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Ludovic de Belleval - Train Money Brain
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But right is right and wrong is wrong
道可道非常道 名可名非常名
至道無難 唯嫌揀擇
Train Money Brain: Personalize, practical investment training
"Everywhere, and Nowhere"
Joined June 2020
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Call for a radical deconstruction of the economic and financial discourse:
• Complete elimination of hindsight reasoning
• Elimination of all invalid assumption of ceteris paribus clause
• Elimination of the use of historical events as proof
Use only to disprove dogma
@michaelxpettis Just another case of applying micro-eco reasoning to macro
Add a pinch of ideology and moralistic bend, and you get a cocktail named Bloody Moron
@michaelxpettis Just another case of applying micro-eco reasoning to macro
Add a pinch of ideology and moralistic bend, and you get a cocktail named Bloody Moron
Initially they thought of calling it "The Fetichist"
but then they thought "The Economist" would be better for marketing
It has served them well
The 2006 Economist article that the US was at risk of putting too much pressure on China b/c of its then wildly undervalued currency was directed in part at me. Guess I have been arguing with the magazine on this issue for ~ 20ys ...
"...in the 17 years during which Japan raised its consumption share, GDP growth declined from roughly 4% in the previous decade to just over 0%.
What analysts often don't remember is that during this time Japan's share of global manufacturing also declined by more than 50%."
Tordoir and Klein are right in saying that the "best" way to resolve global imbalances is for Beijing to take steps (including currency revaluation) to raise the household share of GDP, but it is important to understand the reason "this feels far away".
It is not the Beijing has a special animus towards consumption, as any have argued. The claim that Beijing is ideologically opposed to allowing households more wealth relative to the state seems to have become an after-the-fact justification, both abroad and sometimes even in China.
But in fact other countries that pursued the same high-saving/high-investment growth model also ran into the same set of problems. Once they had closed their underinvestment gap, the economy shifted from rapid, healthy growth to less rapid, and increasingly unhealthy, growth, driven by excessive reliance on unproductive investment and trade surpluses.
They also recognized that they had to rebalance domestic income distribution towards households, but had the same difficulty that China currently has in rebalancing towards consumption. In every case, they were nonetheless forced to do so not because of foreign pressure but because the surging debt associated with the soaring non-productive investment and the manufacturing subsidies eventually became unsustainable.
The most obvious case is – as always – Japan, which formally recognized in 1986 (in the Maekawa Commission Report) that it had a serious problem with low consumption and said, with great fanfare, that it would take urgent steps to boost the consumption share of GDP.
In fact the consumption share of GDP didn't bottom out until 1991, five years later, and it took a further 17 years (until 2008), even under very accommodating global conditions, for Japan to raise its consumption share by 10 percentage points. This wasn't because Tokyo was ideologically opposed to consumption but rather because raising the consumption share required structural changes that undermined other parts of the economy.
Because the low consumption share was part of a growth model that also resulted in easily-available capital, a very forgiving banking system, and heavily-subsidized manufacturing, raising the former also meant reversing the latter. Everyone remembers that in the 17 years during which Japan raised its consumption share, GDP growth declined from roughly 4% in the previous decade to just over 0%. What analysts often don't remember is that during this time Japan's share of global manufacturing also declined by more than 50%.
That's the problem. As long as Beijing sets high GDP growth targets and as long as it wants to continue supporting the manufacturing sector (which, at this point, represents a larger share of the economy than even the property sector at its peak), the only way it can rebalance towards consumption is with huge – and perhaps politically disruptive – transfer of assets and income from local governments to households.
The point is that until Beijing either sharply lowers the GDP growth target (perhaps to 2%?) or forces the transfers to households, it can make all the promises it likes about raising the consumption share of GDP, and foreign policymakers can propose as often as they like that this is the only real solution to global imbalances, but it cannot happen.
That is why it is basically a waste of time for foreign policymakers to try to "convince" Beijing that they should stop opposing a rise in China's consumption share on ideological grounds. Beijing is not opposed to allowing Chinese households to have a better living standard. What they are opposed to is anything that might slow economic growth and undermine manufacturing, especially now when China already has a large problem with youth unemployment and overall underemployment.
Must Read
Most people miss an important thing in the automation debate, whether it is robots or AI agents.
These machines make things. They do not buy them. And consumption is what turns a productivity gain into actual growth.
The argument can be heard in two different places.
One is the AI gospel, loudest in the US, preaching that AI will take most of the jobs. The widely praised @citrini memo gave it a name: an "Intelligence Displacement Spiral". AI displaces workers, those workers spend less, firms under margin pressure buy more AI, which displaces more workers.
