January 10, 2008
ONE HEALTHY CONSUMPTIVE:
The $1.4 Trillion Question: The Chinese are subsidizing the American way of life. Are we playing them for suckers—or are they playing us? (James Fallows, Jan/Feb 2008, The Atlantic)
Through the quarter-century in which China has been opening to world trade, Chinese leaders have deliberately held down living standards for their own people and propped them up in the United States. This is the real meaning of the vast trade surplus—$1.4 trillion and counting, going up by about $1 billion per day—that the Chinese government has mostly parked in U.S. Treasury notes. In effect, every person in the (rich) United States has over the past 10 years or so borrowed about $4,000 from someone in the (poor) People’s Republic of China. Like so many imbalances in economics, this one can’t go on indefinitely, and therefore won’t. But the way it ends—suddenly versus gradually, for predictable reasons versus during a panic—will make an enormous difference to the U.S. and Chinese economies over the next few years, to say nothing of bystanders in Europe and elsewhere.Any economist will say that Americans have been living better than they should—which is by definition the case when a nation’s total consumption is greater than its total production, as America’s now is. Economists will also point out that, despite the glitter of China’s big cities and the rise of its billionaire class, China’s people have been living far worse than they could. That’s what it means when a nation consumes only half of what it produces, as China does.
Neither government likes to draw attention to this arrangement, because it has been so convenient on both sides.
Nice to see that Mr. Fallows has finally moved on. 25 years ago he was droning on about how unhealthy our relationship with Japan was and how it spelled impending doom.
But he still doesn't get it. The Chinese have an unstable society so a guaranteed return from loans to America, the worlds most stable, is awfully attractive. Meanwhile, Americans reap a far higher rate of return--one of the main benefits of that greater development--which has given us our extraordinary household net worth. Consumer goods are a sideshow that folks like Mr. Fallows can never see past.
Posted by Orrin Judd at January 10, 2008 4:19 PMI have a trade deficit with my local grocery store. I take their stuff and give them money that I worked for, in exchange for their stuff. I know one day they'll go out of business or I'll die or move - what will happen to that trade deficit then? Nothing.
Mr. Fallows may think that the money paid to the Chinese for their exports are IOUs, but I'm under the impression the monies paid for imports is a final exchange.
I suspect further he sees the foreign cash inflow back into the US from the Chinese as a mechanism for which there is no parity on the US side - ie. give me your money and I'll pay you interest on it. But he fails to see that when the investor provides their monies to the gov't, markets etc., that money is getting a value added service to it and it grows, via the US gov't creating stable conditions to grow an economy, allowing it collect more revenue in taxes, or the markets putting the foreign capital to the areas where it would again grow. So i'd supect the S&L, Enron & mortgage, insider trading scandals and crisis' tend to flip around quickly because the Markets and Gov't can't afford not do something about them.
Posted by: KRS at January 10, 2008 7:25 PMWow. Our relative advantage in having property rights, rule of law, democracy, a military capable of securing free trade, etc. is only $1.4T over 25 years.
Posted by: JAB at January 10, 2008 8:10 PM