11/18/09 London, England – The newspapers are a-buzz with stories of Obama’s trip to China. The Financial Times tells us what “he should have said.” According to the FT, the American president should have told the Chinese that he wasn’t going to put the US into depression just to protect the value of China’s dollar holdings.
‘We didn’t ask you to stock up all those dollars,’ as Obama might have put it. ‘It’s not our fault if the dollar goes down and you lose money.’
Perhaps Mr. Obama should have quoted the immortal words of a former US Secretary of the Treasury, John Connolly. “It may be our dollar, but it’s your problem.”
Over at USA Today, the editors are more concerned about human rights. The paper must imagine itself back in the days of Woodrow Wilson or George W. Bush, when the US nobly embarked on a mission to raise all of mankind out of sin and error. In effect, Mr. Obama said that all people have ‘universal rights,’ including the right to a free press. China figured this was just the sort of opinion that its people didn’t need to hear. So, it killed the story in its own press. The American president might as well have been talking to himself.
China is today’s big story. Throughout the world’s media there is much buzz and blather about the “romance”…the “historic relationship”…between the two titans. Some reporters see love. Some see jealousy. Some see rivalry.
Here at The Daily Reckoning we are suckers for romance. Give us some “a cigarette that bears a lipstick’s traces…an airline ticket to romantic places…” and we are moonstruck. But we don’t see much romance in the US and China hook up. What we see is the sort of things that delight psychologists and bore everyone else – perversion, co-dependency, and enabling.
On the surface, the two giants bicker over money like any other couple. The US accuses China of being a tightwad…holding its currency down and saving too much. China accuses the US of being a spendthrift, destroying its own purchasing power by wanton and reckless expenditures.
“US president’s currency call breaks with script,” says a headline in The Financial Times today. US economists think China should raise the value of the yuan. This would immediately lower the value, domestically, of the trillion(s?) worth of US-dollar assets China holds as reserves. It would also make Chinese products less competitive on the world market.
Mr. Obama wasn’t supposed to say anything about it on his trip. It would be like bringing up your husband’s drinking problem on your wedding anniversary; it would spoil the occasion.
Apparently, Obama couldn’t help himself. Or maybe he just thought the folks back home would like to hear him give the Chinese a piece of his mind.
But how does the American president know what price to put on the yuan? A sinking dollar is good for the goose over in the US. Why isn’t it okay for the gander in the Middle Kingdom?
A strong yuan would help the world economy “rebalance,” say economists who think they know what they are talking about. In a nutshell, the Chinese produce too much; Americans consume too much. A higher yuan would come down on the high side of the scale – giving the Chinese more purchasing power (thus increasing consumption in the Peoples’ Republic)…and making Chinese exports more expensive (thus decreasing consumption across the Pacific). With a stronger yuan, the Anglo-Saxon economies would be able to produce and sell more things to the Chinese…thus tilting the US economy more towards capital formation and production.
Chinese authorities are no dopes. They know they have a “floating” population of some 150,000 million people who are looking for work. They know that if they don’t find some way to keep these people occupied they are likely to cause trouble. Trouble is the thing China’s leaders most don’t want.
“You think you’ve got trouble,” Premier Hu Jintao might have replied to Mr. Obama. “Did you know that there are something like 200 million Chinese who still get by on as little as a dollar a day? Let’s face facts. You’re sitting there in Washington, comfortably talking about how much free health care and unemployment benefits to give the American people. We don’t have the time…or the money for those kinds of things. Too many Chinese people. They don’t earn enough to afford the kind of cradle-to-grave bribes you give your people. We have to keep them working; there’s no other way.
“Besides, we don’t quite see why we should pay for your mistakes. It wasn’t our economy that blew up. It wasn’t our financial industry that sold houses to people who couldn’t afford them. It wasn’t our consumers who spent more than they had and went too deeply into debt.
“It’s the debtor who’s supposed to pay, not the lender. We’re the lender!”
Behind all the superficial arguing, accusing and kvetching, however, is a sick relationship. It has give and take. But the US is all take. China is all give. And now, on both sides, public authorities make the same mistake. In the US, they try desperately to prod Americans to take more…to continue doing what they were doing wrong. They offer incentives of every sort to lure consumers to consume even more. And their solution to the debt overhang is to hang on even more debt.
