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Mr Obama, debt is the problem, not China.
The American government debt is well over $50,000 per American citizen (unofficially it’s in the 100,000’s per person). Western governments seem to think that it’s acceptable to go into deep debt today, cause inflation tomorrow, then repay the debt in the next decade with inflated dollars. China is using intelligent economic practices and refusing to participate in the western government culture of accumulating massive debt then causing inflation to diminish the debt.
If China rapidly increased the value of its currency it would wipe-out all the savings of its citizens and devalue all the American Treasury bills/bonds that China bought. Instead of the West trying to force China to adopt western monetary practices, it’s time for Westerners to adopt the intelligent eastern practices of less debt and more intelligent governments. This is particularly salient because China has just degraded its credit rating of Western countries because of ” ideological bias in favour of the West” by rating agencies like Moody’s who have been under intense pressure to re-think how they determine ratings.
On the same token, the Chinese fixed currency policy is one of the major causes of the current economic dislocation affecting the global economy. The Chinese have to decide if they are part of the world economy or if they are going to shrink back behind the wall. They can’t have it both ways.
After all, the US is the only country to have all of its external debt in its own currency. Everyone else gets stuck issuing debt in US dollars, so devaluing their own currency has no effect. The US can print a trillion new dollars, pay their debt off, and have a nice low currency, when the feces hits the proverbial fan. Everyone who owns that debt will be screwed, but c’est la vie. It isn’t exactly the same as a default on sovereign debt, but not too far away from it either.
China’s path taken by Japan in the 1980s
History has shown that the rapid appreciation of the yen in the 80s and 90s did not fix the trade gap with Japan. What reason do economists have to believe that the situation with China will be any different? The U.S. generally competes with other Asian countries and Europe to sell products in China, not Chinese corporations, and a rising yuan would have little effect on that trade balance. Furthermore, the revaluation of the yen did significant damage to the Japanese economy, and there is strong evidence to show that the same would occur in China.
China for all this talk about ‘saving face’ is terrified of the prospect of a major trade dispute with the US. The are benefiting far more from the current trade situation than the rest of the world and thus have much more to lose.
The extra cost of doing business in China due to appreciation of the yuan or trade tariffs in itself isn’t what they have to worry about. It’s the confidence of the companies operating within. If those companies feel they could be stuck in the middle of a trade war with China and America they will be more than ready to move out of China. Many of those companies are already frustrated with intellectual property theft and extreme favoritism toward domestic companies.
This is an issue for Canada, as their relative trade deficit with China is just as great as the American trade deficit. Furthermore they’ve imposed protectionist policies against some of the West’s largest tech industries: entertainment, software, gaming, and internet services. Their business would be better done in India where they currently have balanced trade and better market access for our tech industries.
Not to mention, relative to other large developing countries, the cost savings from manufacturing in China have eroded but the risks of intellectual property theft is still just as great. Before the yuan peg the cost of manufacturing in China was within 5% the cost of manufacturing in America:
This is a perfect example of why free trade, despite being an extreme example of human greed, doesn’t work. China was exploited for its cheap wages, but it has been exploited to the point where there is such a high demand for workers, and this new need for workers empowers the Chinese communist government to crush labor movements.
People who hate globalization hate it for the right reasons – cultural destruction, exploitation or poverty, etc. – but they never seem to point out alternatives. People work for terrible wages in these countries because the other options are in fact worse. But then, when enough companies move into the poor nations to exploit their low wage demands, this increases the amount of job options. With more job options, a worker has more power over their own situation. They can force the big companies to pay them better, and life improves. Is this a perfect system? No, it takes too long to work, and its primary motivation is greed on a global scale. Is it the only system that works? As of right now, yes!
The real problem the global economy faces is simple: it’s corporatism, not free trade. Corporations are becoming powerful, and their influence on politics can be seen in the disasters unfolding in the US. They are using this influence to kill regulation, beg for corporate welfare, and pollute our world. Stop catering to corporations and respect the free market and its necessary regulations, and we’ll see a lot of our current problems disappear.
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This entry was posted on Thursday, July 15th, 2010 at 8:50 am and is filed under Deindustrialization. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.