The output still shows up in the national accounts. It just stops circulating through the real economy. Citrini calls that "Ghost GDP". But as @timoreilly puts it, you cannot sustain trillion-dollar valuations on a customer base that is going broke.
The other place is China, making spectacular inroads in robotics, partly because it is about to fall off a demographic cliff. It installed more industrial robots last year than the rest of the world combined.
So let's ask the question that everyone skips. What happens if the productivity gains from robots and AI never turn into extra consumption?
The sequence goes as follows. Output rises. The wage share does not keep up. Demand lags supply. Capacity sits idle, or debt piles up behind it. At that point a country has two exits: sell the surplus abroad, or correct at home through falling output and lost jobs.
China takes the first exit. It runs household consumption at around 40% of GDP, against 60 to 70% almost everywhere else, the legacy of years of repression that move income from savers to industry.
China cannot buy what it builds, so it exports the gap. That lets it appear as a manufacturing powerhouse rather than a consumption laggard. But the export surplus is camouflage. It holds up the growth figures while hiding the demand problem underneath.
The US sits in a different spot. Wages there stopped tracking productivity decades ago, but consumption kept going, propped up by household debt and rising asset prices. The political scientist Colin Crouched once called it privatised Keynesianism: borrowing does the work that pay cheques used to.
America can run this longer than anyone because it issues the reserve currency, so steady demand for dollars lets Washington carry deficits no one else could. It works until the borrowing does not.
Europe is slightly better placed, but keeps trying to make itself worse. Germany is the model everyone wants to copy. The Hartz reforms of 2003 to 2005 held wages down while GDP kept growing, so the household share fell and business profits surged. Lower domestic consumption, larger export surplus. The trouble is that not everyone can be Germany at once. When the whole continent represses wages to defend "cost competitiveness", the South ends up stuck below potential on weak demand, whilst the North ends up repressing domestic consumption, which fuels discontent and harms economic growth.
As stated by @michaelxpettis, a country that externalises its internal imbalances forces the adjustment onto its trading partners. They absorb it as higher debt or higher unemployment, and either way they lose manufacturing, whether they like it or not.
Left alone, this ends in one place, which is well known because America already ran the experiment once.
Through the 1920s, output per manufacturing worker rose 43% while wages barely moved. The income that never reached workers funded overbuilt capacity, speculation, and finally the market bubble. By 1928 sales lagged and factories cut output. The crash turned a distribution problem into a decade-long depression.
What broke the loop was FDR's Second New Deal: the Wagner Act, Social Security, and a deliberate move to align wages with productivity. For the first time the income captured through the 1920s flowed back to households. Demand recovered. The imbalance resolved.
That is the lesson for the robot and AI age. Productivity makes growth possible, but consumption is what actually delivers it (cc @CarlotaPrzPerez). The task now is to get the gains to households, through wages that track output and institutions that give people the security to spend, or through newer ideas like handing displaced workers an equity claim on the machines that replace them (cc @izakaminska).
Automate all you like. Someone still has to be able to buy the output.
This is half true.
You can't RELY on tariffs: true.
But tariffs aimed at sectors is not the only way, nor the best way, to deal with imbalances.
It may be worse than an aggregate tariff wall that aims to counter a undervalued domestic currency.
"According to CBB's Miller, #tariffs can be an effective defensive tool for protecting industries under attack from a #China that often floods the market w/goods to undercut foreign competitors. Tariffs, he says, should be used to ringfence critical sectors as their participants shift to alternative suppliers & rebuild their domestic production capacities.
“But you can’t just throw around a tariff wall & expect industry to miraculously develop domestically as a result of that,” he says."
https://t.co/4K5ZsFxVFs
Excellent description.
May be a good time to read the Alchemy of Finance again.
It’s a giant reflexive feedback loop with the model companies’ expected profits as the fuel beneath it all. It’s the single variable that if it moves, moves everything.
That expectation determines what investors will pay to fund the buildout, and what the model companies are willing to spend on it.
The model companies raise enormous sums of capital and their spending gets booked as revenue for the rest of the value chain. That revenue lifts valuations across the whole complex, which makes it easier to raise the next round, which funds the next wave of spending, which becomes the next wave of revenue.
The earnings are real as accounting entries but they are endogenous to the financing. The revenue exists because the capital was raised but it’s not independent confirmation that the capital was well spent.
In other words, the demand validating the investment is manufactured by the financing of the investment, so it's self-confirming on the way up and it can be just as self-liquidating on the way down.
