Financial Mutually Assured Destruction
Noam Scheiber has a fascinating article on Chinese worries about the U.S. budget deficit and American policymakers’ efforts to calm those fears. The piece doesn’t really point to a hard-and-fast conclusion about how to resolve the situation and that’s more or less the problem:
The day China consumes more, relies less on exports, and accumulates far fewer dollars as a result can’t come soon enough. There’s a certain mutually-assured-destruction quality to our current relationship–Larry Summers calls it the “balance of financial terror”–in which one false move by either side could bring down both economies, and probably the entire global financial system, too. This makes dialogue a necessity. But what it really does is make you pine for a way back from the edge.
As The Atlantic’s James Fallows has pointed out, even if both sides behave responsibly, there’s the persistent risk of miscalculation–or maybe a rumor that triggers a bond market sell-off China didn’t intend. During the cold war, the hotline Kennedy and Khrushchev established was genuinely stabilizing, but it would have been far more stabilizing had the United States and Soviet Union stopped training thousands of nuclear warheads at one another. If, to stick with the analogy, the U.S.-China relationship is only in the early 1960s, then it’s going to be a long couple of decades indeed.
It strikes me that any rational person looking at how the health care debate has unfolded is going to grow substantially more skeptical about the ability of the United States to pass major legislation in general. What’s more, if you contrast the health care situation with the relative ease with which it was possible to enact debt-financed tax cuts (in 2001 and 2003) and a debt-financed increase in Medicare spending (in 2003) you’re not going to get super-optimistic about the prospects of deficit reducing legislation passing in the future.
21 Responses to “Financial Mutually Assured Destruction”
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September 15th, 2009 at 5:50 pm
“you’re not going to get super-optimistic about the prospects of deficit reducing legislation passing in the future.”
HA! That’s for sure. Hell, I’m about thisclose to thinking we need a new Constitutional Convention, for chrissake.
September 15th, 2009 at 5:53 pm
To say nothing of the ease with which it was and continues to be possible to wage debt-financed, senseless wars.
September 15th, 2009 at 6:11 pm
If the Chinese read Matt Lattimer’s account of life in the Bush Fuhrer Bunker last September, they will probably go “Aieeee!”
and dump every Treasury they have. Even at a loss.
It’s like riding in a car driven by a drunk frat-boy. Sooner or later you and a telephone are going to try to occupy the same space.
September 15th, 2009 at 6:12 pm
Excuse me: You and a telephone POLE
September 15th, 2009 at 6:31 pm
DECOUPLING OF THE DOLLAR!
The Dollar will no longer be the base currency;
We Need New Banks, (www.Spiegel.de), Harvard Historian Neall Ferguson.
FERGUSON: The fates of many of the words economies are pegged to development of the dollar (Base Currency) at the present time. If the dollar loses value, (WHICH IS HIGHLY LIKELY), it will be particularly painful for countries like Japan and Germany, whose exports will become more expensive. So it should be in Germans interestin particular that the montary system is changed
DE SPIEGEL: What might such a new system look like?
FERGUSON: Perhaps a little like the situation in the 19th century, when several reserve currencies, The Pound Sterling, Dollar, The German Mark and the French Franc. As such the (DOLLAR DOMINANCE COULD WELL DEMINISH) in favor of the Euro, The Japanese Yen, or the Chinese Currency, the Yuan.
[The BRIC]
Smart countries avoid dealing with the (IMF) and their strings and conditions attached to (IMF) loans building reserves, and support a (Diversified Currency Base) such as the [BRIC].
Such as the (BRIC) Brazil, The Russian Federation, India, and The Peoples Republic of China, they built up huge currency reserves, and deal in Euros, Pound Sterling, local currency, or Gold Bullion, De-coupling themselves from the (IMF) and ($U.S.) dollars also ($U.S.) Treasury bonds and notes;
Brazil: Brazil is selling off dollars at the rate of ($2Bn/€1.6Bn – to – $5Bn/€3.9Bn) billion ($U.S.) dollars per day, and should have been completely divested of ($0.5Trn/€0.39Trn) half a trillion ($U.S.) dollars or so ($U.S.) Treasury bonds and notes on April (2009).
Russia: The Russian Federation, is conducting commerce and trade in (€ Euro’s/£Pounds Sterling) and local currency, of the country trade is conducted with.
India: India sold nearly ($50B/€39Bn) billion ($U.S.) dollars from its reserve.
China: Is looking into its further dealings in the dollar or treasury bonds, while at the same time buying Gold, with ($U.S.) dollars, from its reserves.
