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currency disputes « Previous | |Next »
January 31, 2005

I see from news reports that the US's large current account and budget deficits were a cause of concern at the World Economic Forum in Davos, Switzerland.

CartoonWEF1.jpg
Heng Kim Song, Editorial Cartoonist; Lianhe Zaobao, Singapore.

When will the US budget deficit start putting pressure US interest rates? Should we start thinking of the US in terms of a wrecked economy? Will the "government-is-the-problem" Republican administration sacrifice US manufacturing?

There has been a 25% decline in the US dollar in the last 3 years and the country is importing more than it exports. Though that means the US dollar is no longer a stable currency, the Bush Administration's policy is one of benign neglect toward the dollar. If the U.S. is borrowing from Asian central banks to finance record budget and trade deficits, can the US afford to allow its trade deficit to continue to widen for the next four years?

There is a lot of smoke and mirrors around the deficits in the Republican Whitehouse. An example. The US budget deficit will hit a new record of $427 billion this year. Last year's deficit was $412 billion. Yet White House officials continue to say that they are on track to fulfill President Bush's campaign promise of reducing the budget deficit in half by 2009!

The US has continued to maintain that it was up to others, especially China, to fix things. China needs to revalue its currency as it is undervalued and cheap Chinese goods are flooding the US and world markets. A renminbi revaluation would help reduce the US trade deficit is the US argument. Behind it sits muscle.

Muscle will not work because China will not bow, or cave into, US political pressure. China is not a compliant ally of the US empire like Australia.

China has strong economic growth (9.5% in 2004) and is attracting enormous capital inflows. Foreign investment in China's export sector is being organized to ensure technology or intellectual property transfer and there are rapid increase in productivity. China is running a trade surplus of 2% of GDP, (and a slightly larger current account surplus) and has massive foreign exchange reserves ($600 billion).

China is the new economic powerhouse even if it is an authoritarian regime, where political liberalism, (i.e. freedom of speech and freedom to assemble is traded off for high economic growth. China may well be a new form of capitalism. I would sugggest that China will make up its own mind about what it will do about its currency and when it will introduce greater exchange rate flexibility.

China will not cave in just because the American bully flexes its biceps. A more accurate model of the politics of currency disputes is a game of chicken, as it presupposes more evenly matched plaaaaaaayers.

| Posted by Gary Sauer-Thompson at 12:45 PM | | Comments (0)
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