Auerback: G20 Post-mortem – “Chimerica” has been a Chimera

By Marshall Auerback, a portfolio strategist, hedge fund manager, and Senior Fellow at the Roosevelt Institute who writes at New Deal 2.0.

A disastrous trade war may be coming our way.

There has been a considerable amount of discussion about current account imbalances in light of last weekend’s failed G20 summit. For the most part, the meetings focused less on currency levels per se and more on the underlying trade imbalances. In particular, they discussed the threshold at which both surplus and deficit nations should work to mitigate the extremes implied by deficits/surpluses in excess of 4% of GDP.

Of course, one could argue that the focus on current account imbalances, rather than exchange rates per se, was simply a means by which the Americans could discuss China’s pegged rate regime so that Beijing didn’t appear to succumb to US pressure and “lose face”. But fundamentally, the US dollar/Chinese yuan exchange rate has long constituted a huge source of financial instability in the global financial architecture. Although today’s focus on China tends to highlight its huge and growing bilateral trade surpluses with the US (and to a lesser extent, the Euro bloc), less appreciated is the degree to which its exchange rate policies have historically impacted its Asian neighbors and continue to do so to this day. As recently as 1994, Beijing precipitously devalued the renminbi against the greenback, taking it from 5 to 8.4, a 60%+ devaluation. Even this action understates the magnitude of the change, since it was preceded by a period during which the country’s monetary and financial authorities embraced a policy in which the yuan declined some 60 percent against the dollar.

So much for the need for policy incrementalism, as the Chinese persistently respond today when confronted with calls for a substantial yuan revaluation! In the late 1990s, Beijing’s earlier policy of “beggar thy neighbor” might have engendered comparatively minimal disruption domestically, but it exported the economic dislocation to East Asia and Japan. The cost advantage of these devaluations, conferred on China’s exporters, significantly eroded the trade competitiveness of other East Asian and Japanese exporters. They therefore threw their collective current accounts into substantial deficit by the mid-1990s and set the stage for the Asian financial crisis of 1997 and Japan’s “lost decade.” (It also set the stage for Japan’s implementation of a zero-interest-rate policy, which ultimately provided the foundation for the so-called “yen carry trade” — another grave source of future financial instability.)

I have already argued that QE2 has minimal impact on the amount of new net dollars in existence. But the viscerally hostile Chinese response to the Fed’s policy suggests that they see in it echoes of their own policy of the early 1990s (in spite of the fact that the US has a freely floating exchange rate, not a currency peg).

Most defenders of Beijing justify the pegged rate regime on the grounds that it has helped to move the country up the technological curve and thereby enhance living standards. Perhaps, but India has done it without adopting a similarly mercantilist policy. In any event, the improvements of living standards facilitated by rapid export growth and income gains in China are still heavily skewed toward the exterior regions, rather than the interior of the country.

There could have been better ways for China to improve the living standards of its people. It is perfectly understandable why Beijing adopted the Asian mercantilist model, as it worked so well for the nations of Northeast and Southeast Asia. But it makes no sense for a country of 1.5 billion people with a huge domestic market that its manufacturers could potentially supply for decades. India also seems to have improved the living standards of its people, but it has adopted a much more balanced economic model (and correspondingly less trade friction with the US and EU).

Although Beijing no longer explicitly pegs its currency against the greenback, it does so against a basket of currencies of which the dollar is still the largest component. It therefore remains a pegged rate regime in all but name. This type of currency regime is generally not the best institutional structure for an economy because it entails a surrender of monetary/fiscal sovereignty and builds in an inherent financial fragility. In China’s case, the fragility has been somewhat masked by the fact that it continues to run trade surpluses but, as noted above, it has effectively “exported” the financial destabilization associated with currency pegs to its trading partners.

So what is the problem with a currency peg? A nation with a currency peg can run external deficits (on the current account) for a time, as long as there are sufficient foreign reserves so that the central bank does not need to contract the monetary base (its liabilities). In particular, if investment is targeted at productive ventures that build extra export capacity and if the nation has enough foreign reserves, then a current account deficit for a time can be beneficial in the longer term.

But persistent current account deficits become particularly problematic for a nation running a currency board. The nation faces the continual drain of its foreign reserves, which has two impacts. First, the peg comes under pressure. Second, the central bank has to contract the monetary base, which has a negative impact on aggregate demand. A sharp deterioration in the current account can quickly create a crisis because the economy has engineered a sharp domestic contraction (normally, by sharply raising interest rates) to reduce imports, but also risks running out of reserves and occasionally has to default on foreign currency debt (either public or private).

