest rates are about dividing benefits among borrowers, banks, andsavers, not about boosting or cooling the economy. For the past tenyears the interest rate policy has been against savers in favor ofbanks first and borrowers second. The deposit rates have been kept atone third of the growth rate of nominal GDP. It is the root cause forso many bubbles in China. When interest rate is so low against economicgrowth rate, savers become credulous about all sorts of quick moneyschemes. From stocks and properties to puer tea and modern paintingsbubbles have happened big and small, doing great damages to the Chineseeconomy and society.



Naïve first-time investors inthe stock market have lost their savings. Many people who speculated inthe market and saw their portfolios fluctuating in a day more thantheir salaries have lost desire to hang onto their jobs. The marketburst may not bring them back to their previous occupations. Numerouscities have become hooked onto the money from property development. Themoney was so easy for them: they were building properties likemanufacturing TV sets but assumed the properties would sell at antiqueprices; banks lent trillions to developers for property constructionbefore the properties could be sold; the bank loans had become localgovernment revenues. Many modern paintings have been ramped up hundredsof times in prices. The market mistook weirdness for art, and paintersrushed out weirder and weirder stuff to satisfy the market. In abubble, who cares, as long as someone else would pay a higher pricedown the road. I dare to predict that some of the hottest paintings inthe past three years will drop over 90% in value.



Thelow interest rate caused the problems that are haunting us. Now,governments say the solution is lower interest rate. Somehow, itdoesn't sound right. Conventional wisdom says that a central bankshould cut interest rate when economy turns down. That is true in aconventional downturn driven by inventory cycle. After a credit bubblebursts, cutting interest rate has much less punch. A better approach isto print money and distribute among people to cause inflation thatdecreases general debt burden, while keeping interest rate relativelyhigh.



China is facing three headwinds in its economy.First and foremost, declining global demand is cutting China's exports.Second, stock market bursting is dampening luxury consumption demand,especially for big ticket items like automobile. Third, the propertysector is experiencing a huge inventory overhang, which decreases newproperty development.



There aren't many measures todeal with the first two negative factors. Chinese government hasalready increased VAT rebates for the exporters. The policy purpose inthe current environment should be to enhance their survivability andavoid unnecessary bankruptcies. Their revenues would only recover withthe global economy. The negative effect on luxury consumption from thestock market decline cannot be reversed. The market was a bubble. Thestrong luxury demand was unsustainable anyway. Besides, the luxuryprices in China are much higher than in other and richer countries. Itwas a bubble phenomenon. I saw something similar in Southeast Asia tenyears ago. The market needs to normalize. The demand weakness isforcing the issue.



There are effective policies to dealwith the property inventory. The US property market has absoluteoversupply. Many households were buying second homes purely forspeculation. When the bubble bursts, there are just too many housesagainst the number of households. Most Chinese urban households stilllive in old and low quality flats. They would prefer the new flats.But, the price level, around 20 times household income in many cities,makes the purchase impossible. If the prices come down, the flats canbe sold. I have suggested tax reductions (e.g., decreasing transactiontaxes and making purchase deductible from income tax) to clear theinventory.



Cutting interest rate won't clear theinventory. The affordability is too low for interest rate to make a bigdifference. If monetary policy is to be used for clearing the propertyinventory, it would be better to print money and distribute it evenlyamong people. For example, the central bank could print Rmb 20 thousandper capita. It will give poor households the money for down payment,bringing a new buyer group. Of course, it would lead to inflation,which decreases property price in real terms and is what's needed toclear the inventory. As long as the monetary expansion is transparent,it won't lead to hyperinflation and would be good for social harmony.



MaybeChina and the US should coordinate in monetization. The pair can printsimilar amounts of money relative to their GDP and keep theircurrencies linked up. It would decrease exchange rate volatility duringmonetization. After a credit bubble bursts economic revival depends ona debt writeoff. Cutting interest rate doesn't achieve that. A betterapproach is to print the necessary amount of money and distribute itevenly among people.



