Asia Risks Much with Its Criticism of U.S. Monetary Policy

Here are some comments that are long overdue. Ambrose Evans-Pritchard suggests in the Telegraph that the Asian nations need to get a grip on reality and stop bashing Washington over reckless fiscal and monetary policies and realize that their survival as viable economies depends on the success of those policies.

Mr. Evans-Pritchard recounts the now tedious plaints from Asia concerning the risks their reserves are being subject to as well as the drumbeat for a new world currency regime. He then suggests that if Japan and China are truly successful in taking down the U.S. bond market they will have sown the seeds of their own destruction.

If Asia’s leaders give free rein to frustrations and crater the US bond market, they will ensure their own political destruction. Japan already risks descent into demographic death, deflation, and debt atrophy (its public debt is nearing 200pc of GDP). China’s regime depends on perma-boom for post-Maoist legitimacy. Could it survive the wrath of jobless graduates and rural migrants if it provokes America into erecting trade barriers, killing the globalisation goose that lays the golden egg?

American can if necessary retreat into its vast home market and rebuild its industrial base, well-armed with 12 aircraft carrier battle groups.

The last 12 months should be lesson enough that Asia cannot yet stand on its own two feet. Its mercantilist export model remains a “high-beta” play on the West, to use trader parlance.

A few weeks ago, I wrote a post questioning whether the Asian export model would survive. My thoughts then and now are that yes it will. Over time the economies of Asia have to develop their domestic economies but in the near-term the U.S. would revert more or less to mean and demand for Asia’s exports would revive. Asia has a strongly vested interest in things playing out this way and should they choose to take their threats to the next level might well kill the only chance they have at survival.

Evans-Pritchard points out what Japan and China decry is largely a product of their own making:

Let us not forget how we got here. Japan amassed a quarter trillion dollars of US bonds from January 2003 to March 2004 in a frantic effort to drive down the yen and stave off deflation. It has not yet won that battle. Producer prices fell to minus 3.8pc in April, a 22-year low.

China’s holdings of US bonds are a consequence of its own policy of holding down the yuan to boost exports. Beijing may rage about America’s “helicopter” stimulus, but what would have happened to the factories of Guangdong if the Fed had not taken emergency action or if the US Treasury had allowed the banks to collapse? China wants it both ways.

It may seem fanciful that America would turn inward and recreate its economy but dismissing that eventuality completely would be a mistake. From the rescue of GM and Chrysler to the “Buy American” provisions of various pieces of legislation, there is a feeling about that we need to see to our own. Obama’s calls for the renegotiation of NAFTA during the campaign were not met with jeers. None of this is lost on the political class. There is no natural constituency for globalization or multilateralism in the U.S., quite the contrary the average American is uncomfortable with the concepts and their perceived results. It would not take much to push the country towards isolationism.

The Asians may very well see a diminution in the value of their reserves before this is all over. They would do well to ask themselves whether that might be the least costly alternative.

Comments

[Dave Wrixon:]

And just how do you think China lost its global supremecy in the first place?

The US just is nothing like as important as it likes to believe. It isn't even China's biggest trading partner.

Much of US "success" depends on the dollars status as a reserve currency, which I for one believe that it is at serious risk of losing. But how does isolating itself from the rest of the World actually do anything for it.

Of course the US Government can manage without China if it is prepared to monetise its debt, but this will result in massive wealth destruction through hyper-inflation. That could be good to some degree as it would lead to a greater democratisation of wealth, but are the current powerful vested interests even prepared to go there? No that they probably have a street map anyway!

May 18 05:04 AM

[Ben Gee:]

China is adjusting to a reduced demand of exports well enough to still grow by 6% with help from the world crisis. But you can not expect merchants to stop selling as long as there are buyers and can you blame the merchants because the buyers are in trouble? Trying to make money is a natural thing and is NOT a fault. Spending money you do not have is NOT a virtue, it is in fact an addiction. Every body should try to make money,but you must make things others want and can afford. You can not say someone must buy your goods, you make people want to buy your goods. That is the secret of a sucessful business or country.