While the higher rates may attract foreign capital inflow, they are also deflationary. Proponents of this arrangement argue that deflation starts a process of internal devaluation (wages and prices fall) and increases the competitiveness of the export sector. But it is clear that currency peg arrangements, which eliminate the capacity of the central bank to run discretionary monetary policy, lead to pro-cyclical policy outcomes. So in boom times, with exports strong, the monetary base expands and interest rates fall. Monetary policy reinforces the demand boom.

But if exports fall and thus aggregate demand weakens and/or foreign capital outflow occurs, then the monetary base contracts and interest rates rise, causing a further contraction. Moreover, when times are bad, the treasury may not be able to fund its current budget position (if in deficit). So fiscal policy has to contract, which worsens the situation.

Clearly this is not a problem for Beijing today, as it runs a huge current account surplus. But if it were to revalue its currency and retain the peg (rather than let it float), a future major collapse in export growth would be highly problematic because it would engender a loss of capacity to build foreign currency reserves and support local demand.

Needless to say, China’s peg has NOT been particularly helpful to the US as a whole, either. In general the dollar-yuan peg has helped to perpetuate a weirdly destructive symbiotic relationship between China’s military, which seems to be making lots of money from the speculative enterprises that persistently pop up in the US, and Wall Street, which has become a major beneficiary as the agent that recycles these capital flows back to the US. In the meantime, the peg displaces US workers via low-cost Chinese labor facilitated by technological advances, which drives further outsourcing by US corporations. To offset the impact, the US government has consciously built up its “FIRE” (finance, insurance and real estate) sector, which has “leveraged” the rest of the economy as its employment and profits grew at a faster pace (it received 40% of the nation’s profits before the bust). Leaving aside the issue of “productive” versus “unproductive” labor, it certainly appears in retrospect that the FIRE sector has played an outsized role in the US economy, in effect offsetting the loss of manufacturing capacity. The “market” is now trying to downsize the FIRE sector, but current policy seems designed to resist that. All efforts are aimed at keeping leverage high as the Fed and Treasury try to get banks to lend again — as if another private debt bubble is the cure for what ails the economy.

That all might begin to change. After observing the latest G20 fiasco, it is conceivable that American government will feel that it has no choice but to move toward tariffs, especially as fiscal policy is likely to remain constrained by a hostile GOP-dominated Congress. The numerical targets on current account imbalances were the last warning shot to forestall the protectionist option. This has now failed.
Domestic US political considerations for the President and his party might well mandate a more radical tack. Consider the recent midterm election results. The Democrats sustained huge losses in the rust belt. These states have been traditionally Democratic. True, some went for Reagan in the 1980s, but Obama got them back in 2008 and thereby won the election. He needs this region. He can forget about the South: there, we have all kinds of constituencies that voted against him. He’ll never win over the Christian right, the plutocrats who narrowly vote their pocketbooks, and so forth. Obama needs to win back members of his disaffected base, especially younger voters who didn’t show up because they face a hopeless employment situation. But he won’t get this group back to the polls unless he focuses on jobs. The independents will also be hard to get back without this, because they too are disgusted by the government’s cronyism. But even if the President wins back a large number of disaffected independents and the youth vote, he still needs the rust belt. He therefore has to attack China, the outsourcing of jobs, and focus on Beijing’s currency (which he has recently called “undervalued”, potentially setting the stage to name China as a “currency manipulator” with the World Trade Organization). If Obama doesn’t do this, the Democrats should just wave a white flag in the next election and not waste money campaigning. This is the US political reality as long as the unemployment rate is above seven percent and Corporate America is nuts about cutting costs by moving to low wage platforms abroad. A trade war, complete with tariffs, could well prove inevitable.

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  1. MyLessThanPrimeBeef

    Ask not what reducing unemployment can do for your office.

    Ask what your office can do for reducing unemployment.

    It’s not a ‘chicken or egg first’ question.

  2. Charley

    Trade war, Marshall?

    The US profits by having other nations run surpluses while it runs a deficit. How else is US money printing supposed to inflate the global economy? They send us stuff, and we print dollars and pay them back.

    The trade rules don’t apply to the US since it can run deficits as long as it wants. And, as you know, it can print whatever quantity of money it needs to buy all China can produce. If you are going to follow MMT, then you have to know this.