FT: "China’s premier Li Qiang attributed his country’s competitiveness to technological innovation as he dismissed international complaints over state subsidies. “The key to the competitiveness of Chinese products is not, as some people claim, that it relies on government subsidies,” he said, adding that “the Chinese government is not that wealthy, nor can it afford them”."
This is not the first time this argument has been made. I attended a presentation two weeks ago by a Chinese economist who advanced a similar claim. He supported it, however, by defining "subsidies" so narrowly that they could effectively be dismissed.
He measured subsidies mainly as direct outlays by the central government to manufacturers that are explicitly listed in the "subsidy" accounts of corporate financial statements. In doing so, he ignored credit and interest-rate subsidies, equity support, currency undervaluation, restrictions on labor mobility, government overspending on logistics and transportation infrastructure, environmental costs, and nearly every other policy or mechanism that helps explain China's unusually low household share of GDP.
But this way of thinking misunderstands the nature of subsidies. The most important subsidies are often not direct and explicit fiscal transfers. They are instead implemented in the way income, costs, and risks are distributed throughout the economy. It is mainly the distribution of income from one sector of the economy to another, in other words, that explains large, persistent trade surpluses.
This is why discussions about competitiveness should begin not with transfers that are specifically identified as subsidies but rather with the economic system as a whole. Trade imbaances are systemic. They cannot be explained solely by looking at whether particular companies receive direct government grants or tax breaks.
It is not just coincidence, for example, that countries with large and persistent trade surpluses are far more likely to be countries in which the household share of GDP is relatively low than countries that are especially innovative technologically. The United States, after all, remains arguably the most technologically innovative economy in the world, and yet it has run trade deficits for decades.
China, by contrast, has run large trade surpluses for decades, even though its emergence as a leading technological innovator occurred mostly in the past ten to fifteen years. If technological sophistication automatically translated into trade surpluses, the relationship between innovation and trade balances would look very different.
The claim that technological efficiency necessarily leads to large trade surpluses has never been true. What is true is that in a well-functioning economy, higher productivity should raise household income and therefore increase household welfare. More efficient production should generate higher wages, higher consumption, and stronger domestic demand.
Put differently, if technological efficiency allows a country to export more, it should also allow its households to import more. Rising productivity should increase both a country's capacity to produce and export and its capacity to consume and import. But in China, it is mostly the former that we see.
This is why the distinction between efficiency and competitiveness is so important. Efficiency means producing more output with fewer resources. Competitiveness, by contrast, refers to the ability to expand production and market share regardless of profitability. While greater efficiency can certainly improve competitiveness, it can also be enhanced by transferring costs away from producers and onto households.
What is more, if China's manufacturing competitiveness is indeed based primarily on technological efficiency rather than on direct and indirect subsidies, it should be possible to reverse many of the transfers from households to producers without undermining China's manufacturing success.
China could, in other words, engineer significantly higher wages, a more robust social safety net, higher interest rates, and a substantially stronger currency. These policies would raise household income and increase consumption. If competitiveness really reflected superior technology and productivity, Chinese manufacturers should remain highly competitive even after households received a much larger share of the benefits generated by economic growth.
In that case, not only would the welfare of Chinese households rise in line with China's manufacturing efficiency, but the rest of the world would also benefit from a corresponding increase in Chinese imports. The fact that China has struggled to do this, despite many years of promises to boost consumption, suggests that direct and indirect subsidies play a much larger role in China's competitiveness than many are willing to acknowledge.
Perhaps the clearest evidence lies in China's debt dynamics. China has experienced one of the fastest increases in debt ever recorded for a major economy. Yet with much of that debt representing either direct or contingent government liabilities, and with China simultaneously maintaining one of the lowest household consumption shares in modern history, it is difficult to argue that the debt has primarily been used to support household spending.
Instead, the evidence suggests that debt has been used directly and indirectly to support production and investment. More importantly, the persistent rise in the debt-to-GDP ratio implies that much of this investment has been economically inefficient. If investment were consistently generating sufficient economic returns, debt would not be able to rise so rapidly for so long relative to GDP.
None of this means that Chinese technological achievements are unimportant. On the contrary, China's advances in manufacturing, engineering, batteries, telecommunications, electric vehicles, and many other sectors are real, but this does not explain why Chinese manufacturing is so competitive across the board. Instead, this view reflects a widespread confusion between efficiency and competitiveness, and one that we have seen many times before in modern history, most obviously in the intense disagreements over the sources of Japan’s trade surpluses in the 1980s.