Fiscal stimulus is certainlyeffective in the current environment. The credit market is notfunctioning effectively as declining asset prices have made the capitalbase of borrowers too thin. As discussed above, debt reduction throughinflation could revive the credit market. An alternative is for fiscalstimulus to boost their income. Overtime, their capital base improves.This is a slow approach and may require massive buildup of public debt.Japan adopted this approach in the early 1990s. Its national debt hassurpassed 160% of GDP and, yet, its economy is still sluggish.



China'sannounced fiscal package of Rmb 4 trillion is not all new money. Onlythe increase against the old spending plan is the stimulus part. It istoo early to tell the exact amount yet. An indirect observation is toobserve the change in the fiscal position of the central government,especially the issuance of government bonds. As bank financing plays abig part in infrastructure projects, the increased spending by thecentral government would have a bigger effect. If the centralgovernment issues Rmb 500 billion of treasury bonds and it leads to Rmb500 bn of bank financing for related projects, the total amount ofstimulus is about Rmb 1 trillion. I suspect that the total stimuluswould be close to that next year.



China must watch tworisks associated with fiscal stimulus. First, low efficiency projectscould be funded with little long-term benefit. There are indicationsthat wasteful spending could be coming. Reportedly, local governmentrepresentatives were lining up at the National Development and ReformCommission ('the NDRC') for handouts. Projects that were short down bythe NDRC were brought back. China's tendency is to spread the projectsaround to make all happy. This is not optimal. Most places in Chinashould not urbanize or industrialize. Their ecosystem is too fragileand their local population would migrate eventually.



Chinais a poor country. The money for fiscal stimulus should be usedcarefully to promote the country's long term development. Urbanizationis probably the most important part of the development process. As Ihave written for the past decade, China must concentrate its resourcesto build super cities. China's population is 4.3 times the US's withhalf as much habitable land. Ceteris paribus, China's cities should be8.6 times as big as the US's. It may sound frightening but makes a lotof sense. Most would understand that urbanization has huge economies ofscale in infrastructure development. Less understood are the economiesof scale in job creation. By allowing greater division of labor largecities offer more job opportunities than small cities.



Localgovernment issuing bonds has become a hot topic. It would be a disasterto allow it at present. It would lead to wasteful spending and localgovernment bankruptcy. Ultimately, the central government would beliable for local government debt. It is much better for the centralgovernment to issue bonds and distribute the money to localgovernments. It could be part of fiscal reform. For example, the shareof fiscal revenue for local governments could be boosted by fivepercentage points and be applicable retroactively for 3-5 years. Thecentral government could issue bonds to fund the cost. It alleviatesthe fiscal crisis at local government level, put their fiscal positionat a more solid ground in the future, and contains the risk of localgovernment bankruptcies.



The right for localgovernments to issue bonds must be tied up with China's urbanizationstrategy. Only successful cities would be able to repay their debts.Local government bond market should develop in conjunction with China'surbanization strategy. Before the strategy is clear, the localgovernment bond market shouldn't develop.



It mayserve a better purpose for China to spend its fiscal stimulus money onunemployment benefits. The economic downturn may cause 20 millionmigrant workers to lose jobs. Infrastructure projects could absorbsome. But it would take time for all to be employed. Chinese governmentshould consider allocating some stimulus money to help them through thetour period. Rmb 500 per person or Rmb 10 billion per month in totalcould alleviate their difficulties, I believe. This amount isrelatively small compared to the size of the stimulus package and wouldbe an effective support for social stability during the economicdownturn.



Some local governments are issuing policiesto restrict layoffs at businesses. This would be wrong. Chinesecompanies need to upgrade to generate another growth cycle. Withoutbeing able to restructure their labor force they can hardly upgrade. Ifcompanies are forced to keep excess labor, the business sector willdecline in efficiency and the whole country would suffer. Companiesshould be allowed to restructure to achieve maximum efficiency.Governments should use fiscal levers to help the affected workers.



China'smacro policy has shifted t a simulating stance. The stimulus should bedeployed in the most efficient and equitable manner. It is still earlydays in the stimulus policy. Care must be taken to fill in the details.

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