Posted By Clyde Prestowitz
Monday, August 8, 2011 - 11:07 AM
Share
You have to love the Chinese. No sooner had Standard and Poors downgraded U.S. debt than Beijing let loose with a huge scold about how Ameica has to get its debt under control.
Normally I'd be lambasting Uncle Sam right along with the Chinese. For more than thirty years I have been urging that U.S. incentives to save and spend be reversed in an effort to weaken the dollar, reduce the U.S. trade deficit, and increase domestic investment, production, and jobs. But in this case, I just can't allow the Chinese gall to go unremarked even though their criticism is technically valid.
I mean, let's get real. Even as they were scolding, the Chinese authorities were in the market buying billions of dollars worth of U.S. Treasury debt. And why are they doing this? Well, there are complex reasons, but a main one is to keep their own currency undervalued as a kind of export subsidy. By buying U.S. Treasuries, China's leaders are pushing up the value of the dollar versus the yuan and thereby making U.S. exports more costly and U.S. imports of Chinese goods and services less expensive. In effect, they are devaluing their own currency.
This behavior by China has tended to depress U.S. interest rates, subsidize U.S. consumption, and remove any disadvantage to the United States of its over-consumption. In short, China has done everything it can to encourage and induce just the behavior it is now urging Washington to halt.
No one is forcing the Chinese to buy dollars and treasuries, and a sure way to force Washington to become more serious about prudent fiscal behavior would be for China to halt its buying. But it doesn't and it won't. Not only does China constantly accumulate dollars as a result of the trade surpluses its weak yuan policies induce, but, unlike most countries, China's dollars all wind up being held by the government because Beijing does not allow private citizens and corporations to hold the dollars they earn. Rather they have to turn them over to the government in return for yuan. Thus, just as the United States, over-consumes, China chronically under-consumes as an essential element of its long term, export led economic growth strategy.
Indeed, China's consumption is not only abnormally low as a percent of GDP, but the rate has been falling as China rushes to invest ever more as the tried and true way of maintaining economic growth rates.
The rest of the world, including the G-20, the International Monetary Fund, the World Bank, and most of the world's leading economists have urged China to let the value of the yuan rise and to shift toward more domestic consumption led growth patterns. But China has refused, preferring instead to continue playing the mercantilist game.
China must know that if it insists on running chronic and enormous trade surpluses, the value of its dollar holdings must fall. In effect , what China is doing is suppressing consumption which is transformed into dollar holdings in the hands of the Chinese government. Beijing is transferring funds from the household sector to the investment and government sectors.
Thus, if China really wants to assure the value of its dollar holdings, it should reverse this policy. In short, it should let the people eat some of its accumulated dollars. Hence, I, at least, say "let them (the Chinese) eat dollars."
better than opium,must be.
I have heard Donald Trump said something similar to this and how he will not allow China to dominate the US market, after reading this article it kinda make sense what Trump was talking about it, too bad we cant see the benefits of it if you are in the hawaii web design market. and all Donald Trump has done was talk about it but he is not going to run for president any time soon. so my guess is that this will continue since China seems to have the upper hand design.
china only owns 8 to 9% of US debt. the majority is fracking owned by YOU and ME. usa households.
the author is missing the larger picture. sure, china might hurt from this, but they don't really need to spend their dollars right now (that's why it's such a large war chest). i'm not sure about anyone else, but i *need* every single dollar that i have in the bank right now.
you know what is a real danger? the chinese finally take our advice and let their currency appreciate. massively. this is helped along by QE6, QE7, QE8, etc. right around QE10, massive baby boomer retirement. lots of people with no income except for social security checks, made worthless by both massive yuan appreciation AND QE10.
devaluation of the USD is NOT A GOOD THING. people need to think carefully about this.
US dollar is a reserve currency
Prestowitz would be right if the USD was not being set up as the major if not the only global reserve currency for several decades.
Imagine a world where gold is the only money and it is only produced in the US. All other countries, to the extend that gold is desirable, would have to run trade deficit with the US in order to accumulate gold.
I love that China is now scolding the US on economic policy. For all its economic flaws, China has managed to keep solid national accounts and is going from strength to strength. The only threat to China is the aging population, but even the elderly can work from home if wages are sustained. It's time the US start looking abroad for inspiration on economic management.
