I know I linked to it yesterday, but that just wasn’t enough.
If you want to understand the world economy today, and what has happened during the last decade between the U.S. and China, amd how the Chinese have ended up holding $1.4 trillion, you need to sit down and read James Fallows’ piece in the new Atlantic. (In the time between the piece’s research and its publication that number jumped to $1.53 trillion, Fallows reports on his blog — another reason you should read the piece!)
This is a topic of sufficient complexity that most of us have very little hope of understanding it, yet Fallows lays it out with care and clarity. Here are a handful of key passages, offered primarily to get you to click on the link to the full piece, because that’s what you should do:
Through the quarter-century in which China has been opening to world trade, Chinese leaders have deliberately held down living standards for their own people and propped them up in the United States. This is the real meaning of the vast trade surplus — $1.4 trillion and counting, going up by about $1 billion per day — that the Chinese government has mostly parked in U.S. Treasury notes. In effect, every person in the (rich) United States has over the past 10 years or so borrowed about $4,000 from someone in the (poor) People’s Republic of China. 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…
Neither government likes to draw attention to this arrangement, because it has been so convenient on both sides. For China, it has helped the regime guide development in the way it would like — and keep the domestic economy’s growth rate from crossing the thin line that separates “unbelievably fast” from “uncontrollably inflationary.” For America, it has meant cheaper iPods, lower interest rates, reduced mortgage payments, a lighter tax burden. But because of political tensions in both countries, and because of the huge and growing size of the imbalance, the arrangement now shows signs of cracking apart…
So why is China shipping its money to America? An economist would describe the oddity by saying that China has by far the highest national savings in the world. This sounds admirable, but when taken to an extreme — as in China — it indicates an economy out of sync with the rest of the world, and one that is deliberately keeping its own people’s living standards lower than they could be…
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.
So what’s the problem? There are several. One is that the U.S. has set up a tough situation for itself if it finds itself in conflict with China some time in the future.
Whatever the provocation, China would consider its levers and weapons and find one stronger than all the rest — one no other country in the world can wield. Without China’s billion dollars a day, the United States could not keep its economy stable or spare the dollar from collapse.
Would the Chinese use that weapon? The reasonable answer is no, because they would wound themselves grievously, too. Their years of national savings are held in the same dollars that would be ruined; in a panic, they’d get only a small share out before the value fell. Besides, their factories depend on customers with dollars to spend.
But that “reassuring” answer is actually frightening. Lawrence Summers calls today’s arrangement “the balance of financial terror,” and says that it is flawed in the same way that the “mutually assured destruction” of the Cold War era was.
I think you’d better just go read the rest now.
[tags]china, world economy, u.s. trade deficit, james fallows[/tags]
There are no revisions for this post.