    So it can literally print China into hyperinflation. Come on, Dude. You know this.

    The US will not impose tariffs, since it would be imposing tariffs on WalMart and it 700 factories; Caterpillar; and like job exporters.

    BTW: Whatever happened to Billy Mitchel’s argument that a country can run trade deficits as long as others are willing to accumulate assets in its currency? Are you saying that this particular assumption of MMT doesn’t work for job creation?

    1. Marshall Auerback


      I am arguing the likely POLITICAL case. Clearly, if our officials understood how to conduct fiscal policy properly to generate full employment, then you wouldn’t have this issue. The problem is that given the likely lack of support coming from the fiscal end, and the possibility of a huge deterioration in the external account, the US faces a huge risk of ongoing high unemployment. So, yes, a trade war is a serious possibility as a political response.
      In regard to the “exports are a cost/imports are a benefit” argument, I always take the view that the “exports are a cost/imports are a benefit” are only POTENTIAL costs and benefits if and when we have a full employment economy.

      Yes, a sensibly constructed fiscal policy which incorporates a Job Guarantee program would be great, but let’s deal with reality here. It ain’t gonna happen any time soon. So, failing that, there clearly is a big problem, which is why I am worried about China’s export wave which is now hitting our shores. We’re clearly entering into a period of fiscal retrenchment (likely to increase after the mid-term elections in the US) and we are beginning to experience this tsunami of imports from China, which will create huge additional deterioration in our trade account. Since we’re unlikely to come up with a sufficiently robust fiscal response to offset the job losses, that spells trouble. We’re about to experience massive deterioration in the trade account in the US, along with sequential fiscal retrenchment, so we’ve got the makings of a disaster.

      Should we blame China for that? Of course not, but the consequences of China’s fixed exchange rate policy along with our inclination to depress domestic demand via fiscal retrenchment has the makings of an economic disaster.

      1. Septeus7

        Quote: “I always take the view that the “exports are a cost/imports are a benefit” are only POTENTIAL costs and benefits if and when we have a full employment economy.”

        The basis reason I have argued that MMT is flawed is because full employment depends of the number of activities an economy can generate and without a manufacturing economy you won’t get a physical multiplier effect because the domestic manufacturing milieu is what physically produces in types of jobs based on the social networks of skilled workers.

        Collaboration and diversity is what allows for development not specialization with the basis of the globalization argument. So far the MMT guys have refused to make arguments against my position.

        Here’s a econophysics paper that argues for my position based on evolutionary modularity “”

  3. DavidHK

    It has been noted many times that selling its
    treasury holdings would be China’s nuclear
    option. In its aftermath, China would be
    hurt more than US.

    Well, American trade sanctions are a nuclear
    option too. The tariff would certainly dampen
    domestic consumption which is more than 70%
    of US economy. It hurts the multinationals
    more than anyone else, and so it hurts US
    investors. And we haven’t considered the erosion
    of US position in the world trading system yet.

    1. Charley

      Ah, yes. But it is so much fun to float these silly ideas and watch the left and the right scramble around and take sides like trained circus animals. They way they did over that silly center two blocks from ground zero; and the deficit commission chairs non-report report.

      That’s the point, of course: To keep the sheeple running in circles — reacting to the brief glimpse of their own tails…

    2. MBT

      Few years ago, people were so hot with ideas such as: China cannot survive without US market, there is no decoupling.

      – Obviously china can maintain/return to high growth quickly while US is still in deep slump.

      – decoupling is here.

      Wanna bet China can start a long term trade war and win against US? They have the demographic, geopolitical goodwill, and dollar to dump.

  4. TC

    Leaving aside the issue of “productive” versus “unproductive” labor…

    How can anyone associating their work with that of Franklin D. Roosevelt do such a thing? Transforming an economy built on finance, insurance, real estate — the enterprise of Venetian money changers — is from my reading of this article the only sane policy focus the United States should engage. Yet we are to ignore this possibility of restoring the physical economy with a technological platform worthy the 21st century, and instead resign to those status quo prescriptions being put forward by our nation’s desperate, subversive imperialists and brace for trade war.

    So, what is being said here is that, U.S. [so-called] leadership is willfully provoking trade war with a narrow, monetarist policy approach that remains oblivious to the collapsed state of the U.S. physical economy and its hopeless incapacity to generate real wealth necessary to honor the mountain of gambling debts run up while the productive economy was systematically dismantled. And we should blame the Chinese for this? This is insane!

