August 1, 2011
One of the most fascinating pieces of news this week came from China.
On Friday, Chinese state media warned that the United States was threatening the world with a recession that could be ‘‘much nastier’’ then the 2008 downturn. It described Washington’s standoff over the ‘‘debt ceiling’’ as ‘‘dangerously irresponsible’’.
Referring prosaically to the donkey and the elephant – symbols of the Republicans and Democrats -Xinhua, the official state news service, wrote:
“The ugliest part of the saga is that the wellbeing of many other countries is also in the impact zone when the donkey and the elephant fight.”
The Chinese are right to be worried, because China is the largest foreign holder of US government debt, with an estimated 60t o 70 per cent of its $3,200 billion foreign exchange reserves invested in US assets.
And if you’ve travelled to China, you’ll know that the average man on the street is well aware of his country’s huge financial dilemma, and equally well aware that its government has made a massive bet on America.
Two years ago, I spent several weeks in China interviewing people for a documentary and we spoke about this specific issue.
The people knew what was at stake, and they were extremely sceptical about the wisdom of having all your eggs in one basket.
Yet they have no choice. The more China runs a huge current account surplus and money flows into China, the more the Chinese have to reinvest this money somewhere and the US treasury market is the biggest market in the world.
In a sense, the Chinese and the Americans are equally to blame.
The nub of the issue is global imbalances.
The US wants to shop its way out of the recession, and China wants to finance it. In contrast, the Chinese don’t want their own people to enjoy the fruits of their phenomenal exporting success – so, rather than spend the money they earn, their government recycles this money and lends it to Americans, so that Americans can buy more Chinese imports.
In addition, the money they do spend in China is going on an investment binge. But we know that countries can invest too much.
Remember the ghost estates? They were classed as an investment; now bits of them are to be flogged for half-nothing by Nama.
The perils of over-investing are there for all to see in the debris of the dotcom boom.
Only last week, we saw what sometimes happens when you invest too quickly in infrastructure: for the first time ever, two high-speed trains crashed directly into each other in China.
The government has been rolling out new infrastructure so quickly to meet its own inflated targets and things are going wrong.
Any visitor to China will see the same in the build quality of schools and hospitals.
On the other side of the world, there is the opposite problem. In Washington, the unthinkable is happening.
The Republicans and their Tea Party pals are so keen to teach Barack Obama a lesson that they are risking a default on US assets in order to prove a political point.
As man-made crises go, the debt ceiling one is hard to beat.
On Friday, for the first time in years, the British government can borrow more cheaply than the American one as US markets digest the possibility of a default, which is totally politically driven.
The financial reality is that the US has had no difficulty in financing itself in the past two years.
The so-called bond vigilantes who are supposed to rear up and discipline governments have not emerged out of the shadows in America.
But what has emerged is the political cycle and the timetable to next year’s presidential election.
However, when we pan out from Washington and gain a bit of altitude from all these issues, the reason for all these crises is because the world economy is so imbalanced.
The European Union is running a current account surplus. So too are China and India, and the other huge developing countries like Brazil.
The Brazilians are imposing taxes on money coming into the country because they can’t cope with the inflow.
Also, like China, Brazil wants to keep its currency artificially low in order to piggyback on US profligacy. No one wants to take responsibility.
The US doesn’t want to stop borrowing.
The Chinese and other emerging countries don’t want to stop saving. Europe doesn’t know what it wants.
The latest European move for austerity and tighter budget controls, which will reduce demand, prompts the question: ‘‘Who is going to buy stuff to keep the world going?” If the rich Europeans don’t want to spend – and see exporting as the key to growth – who are they going to export to? China? Obviously not, because the Chinese want to keep exporting.
To booming Brazil and Latin America? No, because Brazil and Argentina are on an export binge too.
Maybe the rest of Asia – the former Asian Tigers – might buy something? But they are export-obsessed too, as is India.
As for Russia, it is a special case, and I will consider it a ‘‘proper’’ economy the day I go to a shop and buy something with ‘‘Made in Russia’’ on it.
So we are faced with a huge global dilemma.
The world loves to point the finger at the caricature of a fat, bloated US, which is gorging itself on other people’s money and simply can’t discipline itself.
But someone else has to start buying, otherwise we will descend into a global depression. Everyone is trying to export and save; no one is prepared to import and spend.
This is what happened in the early 1930s.
It’s not just the free-spending Yanks that are the problem – the big saving nations like Germany and Japan are also to blame, not to mention China and India. If they don’t want to spend and instead prefer to save their cash and export -which is, in effect, choosing a strategy whereby someone other than your own citizens buys your own goods – they had better figure out who is going to do this buying.
Until these global imbalances are rectified, the global economy will be characterised by recurring financial crises.
This is because, if a country is not keen to buy all the goods you are producing (as is the case in China today), then the Chinese have to lend to the country that is prepared to buy the Chinese stuff. Horse sense tells you that, the more you lend to one individual or country, the less likely you are to get the money back. Thus you have periodic debt crises.
Equally, all this unwanted money sloshing around leads to all classes of bubbles in asset prices, as ‘‘flavour of the month’’ assets emerge, inflate rapidly and then deflate unexpectedly and damagingly.
Eventually, someone has to take the lead.
And while it’s all very well to get your censored official news agencies to tell the Americans to be responsible, China can’t indefinitely remain ‘‘an economic giant and a political pygmy’’, to paraphrase Willy Brandt’s memorable description of post-war Germany.
So while, this weekend, the world’s eyes will be focused on Washington, the fiscal, trade and current account positions of the US are a reflection of global imbalances, rather than the unique cause of them.