May 18 05:27 AM

[nobby73:]

I would recommend something that proved quite successful for the British Empire. When the demand for silk and tea proved too high and drained the Bank of England's reserves of silver (they would take any other form of payment), they hit upon the plan of selling opium produced in India to the Chinese market. It proved quite a hit with the locals. So, I would suggest annexation of Colombia and Bolivia (you'll have to sort out those gangs in Mexico, but that shouldn't be too hard) and then start shipping over large quantities of refined "coca". I suspect it will go down very well...

May 18 05:45 AM

[User 353732:]

1. In an economy dependent on global supply chains(which exist because they create major, tangible benefits) how can the US retreat into autarky without major costs and tremendous reallocation of internal resources? Moreover, the US, which from a physical,resource ,technological capacity and financing perspective could be self sufficient(or even an exporter) in energy has chosen to be remarkably dependent on foreigners, even malign foreigners, for this absolutely vital econmic input. If in something as obviously critical the US has, so far, not displayed the national will to protect itself, how will it attain autarky in many other inputs to the economy?
Moreover, important sectors of the economy( e.g agriculture, aerospace, machine tools, heavy equiipment, software, defense) have, over the years, developed significant, lucrative and growing global customer bases and would suffer greatly from loss of access.Finally, if the US chose autarky, the dollar would cease to be the global reserve currency and we all know the impossibly large economic costs that would create.
2. If the US has a huge internal market that provides the theoretical basis for the autarky arguement, then India and China could also take the same path, especially India which is much less globally integrated than the US or China.
3. In my view, in May 2009, Asia has more net economic/financial leverage over the US than the US has over Asia. This did not happen suddenly or by accident. It is a consequency of deliberate national choices and public policies. Reversing this assymetry cannot also happen quickly: it will take many years. Until then Asia and the US can snarl and growl at each other all they want but dramatic and swift decoupling is simply not attainable.

May 18 06:45 AM

[Morrison Bo...:]

What matters is not how the world's monetary system evolved into the current situation, with its gigantic risks and imbalances; but how to move the world to a Single Global Currency where such risks and imbalances will not appear.
The success of the euro shows that monetary union is the best way to ensure monetary stability and resolve imbalances. For example, there is zero concern today about the imbalances between France and Germany.
The primary problem with the euro and currencies of other monetary unions is that they still must co-exist within the international multi-currency system itself where the value of those common currencies must still fluctuate in value against each other.
If 16 countries can use the same currency, why not 192?
In addition to eliminating currency risk, the use of a Single Global Currency would eliminate the current foreign exchange trading expense of $400 billion annually, eliminate current account imbalances, eliminate the need for foreign exchange reserves (now totaling more than $6 trillion); and bring other benefits worth trillions.
The Single Global Currency Assn. (singleglobalcurrency.org)
promotes the implementation of a Single Global Currency by 2024, the 80th anniversary of the 1944 conference. That's only 15 years away.
The world is moving toward a Single Global Currency through the
creation, expansion and merger of regional monetary unions. Countries could also form ad hoc monetary unions by "izing" their countries to a major currency as Ecuador and El Salvador did by "dollarizing" and as Montenegro and the Vatican did by "euroizing." Another route is through international monetary conferences proposals and agreements, such as were seen at
Bretton Woods in 1944.
The challenge now is to reach that goal deliberately, as soon as possible with as little cost and as few crises as possible.
China and Asia can help lead the world in that direction.
See the book, "The Single Global Currency - Common Cents for the World."
Morrison Bonpasse
Single Global Currency Assn.
Newcastle, Maine, United States

May 18 07:29 AM

[andypandy:]

Ha - how ridiculous - "Asia cannot yet stand on its own two feet." The solution to their problem is simple, stop exporting. They have over 1 billion people, I am pretty comfortable that they can consume all of their exports. America isn't so special that its inhabitants are the only ones that can go out and shop. We are the ones with a huge problem, we don't have any production in America.

