Tuesday, April 6, 2010

Yes there is an Immaculate Transfer

Paul Krugman wants to know:

Imagine that US savings rise and China’s savings fall, holding the exchange rate constant. Does this painlessly reduce the US trade deficit?
We know that the US consumer began cutting back since 2008 and has not returned to free spending ways just yet. Meanwhile the Chinese went on a proportionally much larger stimulus binge. What was the result?

Chinese imported 5% more oil in 2010 than 2009, but the US imports are still down relative to 2009. So, savings does help with the trade deficit, we have a smaller oil trade deficit and China has a larger one.

What happens to the exchange rate because of this? If China is using oil more efficiently now than in 2009, while our efficiency is about the same, then China gets more oil and the exchange rate can stay pegged. China is a developing nation so as they acquire more capital their energy efficiency is likely to go up fast.

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