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global financial imbalances « Previous | |Next »
April 19, 2006

Gerard Barker's latest op.ed in The Times is about global financial imbalances, and more particularly the relationship between China and to the US. He says that China’s current account surplus exactly mirrors the US deficit --- at 7 per cent of GDP---and that this imbalance is an economic wedge between China and the US.

Barker's judgement is that:

This situation is untenable. The US cannot go on accumulating debt at its current rate. Yet China, too, in this rapid development stage, is in the odd position of exporting capital on the back of a large domestic savings surplus. That makes no sense, either. And so rebalancing the US-China economic relationship is not only desirable but inevitable, sooner or later.The only question is how. The United States can increase its savings relative to its investment or let the dollar fall. China can reduce its savings or let the renminbi rise.

Baker adds that there appears to be a shift in the US to address this long term unsustainable position. As the beleaguered Bush Administration is making no serious effort to reduce the fiscal deficit, which would help to increase savings, so it it may actually be starting to think in terms of reducing the dollar.

The case for America needing a competitive dollar is made by Martin Feldstein. A sharply lower dollar means higher US interest rates, lower equity prices and, possibly, an inflationary surge.

What about China? What options does it have?

It’s clear that Beijing prefers the export-led, cheap-currency growth that served Japan so well before that has enabled it to keep its shaky financial system afloat. Though the Chinese government is trying to rebalance the economy by encouraging domestic consumption, foreign direct investment seems to keep outpacing these effort. China has more reserves than it needs.

The protectionists in the US, led by Senators Lindsey Graham and Charles Schumer, continue to try to force Beijing to revalue the yuan. Theyir brief is to protect manufacturing jobs, and they argue that China's flooding the US with cheap imports devastates American manufacturing. This problem, they say is exacerbated by China's undervalued currency and trade surplus, Graham and Schumer have threatened a 27.5% across-the-board tariff on Chinese goods if the yuan is not allowed to appreciate. In July 2005 China allowed its currency to appreciate by just over 2%, but the senators have argued that this is not enough.

Maybe the US will bite the bullet and dump the old policy of a strong dollar. The US can no longer continue to able to borrow the costs simultaneously to maintain both its new empire and its middle-class consumerist lifestyle as the flows of foreign-capital into the US is beginning to reduce.

| Posted by Gary Sauer-Thompson at 8:17 AM | | Comments (0)