May 18 08:43 AM

[andypandy:]

No, the primary problem with the euro and currencies of other monetary unions is that they are not GOLD!


On May 18 07:29 AM Morrison Bonpasse wrote:

> What matters is not how the world's monetary system evolved into
> the current situation, with its gigantic risks and imbalances; but
> how to move the world to a Single Global Currency where such risks
> and imbalances will not appear.
> The success of the euro shows that monetary union is the best way
> to ensure monetary stability and resolve imbalances. For example,
> there is zero concern today about the imbalances between France and
> Germany.
> The primary problem with the euro and currencies of other monetary
> unions is that they still must co-exist within the international
> multi-currency system itself where the value of those common currencies
> must still fluctuate in value against each other.
> If 16 countries can use the same currency, why not 192?
> In addition to eliminating currency risk, the use of a Single Global
> Currency would eliminate the current foreign exchange trading expense
> of $400 billion annually, eliminate current account imbalances, eliminate
> the need for foreign exchange reserves (now totaling more than $6
> trillion); and bring other benefits worth trillions.
> The Single Global Currency Assn. (singleglobalcurrency.org)
>
> promotes the implementation of a Single Global Currency by 2024,
> the 80th anniversary of the 1944 conference. That's only 15 years
> away.
> The world is moving toward a Single Global Currency through the<br/>creation,
> expansion and merger of regional monetary unions. Countries could
> also form ad hoc monetary unions by "izing" their countries to a
> major currency as Ecuador and El Salvador did by "dollarizing" and
> as Montenegro and the Vatican did by "euroizing." Another route is
> through international monetary conferences proposals and agreements,
> such as were seen at
> Bretton Woods in 1944.
> The challenge now is to reach that goal deliberately, as soon as
> possible with as little cost and as few crises as possible.
> China and Asia can help lead the world in that direction.
> See the book, "The Single Global Currency - Common Cents for the
> World."
> Morrison Bonpasse
> Single Global Currency Assn.
> Newcastle, Maine, United States

May 18 08:47 AM

[CautiousInv...:]

These issues are a bit more complicated than either author suggests.

China has over a $trillion tied up in US Treasury's, the outcome of a very deliberate mercantilist policy of exporting cheap goods to exploit its large population and cheap labor base. Built upon rickety factories, this is a fast and expedient means of promoting economic growth.

And, as others have noted, we in the US sucked up these goods while inventing financial products and exporting jobs and employment opportunities.

Given the current climate and a likely retrenchment in consumer spending, it's not entirely clear how much China will be able to assist us further in financing our fiscal deficits.

Their accumulation of reserves will stall as US savings rise, with the likely outcome that the US consumer will be a fresh and welcome source of funding for the US financing needs. The critical issue then is how they handle their current reserves, not whether they continue to buy Treasuries going forward as they may or may not have the surpluses.

As to the larger and more contentious issue, the US in the short-term cannot pursue policies of autarky any more than China can convert to a consumer driven economy. As others have noted the US lacks the infrastructure needed to produce the wide range of consumer goods that are now imported; it would take time and a massive reallocation of resources to achieve economic self sufficiency. And any sober analysis of the allocation of resources to this end would likely raise serious questions.

Similarly, China cannot suddenly become a consumer driven economy; since 2003 it has announced that it wants to increase domestic consumption yet consumer spending as a fraction of GDP has declined from 40% to 35%. To move to a consumer driven economy the wage structure would need to change and new economic classes would need to emerge; both pose problems to the Chinese economy.

In broad terms, increasing wages would diminish China’s competitive advantage as an exporter; there would have to be solid evidence that the growth in consumer spending would more than offset losses in the export sector. And this may not be the case until China installs broader social safety nets, including expanded healthcare and retirement pensions.