US dollar is a reserve currency
Good.. Prestowitz would be right if the USD was not being set up as the major if not the only global reserve currency for several decades.
Imagine a world where gold is the only money and it is only produced in the US. All other countries, to the extend that gold is desirable, would uçak biletihave to run trade deficit with the US in order to accumulate gold.
It is neither unfair nor harsh to characterize as sheer hypocrisy Chinese's scolding the US for the credit downgrading. Chinese Government knows the possible consequences of its trade policy and practices. It is understandable that China set its policy largely out of domestic concerns, such as unemplyment and social unrest. I don't expect they would do otherwise.
After all these years of helping Chinese build their economy, Americans, I would think, be extended a helping hand by Chinese Government at this moment. Chinese instead wasted no time launching a vitriolic attack on the US. One does not insult one's customer.
Chinese government as well as private citizens are becoming solipsistic and vulgar as they are resplendent with opulence of unspeakable trade surplus. They shed their humble, unpretentious Confucianist virtues to embrace self-centered mercantilism in the guise of economic globalization.
I watch all this with heavy sadness for I am Chinese living in America and can't say this without risking lengthy jail time in China.
... in China's continuing to buy American debt while telling Amerixca this must stop one day. Possibly it's the same sharp practise that makes great fortunes on The Street, but I don't think even that point has been made here.
China is really up the creek on this one. They could put their money where their mouth is and start dumping dollars, but they know full well that their exports would decline if the RMB began to look more like a free-floating currency. Heck they won't be able to play SWTOR, and that counts for something. This would set-off a domino effect that would have much worse consequences now than it would have if they'd acted some years ago. Specifically, half their economy now is fixed investments and they're sitting on one of the largest (possibly the largest) asset bubbles ever.
So their options are to sit on their thumbs and wait while domestic inflation keeps growing uncontrollably and the asset bubble gets even larger, or take pro-active steps to dismantle their economy in a more controlled way. I think they made their choices on this already. It remains to be seen if their government and central bank will be able to keep a handle on things when shit hits the fan, but their recent efforts on inflation have not been encouraging. Brutal, would be one way to put it, but ultimately ineffective.
reading too much into a few comments
It is entirely reasonable for a creditor to comment on the conduct of the debtor is he is not behaving to the creditors interests, even with the truth that the creditor may choose to lend more to the same debtor. Banks do the same often. Admonition from a bank to its clients does not always mean the end to lending.
There can be not much more to these.
It remains to be heard how vociferous China becomes in the future.
Chinese Government knows the possible consequences of its trade policy and practices. It is understandable that China set its policy largely out of domestic concerns, sázky such as unemplyment and social unrest. I don't expect they would do otherwise.After all these years of helping Chinese build their economy, Americans, I would think, be extended a helping hand by Chinese Government at this moment. Chinese instead wasted no time launching a vitriolic attack on the US. One does not insult one's customer.
His would set-off a domino effect that would have much worse consequences now than it would have if they'd acted some years ago. Specifically, half their economy now is fixed investments and they're sitting on one of the largest (possibly the largest) asset bubbles ever.So their options are to sit on their thumbs and free bets wait while domestic inflation keeps growing uncontrollably and the asset bubble gets even larger, or take pro-active steps to dismantle their economy in a more controlled way. I think they made their choices on this already.
Clyde Prestowitz is the president of the Economic Strategy Institute and writes on the global economy for FP.
Read More
May/June 2013
-
Profile
-
FP Power Map
-
Think Again
Follow us on Twitter | Visit us on Facebook | Follow us on RSS | Subscribe to Foreign Policy
About FP | Meet the Staff | Foreign Editions | Reprint Permissions | Advertising | Writers’ Guidelines | Press Room | Work at FP
Services:Subscription Services | Academic Program | FP Archive | Reprint Permissions | FP Reports and Merchandise | Special Reports | Buy Back Issues
Privacy Policy | Disclaimer | Contact Us
11 DUPONT CIRCLE NW, SUITE 600 | WASHINGTON, DC 20036 | Phone: 202-728-7300 | Fax: 202-728-7342
FOREIGN POLICY is published by the FP Group, a division of The Washington Post Company
All contents ©2013 The Foreign Policy Group, LLC. All rights reserved.
(13)
HIDE COMMENTS LOGIN OR REGISTER REPORT ABUSE