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US Balance of Payment Crisis with China

Today, I watched an interesting video clip on CNBC which you can watch here . There was an analysis by CNBC economists about loss of Japan as a Global Player. What went wrong with Japan’s Macroeconomy? Let me explain this in common man’s language. In 1985, Plaza Accord was forced on Japan by Reagan administration. Why Balance of Payment crisis of US with Japan was problem during 1980s and how that crisis is different from present Balance of Payment crisis that US has with China?

During 1980s, When US was running a Balance of Payment crisis with Japan, American educated Japanese students of economics convinced the government of Japan that appreciation of Yen w.r.t. Dollar would be beneficial for both US and Japan. What is Balance of Payment and how it impacts macroeconomy ? This has been discussed in depth in my upcoming book and the discussion is pretty lengthy for me to just write a short blog about it. I have covered it in depth in my upcoming book.

As a result of Balance of Payment crisis with Japan , US was running out of its options to sustain its unbalanced economy during 1980s. Hence, Only option left for US during 1980s was to convince Japan to let USD depreciate w.r.t. Japanese Yen. Had Plaza Accord not been forced on Japan during 1985 and if Japan had not appreciated its Yen compared to USD, american economy would have experienced an economic depression. Japan’s decision to sign the Plaza Accord turned to be a blunder for their macroeconomy. Their stock market crashed from 39,000 to 15,000 and it resulted into what was called the lost decade of Japan. In last few years, Japanese stock market has fell further hovering around 10,000.

Today, US is running similar Balance of Payent deficit with China. But, China seems to have learnt from mistakes made by Japan with Plaza Accord. Hence, China is unwilling to let its Yuan rise as it does not wish to see lost decade of growth like what Japan experienced after signing Plaza Accord. So, What does this mean for US? It surely means that Fed cannot continue its monetary Policies which would continue to increase its Balance of Payments with China. Fed would have to reform its monetary policy and there is no doubt about it.

The Federal Open Market Committee (FOMC) has been consistent with its decision to cut down QE and after a complete withdrawal of QE, US Macroeconomy seems to be in a deep trouble. Does this mean that US would experience a lost decade of growth like Japan? Without any macroeconomic reforms , It is a certainty that US would experience a lost decade of growth very similar to Japan. How does US deal with rise of industrial power of China? Only Mass Capitalism can save the US during these turbulent macroeconomic times.

What is Mass Capitalism and how Mass Capitalism based economic reforms would solve this geo-political and economic problem has been explained in the last chapter of my upcoming book. Choosing the book’s title has been the most challenging thing for me. Although, I am an engineer by education and profession, the solutions that I have offered for fixing US macroeconomy are truly beneficial not just for its most capital intensive semiconductor industry for overcoming the economic limits of Moore’s law ( which is bringing this great industry to a standstill ) but these reforms would also benefit all industries. After a lot of brainstorming, I believe the title of my book should be MASS CAPITALISM : A Blueprint for Economic Revival.

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