Creating new economic classes, as has happened in the southern coastal regions which have enjoyed the greatest prosperity, creates a different problem. China remains a somewhat divided country with sharp divisions between those who have prospered from recent growth and the inland agricultural peasants who make up half the population. The political tension between the two groups is palpable and Chinese leadership will not do anything to escalate the rising tension between these groups by escalating the economic status of the coastal middle class.

Thus, it is likely the US will remain an importer of Chinese goods, though at reduced levels, and any attempt by China to move towards more of a consumption driven economy will occur slowly. Needing the US market and wanting to protect the value of its present holdings in Treasuries, it’s unlikely China will do anything precipitously that would erode the value of its holdings. For the time being, it’s in our mutual interests to continue doing business with each other.

May 18 10:53 AM

[Gregman2:]

The success China has had in its manufacturing sector came at our expense, due to technology transfers. Hence, they share in the blame. Many in Asia want to blame the U.S. consumer for excess, but buying crap from Chinese factories helped make them rich. It's a two way street. It's time for the U.S. to regain its manufacturing base.

May 18 11:34 AM

[HaavBline:]

For decades, Americans have never hesitated to critisize and give directions to other countries. It is time that we learn to listen to some criticism and stop being so thin-skined and defensive, as the author demonstrated.

The reality is, as US buying power has been truncated and is not likely to revive in a big way, other countries no longer have as many reasons to hide their displeasures toward self-serving American policies. We will have to learn to listen and accomodate other's interests and concerns and work on an equal basis.

Consider that these countries are our bankers, it is not bad that we can still work with them on an equal basis.

May 18 11:56 AM

[Canadian Re...:]

When I worked in China 3-4 years ago, Chinese government reported that 10% of the population have achieved middle class. That is 130 million people with money to spend.

The way these new middle class Chinese spent money put me to shame. These people did like to spend. My secretaries and drivers kept asking me why I did not upgrade my cell phones. They were upgrading their cell phones every 3-6 months.

They bought condominiums. Each has at least 6 air-cons, a couple of TV, fridge, furniture, etc. They also bought cars. They ate out a lot. Some of the restaurants were just huge, like covering half to one city block.

They went to Hong Kong on shopping junkets. They used to carry bags of RNB bills as credit cards were not very popular or common then. Most small businesses dealed in cash. You know. Better to keep the government out of their pockets. They kept HK tourism industry going. HK'ers used to look down on Mandarin speaking Chinese. Now they are learning Mandarin so they can earn the RMB from Mainland Chinese. What a trun of fortune.

So, don't worry. Chinese consumption class will happen sooner than we figure.

May 18 12:56 PM

[carey_jim:]

It's inevitable that all of our models are simplifications but it isn't inevitable that we take our simplifications too seriously.

Most developing economies choose protective mercantilism as economic models and anyone who knows anything at all about economic history knows that the United States itself, in the 19th century, was no exception. And yet, by the end of the 19th century, America surpassed Britain to become the most powerful economy in the world.

In fact, Alexander Hamilton, who was the founder of the American economic system of the 19th century, explicitly rejected the (then radical) free-trade ideas Adam Smith and embraced mercantilism instead.

The Chinese are anything but stupid and uneducated and so, by definition, they know economic history. If any country will take an irrational, a-historical approach to economic reality it will be the United States which is now, at the beginning of the 21st century, in a similar position to that of Britain in the pre-1914 period.

But every analysis is a simplification of an immensely complex world and we should not take any of our models too seriously. They are road maps to the future, not the future itself.

As for America turning isolationist again, I think modern technology makes that impossible. We are no longer separated from Asia and Europe by 8000 miles of ocean as we were at the beginning of the last Great Depression, but linked with fiber optic cables via the Internet and satellites and by jet transportation.

The technology of communication will continue to evolve and I think the culture that can produce people who know how to use and develop this technology will produce the strongest economy in the future.

All economic and other models are maps into this future that will be created by scientists and technicians.

I think it is only what we in the West call the liberal arts will make that future place livable.