The bigger problem, as I see it, is that there is no meaningful agreement between China and its major trading partners on the real causes of global trade imbalances. The former views China's surpluses primarily as the result of technological success and market competitiveness, while the latter mostly views them as the result of policies that systematically suppress domestic consumption and subsidize production, either directly or indirectly.
History – again, most obviously, the history of the intense disagreements over the sources of Japan’s trade surpluses in the 1980s – suggests that when major economies cannot agree on the causes of persistent trade imbalances, they won't agree on the solutions. And if trade conflicts are ultimately resolved without a shared understanding of the underlying problem, the adjustment process is likely to be more costly than anyone initially expected.
The most important question is not whether today's trade tensions will eventually be resolved. They will be. More important is how the costs of adjustment will be distributed among China, the United States, Europe, Japan, India, and the rest of the world. That is a question we should probably approach with some trepidation.
https://t.co/o6ru3fJk8z
@ZhangTaisu "要 夯 实 居 民 消 费 基 础 , 加 快 制 定 并 实 施 城 乡 居 民 增 收 计 划 , 以 更 加 积 极 的 就 业 政 策 扩 大 就 业 容 量 , 以 更 加 完 善 的 分 配 制 度 提 高 居 民 可 支 配 收 入 , 以 更 加 健 �� 的 社 会 保 障 体 系 缓 解 居 民 消 费 的 后 顾 之 忧 ｡ "
说起来容易, 做起来难
@Brad_Setser I completely agree with you
From their viewpoint one could also argue that it is the cost of a valued political goal: sacrifice people well-being for the sake of global (manufacturing) dominance
Fits well in the rhetoric of “century of humiliation”:
https://t.co/jf0ZZMxg5o
Merz, China, and the Ghost of the Plaza Accord
“Im Plaza-Hotel in New York wurde einmal eine Verabredung getroffen…”
Translation: “An agreement was once reached at the Plaza Hotel in New York…”
That was Friedrich Merz at the EU summit press conference on June 19, 2026, indirectly invoking the Plaza Accord while discussing currency distortions and China.
The problem is that in China, the Plaza Accord is not treated just as an episode of diplomacy and exchange-rate maneuvering. It has been turned into a political symbol through decades of state-directed propaganda.
A few examples over the past decade:
On February 26, 2016, People’s Daily Overseas Edition ran a front-page article titled “Those Talking Down China Are Bound to Fail.” It directly addressed talk before the G20 Shanghai meeting of a “new Plaza Accord,” saying China could not possibly be interested in signing any such agreement. It framed Japan’s experience as a case of the United States using yen appreciation to cripple Japan.
In August 2019, after Washington labelled China a “currency manipulator,” CCTV and China Media Group ran commentaries describing the “currency card” as an old American trick — economic bullying by another name. The Plaza Accord was presented as the classic example of America using exchange rates to suppress competitors.
In February 2023, Xinhua, CCTV, and People’s Daily promoted the official report “U.S. Hegemony and Its Perils.” It described the Plaza Accord as “hegemonic financial diplomacy,” arguing that America forced Japan to appreciate the yen and open its financial markets in order to eliminate Japan as an economic threat.
As recently as March 31, 2026, People’s Daily again referred to Japanese concerns about a possible “second Plaza Accord” after Trump criticized the weak yen.
In other words, much like the narrative of China’s “century of humiliation,” the CCP has spent decades burning the Plaza Accord into the public mind as a symbol of American imperialism and financial coercion.
So one has to wonder: who exactly is advising Merz on China policy?
Because this line achieves almost nothing — except painting Beijing into a corner and hardening its stance.
@Brad_Setser They're not open at all
Even if you're "right", the cause of foreign US/EU is hotly debated, not only within CH
So it is framed as political / national pride:
"exchange rates as a pretext for oppression..."
"Today's China is not the Japan of the past... (it is vastly superior)"
"...much like the narrative of China’s “century of humiliation,” the CCP has spent decades burning the Plaza Accord into the public mind as a symbol of American imperialism and financial coercion."
Still, however unskillful, Merz's shift is a big deal.
One step at a time.
Merz, China, and the Ghost of the Plaza Accord
“Im Plaza-Hotel in New York wurde einmal eine Verabredung getroffen…”
Translation: “An agreement was once reached at the Plaza Hotel in New York…”
That was Friedrich Merz at the EU summit press conference on June 19, 2026, indirectly invoking the Plaza Accord while discussing currency distortions and China.
The problem is that in China, the Plaza Accord is not treated just as an episode of diplomacy and exchange-rate maneuvering. It has been turned into a political symbol through decades of state-directed propaganda.
