[Paleopsych] American Conservative: Paul Craig Roberts: Who Owns the Dollar?: Our currency and our economy are held hostage by Asia.
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Sat Jun 25 14:43:23 UTC 2005
Who Owns the Dollar?: Our currency and our economy are held hostage by Asia.
July 4, 2005 Issue
China is the leading scapegoat for America's economic ills. On May 20,
New York Times columnist Paul Krugman blamed China for the U.S.
housing bubble. If only China were not lending us so much money,
mortgage rates would be higher, forestalling a housing bubble. Krugman
says China is a poor country and should be investing its capital at
home, not lending it to the U.S.
Krugman could just as well have said, "If only U.S. manufacturers
produced in America instead of outsourcing to China, the Chinese would
not have any money to lend us. Thus, no housing bubble."
Krugman is correct that if foreign lending to the U.S. slows, interest
rates will rise, putting a speculative housing market in trouble. But
the interest of the U.S.-China relationship goes far beyond the effect
on the U.S. housing market. Economists set in traditional ways of
thinking miss the really important aspects of the relationship.
For example, Krugman notes that China is a poor country and is slowing
its own development by lending to the U.S. We do think of China as a
Third World country with large supplies of underemployed labor.
China's trade relationship with the U.S., however, suggests the
opposite. The U.S. trade deficit with China is larger than with any
other country, including highly industrialized ones such as Japan and
Germany. Think of all those Toyotas, Hondas, Nissans, office machines,
and video games that Americans buy from Japan. Yet in the first
quarter of this year, the U.S. trade deficit with China is running 50
percent larger than the deficit with Japan. Indeed, the U.S. trade
deficit with China is larger than the deficit with all of Europe. It
is larger than with Canada and Mexico combined, two countries in which
U.S. corporations manufacture cars, appliances, and a variety of
big-ticket items for American markets.
What are Americans buying from China? With China a poor country and
the U.S. a First World superpower, you would think China would have a
trade deficit as a result of selling us cheap goods and importing high
value-added manufactured goods. Instead, it is the other way around.
The U.S. is dependent on China for manufactured goods, including
advanced technology products. In the first quarter of 2005, U.S.
imports from China are 5.7 times higher than U.S. exports to China.
Last year, U.S. exports to China were $34.7 billion. Imports were
$196.7 billion for a U.S. trade deficit with China of $162 billion.
It was not always this way. In 1985, U.S. trade with China was in
balance at $3.8 billion. Ten years later, U.S. imports from China were
four times U.S. exports to China.
The U.S.-China economic relationship is a highly unusual one between a
First World and a Third World country. Moreover, the U.S. trade
deficit with China in manufactured goods and advanced technology
products is growing rapidly. What explains the U.S. dependence on a
poor country for First World products?
The answer, and the key to China's rapid development, is that
corporations in First World countries--American businesses chief among
them--use China as an offshore location where they produce for their
home markets. More than half of U.S. imports from China, and as much
as 70 percent from some of China's coastal regions, represent offshore
production by American firms for U.S. markets.
What economists overlook is that when we speak of the Chinese economy,
we are speaking in large part of the relocation of American
manufacturing to China. Those millions of lost domestic manufacturing
jobs were not lost. They were moved. The jobs still exist, only they
are not filled by Americans.
In a world where capital and technology are highly mobile
internationally, these critical factors of production flow to
countries with the lowest cost of labor. China has attracted
manufacturing, and India has attracted professional services. This has
left the American work force with job growth only in lower-paid
domestic services, which provide no export earnings.
The rapid transformations that have occurred in some Indian cities,
which have become high-tech centers, and along the coast of China are
unprecedented in economic history. The changes are so rapid because
they are driven by the relocation of First World businesses seeking
the lowest labor cost.
Economics relies on automatic adjustments to rectify trade imbalances.
The trade deficit with China should cause the Chinese currency to
appreciate relative to the dollar, raising the dollar cost of Chinese
labor. In the long run--in which, J.M. Keynes said, "we are all
dead"--adjustments would occur until U.S. and Chinese wage rates and
living standards equalized.
Considering the disparity between American and Chinese wage rates and
living standards, the adjustment would be extremely painful for
Americans. But the adjustment is forestalled by two factors.
China keeps its currency pegged to the dollar, so when the dollar
falls, the Chinese currency falls with it and there is no adjustment.
China does not permit its currency to be traded, and there is not
enough of it in international markets for currency speculators to be
able to force the Chinese off the peg.
The other factor is the dollar's role as world reserve currency. The
reserve-currency role means that every country has a demand for
dollars in order to pay its oil bills and settle its international
accounts. The world demand means that the U.S. can run large deficits
for many years before the chickens come home to roost.
In the meantime, Asian countries are accumulating hundreds of billions
in dollar assets, making them America's bankers. Industrially
developed countries such as Japan, Taiwan, and South Korea have little
need to use the dollars that they earn from their trade surpluses with
the U.S. to import American capital goods to fuel their further
development. They use the dollars that we pay them for their goods to
purchase U.S. government bonds and American companies, real estate,
and corporate bonds.
China, which has been growing at about 10 percent annually for a
number of years, could conceivably use its export surplus with the
U.S. to expand its infrastructure more rapidly in order to develop
even more quickly. But a 10 percent annual growth rate is probably the
highest rate of change with which China wants to contend. As First
World firms are flooding China with their capital and technology,
China doesn't need to use its trade surplus with the U.S. to purchase
As a result of many years of persistent trade surpluses with the
United States, the Japanese government holds dollar reserves of
approximately $1 trillion. China's accumulation of dollars is
approximately $600 billion. South Korea holds about $200 billion.
These sums give these countries enormous leverage over the United
States. By dumping some portion of their reserves, these countries
could put the dollar under intense pressure and send U.S. interest
rates skyrocketing. Washington would really have to anger Japan and
Korea to provoke such action, but in a showdown with China--over
Taiwan, for example--China holds the cards. China and Japan, and the
world at large, have more dollar reserves than they require. They
would have no problem teaching a hegemonic superpower a lesson if the
Last year the U.S. trade deficit with the rest of the world was $617
billion. In the first quarter of this year, our trade deficit is $174
billion--$35 billion higher than in the first quarter of last year. If
this figure holds for the remaining three quarters and does not
increase, the U.S. trade deficit in 2005 will be $700 billion.
Offshore outsourcing makes it impossible for the U.S. to rectify its
trade imbalance through exports. As more and more of the production of
goods and services for U.S. markets moves offshore, we have less
capability to boost our exports, and the trade deficit automatically
widens. Economic catastrophe at some point in the future seems
In the meantime, even a small country could pop the U.S. housing
bubble by dumping dollar reserves--which is some fix for a superpower
to be in, especially one that is disdainful of the opinion of the rest
of the world. Comeuppance can't be far away.
The hardest blow on Americans will fall when China does revalue its
currency. When China's currency ceases to be undervalued, American
shoppers in Wal-Mart, where 70 percent of the goods on the shelves are
made in China, will think they are in Neiman Marcus. Price increases
will cause a dramatic reduction in American real incomes. If this
coincides with rising interest rates and a setback in the housing
market, American consumers will experience the hardest times since the
Paul Craig Roberts was Assistant Secretary of the Treasury under
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