    1. Paul Repstock

      I couldn’t agree much more TC. Invoking the name of FDR at this time is specially apropriate given the sad state of American infrastructure. Mr. Obama seems to have dropped a golden opportunity when he opted for shoring up banks rather than creating employment.

      Part of the problem is probably the conciet pitting blue collar against white collar status. Another part may be the mindset which forments resentment against employers. There is no recongnition in North America that the workers can be as much a part of the company as the bosses.

      I was totally impressed by last weeks ‘news’ story about the construction ‘In China’ of a 15 story hotel in 6 days. That would not be possible in any part of North America or Europe.

    2. Marshall Auerback

      I think you’re reading WAY too much into that clause. I merely was trying to suggest that the whole issue of productive vs unproductive labour is a debate worthy of an entire argument in itself, but didn’t want to get into it in this particular piece.

    1. Lil'D

      Mosler is worth reading. I think he makes a reasonable point, but it’s not in isolation.
      His claim: wealth increase = imports – exports + (productivity consumed)
      I might argue that to first order, total productivity is (productivity consumed + exports)

      so if we actually make some stuff, and we trade some of it for other stuff we like better, we are in good shape.

      the trade deficit, however, if it leads to outsourcing of production, might end up reducing the total productivity, which is not good. Ultimately, more consumption => higher satisfaction (according to theory) and somebody has to make the stuff that’s consumed.

    2. Jim Baird

      Yes, they are valid. The problem, as Marshall explains above, is that imports are a benefit to the majority only if you have a fiscal and monetary policy in place that provides for full employment. Since we don’t have policymakers who understand the monetary system and don’t have, nor are likely to have any time soon, such a full-employment policy, the mercantilist bent of China’s trade policies are damaging to the most vulnerable in the U.S.

  5. LJR

    China does not have the “curse of democracy.” This means they can project a strong and highly focused will. The U.S. may be stupid enough to institute tariffs but the result will be the kind of inflation that gets incumbents kicked out of office. Who exactly suffers from a 15% tariff on Nike footwear? Or do you suppose that U.S. manufacturers in China will be exempt? That won’t sit well with the Chinese. Let’s not even talk about the lobbying that Walmart will bring to Washington. If Washington exempts U.S. manufacturers I suspect China will be more than happy to do it for them.

    The problem you have with your “fie fie” prattle is that it is as silly as that of the pompous English in the 1940s who failed to recognize that they were no longer the “Empire upon which the sun never sets.”

    The Chinese do what they do because they perceive it has value to them. It is not their job to worry about our welfare – and they don’t. We have stopped being the customers of last resort and we are about to be dumped into the river like a sack of unwanted kittens.

    Apparently you think that only the Americans can engage in economic warfare. When someone else does it you cry “unfair!” Of course it is. Get used to it. There’s a lot more coming and this country is going to eat humble pie like never before.

    Somehow I don’t think even the crazies in Washington think the problem can be solved with the military. Bombing little countries that can’t fight back is our specialty – we don’t go after guys our own size. Heck, we might get beat!

    Obama? He’s the Goldman Sachs sock monkey – don’t expect him to grow a pair. They’d have to grow off the end of Blankfein’s elbow.

    1. Jim Haygood

      Actually, even desperately poor, underdeveloped Third World regimes such as Vietnam and Afghanistan whip the pale pimply asses of the US-led NATO clown posse now.

      The Anglophone world, with its imperial conceits, its fossilized political regimes and its parasitical special interests, is in headlong terminal decline.

      It’s the inexorable fate of all overextended empires which begin employing inflationary fraud to fund their structural deficits. Strange that they never diagnose the disease until the huns are at the gate.

      But doubtless there were always demented economic advisors counseling that ‘monetary autonomy’ was the golden [sic] path to prosperity! Modern it ain’t.

    2. Mikey

      Wait until the Einsteins in charge figure out, United states is not the only country who can print money.

      China certainly can print yuan, dump T-bill, but buy Dollar cash, and dump this everywhere in the planet where US has no access in exchange for large yuan project.. (Iran, Venezuela, entire africa, asia and latin america.)

      Essentially, print Yuan to buy dollar in the form of road, dam, airport and put it everywhere in the planet.

