Hysteria over China

Over at Good Klein's, a critique of a NY Times article which discusses China's rising economy and what it might mean for us. Ezra's post itself is mostly alright, although it suffers from improper perspective (PPP is only one measure of national wealth, and not the most instructive). but the really interesting stuff is found in the comments, where we get little nuggets like this one from Matt Steinglass:

the undervalued yuan sucks if you're a worker who makes basically anything in the US that competes with Chinese products -- and that includes software programmers and movie industry personnel. Nice deal for people who own multinational corporations, though.

and another, even worse, contribution from JimPortlandOR:

But soon, the Chinese will have 2 trillion in US Treasury debt in their hands. They can buy what they want of ours now, without a change in currency value.

And, that's a very large sword hanging over our heads. Many in the US think the US is the new Rome. If it is, it is about to be sacked, like Rome, by a much more modern brand of visigoths - visigoths with all that they need to become economically dominant.

Our 'Rome' has key and pervasive elements of our business leadership (and political apparatus) quite willing to sell out our economic underpinnings, and they are working hard to empty the US factories, warehouses, and monetary institutions of what we need for our future.

If China stopped buying our debt in big chucks, monthly, we'd have to find a replacement - likely having to increase interest rates to attract it, with the effect being slower US growth.

A bigger danger is that they might dump some portion of that debt on the world market by buying Euros or Yen (or whatever). This would set off a dollar crash. The hidden danger is that they might use this threat to shape US policy on non-economic matters - blackmail.

But something is clearly wrong when the value of the US dollar versus the Euro has fallen by over 50% since 2003 (from about $0.75 to over $1.35 to purchase a Euro). This is supposedly good for our exports (more competitive pricing), but it hasn't had that effect - our trade deficit continues to grow dramatically. Obviously this is a very complicated matter which experts don't agree upon - but good things haven't historically happened to countries with falling currency values.

This stuff is wrong-headed for a number of reasons (including the xenophobia-lite comparison of the Chinese to the visigoth Barbarians). actually, U.S. exports have grown pretty healthily in recent years. the trade deficit has expanded because we've increased our imports at a greater rate, partially because China undervalues its currency. in a sense, China is subsidizing our current consumption, and i don't think we should be upset about it. in a way, they're doing us a favor.

plus, as long as the government remains solvent, the debt isn't a problem. we need to fix the federal deficit, and the debt service will take care of itself so long as the government continues to grow. a problem might arise if we find ourselves in a recession, and China responds by panicking and selling our debt. *then* we might be in trouble. but China's economic growth is dependent upon the ability of the U.S. (and E.U.) ability to buy their exports. if they sell all of our debt and sink our economy, they will be shooting themselves in the foot. the E.U. and SE Asian economies (including China) will all go down with the ship, but export-biased countries like China will suffer the most. not only that, but the mechanism for China's under-valuation of the yuan is the purchase of our debt.

as for US/Euro exchange rates... that really has little at all to do with China, and more to do with the Euro's increased stability and strong dedication to moderating inflation (perhaps sacrificing some growth as a result), which goes all the way back to the policies of the EMS in the 1980s. meanwhile, the U.S. expansionary monetary policies in the early-2000s pulled us out of recession but left us with some inflationary pressures. it's a trade-off, and the U.S. may have more devaluation in store. but we can take it, and it might help us narrow the trade deficit. a strong currency isn't always a signifier of a strong economy.

also, PPP isn't insignificant, but it's only part of the story. true, China's economy may surpass us in a few years, but that should be expected: they are a much bigger country than us. they've got roughly 4 times as many workers, and about 4 times the population. they have more regional trade partners which are also expanding economies, while the U.S. has Canada... and that's about all.

but China is a long way away from reaching our standard of living. they have much greater needs in common infrastructure and social insurance, and their government has made greater promises to their people. their environmental situation is nearing disaster, their health system is non-existent in much of the country. the country faces a lot of challenges in the future, including massive political reforms, which are probably inevitable. per capita income will take decades of 10% growth to reach the levels of the U.S., and there's a chance that their financial markets are in a bubble (lotta uncertainty in recent months).

remember: everything now being said about China was said about Japan in the 1980s. the doomsday warnings proved to be idiotic. in other words, the reports of the collapse U.S. economic superiority have been greatly exaggerated.