Professor Pangloss, Call Your Office

Economics is not a zero-sum game, but right now, China’s problems might be our salvation. From The Diplomat we get a rosy bit of analysis by Charles Dumas & Diana Choyleva:

With the yuan allowed to increase against the dollar again since mid-2010, and Chinese wage costs now rising faster than prices, China’s unit labor costs are rising in dollar terms by over 10 percent. In the United States, they are flat to falling. The undervaluation of Chinese costs that Beijing hoped to preserve by controlling the yuan/dollar rate has been eroded at a 10 percent annual rate since late-2009. By mid-2012, the United States could see its relative bilateral competitiveness improved vis-à-vis China by more than 20 percent. China’s refusal to let the yuan appreciate was a blunder. Its real exchange rate has gone up hugely, but through the toxic “back door” of inflation.

The United States, now concerned with preventing government debt spiraling out of control, is engaged in sharp fiscal deflation that won’t be offset much by monetary ease or external growth, as Chinese growth slows down fast while Europe contends with a major recession. The global economy is teetering towards another hard landing in 2012. And from these “ashes” it is the American Phoenix that will rise. Renewed U.S. competitiveness will cause “off-shored” business to return to the United States, boosting capital spending, which cash-rich firms can easily finance. Public sector deleverage and rising household savings suggest the next 3 to 5 years are unlikely to see rapid demand growth, but a rising U.S. production share of what demand there is should ensure reasonable GDP growth.

I’d love to say, “Yes! This! Of course!” However, there’s a flaw in the authors’ reasoning. Yes, it seems the US will regain competitiveness vis-a-vis China. But to what end? With China in turmoil, Europe in recession, and US consumers still deleveraging, to whom will newly-recompetitive US industries sell their wares?

And if ObamaCare, Dodd-Frank, and the Vengeful EPA are all still sitting on the economy’s throat, “cash-rich” American companies will likely continue to sit on their cash. Especially since corporate profits are expected to be lower last quarter.