China too has such a tradition of liberal arts, which is older even than ours and even though she doesn't know it, she doesn't need our culture or civilization, only our science and technology. China will make her own maps into the future as the need arises. Let us hope she doesn't take them too seriously.

May 18 03:44 PM

[Tony Daltorio:]

Unlike Japan and Korea, which are export driven, China is rapidly moving away from the export-model. Apparently the author thinks that the Chinese are stupid and will always be reliant on their American "masters". Looks to me that the shoe will soon be on the other foot.

May 18 03:57 PM

[danf:]

It's curious to see so much cultural self loathing in some of these comments. The children sense that they compare poorly to the virtues, sacrifices and ruthless accomplishments or their forefathers. Because they cannot measure up, they disparage and declaim.

Nobody knows what is going on inside China. Probably the Chinese don't know. China is unstable politically and demographically. I suggest that their political culture is alien to Chinese traditions and riddled with internal contradictions.

Asian economies will have a hard time generating their own consumption because their cultures don't value win-win outcomes.

America is in shock now as the productive classes are reeling from a coup by incompetent financial and governmental managerial elites who have mobilized the taking classes into their schemes to hang onto their entitlements.

The fumblings of Government will lead to a producers strike. Producers will respond to incentives and become non-producers. The taking classes will find the larders empty. A new awakening of republican virtues will begin to appear (no I don't mean the party).

Fearful times will favor the grounded, the intolerant believers in virtue. Civilizations are built and sustained by flint hard mentalities that are not visible in our landscapes for the present moment.

May 18 11:00 PM

[Blackeyebart:]

The nub of the argument seems to be that from China's viewpoint the US is "too big to fail." Now, where have I heard that before?

I have seen the enemy and he is us.

May 19 12:02 AM

[andypandy:]

hope you are right, I just don't think you are. The sheeple need their safety nets.


On May 18 11:00 PM danf wrote:

> It's curious to see so much cultural self loathing in some of these
> comments. The children sense that they compare poorly to the virtues,
> sacrifices and ruthless accomplishments or their forefathers. Because
> they cannot measure up, they disparage and declaim.
>
> Nobody knows what is going on inside China. Probably the Chinese
> don't know. China is unstable politically and demographically.
> I suggest that their political culture is alien to Chinese traditions
> and riddled with internal contradictions.
>
> Asian economies will have a hard time generating their own consumption
> because their cultures don't value win-win outcomes.
>
> America is in shock now as the productive classes are reeling from
> a coup by incompetent financial and governmental managerial elites
> who have mobilized the taking classes into their schemes to hang
> onto their entitlements.
>
> The fumblings of Government will lead to a producers strike. Producers
> will respond to incentives and become non-producers. The taking
> classes will find the larders empty. A new awakening of republican
> virtues will begin to appear (no I don't mean the party).
>
> Fearful times will favor the grounded, the intolerant believers in
> virtue. Civilizations are built and sustained by flint hard mentalities
> that are not visible in our landscapes for the present moment.

May 19 12:03 AM

[johngonole:]

I'm against a one world currency if not for the simple reason that it will lead to a one world government. I would agree that certain efficiencies would be gained by a one world currency. But tell me this. A Fiat currency is basically printed by some group in exchange for something of value. Its the value of what this group purchases that gives this currency value. But this brings up an interesting point. In the beginning it starts with someone simply printing funny money and buying whatever they want. What small group of people will get this previledge. Who will decided monetary policy. What happens if they mess up.

With competing currencies their are checks and balances. I can switch currencies if I choose. The same can be said of governments. I believe right now power is shifting from small local government to large federal governments. Eventually power will shift from goverernments of countries to a one world government. Problem is the same. If all the sudden I disagree with the one world governments education policy I can't simply move to over one county to a place that has a good education policy. Competition between government entities breeds excellence. A one World currency and one world government will be a disaster. It will birth an elite class who will enslave everyone else. We all know monetary policy is set in secret. With a one world currency those on the inside will enrich themselves. I could probably go on for hours and hours about why this is a terrible idea. I would rather have some inefficiency than cede all power to a small group of unelected officials.