In China, meanwhile, the authorities desperately prod their people to give more…to produce more. Or, at least to build more plant and equipment with which to turn out more goods.
In the US, consumer spending is about 70% of the economy. In China, fixed capital formation is estimated to have made up 70% of China’s growth in 2008 and as much as 90% in the first half of this year.
Is this a formula for a happy marriage? Over the last two years, this co-dependent relationship has broken down. Paul Krugman wrote in The New York Times that we’ve seen “the greatest collapse in world trade in history.”
But neither side has learned a thing. The taker now proposes to take more. The giver now proposes to give more.
They don’t need counseling. They need a divorce.
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Hello.
I would like to put a link to your site on my blog roll if you want to do the same for mine. It would be a good way to build up both of our readerships.
thank you.
Bill, you are such an entertaining writer that I can forgive anything you say. Stil, it grieves me that you are so sold on unregulated capitalism. Both unregulated capitalism and socialism lead to the same destination — social disaster. Both demand citizen participants whose character, morals, and ethics are impossibly high. Both extremes eat investors alive whenever they have the opportunity. Thus, society must protect itself with whatever regulations are necessary without crushing the entrepreneural spirit. Moderation in all things seems fitting in these cases. it’s not a perfect system, but it will have to do until something better comes along.
Works both ways and it’s apparently a relationship that’s working well for both parties involved. China is growing by leaps and bounds and we’ve raced back from the recession to growth with this relationship intact. You try to find dark clouds everywhere even when the skies are mostly sunny. It’s depressing and funny all at the same time.
RACED back to growth?
HAHAHAHAHAHAHAHAHAHA
HAHAHAHAHAHAHAHAHAHA
*snort*
HAHAHAHAHAHAHAHAHAHA
HAHAHAHAHAHAHAHAHAHA
*gasp*
HAHAHAHAHAHAHAHAHA
ha ha
*cough*
Man, I though my sides were going to split for a moment.
Where am I? Harry… the relationship is completley insane – china absuses and forces its workers to produce while the U.S. corprocracy ships jobs to them.. eventually and recently jobs have been lost due to this so the purchasing of these products have fallen due to outsourcing – its unhealthy. It has finally reached its peak nad maybe these idiots in the Fed/Treasury/ and white house will wake up… Our economy doesnt need to consume to be healthy – a balanced trade deficit and a resonable spending government (HAHA) would be best case scenaio. This unhealthy economy has gone on too long and unfortunatly its coming to an end now -when the U.S. liabilities towards social security, healthcare, ect are at maximums… It’s a disaster in the making. So continue to pray and wish that 1 million tones of gold falls from the sky onto the U.S. because otherwise we have to cut back on our standard of living or just hope our debt is cleared by the top 1% of the economy (Goldman Sucks, and JP Whoregan)
The Chinese interpretation of “freedom of the press” was all wrong! It’s “freedom of the printing press!” Woopee!
Oh, and Harry, geez man, you really have to open your eyes. The US is EXPORTING inflation: this is how things work- duh! Guess what happens when a country is over-inflating like crazy? POP!
Guess what happens when the Chinese no longer are able to prop up the US’s debt load? CRASH!
Yeah, ha ha ha…
It is just a sort of genetic engineering (but within a real life social field experiment) what is going on between China and the US. Should be interesting to see what will be the outcome, but then, I didn’t want to be sarcastic today.
Bill
With the utmost respect for your column – which I read every day – even Obama gets the occasional thing right. And this time, he is right about the yuan. It should be stronger and it would be stronger if it weren’t for the strenuous efforts of the Chinese authorities to keep it weak. No one has any sympathy for banks that lent money to people thatcouldn’t afford to pay it back; no one should have sympathy for China if the value of its Treasury holdings decline. Or indeed default. The only reason it has the holdings in the first place is because they have prevented the yuan from appreciating as it certainly would have, if allowed to float. How can you have a free markets, without a free floating currency? China is an accident waiting to happen and the shock waves will be global. If, as I suspect, the world becomes a much more ‘local’ place in the years to come, my money is on the States.
Right on BB! Hey ic the,”Poly-Anna Troll” is back! Egg-nore him. And he’ll go away! Live long and prosper,all. W0o!!!