Ferguson’s Yellow Peril

Aug 23 2012 @ 2:28pm


Fallows makes an important point:

A little earlier I had a testy on-stage exchange with [Niall Ferguson] about the United States and China. He said that U.S. budget deficits would lead to the certain collapse of the U.S.-China relationship, since China would cut off further credit to the spendthrift Yanks. I said that might sound like a neat theory but reflected no awareness of actual Chinese incentives and behavior, and that the showdown he considered "inevitable" in fact would not occur. As it has not.

Niall has made considerable contributions to the argument that holding US bonds is a strategic device advancing China's rise. Back in 2011, Fareed Zakaria broke down why this is off-base:

Here in the U.S. you hear many people worry that the Chinese government might stop buying American T-Bills. I think these fears are vastly overblown. The economic situation between China and the U.S. is the financial version of mutually assured destruction – that cold war doctrine of nuclear deterrence…. China is addicted to a strategy of export-led growth, which requires that it keep its goods cheap. This means keeping its currency undervalued. That's why it buys dollars.

In a 2010 post, economist Michael Pettis framed the issue in a little more detail:

China’s reserves are often thought of as if they were a treasure trove available for spending.  They are not. They are simply the asset side of the mismatched balance sheet. … [A]s long as China ran the largest current account surplus ever recorded as a share of global GDP, and the US the largest current account deficit ever recorded … it was almost impossible for the [Chinese central bank] to do anything but buy US dollar assets.  Given the sheer amounts, a substantial portion of these assets had inevitably to be USG bonds.

This was not a discretionary lending decision.  It is the automatic consequence of China’s currency regime, in which it pegs the RMB to a foreign currency, in this case the dollar. …  The moment the [central bank] stops buying [dollars], in other words, the RMB will rise in value.

Niall's argument that Obama has failed to generate a consistent policy on China is certainly legit. But does he think that declaring China a "currency manipulator" on the first day of Romney's presidency – as Mitt has promised – is sound policy? Stephen Roach imagines a Romney presidency in which Mitt pushes forward with a currency manipulation bill:

Taking the cue from the new premier, the Ministry of Commerce immediately announced retaliatory tariffs of 20 percent on all U.S. exports to China. This hits growth-starved America right between the eyes. After all, with US $104 billion of American-made goods sold in Chinese markets in 2011, China had become the United States' third-largest and most rapidly growing export market. With consumer demand mired in a post-bubble quagmire and the fastest growing segment of exports now under pressure, an already weakened U.S. economy is suddenly facing stiff new headwinds. Meanwhile, to add insult to injury, Wal-Mart announces average price increases of 5 percent – pointing to sharp tariff-induced increases in import prices that it was only able to offset partly through reduced profit margins. Other retailers follow suit and already hard-pressed American consumers hunker down further in response. Talk of U.S. stagflation is in the air as forecasters lower their sights on growth but raise predictions for inflation.

Previous coverage here.

(Illustration: an 1899 cartoon, in which the features of the dreaded Oriental seem to have been merged with African stereotypes as well.)