There’s been a lot of discussion recently about the need for China to let the yuan appreciate. The argument is that in order to realign global imbalances (U.S. consumers spending too much while Chinese consumers save), China needs a certain degree of shift away from the export sector as it becomes more consumption orientated. That at least, is the cover story.
The real story is that the U.S. is now threatened with years of alarmingly high unemployment so essentially, America needs to “export” a certain percentage of its workforce. Of course, this doesn’t mean sending U.S. citizens to work in foreign factories; what it means is that U.S. businesses will become increasingly dependent on foreign markets, especially China, for their products.
In order to achieve this, two things will need to happen. First, it will be more important than ever for the U.S. to nurture a highly-skilled workforce and encourage innovation. Second, in order to make those products and services more competitive, the dollar will need to depreciate in a trend against the Chinese renminbi that will last for years.
The OECD recently published its growth estimates for the U.S. economy in 2010 and 2011 (2.5% and 2.8% respectively) which doesn’t sound too bad until you take one thing into account. Those growth numbers are barely enough to sustain the estimated 100,000 jobs which must be created every month just to break even with the number of new workers coming into the system. In other words, growth at those levels will do basically nothing towards bringing back the 8 million jobs that have been lost in this recession.
Of course, this has direct implications on U.S. monetary policy. Because the Fed has a dual mandate, there likely won’t be the need for officials to raise interest rates for some years to come. Spikes in overall CPI (as we recently saw) are likely to be temporary as slack in demand will keep commodity prices in check (although they will go higher). Core measures of inflation however, the kind that most concerns the Fed, will basically not be going anywhere for the foreseeable future.
So, what this all comes down to is that U.S. firms will need to continue the trend of being more export driven, something which has already been in place for several decades. A bit over 50% of the profits in the companies which make up the S&P 500 now come from overseas markets, up from around 30% two decades ago.
In other words, when you hear economists and policymakers talking about the need for China’s economy to become more dependent on internal consumer demand, what they’re really talking about is the need for Chinese consumers to become more demanding of external products, i.e. imports, which essentially means the U.S. will need to have its workers “hired” by China.