Michael Pettis

No, no, the trade thing I think is important.

I feel like I can hear the echo of Michael Pettis in your voice a little bit here.

He's made this argument in several books, in The Great Rebalancing, in Trade Wars or Class Wars, various articles published in various places.

And what I think he's, like the fundamental thing that he's right about is that you cannot look at really any world economy In isolation, right? They are all trading with the rest of the world, and you have to understand that that is an essential part of how their economy is working.

So then the question is, why? Now, listen, we have, and again, it's not just Gordon.

I mean, everybody from Michael Pettis to Peter Zahan and whoever this Professor Zhang guy is, I have no idea.

but you you essentially have all of these people painting this dire picture with no one asking what is the actual plan and in my entire time here there's always been a direction and again we can disagree with it and again i am not going to stress that this is a plan whatever it might be that is going to be successful but when xi jinping came into power in 2012 the economy was unsustainable.

Even he knew at that point in time, because of property, because of debt, he tried to work, or I should say, Li Keqiang tried to work and did an atrocious job, by the way, of being able to deleverage the economy by 2017.

So that's the reason.

The other thing is debt.

And debt is rapidly increasing according to Michael Pettis and others.

The problem here is that people say, well, you know, the Chinese owe money to themselves.

Hugh Hendry has joked that countries pursuing this strategy are great at generating GDP but not profits, and there is not much point in that.

Michael Pettis recently wrote in the FT that the global trading system has long diverged from one in which countries specialize and benefit from the comparative advantage-based trade that economists talk about.

The theory of comparative advantage says that the global economy benefits when different countries specialize in the products they can produce comparatively more efficiently, exchanging them for products that other countries can produce comparatively more efficiently.

Pettis points out that it is a lot trickier to trade with countries who are willing to dump goods abroad below their cost of manufacture, as while you are getting cheap goods, which is a win, if they persist long enough, your industry can be wiped out.

That's why China's trade surplus exploded.

That's Michael Pettis, a US professor of economics who's lived and taught for most of his life in Beijing.

He says that the manufacturing boom may be extraordinary, but in a way it's an illusion, fuelled by debt.

It's not a sign of health, but rather a symptom of declining consumer demand at home.

Yeah, it's the biggest number we've ever seen.

That's Michael Pettis, a US professor of economics who's lived and taught for most of his life in Beijing.

He says that the manufacturing boom may be extraordinary, but in a way it's an illusion.

Juiced by massive state subsidies, he says, fuelled by debt, it's not a sign of health, but rather a symptom of declining consumer demand at home.

If you can break even, and remember, you're getting massive subsidies.

But if you can break even, you're pretty happy.

Professor Michael Pettis.

But of course, not everyone in China sees it like that.

In 2002, Ben Bernanke, then a member of the Federal Reserve Board of Governors, publicly acknowledged that the Federal Reserve's mistakes contributed to the worst economic disaster in American history.

Michael Pettis, when writing about Chinese overproduction, compared it to American overproduction in the 1920s.

He explained that the 1929 crash cut off funding for countries who were buying US exports.

If foreign countries could no longer absorb US overcapacity, he argues, then the US needed to either increase domestic consumption or cut back on domestic production.

And we talked about it's ripped in the EU and what kind of impact that's had on what EU governments are willing to do to China.

And I think if you go and look at someone like Michael Pettis, who's a great economist, china analyst has been for a while you know his argument is and would be and i think quite logically is like the whole model is just based on industrial production and uh aggressive exports and so if the us is not gonna be available as a market that you know aggressively try to find offtake valves um for production elsewhere and you see that across uh even all these smaller markets the eu their you know emerging economies that robin brooks points to in this data So I think, like, you see this export surge, and it's very easy to say, oh, well, like, more exports good, that must mean things are going great.

But I think there's more nuance to it suggesting that this is, you know, I think this is exactly what the, you know, the plan with something like Liberation Day has been, which is to basically force, you know, dumping in a bunch of other markets and lead to a lot of kind of local displeasure with the Chinese trade relationship.

And it's interesting, too, that that's happening at the same time as, There's been an increase in debt to fund a lot of this industrial expansion that this Wall Street Journal article talks about.

And so it's not a call that like China collapses tomorrow or anything.

But I actually think the export headline is interesting because a lot of people read it kind of the positive way.

And I think it's actually flows much more into kind of the Michael Pettis view of things.

Yeah.