|  The US/China talks are actually, in many respects more important than the healthcare debate. What China is willing to pay for may well be what the US can do, and what is being negotiated right now is what they'll pay for.
Let's take a look at the issues. The exchange rate and Treasury purchases First we have this: At stake is continued demand by China, the largest foreign investor in U.S. Treasuries, for the unprecedented issuance of American government debt.
Sounds good. But then we have this: The value of China’s currency, the yuan, is also on the agenda. The U.S. regards China’s currency policy as a distortion and wants China to let the value of the yuan appreciate.
Here's the problem. Those two things are in opposition. The more treasuries China buys the more downward pressure there is on the Yuan and the more upward pressure on the dollar. Buying treasuries (or any other dollar denominated assets) does not lead to the Yuan appreciating, unless China buys less of them. But if China buys less of them, well, the US won't have enough purchasers (actually the US already won't have enough purchasers and the Fed will have buy treasuries, but how much is in question.) US Savings Rates, the Death of the American Consumer and the everlasting great recession |
What's interesting about all this is how honest Geithner is being about the US economic situation with the Chinese. Take for example, this: In the talks today and tomorrow in Washington, U.S. officials said they plan to tell the Chinese the American rebound from a recession won’t be led as much by consumers as past recoveries.
Why is this? Because employment is not going to recover before the next recession, and because the savings rate for the US has to stay relatively high so that Americans can de-leverage, as has also been admitted: “We are committed to taking measures to maintaining greater personal saving and to reducing the federal deficit to a sustainable level by 2013,
What this means is that the consumer spending is not going to lead the recovery this time around. Consumers are not going to dig the US out of this, because China is not willing to lend US consumers that much money anymore. But the statement is contradictory on its face. If deficits have to be brought under control, and savings rates have to be kept relatively high, who's going to create the demand required by the economy to get out of the great recession? Not government, because of the deficit issue. Not consumers, because they are going to have a higher savings rate and their assets (read houses) aren't going to look good to be borrowed from. Which leads us to another point. Both America and China did a stimulus. China's stimulus is already working. It had 7.1% GDP growth. The US is still mired in recession. Why? Two main reasons. - China did its stimulus right. It wasn't 40% bullshit tax cuts with almost no stimulative effect.
- China, as a creditor rather than debtor nation with huge savings, can credibly be expected to continue its stimulus, while the US can't. When businesses make decisions about spending they need to know the money will be there next year, they don't know that with the US.
Americans also want the Chinese to move to greater domestic demand,, to open up the Chinese market to US investment (because American companies desperately want to be able to invest in a country with real growth prospects, rather than the US) and to start buying more US goods. This requires letting the Chinese currency appreciate against the US dollars and is needed long run for American health. But in the shorter term it leads to a fiscal crisis. If America doesn't want to increase taxes to pay for its own spending, how can China buy less treasuries and US assets and thus allow the Yuan to appreciate? And why should they, when right now in exchange for money the Chinese can afford to lose and crappy consumer goods, the US is exporting its industrial base to China? An industrial base is worth any price. Americans, with their unwillingness to tax themselves, aren't willing to pay for the American industrial base. The Chinese are.
Why can't we get a good healthcare bill? Because the US is a debtor nation, and China isn't willing to pay for Americans to have healthcare. That's why it has been declared that the health reform bill must be deficit neutral (or close). On the other hand, since bailing out the financial system meant bailing out the value of a lot of Chinese assets, the Chinese were (grudgingly) willing to go along with that, since they benefited. They do not benefit from Americans getting health care. Can you say co-dependent? I sure hope so, because that's the Chinese/US relationship. But one side of the relationship is getting a lot more out of it than the other one and every year the Chinese need America less, and America needs China more. (image by Futureatlas.com) |
