‘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
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
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
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
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
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.