      Do it 10 times faster than Ben can print money. $600 Trillion? chump change. Pave the entire asia and europe with high speed railways and deep water ports. Problem solved.

      1. Lil'D

        There is very little trade denominated in RMB, so China “printing” is pretty irrelevant. They control conversion, which leads to their current account balance, but risks internal inflation. Productivity has been increasing … we’ll see how it turns out, but there is a qualitative difference in scope between a reserve currency country “printing” and china

  6. fred

    If China sold its US Bonds what would be the instrument that they re-invest in?

    Certainly not Euro’s. If they bought gold they would move the up the gold market and set themselves up for even larger losses.

    The investment condundrum that China faces is there is no market large enough to take their investment other than US Treasuries.

    1. LJR

      When China sells a stuffed teddy bear to Europe it gets paid in Euros, not dollars. If the U.S. stops buying so much from China then China gets fewer dollars to pump back to us. The only reason China holds dollar denominated debt is that it’s the way they maintain the currency peg.

      If natural resources rise dramatically against the dollar we’ll probably see the Chinese let the RMB rise. This will be seen as a great victory for the U.S. but it actually means the Chinese are cutting us loose. Our stupid supposition is that we will somehow have competitive exports when the dollar drops ten or twenty percent. Come in Houston! We’re not Germans – we don’t have the ambition or ability to manufacture much of anything any more. Our engineering schools are turning out a dimwitted fraction of what they did thirty years ago. Who exactly is going to rebuild the American Manufacturing Colossus? The X Generation? Hah! Maybe we can take Ayn Rand’s body parts and create a Galtenstein monster. That’s it. We’ll invent Rearden Metal. Alan Greenspan as John Galt.

      Prepare to see the Chinese force feed the goose by stuffing the Fed with T-Bills as it attempts to keep the yields low. The Chinese will then take those wads of cash and go on a natural resources shopping spree unlike anything the world has ever seen.

      American politics has brought a whole new meaning to the word “dysfunctional.” It’s like snorkeling in a cesspool.

      1. Jim Haygood

        ‘We’ll invent Rearden Metal.’

        Rearden metal! Mwa ha ha ha! Bernanke can pull that stuff right out of his arse, man, to the tune of a trillion a year.

        And cigarettes with golden dollar signs on them — those’ll be the bomb in Shanghai, with its glittering skyline of Howard Roark-designed apartment towers.

        Who knew that Galt Gulch was in Guilin?

      2. Externality

        Americans in so-called “fly-over country” and even parts of California want to go back to manufacturing tangible goods. Americans can and do manufacturer Japanese and German cars more efficiently than the Japanese and German workers. Real estate prices and environmental regulations, not inept workers, caused manufacturing to be outsourced from Silicon Valley.

        The problem is an East Coast elite that views “financial services” and “knowledge work” as the future and manufacturing as part of America’s low-brow, environmentally insensitive past. Thomas Friedman and other Wall Street flacks are constantly ridiculing the idea that manufacturing has any future in America. The future, the elites believe, belongs to Wall Street, very high level IT work, and academia.

        To that end, Wall Street and DC have used the WTO and other trade forums to gain increased market share for banks by bargaining away our industrial base. Nor will Wall Street or DC invest in _substantially_ increasing manufacturing capacity in America, preferring to fund industrial plants built overseas. Raw materials are frequently mined or harvested in the US, shipped to a low-wage country for processing, and then shipped back. This process is highly profitable for Wall Street which can offer banking services, currency and commodity hedges, etc.

        Friedman and others essentially created a self-fulfilling prophesy, as the more STEM is portrayed as part of the past, the less anyone is willing to support it.

        As to the shrinking number of STEM(*) students, this could easily be reversed by addressing the causes:

        (1) The media and academia both ridicule scientists and engineers; they are often portrayed as mentally ill loners on TV and schoolteachers seem to find nothing wrong making fun of students whose interests lay in math and sciences.

        (2) Programs to encourage participation in these fields were scaled down or eliminated after the end of the Cold War and are underfunded and balkanized by race, gender, etc.

        (3) Engineering students often find that it is difficult to engage in work-study or outside employment while taking time consuming laboratories and classes such as calculus. Over time, students are tempted to change to an easier major.

        (4) Much of the Cold War scientific infrastructure that offered scholarships, internships, and networking opportunities to young scientists was closed down during the 1990s.

