This is an interesting depiction of the tightly intertwined political economic dynamics of the US and China from Mark
Next, some excerpts from the article (emphasis mine)… ``A new economic dance
``The United States has been here before. In the 1980s, it ran heavy trade deficits with Japan, which recycled some of its trading profits into American government bonds.
``At that time, the deficits were viewed as a grave threat to America's economic might. Action took the form of a 1985 agreement known as the Plaza Accord. The world's major economies intervened in currency markets to drive down the value of the dollar and drive up the Japanese yen.
``The arrangement did slow the growth of the trade deficit for a time. But economists blamed the sharp revaluation of the Japanese yen for halting Japan's rapid growth. The lesson of the Plaza Accord was not lost on China, which at that time was just emerging as an export power.
``China tied itself even more tightly to the United States than did Japan. In 1995, it devalued its currency and set a firm exchange rate of roughly 8.3 to the dollar, a level that remained fixed for a decade.
``During the Asian financial crisis of 1997-98, China clung firmly to its currency policy, earning praise from the Clinton administration for helping check the spiral of devaluation sweeping Asia. Its low wages attracted hundreds of billions of dollars in foreign investment.
``By the early part of this decade, the United States was importing huge amounts of Chinese-made goods, toys, shoes, flat-screen televisions and auto parts, while selling much less to China in return.
``"For consumers, this was a net benefit because of the availability of cheaper goods," said Lawrence Meyer, a former Fed governor. "There's no question that China put downward pressure on inflation rates."
``But in classical economics, that trade gap could not have persisted for long without bankrupting the American economy. Except that China recycled its trade profits right back into the United States.
``It did so to protect its own interests. China kept its banks under tight state control and its currency on a short leash to ensure financial stability. It required companies and individuals to save in the state-run banking system most foreign currency, primarily dollars, that they earned from foreign trade and investment.
``As foreign trade surged, this hoard of dollars became enormous. In 2000, the reserves were less than $200 billion; today they are about $2 trillion.
``Chinese leaders chose to park the bulk of that in safe securities backed by the American government, including Treasury bonds and the debt of Fannie Mae and Freddie Mac, which had implicit government backing.
``This not only allowed the United States to continue to finance its trade deficit, but, by creating greater demand for United States securities, it also helped push interest rates below where they would otherwise be. For years, China's government was eager to buy American debt at yields many in the private sector felt were too low.
``This financial and trade embrace between the United States and China grew so tight that Ferguson, the financial historian, has dubbed the two countries Chimerica.
Finally, my comment:
One very important matter missed out by this insightful article is that these prevailing dynamics operate under the principle of FREE LUNCH or “something out of nothing” concept of the US dollar currency standard.
Basically, the US issues its notes backed by the “full faith and credit” of the US government in exchange for real goods and services from the rest of the world. Thus the natural consequence from the operating platform is to see enormous current account imbalances from the global economy framework-again, where the US exports financial claims (US dollar and US dollar assets) to fund its balance of payment debt driven deficits while it import goods and services elsewhere.
And one major consequence has been the aberrant global “vendor financing scheme” which had been quoted by Mr. Landler at the prologue of the article as…``Usually it's the rich country lending to the poor. This time, it's the poor country lending to the rich."- Niall Ferguson.” (Hey Pope Benedict, don’t you think your campaign against greed should to start with this greed fostering "something for nothing" system?)
And it is also the principal reason behind the serial bubble (inflate-deflate) cycles around the world...
In Japan then…
[M. Landler] ``At that time, the deficits were viewed as a grave threat to America's economic might. Action took the form of a 1985 agreement known as the Plaza Accord. The world's major economies intervened in currency markets to drive down the value of the dollar and drive up the Japanese yen.
``The arrangement did slow the growth of the trade deficit for a time. But economists blamed the sharp revaluation of the Japanese yen for halting Japan's rapid growth…
And in the world today...
[M. Landler] ``This not only allowed the United States to continue to finance its trade deficit, but, by creating greater demand for United States securities, it also helped push interest rates below where they would otherwise be. For years, China's government was eager to buy American debt at yields many in the private sector felt were too low.”
And because of the boom bust character emanating from such framework, trade policies have accordingly been shaped to the operating environment.
[M. Landler] ``But in classical economics, that trade gap could not have persisted for long without bankrupting the American economy. Except that China recycled its trade profits right back into the United States.
``It did so to protect its own interests. China kept its banks under tight state control and its currency on a short leash to ensure financial stability. It required companies and individuals to save in the state-run banking system most foreign currency, primarily dollars, that they earned from foreign trade and investment.
And so the idea being peddled by some experts that trade protectionism needs to be raised via the currency “lever”, aimed at improving the state of global balance of payments, doesn’t square with the realities of the operating framework of the present system which NATURALLY prompts for these anomalies. The fundamental reason is that the present monetary system lacks the self-adjusting mechanism traditionally seen in the gold standard.
Blaming simplistically the US for “overconsumption” or China for “exporting overcapacity” via the currency "manipulation" channel seems like the proverbial “pot calling the kettle black” and deals with cosmetic issues.
Yet the policy prescriptions from these experts appear directed at salvaging the statusquo of inflation driven economic growth models of the US dollar standard system. [M. Landler] ``"It is sometimes hard to change successful models," said Robert Zoellick, who negotiated with the Chinese as a deputy secretary of state. "It is prototypically American to say, 'This worked well but now you've got to change it.' "
In short, for as long as the US dollar functions as the backbone of the world's financial architecture, we should expect to see the persistence of the phenomenon of highly skewed global balance of payments and “mercantilist” policies which help shapes them.
Desires to remedy such imbalances without dealing with operating platform of the present global currency standard seems likely a "tooth fairy" approach. This unsustainable system will likely persist until it crumbles under its own weight (like a Ponzi house of cards), possibly fast tracked by the adoption of destructive policies recommended by the "omniscient" liberals, or by a concerted political thrust to overhaul the system.
But since governments are typical reactive agents and where a systemic reconfiguration translates to an admission of a shift in the distribution of geopolitical power, the latter option seems unlikely.
This makes a crisis as the only catalyst for change. Here Secretary Paulson got it right, [M. Landler] ``"One lesson that I have clearly learned," said Paulson, sitting beneath his Chinese watercolor. "You don't get dramatic change, or reform, or action unless there is a crisis."
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