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James Fallows studied American history and literature at Harvard, where he was the editor of the daily newspaper, the Harvard Crimson. From 1970 to 1972 Fallows studied economics at Oxford University as a Rhodes scholar.

January/February 2008

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.

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. For China, it has helped the regime guide development in the way it would like—and keep the domestic economy’s growth rate from crossing the thin line that separates “unbelievably fast” from “uncontrollably inflationary.” For America, it has meant cheaper iPods, lower interest rates, reduced mortgage payments, a lighter tax burden. The average cash income for workers in a big factory is about $160 per month. On the farm, it’s a small fraction of that. Most people in China feel they are moving up, but from a very low starting point.

This is the bargain China has made—rather, the one its leaders have imposed on its people. They’ll keep creating new factory jobs, and thus reduce China’s own social tensions and create opportunities for its rural poor. The Chinese will live better year by year, though not as well as they could. And they’ll be protected from the risk of potentially catastrophic hyperinflation, which might undo what the nation’s decades of growth have built. In exchange, the government will hold much of the nation’s wealth in paper assets in the United States, thereby preventing a run on the dollar, shoring up relations between China and America, and sluicing enough cash back into Americans’ hands to let the spending go on.

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Plunder: to rob of goods or valuables by open force, as in war; despoil, or fleece; to take wrongfully, as by pillage, robbery, or fraud; loot.

U.S. has plundered world wealth with dollar: China paper
Fri Oct 24, 2008

BEIJING (Reuters) - The United States has plundered global wealth by exploiting the dollar's dominance, and the world urgently needs other currencies to take its place, a leading Chinese state newspaper said.

"The grim reality has led people, amidst the panic, to realize that the United States has used the U.S. dollar's hegemony to plunder the world's wealth," said the commentator, Shi Jianxun, a professor at Shanghai's Tongji University.

Shi, who has before been strident in his criticism of the U.S., said other countries had lost vast amounts of wealth because of the financial crisis, while Washington's sole concern had been protecting its own interests.

Shi suggested that all trade between Europe and Asia should be settled in euros, pounds, yen and yuan, though he did not explain how the Chinese currency could play such a role since it is not convertible on the capital account.

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China: where’s the inflation?
Jun 15th, 2010

Financial repression

Why has inflation been muted – as it has by the way in other countries that followed the so-called Asian growth model, including most importantly Japan in the past several decades?

University of Chicago economist Robert Aliber - if the nominal exchange rate is not allowed to rise, policymakers can still contain inflation by what economists call financial repression.

This has the effect of transferring large amounts of income away from net savers, which for the most part consists of Chinese households, and in favor of net users of capital. Net users, of course, consist primarily of large, capital intensive businesses, real estate developers, infrastructure investors and local and central governments, including the People’s Bank of China, the largest net borrower of renminbi in China. Net savers are forced into subsidizing net users, in other words.

The consequence is that monetary growth is channeled not into household demand but rather into the production of more goods, and the inflationary impact of monetary expansion is muted. Financial repression is an alternative to currency appreciation or inflation.

But according to Aliber’s model, financial repression has a cost. It leads to overinvestment, asset bubbles, and rising excess capacity - correctly valued costs of Chinese investment in infrastructure, real estate development, manufacturing capacity, and government spending, exceed the economic benefits.

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China: The Cocaine of Cheap Money
Jul 28, 2010

What can the authorities do? If Beijing raises interest rates quickly, debt and bankruptcy will surge and growth will collapse.

If they don’t raise interest rates, they can keep growth high for a while longer, but the amount of reserves and misallocated capital will continue rising, making the eventual cost of raising interest rates even higher.

Finally, if they raise interest rates slowly, they will slow growth while still suffering many more years of worsening imbalances, until rates are finally high enough to begin reversing the imbalances.

So there’s the dilemma: they’re damned if they do and damned if they don’t.

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When Americans Stop Shopping, the World Suffers
07/28/10

Total imports fell from $2.538 trillion in 2008 to $1.947 trillion in 2009 -- a decline of almost $600 billion. This means the nations that export goods to the U.S. received $600 billion less from the U.S., and that's a lot of sales to lose.

Unsurprisingly, that decline in sales to the U.S. is one reason for a slow-growth global economy, as many of the top exporting countries struggle with tepid demand.

It's Not Just Oil

Oil imports totaled $234 billion in 2008, and $215 billion in 2009 -- roughly 10% of all the goods and services the U.S. imported.

Goods are the largest category of U.S. imports, totaling $2.139 trillion in 2008 but just $1.575 trillion in 2009 -- a whopping $564 billion decline. And while many focus on foreign trade with China, America's biggest trading partner is Canada.

The Chinese government fought the global slowdown by ramping up a massive domestic stimulus package that counteracted not just the drop in China's exports but also weak domestic consumer demand. Whether the Chinese economy can continue expanding without the government stimulus and export growth remains to be seen.

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PeakTrader said...

It's likely the government's huge spending spree and massive regulations created the slow-growth recovery, offsetting much of TARP and the quantitative easing.

So, there's more debt and less tax revenues. The Bush tax cuts may expire at the wrong time preventing (again) a stronger recovery:

AP survey: A bleaker outlook for economy into 2011
July 29, 2010

The U.S. economic recovery will remain slow deep into next year, held back by shoppers reluctant to spend and employers hesitant to hire.

They (economists) foresee weaker growth and higher unemployment than they did before.

Economic growth the rest of this year and early next year will weaken, to less than 3 percent.

The unemployment rate will be no lower at the end of the year than it is now -- 9.5 percent. A majority think it will be 2015 or later before the rate falls to a historically normal 5 percent.

State budget shortfalls pose a "significant" or "severe" risk to the national economy. The loss of tax revenue has forced state and local governments to cut services and lay off workers.

Growth would have to equal 5 percent for a full year to drive the unemployment rate down by 1 percentage point.

"There's a risk that the loss of momentum will snowball and feed on itself, but I think in the end the recovery will stay on track," predicted James O'Sullivan, chief economist at MF Global.