        Possible (if politically incorrect) suggestions:

        1. Spotting aspiring engineers in high school and encouraging them to participate in engineering-related contests, summer programs, etc. This will help them to maintain their interest and disregard stereotypes of STEM majors. This was done to great success during the Cold War. While “tracking” students is no longer PC, it worked.

        2. Creating a program to fully or substantially fund engineering studies for interested STEM majors who are US citizens. The program should not be balkanized along racial, gender, or other lines. Many foreign countries have similar programs, often used to help students interested in studying in the US.

        3. Considering major, as well as financial need, when allocating financial aid. Students enrolled in majors relevant to national priorities should take priority over less relevant majors or professional degrees. Engineering majors might come ahead of law students, for example.

        4. Using Public Service Ads as a way to help re-brand STEM careers away from the caricatures created by Hollywood.

        5. Increasing opportunities for US citizens who are studying for or starting STEM careers to have internships at national laboratories, the NIH, defense contractors, etc.

        (*) STEM = Science, Technology, Engineering, and Mathematics.

    2. Paul Repstock

      First, China isn’t too likely to sell all it’s American securities holdings. (probably overstated anyway) They would drive down the American dollar at no benifit to their own economy. That would be strictly a political move if done.

      Second, if indeed the Chinese needed a place to put their money (which is absolutely a concern) they need look no further than their own country. The infrastructure spending in China is phenomenal. This spending will guarantee their place in the world long after Walmart is bankrupt.

      1. LJR

        Exactly! Infrastructure, a good work force and natural resources. That’s the real wealth of nations. The dollar is just a mirage.

        Driving the dollar down after they’ve rendered us (with a lot of help from our oligarchs) impotent is much to their interest. Their next step is to drive our standard of living down to the point that we can’t afford to support our military. To do that they’ll be more than happy to lose a few trillion here or there. Money well spent.

    3. Susa

      China’s problem is that it’s treasury holdings are actually not big enough for the nuclear option to work. China + Hong Kong hold just over a trillion in treasury bonds, which in these strange times have turned out to be small potatoes. Maybe pushing the big red button could do something a few years down the road, but not so much right now.

      1. M Br

        There are way to go nuclear. One peg that nobody wants to talk about is Saudi-oil-Dollar peg. This is the last reason US can sustain current consumption binge next to China recycling dollar into US.

        If Saudi unpeg, US economy will stop functioning fairly immediately (think $5/gallon gas the next day, and supply dwindle 20-30% due to Asian buying all the oil in their stronger currency.)

        And Saudi is a small country, only 30million people. Blowing it’s economy with $20-30B (eg. create currency and social instability) is easy.

    4. Benny

      The Chinese will dump their dollars by buying Africa, all of it. The continent has everything a rapidly growing hedgemon wants and needs. African leaders will gladly sell their countries for money bling and guns. They’ve made a good start there already.

  7. Brett

    The trade war has been underway for years….question is, are Americans as loyal to their country as Chinese are to theirs. My bet is no. Americans are more loyal to money. Therefore the big companies that would need to side with the American populace in a true trade war, won’t. America needs massive government intervention to fend off China, but there is no will, no recognition. Not tariffs, but out and out blockades, quotas, etc. America is losing, but it doesn’t even know it needs to be fighting.

    1. Externality

      As I said above, average patriotic Americans who oppose outsourcing our economy are derided as luddites, racists, nativists, dangerous nationalists etc. by the elites (and the flacks) who seem fixated with a “flat world” where everyone engages in win-win trades across increasingly irrelevant national borders.

      There was an interesting article in Foreign Policy magazine arguing that the DC elites need to adopt a more realistic view if they want to stay in power:

      I know that all the big economists, pundits, CEOs, and political leaders have embraced former President Clinton’s view that globalization will make all countries rich and that being rich they’ll all become democratic and that being democratic they will all become peace loving and go to Nirvana together. In essence Clinton was saying the world would become like us and that globalization is really Americanization.

      But it didn’t sound like that in Seoul. Instead of the old Washington Consensus, it was the new doctrine of the Beijing-Berlin Consensus that dominated the discussion. Of course, lip service was paid to the need for rebalancing the global economy’s enormous trade and current account imbalances. But when Obama suggested that the Germans might consider consuming more, they told him that would be impossible because, well, Germans just don’t do that. The Chinese said they believed in globalization so long as it meant that the United States did all the consuming while also refraining from stimulating its economy and simultaneously supplying global security.

