THE US NEED FOR CHINA

• First, columnist Fareed Zakaria summarizes this increasing interdependence between China and the US:  “China has become the key to America getting through the worsening economic crisis.”  Virtually every politician and economist, regardless of their ideology, believes that the US must spend its way out of this recession.  But to spend means to increase the deficit, which could total this fiscal year alone between $1 trillion and $1.5 trillion!  (Incidentally, that is between 7 and 11% of GDP).  So, who will buy up this debt?  The only nation that has the cash to do so is China.  Zakarai writes that in September China became America’s largest creditor, surpassing Japan.  Although we do not know for certain, it appears that China currently holds about 10% of America’s debt.  China is, without a doubt, “America’s banker”!  How long can China continue to fund our debt?  Currently, China has about $2 trillion in foreign exchange reserves.  (America has only $73 billion.)  The challenge here is that China must spend vast amounts of its resources to stimulate its own economy.  A few weeks ago, for example, China announced that it would spend a staggering $600 billion to stimulate its own economy.  (That is 15% of its own GDP.)  Zakaria writes that “At the same time, Washington desperately needs Beijing to keep buying American bonds, so that the US government can run up a deficit and launch its own fiscal stimulus.  In effect, we’re asking China to finance simultaneously the two largest fiscal expansions in human history—theirs and ours.”  Will China agree to do both?  There is simply no other nation that can finance America’s debt but China.  Zakaria quotes from Niall Ferguson’s new book, The Ascent of Money, which describes the birth of a new nation after the cold war—he calls it “Chimerica.”  This new “nation accounts for a tenth of the world’s land surface, a quarter of its population and half of global economic growth in the past eight years.”  Ferguson writes:  “For a time it seemed like a marriage made in heaven.  The East Chimericans did the saving, the West Chimericans did the spending.”  The Easterners got growth, the Westerners low inflation and low interest rates.  Ferguson correctly observes that “The big question today is whether Chimerica stays together or comes apart because of this crisis.  If it stays together, you can see a path out of the woods.  If it splits, say goodbye to globalization.”  The US has never been in this kind of situation.  We are utterly dependent on a nation that has been our antagonist and our enemy.  China has other options, while the US does not.  If China finds that its financing of our debt is not working, it will turn inward and focus exclusively on stimulating its own economy.  That the US is in a precarious situation is a classic understatement.

• A second thought about the current economic crisis is the talk about a “new New Deal.”  Obviously, this kind of talk focuses on what president-elect Barack Obama is promising to do in his new administration.  Columnist George Will has some salient observations about such talk.  It is worth listening to!

1. It took 25 years, until November 1954, for the Dow to return to the peak it had reached in September 1929.
2. America’s largest industrial collapse occurred in 1937, eight years after the 1929 stock market crash and nearly five years into the New Deal.
3. In 1939, after a decade of frantic federal spending, unemployment was at 17.5%.
4. There is growing evidence that government policies during the New Deal actually deepened and prolonged the Great Depression.  Will writes:  “The policies included encouraging strong unions and wages higher than lagging productivity justified, on the theory that workers’ spending would be simulative.  Instead, corporate profits—prerequisites for job-creating investments—were excessively drained into labor expenses that left many workers priced out of the market.”
5. Will quotes Russell Roberts of George Mason University:  “By acting without rhyme or reason, politicians have destroyed the rules of the game.  There is no reason to invest, no reason to take risk, no reason to be prudent, no reason to look for buyers if your firm is failing.  Everything is up in the air, and as a result, the only prudent policy is to wait and see what the government will do next.  The frenetic efforts of FDR had the same impact:  Net investment was negative through much of the 1930s.” 
6. Obama promises a stimulus package to get Americans spending again.  But think of that.  The need is for Americans to start saving again.  So, perhaps the stimulus check should be placed in the bank and not spent.  But that is not what he wants Americans to do.  Since individual consumption is 70% of all economic activity in the US, he needs for Americans to spend the check, not save it.  But we need for them to save more also.  As a nation, we are in a conundrum with no quick fix and no easy solution.  Responsibility, restraint and remorse for past sins are all needed in this situation—and none of these things can be provided by the US government.

See Zakaria’s essay in Newsweek (1 December 2008) and Will’s editorial in the Washington Post (30 November 2008).

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