[Mb-civic] How U.S.-China economic relationship really works

ean at sbcglobal.net ean at sbcglobal.net
Thu May 26 18:22:28 PDT 2005


SEATTLE POST-INTELLIGENCER
http://seattlepi.nwsource.com/opinion/225167_krugman22.html

How U.S.-China economic relationship really works

Sunday, May 22, 2005

By PAUL KRUGMAN
SYNDICATED COLUMNIST

Stories about the new U.S. Treasury report condemning China's 
currency policy probably had most readers going, "Huh?" Frankly, this 
is an issue that confuses professional economists, too. But let me try 
to explain what's going on.

Over the past few years China, for its own reasons, has acted as an 
enabler both of U.S. fiscal irresponsibility and of a return to Nasdaq-
style speculative mania, this time in the housing market. Now the U.S. 
government is finally admitting that there's a problem -- but it's 
asserting that the problem is China's, not ours.

And there's no sign that anyone in the administration has faced up to 
an unpleasant reality: The U.S. economy has become dependent on 
low-interest loans from China and other foreign governments, and it's 
likely to have major problems when those loans are no longer 
forthcoming.

Here's how the U.S.-China economic relationship currently works:

Money is pouring into China, both because of its rapidly rising trade 
surplus and because of investments by Western and Japanese 
companies. Normally, this inflow of funds would be self-correcting: 
Both China's trade surplus and the foreign investment pouring in would 
push up the value of the yuan, China's currency, making China's 
exports less competitive and shrinking its trade surplus.

But the Chinese government, unwilling to let that happen, has kept the 
yuan down by shipping the incoming funds right back out again, buying 
huge quantities of dollar assets -- about $200 billion worth in 2004, and 
possibly as much as $300 billion worth this year. This is economically 
perverse: China, a poor country where capital is still scarce by 
Western standards, is lending vast sums at low interest rates to the 
United States.

Yet the United States has become dependent on this perverse 
behavior. Dollar purchases by China and other foreign governments 
have temporarily insulated the U.S. economy from the effects of huge 
budget deficits. This money flowing in from abroad has kept U.S. 
interest rates low despite the enormous government borrowing 
required to cover the budget deficit.

Low interest rates, in turn, have been crucial to the U.S. housing 
boom. And soaring house prices don't just create construction jobs; 
they also support consumer spending, because many homeowners 
have converted rising house values into cash by refinancing their 
mortgages.

So why is the U.S. government complaining? The Treasury report says 
nothing at all about how China's currency policy affects the United 
States -- all it offers on the domestic side is the usual sycophantic 
praise for administration policy. Instead, it focuses on the 
disadvantages of Chinese policy for the Chinese themselves. Since 
when is that a major U.S. concern?

In reality, of course, the administration doesn't care about the Chinese 
economy. It's complaining about the yuan because of political pressure 
from U.S. manufacturers, who are angry about those Chinese trade 
surpluses. So it's all politics. And that's the problem: When policy 
decisions are made on purely political grounds, nobody thinks through 
their real-world consequences.

Here's what I think will happen if and when China changes its currency 
policy, and those cheap loans are no longer available. U.S. interest 
rates will rise; the housing bubble will probably burst; construction 
employment and consumer spending will both fall; falling home prices 
may lead to a wave of bankruptcies. And we'll suddenly wonder why 
anyone thought financing the budget deficit was easy.

In other words, we've developed an addiction to Chinese dollar 
purchases, and will suffer painful withdrawal symptoms when they 
come to an end.

I'm not saying we should try to maintain the status quo. Addictions 
must be broken, and the sooner the better. After all, one of these days 
China will stop buying dollars of its own accord. And the housing 
bubble will eventually burst whatever we do. Besides, in the long run 
ending our dependence on foreign dollar purchases will give us a 
healthier economy. In particular, a rise in the yuan and other Asian 
currencies will eventually make U.S. manufacturing, which has lost 3 
million jobs since 2000, more competitive.

But the negative effects of a change in Chinese currency policy will 
probably be immediate, while the positive effects may take years to 
materialize. And as far as I can tell, nobody in a position of power is 
thinking about how we'll deal with the consequences if China actually 
gives in to U.S. demands and lets the yuan rise.

Paul Krugman is a columnist for The New York Times. Copyright 2005 
New York Times News Service. E-mail: krugman at nytimes.com

© 1998-2005 Seattle Post-Intelligencer

------


-- 
You are currently on Mha Atma's Earth Action Network email list, 
option D (up to 3 emails/day).  To be removed, or to switch options 
(option A - 1x/week, option B - 3/wk, option C - up to 1x/day, option D - 
up to 3x/day) please reply and let us know!  If someone forwarded you 
this email and you want to be on our list, send an email to 
ean at sbcglobal.net and tell us which option you'd like.


"In times of universal deceit, telling the truth is a revolutionary act."
   ---   George Orwell


-------------- next part --------------
An HTML attachment was scrubbed...
URL: http://www.islandlists.com/pipermail/mb-civic/attachments/20050526/2a706c86/attachment-0001.htm


More information about the Mb-civic mailing list