One of the themes of my blog has been that there are more grays than black or whites operating in the U.S. relationship with China, and if our policy-makers don't stop relegating China to sound bites, another Cold War is not far off. The Sword of Damocles this time around is not mutually assured physical destruction, but mutually assured economic destruction. And we really really like our expensive toys. It is time we start understanding China.
Mr. Fallows has spent way too much time studying Strunk and White (but that's a good thing), and his sentences are so packed with meaning that any treatment but a simple reprinting would do disservice to the prose. Here are several selected passages that I think give a nice overview and framework of Mr. Fallows's piece. But please, read the whole article, too.
Like so many imbalances in economics, this one can’t go on indefinitely, and therefore won’t. But the way it ends—suddenly versus gradually, for predictable reasons versus during a panic—will make an enormous difference to the U.S. and Chinese economies over the next few years, to say nothing of bystanders in Europe and elsewhere.
Any economist will say that Americans have been living better than they should—which is by definition the case when a nation’s total consumption is greater than its total production, as America’s now is. Economists will also point out that, despite the glitter of China’s big cities and the rise of its billionaire class, China’s people have been living far worse than they could. That’s what it means when a nation consumes only half of what it produces, as China does...
In the past six months, relative nobodies in China’s establishment were able to cause brief panics in the foreign-exchange markets merely by hinting that China might stop supplying so much money to the United States....
Americans sometimes debate (though not often) whether in principle it is good to rely so heavily on money controlled by a foreign government. The debate has never been more relevant, because America has never before been so deeply in debt to one country. Meanwhile, the Chinese are having a debate of their own—about whether the deal makes sense for them....
The average cash income for workers in a big factory is about $160 per month. On the farm, it’s a small fraction of that. Most people in China feel they are moving up, but from a very low starting point...
China’s savings rate is a staggering 50 percent, which is probably unprecedented in any country in peacetime. This doesn’t mean that the average family is saving half of its earnings—though the personal savings rate in China is also very high. Much of China’s national income is “saved” almost invisibly and kept in the form of foreign assets. Until now, most Chinese have willingly put up with this, because the economy has been growing so fast that even a suppressed level of consumption makes most people richer year by year...
The government doesn’t want to let the market set the value of the RMB, because it thinks that would disrupt the constant growth and the course it has carefully and expensively set for the factory-export economy. In the short run, it worries that the RMB’s value against the dollar and the euro would soar, pricing some factories in “expensive” places such as Shanghai out of business. In the long run, it views an unstable currency as a nuisance in itself, since currency fluctuation makes everything about business with the outside world more complicated. Companies have a harder time predicting overseas revenues, negotiating contracts, luring foreign investors, or predicting the costs of fuel, component parts, and other imported goods.
And the government doesn’t want to increase domestic spending dramatically, because it fears that improving average living conditions could paradoxically intensify the rich-poor tensions that are China’s major social problem...
This is the bargain China has made—rather, the one its leaders have imposed on its people. They’ll keep creating new factory jobs, and thus reduce China’s own social tensions and create opportunities for its rural poor. The Chinese will live better year by year, though not as well as they could. And they’ll be protected from the risk of potentially catastrophic hyperinflation, which might undo what the nation’s decades of growth have built. In exchange, the government will hold much of the nation’s wealth in paper assets in the United States, thereby preventing a run on the dollar, shoring up relations between China and America, and sluicing enough cash back into Americans’ hands to let the spending go on...
The public is beginning to behave like the demanding client of an investment adviser: it wants better returns, with fewer risks...
The unfair reason is all-purpose nervousness about any new rising power. “They need to understand, and they don’t, that everything they do will be seen as political,” a financier with extensive experience in both China and America told me. “Whatever they buy, whatever they say, whatever they do will be seen as China Inc.”...
China can’t afford to stop feeding dollars to Americans, because China’s own dollar holdings would be devastated if it did. As long as that logic holds, the system works. As soon as it doesn’t, we have a big problem...
As many world tragedies have been caused by miscalculation as by malice...
With a lack of tragic imagination, Americans have drifted into an arrangement that is comfortable while it lasts, and could last for a while more. But not much longer...
For the final and most important paragraph, you're going to either need to go buy the issue yourself or head on over to the site and read the free article.
If I didn't think this article was so important, I think I'd be embarrassed by how much of it I just reprinted above. But it is, and I'm not.
On another note, it was a (nice) surprise to see a humor page back in the Atlantic (though apparently only for subscribers). I thought they had rid the Atlantic of humor? Or maybe this one is cynical enough to be devoid of humor?
3 comments:
I like to think of this debt as a hedge against US-China open war. I doubt there is a historical precedent for government-owned treasury debt cancellation, but if China was to engage The US in any type of military struggle over, say, Taiwan, would it not be the immediate response of the US Treasury to junk the debt as a write-off for the cost of the war? It would certainly downgrade the status of the US bonds far below its present (and admittedly tedious) AAA rating, but it would strike a serious blow to The capital reserves of a formidable military rival.
Chester,
This is from what I gather: Much like a nuclear strike, this sort of economic strike is only most effective for whomever uses it first. Both China and the US would be in big time economic trouble if either side used the debt as a weapon, but the side who feels it the most will be the side that was acted upon. But, the big problem is that both sides will be hurt, it is just a matter of who is going to hurt more. Plus, if the US junks the debt then our credit rating would be destroyed unless we were subsequently able to win a devastating victory over the PRC. Though I think Vizzini of The Princess Bride was referring to British campaigns in Afghanistan, we don't want "to fall victim to one of the classic blunders! The most famous is never get involved in a land war in Asia." The debt is a hedge against US-China open conflict, a hedge by both sides as you point out.
The main thing that comes out of this is that we need to figure out how to best coexist, solve our mutual differences, and thrive without resulting to warfare, economic or literal.
I never thought Vizzini was talking about the British blunder, I always assumed he was referring to Hitler walking into a Russian winter, (Europe, Asia, I don't really know where the Urals demarcate the Eurasian border, but the Furer definitely blew that one) nonetheless, the point is clear, there will be no winner in a war between china and the US, economic or militarily. A point I already made with the "hedge against war" comment.
Post a Comment