The game all over the world is monopoly! Monopoly is where we are going.

May 19 12:35 AM

[Canadian Re...:]

Posters who think Chinese do not know how to consume obviously do not know Chinese. They like to consume just like you and me. Previously, they did not do it because they did not have money. Now 10% of them have it and are spending better than you and me. See all the Chinese tourists.

May 19 12:43 AM

[donzelion:]

"The Asians may very well see a diminution in the value of their reserves before this is all over."

Possibly, but more likely, their reserves will circulate internally and become "parked" in various other Asian economies. Asians can play "hot potato" with depreciating assets with equal finesse to their Wall Street counterparts. Bear in mind that when thinking of "China" only doesn't come close to accounting for the massive Chinese dominance in mainline industries in the Philippines, Thailand, Malaysia, Indonesia, and other Asian markets. Chinese government-backed companies have been trading treasuries for commodities, equities, and real property quietly for six months; the pace of diversification will accelerate if the dollar starts dropping.

As for the basic thesis: China is export-dependent, the U.S. is one major market for their products. However, over the next decade, I'd be on the lookout for another major market: the Arabian Gulf. Half the reason for Ford/GM/Chrysler's decline relative to other automakers is the substantial loss of this profitable market to German/Japanese/Korean rivals (due in no small part to an unwillingness by Americans to post personnel overseas to look after that supply chain). US companies suffer massive competitive disadvantage due to our unique taxes on global earnings (what Obama mistakenly views as "tax evasion" is actually the international norm - and one of the main obstacles for exporting US goods).

May 19 08:20 AM

[carey_jim:]

"It's curious to see so much cultural self loathing in some of these
> comments. "

Give examples, don't talk in generalities. I didn't see any "cultural self-loathing" at all. In fact, America is the most self-congratulating, chauvinistic culture in the world. Show me an American who thinks another culture is superior to America and I'll eat seven big Mac's in five minutes.

"Nobody knows what goes on in China, probably the Chinese don't know? Don't take your models so seriously. Use them as road maps only. They are not reality.

"I suggest that their political culture is alien to Chinese traditions
> and riddled with internal contradictions."

Chinese traditions are Confucian-Taoist and mostly totalitarian, just as Western traditions were Christian and mostly totalitarian until about 200 years ago (American and French revolutions.)

China entered the modern world in 1947 with a 'communist' (totalitarian) revolution that was forced on it by a Western Chinese policy that was stupid, greedy and immoral.

For the rest of your screed, as I said, don't take yourself or your models so seriously.

If the Chinese 'don't know what's going on in China' then you don't either.

On May 18 11:00 PM danf wrote:

> It's curious to see so much cultural self loathing in some of these
> comments. The children sense that they compare poorly to the virtues,
> sacrifices and ruthless accomplishments or their forefathers. Because
> they cannot measure up, they disparage and declaim.
>
> Nobody knows what is going on inside China. Probably the Chinese
> don't know. China is unstable politically and demographically.
> I suggest that their political culture is alien to Chinese traditions
> and riddled with internal contradictions.
>
> Asian economies will have a hard time generating their own consumption
> because their cultures don't value win-win outcomes.
>
> America is in shock now as the productive classes are reeling from
> a coup by incompetent financial and governmental managerial elites
> who have mobilized the taking classes into their schemes to hang
> onto their entitlements.
>
> The fumblings of Government will lead to a producers strike. Producers
> will respond to incentives and become non-producers. The taking
> classes will find the larders empty. A new awakening of republican
> virtues will begin to appear (no I don't mean the party).
>
> Fearful times will favor the grounded, the intolerant believers in
> virtue. Civilizations are built and sustained by flint hard mentalities
> that are not visible in our landscapes for the present moment.

May 19 12:38 PM