Walloping Wake-up Call
Niall Ferguson of Harvard and Moritz Schularick of Berlin have a piece in today’s New York Times: “The Great Wallop.” Here’s the beginning:
A few years ago we came up with the term “Chimerica” to describe the combination of the Chinese and American economies, which together had become the key driver of the global economy. With a combined 13 percent of the world’s land surface and around a quarter of its population, Chimerica nevertheless accounted for a third of global economic output and two-fifths of worldwide growth from 1998 to 2007.
And here’s the conclusion:
Right now, Chimerica clearly serves China better than America. Call it the 10:10 deal: the Chinese get 10 percent growth; America gets 10 percent unemployment. The deal is even worse for the rest of the world — and that includes some of America’s biggest export markets and most loyal allies. The question is: What can the United States offer to make the Chinese abandon the dollar peg that has served them so well?
The authorities in Beijing must be made to see that any book losses on its reserve assets resulting from changes in the exchange rate will be a modest price to pay for the advantages they reaped from the Chimerica model: the transformation from third-world poverty to superpower status in less than 15 years. In any case, these losses would be more than compensated for by the increase in the dollar value of China’s huge stock of renminbi assets.
It is also in China’s interest to kick its currency-intervention habit. A heavily undervalued renminbi is the key financial distortion in the world economy today. If it persists for much longer, China risks losing the very foundation of its economic success: an open global trading regime.
And this is exactly what President Obama can offer in return for a substantial currency revaluation of, say, 20 percent to 30 percent over the next 12 months: a clear commitment to globalization and free trade, and an end to the nascent Chinese-American tariff war.
For as long as the People’s Republic has existed, the United States has been the principal upholder of a world economic order based on the free movement of goods and, more recently, capital. It has also picked up the tab for policing the oil-rich but unstable Middle East. No country has benefited more from these arrangements than China, and it should now pay for them through a stronger Chinese currency. Chimerica was always a chimera — an economic monster. Revaluing the renminbi will give this monster the peaceful death it deserves.
And a lot of sobering stuff in-between.
Speaking on a subject that I have no right to address, my economic knowledge being somewhat less than zero, I’d point out that the article gives three good reasons why the US should want to redress the economic balance between our two countries, but only one half-hearted reason why China might want to. For years, China has been facing a massive under-employment problem, to say nothing of unemployment, and has depended on its export economy to provide the tens of millions of new jobs it needs each year just to provide for natural growth in the job market. For years we have been suggesting to China a reorientation that would mean less for export and more for China’s own internal consumption. It makes sense on paper, but makes less sense to a Communist Party extremely nervous about any possible challenges to its monopoly. At the moment all those high-living and high-spending Shanghai and Beijing millionaires have no gripes against a Party which makes it possible for them to buy Vuitton luggage, Cartier jewels, and Mercedes-Benzes. It’s not those people who might be trouble makers, but the workers and the peasants (apologies to the Chinese Communist Party for sounding like a Marxist!) Would a genuine consumer society, one not restricted simply to the urban rich, risk things getting out of control? Remember that, as some have pointed out, China (and some other countries) has gone through the kind of industrial revolution that Britain and W. Europe went through in late 18th and 19th centuries. Such revolutions bring strains and tensions, to say nothing of bouts of violence But what took Britain, France, Germany, the US, etc., roughly a century and a half has taken China only a few decades and has had an impact on many, many more people than Europe ever dreamed of.
Of course there are those who say that China is in danger right now of building a bubble economy, like Japan in the 1980s, like the US in 2007. If it bursts, who knows what will happen and how things will fall out?
Perhaps (to sound ecclesiastical for a moment) what China needs is the secular equivalent of Vatican II to help deal with these strains and tensions. But there are those Chinese who would say: that’s what Gorbachev tried to do in Russia, and where is the Soviet Union today? Sic transit gloria mundi — or perhaps, in modern terms, Rapid Transit Gloria Mundi.
Paul Krugman’s column touches on the same subject: “World Out of Balance.”
http://www.nytimes.com/2009/11/16/opinion/16krugman.html?ref=opinion
I see President Obama is on his Kow-Tow tour and is trying to sooth their fears. He began bowing and scraping when he arrived in Bejing. I do not recall fromer presidents grovelling like this. Why does President Obama bow so low to oritental despots? Why so supine?
When the Red Chinese are worried about our finances, that is not a good sign.
Also it is interesting how the Chi-Comms are not thrilled about our instituting – on top of our current debt – the Democrats’ national medical insurance plan.
I think it’s because he secretly hates America, Ken.
“The reality, however, is that an end to Chimerica is in the American interest for at least three reasons.”
While of course it is in the interest of the wealthiest nation in the world, it is unfortunately not in the interest of the one-hundred million Chinese whose income is less than $1.25 per day.
It seems to me the very notion of bowing low to kings and queens and other potentates runs contrary to the American way.
By our founding documents we claim that all men are created equal, and in fact we have until now anyway, honestly thought that any American is good enough to look any other man directly in the eye; man to man.
But of course we were promised, and indeed voted for “change”, and it seems our President is trying his best to deliver.
;-)