Friday, January 8, 2016

Should We Worry About China's Ecnomic Problems?

Paul Krugman offers his description of China's economic problems and discusses the implications for the global economy.  His first take is that China's slowdown is very important since it accounts for 25% of global manufacturing.  He confesses some ignorance because there are many doubts about the statistics available from China.  Moreover, China's has the second largest economy in the world but it is only a small share of the global economy.  His greater concern is that many nations will have difficulty using monetary policy and fiscal policy in a weak business cycle.  Monetary policy is close to its limits in the US and Europe since interest rate are already close to zero.  Politics prevent the use of fiscal policy in the US and Europe. Therefore, we will be stuck in a bad business cycle for longer than necessary.

My view is that Krugman's analysis of the global economy is colored strongly by his understanding of business cycle theory in a nation state.  Nations that export raw materials to China are in trouble and they will purchase less from the rest of the world.  Oil prices and the prices of other commodities have also fallen in response to weak global demand.  This has already created turmoil in the currency exchange markets. Its also hard to gauge the reaction of stock markets to the problems in China's market.  I worry much more about financial contagion than Krugman. 

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