      Somehow, it just didn’t sound like the Beijing-Berlin Consensus was going to work for recovery of the U.S. economic dynamism, or for the re-election of Barack Obama.

  8. deeringothamnus

    Aside from America’s rich agricultural resources, we do not make anything else China wants to buy. Britain was in this situation when it went to war to keep the Chinese hooked on opium. We go to war to keep the world hooked on military goods. Meanwhile, check out General Electric’s Chinese website. This US government bailed out corporation has outsourced what little R&D they do on the cheap to China.

  9. Brick

    Seems the article is mostly right but I would still quibble about whether the expansion of the Fed’s balance sheet is printing. I kind of agree that it does not increase the money supply, but suspect it might have a nasty side line of depressing the velocity of money.
    Returning to the issue of the article I am not sure tariffs will ultimately help anyone, as everyone joins the band wagon and globalisation slows. I hope that most US politicians have figured this out. My hope is that they adopt a pro growth policy while completely restructuring spending in line with realistic objectives. I don’t think it will happen because there are too many vested interest in it not happening. What I expect they will try to do is impose tariffs but hide it behind ecological ideals. For instance they might ramp up taxation on container ship fuel or aviation fuel.
    The ultimate question though, hinted at in the article, is whether the US political system is flexible and strong enough to work together in a way which will strengthen the country and allow difficult issues to be sold to the public.

  10. Jim the Skeptic

    We are now close to 3 years into this Great Recession. We have repeatedly bailed out the financial industry with taxpayer funds. We have stimulated the economy with taxpayer funds. Unemployment is still at about 10%.

    The Republicans now want to balance the budget and cut taxes for businesses. Anyone who believes that this will have a major positive impact our current unemployment is a fool.

    Judgement day comes 2 years from now, Republicans in the House are looking into the abyss. President Obama is looking into the abyss. Bring back jobs for the great unwashed or get prepared to be thrown out of office. Corporations don’t vote, yet!

    It looks like Obama/Bernanke finally get it. Bernanke’s QE2 seems unlikely to accomplish much except lower the value of the dollar which the rest of the world is railing against. We get higher prices for imports and a better chance of creating jobs. Obama’s proposal that countries limit exports to 4% above imports failed at the G20 meeting in South Korea, but the card was on the table. The net importer holds most of the cards in this game. Net exporters have to protect their exporting industry. Half a loaf is better than none.

    Imagine the Republicans voting against extending unemployment while continuing to support Global Free Trade. I don’t think they are suicidal. The politicians are running out of options.

    1. Jim the Skeptic

      Correction: “… limit exports to 4% above imports failed at the G20 meeting in South Korea…”

      Should have been: “… limiting current account surpluses and deficits to less than four percent of gross domestic products.”

  11. Lil'D

    (A) If there is a trade war, the US will “win”

    (2) it will be a pyrrhic victory; virtually no one will be better off

  12. charles

    Imho, China is just another Geithner/HBO proxy and the total
    failure of redesigning the American economy.
    Geithner has been pressing in a similar way Germany, more than
    the EU itself, just to stir the same anger and backlash from
    Mr Schauble.

    Can anyone recall the last time the U.S registered a trade surplus

    Guess who will be the winners of a trade war, if the Bushobama
    team join forces with the Republicans and other populists…

  13. sergio

    Throughout history slavery as always been rewarding to all whom enslaved people. China as always been a slave state and now their ship is in. No society in this world as it exists today will be able to compete against China. The only asset that the U.S. has is, the stupidity and ignorance of the Chinese leadership. The Chinese can take their currency and burn it as fodder. All that China needs to do is continue to provide their slave labor and then demand all payments in Gold and other commodities. This will shut everyone’s mouth. China’s golden age was in the 13th century where Gold was the means of payment and paper notes were used to guarantee the amount that had to be paid.

  14. fromchina

    The American political system has fundamentally changed. Political candidates must first get cleared by the oligarchy, before they can even get on the ballot. Voters want employment, but the oligarchs want Chimerica, or chimera as you put it. Guess who wins?

    Politicians would like to be elected and reelected, but they won’t go as far as to antagonize the oligarchy just to please voters.

    Democracy? Not really. Not anymore.

  15. Russell Vandemark

    Having just discovered the joys of organic farming in our own backyard, I have to say potato soup is our favourite of the month. I found a website dedicated to potato soup recipes, which is quite amazing when you think about it. There’s a website for anything nowadays it seems!

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