Yes but I would say its stronger than this – things *have-to* get worse before they get better. Which is why essential reforms are almost always delayed (eg. measures to curb-hyper inflation, or a house-price bubble – everyone knows what to do, and that it needs doing, but nobody wants to be the one to do it – because of being blamed for immediate harm).

And, with respect to J-shaped curves you might add: the longer a reform is delayed, the deeper the down-tick (the worse the worse-ness will be).

So you get each government delaying inevitable reforms (eg. to pensions) because they don’t want to be blamed for the immediate harm – and the longer the inevitable reform is delayed they worse the inevitable harm becomes. Eventually there is a big crisis, which was – in principle – avoidable.

Sadly, politicians are quite correct to worry that they will be blamed for immediate harm but not-credited for longer term benefits.

Margaret Thatcher’s economic reforms in the UK were hugely beneficial to the country in the long-term, reversing many decades of relentless economic decline and elevating the UK (for a while) to being the fourth most productive economy in the world.

But ‘Thatcherism’ is remembered by most UK people for the (inevitable) short-term harm these reforms inflicted initially. The economic benefits were either not noticed (since they built up slowly over several years) ; or else they were (wrongly) credited to other factors.

I can’t see things improving until some government drills it into the electorate that any beneficial change – beneficial overall and in the long term – nevertheless inevitably causes some harm to some people for some time. That’s life.

I would say its stronger than this – things have-to get worse before they get better. Which is why essential reforms are almost always delayed (eg. measures to curb-hyper inflation).

And, with respect to J-shaped curves you might add: the longer a reform is delayed, the deeper the down-tick (the worse the worse-ness will be).

So you get each government delaying inevitable reforms (eg. to pensions) because they don’t want to be blamed for the immediate harm -

It’s not about China…well it is in part (of course), but USA is only the captain of one economic ship…its own (though it’s a darn big ship).

Tim’s argument is totally correct, and explains the query Felix had. Put another way, currency changes are far more liquid than changes in trade of physical goods and should be expected to react more quickly to short term patterns.

Tim adds: I agree, it’s a rash prediction (which is why it’s hedged) but I would be surprised. The euro over $1.50? The £ at 1.95 or so? In the medium to long term trade flows are pretty much determined by relative prices. I really am seeing this in the metals business: we’re all buying from there, not selling to there now.

But.

China is locked in to USA debt, despite their threats to change currency. And, even as I am typing this I am beginning to understand where you are going. Are you saying that, and I understand this from one point of view, China is too late in threatening to change exchange currencies and Bush has outplayed them?

If so: neat.

STB.