Saving the World Economy: No, Just Chill Out and Have a Burger
I had a wonderful experience last weekend in Brantford Ontario. My family was invited to the 25th wedding anniversary celebration of my brother and sister-in-law. It is a very good group of people to get together because everybody has fun and everybody enjoys life. For your serious Sam economist scribe, it’s always a welcome day out to visit with people who are close to me but who also have a great grasp of life.
So the next day found me riding in a big tractor planting soybeans listening to my satellite radio. I have a great tendency to listen to Bloomberg news on the satellite radio. They have a great combination of economics and pragmatism mixed in with guests and commentators who really know what they’re talking about. So when one of the commentators said that Hillary Clinton and US Treasury Secretary Timothy Geithner were in China over the past few days to help save the world economy, I did a bit of a double take. I know we are in a bit of a mess in our world economy with the European debt problems but I didn’t know having our American friends go to China was going to help save things. At least at the anniversary celebration over the weekend I don’t think everybody spent any time musing about world economic doom.
Oh, I’m sure that maybe I did. I tend to mix economics and world politics with my burgers, sausages and summer ice cream cones. I guess that doesn’t make me the life of the party, so I’ll have to work on that. Still, figuring out how China is go save the world economy has got me thinking.
If you haven’t noticed we’ve got some major structural problems within the world economy today. The most recent problem is in Europe where we have the specter of sovereign debt defaults in places like Greece making the Euro a little jittery. It would seem that nobody thought that 13 different fiscal policies and one common currency would be a problem back when it was enacted. Today there were some major debt problems in Spain sending markets down again. The bottom line is “Europe “needs to recover and stabilize their currency to prevent any type of hiccup on North American shores. The question is can they do it and how long will it take?
Some of you still might be thinking why would this have any impact on me? For instance I would like to think as I plant my soybeans this week any European debt problems would stay over there. Unfortunately some of the major European banks that had major exposure to the Greek problems as well as the economies of Portugal Spain and Ireland have major ties to North American banks. So if there is a major bank problem in Europe, it will definitely affect the financial sector here and guess who gets to pay for that? That is an aside from the fall people might be experiencing in the stock market as well as those who thought the loonie was going to a $1.10 US.
At the same time our American friends have been in China partly talking foreign policy regarding North Korea and partly talking about the undervalued Chinese Yuan. The Chinese have a fixed currency rate which many economists believe is 40% below what it should be. This has boosted exports but many feel it is taking away jobs in Western economies. At the same time if the Chinese currency were revalued, Chinese manufacturers would have more market power on the world stage.
The Chinese have responded to this by saying they are going to do it their way, which is typical of a centralized economy. You can argue that nobody really knows what is at the core of the Chinese economy because the state keeps much of that secret. The exchange rate is certainly one big part of that and when and if it moves up will be a very measured process by the Chinese leadership.
A good example of this was the recent importation of American corn into China. China has always had an insatiable appetite for North American soybeans but corn has always remained outside that window despite the Chinese having the largest hog population in the world. So suddenly in 2010 they are importing corn and is sent agricultural markets buzzing. However, at the end of the day we are just guessing why. State secrets are state secrets and they will hold the cards to their advantage until they don’t need to anymore.
It’s an interesting international economic paradigm, Europe and China. Surely the impact of some of those decisions taken in those places will affect us here in Canada. However, maybe it shouldn’t be top drawer for us. Canadian summers are just too valuable. Let’s all chill out and leave the economics to me. If you see me at a party, invariably I’ll be thinking about that, with burger in hand.