The Fed’s flow of funds data that was released last week more than ever highlights America’s acute dependence on the kindness of strangers, particularly those of the Asian variety. Globalisation has been turned on its head. Instead of the centre lending capital to the developing periphery, capital is flowing back to the centre--that is, the United States. Even poor nations are lending the United States huge quantities of surplus capital, mainly to keep America afloat as the world's buyer of last resort. China is the new “bad boy” of the global economy, having displaced Japan as the aggressive emblem of a trading system ferociously out of balance. Congress has begun making increasingly loud protectionist threats; the latest example is legislation that threatens to impose 27.5% across-the board tariffs on Chinese exports into the US if the RMB peg is not abandoned.
Even traditional American champions of globalization (including Federal Reserve Chairman Alan Greenspan) have begun scolding China for excessive ambitions, just as they once criticized Japan, to no avail. The National Association of Manufacturers issued a report warning that 2.3 million US manufacturing jobs have disappeared since 2000, largely due to international competition (not entirely from China). The United States risks losing "critical mass" in manufacturing, says the NAM. A Defense Department technology-advisory group confirmed that so much “intellectual capital and industrial capability” has been moved offshore, particularly in microelectronics, that the Pentagon is dangerously dependent on foreign producers to make its high-tech weaponry...........
But the nexus between China and the US is fundamentally unhealthy and ultimately points to the fragility at the heart of the global economy right now. China’s “kindness” is in effect killing America, although in the absence of Congressional disruption this curiously symbiotic death spiral could continue for a while longer. By allowing the US to buy more than it produces and borrowing to do so, it will eventually force an ugly reckoning. With its ever-swelling trade deficits, the moment of painful adjustment draws closer, but the debt cycle is unlikely to stop until creditor nations conclude that the US debt position is too dangerous and start withholding their capital. Alternately, if China's overheated economy gets mired in financial disorder or inflationary pressures, as appears to be the case today, it might need to bring its capital home--thus pulling the plug on American consumers and the “buyer of last resort” for the global system at large. The paradoxical relationship between China and the US provides a clear illustration as to why the global economy is so precariously placed. The two epicentres of growth both exhibit tremendous structural problems, so a multitude of things could go wrong in the months ahead. Ironically, Congress might turn out to be the author of America’s own misfortune. That is, if the Chinese don’t beat them to it first.
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Thursday, September 18, 2003
China and the US Deficit: Part 339
Lloyd has been sending me some interesting links lately. A couple of weeks ago he sent me this from the ILO, which gives a fascinating birds eye view of international labour demographics. Today he's sent me a link to material on Prudent Bear. The topic is China and the US deficit and I see they have a piece by Richard Duncan as well as this piece by Marshall Auerbach
Posted by Edward Hugh at 8:49 AM