The Bric has long been in the process of Dollar Decoupling and now European Countries are now Decoupling their economies from the Dollar based currency system, if the (IMF) International Monitary Fund does not shift to the [BRIC] system, a new Organization will be set up by the [BRIC ] and the (EU), as it will be necessary for these Spheres of Economic Power to have a sounder base currency than that of a single Dollar based monitary system, as the Federal Reserve prints the Dollar into value less currency.
HERCULE TRIATHLON SAVINIEN
September 15th, 2009 at 6:38 pm
Of course what Matty really means is “… pass major legislation which violates Obama’s promise not to raise middle class taxes”.
I’m still waiting for our Honest Abe wannabe to come clean with the voters on how much money he needs to take from them to finance ObamaWorld.
That is what Matty means by “deficit reducing legislation”.
Talk about heavy political blowback!
September 15th, 2009 at 6:47 pm
Hmmm. US Treasury TIC Data (includes China’s holdings of US Treasuries) is released every quarter. Tomorrow’s release is at 9 am.
Do you feel lucky?
September 15th, 2009 at 6:58 pm
Wonder why they never mention the trade deficit, only the budget deficit? China invests in treasury bonds because it’s a place to recycle their trade surplus and keep their currency low to maintain their competitive advantage. If there were fewer Treasuries, they’d have to invest the money in something else.
Of course it’s convenient for the supply- siders, who can have their tax cuts without actually figuring out how to pay for them.
September 15th, 2009 at 7:05 pm
What’s more, if you contrast the health care situation with the relative ease with which it was possible to enact debt-financed tax cuts (in 2001 and 2003) and a debt-financed increase in Medicare spending (in 2003) you’re not going to get super-optimistic about the prospects of deficit reducing legislation passing in the future.
I don’t understand. Obamacare is deficit increasing legislation. So why would any difficulty in passing it reflect badly on passing deficit reducing legislation in the future?
September 15th, 2009 at 7:41 pm
I see Al is currently using #3 of his “Three Strategies for Hacktakery”: “Pretend to Be Unbelievably Stupid.”
It never gets old!
September 15th, 2009 at 7:48 pm
#8 – You are absolutely correct. We would already be in a huge deep hole had the Chinese not essentially been financing our consumption (to keep up demand for their production). It is one giant house of cards, except it exists on a global scale that, if it blows, will make 2008 look like a cakewalk.
You cannot decouple production and consumption the way we have. And this is exactly what all these free-traders have argued for, but fail to see that this cannot be sustainted. America is essentially running up a huge credit card balance, but only earns Wal-Mart wages.
But what this really details is that there is a surplus of workers worldwide for the goods the West consumes.
September 15th, 2009 at 8:00 pm
The problem is this: the payoffs to Obama’s union pals – like the tire tariff – run the risk of setting off a chain of emotional (as opposed to rational) responses. Will the tire tariff be the thing that does that? Probably not. But if the President continues to kowtow to anti-China sentiment this way, each time it happens, the probability increases.
Brad Delong was pretty good on this.
September 15th, 2009 at 8:07 pm
Except that this is all based on a misconception. The deficit is not “financed” by Chinese lending or any other kind of lending. The Fed sells T-bonds as part of its open-market operations, which have the effect of setting interest rates.
Federal government borrowing does not “finance” anything.
September 15th, 2009 at 8:15 pm
#8 Wonder why they never mention the trade deficit? In the European Press the trade deficit is of major concern, the American Empire Press only puts out talking points the trade deficit is the largestest in the history of the American Empire, along with it’s debt.
The Only Sphere of Economic Influence that has not Decoupled is the (EU) all others are either in the process or have decoupled. The Global Community is entering the (21st) Century with or without the American Empire.
We have not begun to see the economic downturn yet, Sept. 7th was the end of the Summer Economic Plateau, the up tick was necessary buying for back to school, but the Holiday Shopping Season with a job less recovery, this thing is by no way over, and double digit inflation is just a breath away.
HERCULE TRIATHLON SAVINIEN
September 15th, 2009 at 9:29 pm
What happens when the Chinese demand we send them millions of moderately attractive women?
September 15th, 2009 at 11:48 pm
They kill their own women off, why would they want ours?
