Reply #62: U.S. and China on a collision course [View All]

[54anickel]

http://www.iht.com/articles/2005/04/26/news/edbowring.php

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There has been a mix of reasons for China's failure to change: bureaucratic inertia, an indecisive new leadership, fear of the impact on employment and the financial system. But the most important factor now seems to be reaction against U.S. pressure. Nationalism has been on the rise as China's pride has been swelled by foreign adulation.

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As for the United States, its assumption that it can have continuous 3 percent GDP growth based almost entirely on other nations' savings is even more remarkable. The buyers of U.S. debt - mostly Asian central banks - have helped sustain U.S. illusions about its economic prowess. More the fool they. But the United States itself is mainly to blame for abusing the role of the dollar to buy growth. China is right that the trade deficit is a U.S. problem that will not be solved by a yuan revaluation. Indeed it could make it worse and create inflation, not jobs, in the United States.

Nothing but a rise in savings - which means a sharp fall in consumption - can solve the deficit problem. In other words, the United States must face up to the necessity of a recession or prolonged minimal growth if balance is to be restored. Policies under Bush/Greenspan have delayed the day of reckoning. But it is coming.

This is not just politically unpalatable at home. U.S. attitudes to its foreign partners are either not-so-benign neglect, or assume that the United States is doing the world a favor by sustaining its consumption binge. In fact the imbalances are now threatening the trade system and dollar dominance which have been such successful ingredients of U.S. policy for 40 years.

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