A few examples over the past decade:
On February 26, 2016, People’s Daily Overseas Edition ran a front-page article titled “Those Talking Down China Are Bound to Fail.” It directly addressed talk before the G20 Shanghai meeting of a “new Plaza Accord,” saying China could not possibly be interested in signing any such agreement. It framed Japan’s experience as a case of the United States using yen appreciation to cripple Japan.
In August 2019, after Washington labelled China a “currency manipulator,” CCTV and China Media Group ran commentaries describing the “currency card” as an old American trick — economic bullying by another name. The Plaza Accord was presented as the classic example of America using exchange rates to suppress competitors.
In February 2023, Xinhua, CCTV, and People’s Daily promoted the official report “U.S. Hegemony and Its Perils.” It described the Plaza Accord as “hegemonic financial diplomacy,” arguing that America forced Japan to appreciate the yen and open its financial markets in order to eliminate Japan as an economic threat.
As recently as March 31, 2026, People’s Daily again referred to Japanese concerns about a possible “second Plaza Accord” after Trump criticized the weak yen.
In other words, much like the narrative of China’s “century of humiliation,” the CCP has spent decades burning the Plaza Accord into the public mind as a symbol of American imperialism and financial coercion.
So one has to wonder: who exactly is advising Merz on China policy?
Because this line achieves almost nothing — except painting Beijing into a corner and hardening its stance.
@darioperkins Don't take headlines literally. They're in love 🥰
For a descriptive paper the authors' agnostic approach is fine. But it doesn't warrant the policy implications, like the warning against tariffs. 'Tariffs are unlikely to defend EU+7 positions in third markets,' they argue. But that's an answer to a question no one asked /End
The brief openly "does not take a position on the sources of China's growing competitiveness, whether… industrial subsidies, exchange rate policies, or other factors." It takes China's export surge as given. But those distortions are the whole reason tariffs are on the table /3
"...a country cannot have a comparative production advantage in "almost everything"...
...When a country specializes in gaining across-the-board competitive advantage, however, it reduces global production by suppressing domestic demand and externalizing the consequences."
Few things seem to confuse economists more than the concept of "comparative advantage". Comparative advantage exists only for those sectors of the economy that are relatively more efficient than other sectors of that same economy, and this comparative advantage remains in place whatever the level of the currency (adjusting for import prices).
This means by definition that a country cannot have a comparative production advantage in "almost everything". Instead, a country can only have a comparative advantage in producing roughly half of what it consumes and invests, and a comparative disadvantage in producing the rest.
This is why trade is supposed to maximize output – a country produces more of those goods in which it has a comparative production advantage than it can consume domestically. It does this so that it can export the excess in order to pay for imports of those goods in which it has a comparative production disadvantage. That is arithmetically the only way to maximize production.
But if a country exports not in order to pay for imports but in order to acquire foreign assets, this is the classic definition of mercantilism, under which the benefits of comparative advantage do not exist. In that case what the county has is "competitive" advantage, and this competitive advantage can be eliminated simply by allowing the currency to appreciate to its fundamental level.
Note that in Ricardo's famous example, Portugal had a competitive advantage in producing both wine and textiles, but a comparative advantage only in producing wine. That is why Ricardo was able to prove that total production would rise if Portugal produced only wine and England only textiles, with each selling part of what it produced to the other in order to acquire what it didn't produce.
Had Portugal instead done what surplus countries do – suppress domestic consumption in order to sell both wine and textiles to England, while getting paid in the form of a net acquisition of English assets – total production would have declined, not risen.
There are many problems with the concept of a country specializing in its area of comparative advantage, but in general it results in a rise in global production and global demand. When a country specializes in gaining across-the-board competitive advantage, however, it reduces global production by suppressing domestic demand and externalizing the consequences. Keynes explained how this happens perfectly well at Bretton Woods.
For those who are interested, I explain this further here: https://t.co/RzK2vyDlhY
@TGrjebine @CBeaune @StrategiePlan @michaelxpettis @Brad_Setser @SanderTordoir Asking China for an "accord" like Plaza = telling them "you're just like Japan".
Not a chance.
You might as well ask them to "agree" that TW is not part of CH.
Keynes' currency union is a better reference
cf. @michaelxpettis's framing
https://t.co/ctkbyOHxYZ
@SanderTordoir The focus on CNY, however correct, is problematic as it targets CH
It invites comparisons with Plaza (cf. Merz)
Which is a no-go, given CH national pride
CH cannot be seen to have made the same mistake as Japan and dealt with similarly
Keynes' currency union a better frame
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