September 16th, 2009 at 4:52 am
11: This is dead wrong. The Chinese would not be half as wealthy today if it were not for the enormous trade deficit they have been running for the past couple decades. We have permitted them enormous supply side growth during that time. We benefited from the cheaper goods, but we would probably be just as well off if we had continued to improve the efficiency and productivity in our own economy by purchasing our own goods. We both stand to lose from destabilization of the current arrangement, but it is purposeful Chinese policy that got us here, and they reaped the lion’s share of the benefit.
September 16th, 2009 at 7:10 am
Dean Baker, on both of these matters:
September 16th, 2009 at 7:25 am
Noam Scheiber “Larry Summers calls it the “balance of financial terror”–in which one false move by either side could bring down both (the US & Chinese) economies”
What a crock of shit. Is Larry Summers is out of his fucking mind? Does he really believe any rational thinking human being would accept such nonsense? Larry Summers does not strike me as a moron. It must be that he is gripped by the sheer arrogance of old conceits that he is willing to entertain such lunacy. It is the only explanation.
-China has $2.5 trillion in foreign currency reserves.
-The US owes foreign countries $2.1 trillion.
-China’s total national debt obligations, despite being currently engaged in the 6 largest building projects in history of mankind, despite spending tens of billions to bring universal health care to its 1.3 billion citizens over the next four years, and despite pumping $585 billion dollars worth of cash directly into their domestic economy this year, stands at $80 billion, or miniscule 1.4% of its GDP.
-The US has a total debt obligations of nearly $12 trillion, or a whopping 90% of its GDP.
-According to most experts China’s GDP will grow this year by at least 8.3% (Goldman Sachs’ estimate -9.4%), a staggering figure considering the world is in the midst of a Great Recession.
-US GDP will contract this year, by at least 1.5%, and possibly by as much as 3.5%.
-Individual Chinese savings rates are nearly 30%. Chinese consumption-to-GDP ratio stands at 36%, meaning that China is poised for explosive domestic spending and even more explosive domestic growth, without worries of creating a debt bubble.
-The individual savings rate in the US, despite have jumped to as high as 7% earlier this year, is headed quickly back toward zero. American’s consumption-to-GDP ratio is tapped out at 70%. We know where these numbers lead -modest domestic growth fueled by massive individual debt.
-China presciently raised reserve requirements for Chinese banks five times between 2007-2008, and as a result, China’s major and minor banks not only survived the world financial crises but now find themselves awash with cash -and confidence in China’s collective future.
-As we all know, US banks at all levels all over the country were highly leveraged and many crashed as a result of this and other things. $3 trillion in US government loan/giveaways were required to keep America’s financial system (temporarily?) functioning. American bankers, clearly, have no interest in the collective future of the United States and its people. If anything, it seems the United States and its people function only to serve individual banks and banker’s interests. This relationship has been and will continue to be a recipe for National disaster.
Larry Summers simply doesn’t get it. China does not need the United States of America in order to avoid economic calamity. China is already the world’s 3rd largest economy and has the 5th largest domestic market, including the world’s largest -always critical- domestic market for automobiles. Their $585 stimulus package was aimed directly at a domestic market that is already DOUBLING in size every four years.
China is the world’s leading manufacturer of the four critical green technologies of the future, lithium batteries, electric automobiles, wind turbines and solar panels. China has more miles of high speed rail and subway track than the rest of the world combined, and all of it is brand new. China has the largest aqueduct system in history, and it is brand new. China is building, BUILDING, rivers. China will have by 2015 the most extensive highway network in the world, surpassing even the once mighty country that is most proud of its automobile culture and its highways, the United States. And all of it, brand spanking new.
Larry Summers thinks that the United States has China by the balls because we owe them unbelievable, unheard of sums of money. Larry Summers is wrong. China is not a troubled bookie worried about some scrounger welching on a huge bet. China is more like a loan officer at a well funded bank. If you don’t pay them, they take your fucking house away. And if you don’t have house to give, if you are broke and begging on the street, that is really some tough titties for you. In the meantime, the loan officer and the well funded bank will survive just fine.
September 16th, 2009 at 10:43 am
This issue gets at the problem with believing large cash stimulus and quantitative easing now will not be a problem down the road. Those who think it is not a problem assume that the Fed has tools to deal with excess liquidity and prevent inflation or other pernicious effects from getting out of hand.
The problem is one of those tools seems to be the Fed cajoling congress to exercise fiscal restraint. http://www.washingtonpost.com/wp-dyn/content/article/2009/06/03/AR2009060301367.html
September 16th, 2009 at 11:12 am
Max, China may eventually be able to meet the supply side of their economy with domestic demand, but that is not currently the case. If the US market crashes, China’s growth ends.