What Others Think Of Us: Chinese & American Crisis Policies

The US has run a massive current account deficit for a long time, while China has run a sharp current account surplus...With a current account deficit and absent any willing lenders, the only way forward for the US is to recognize that a rebalancing of its economy away from consumption to production is in its interests. This calls for...overall contraction of the economy by over 20% and perhaps as much as 30%; for a very sharp decline in wages and other local factor costs of production and lastly for currency depreciation that helps to rebalance its global competitiveness...As for China with its gargantuan current account surplus, the only way forward is to effect greater government spending...intended to spark consumption as it attempts to replace production intended for the export market - primarily to the US market. The resulting Chinese economy will probably be 10-20% smaller, but certainly better balanced and capable of generating more profits than it does now...Instead of accepting these bald-faced truths, the two countries are trying to sugar-coat the situation by in effect switching their respective medications. The US is behaving as if the government has the wherewithal to fiscally stimulate a broken part of its economy, and China is behaving as if its path to resurgence lies in the age-old production route....Honey, I Switched the Medication, Chan Akya, Asia Times, 12/17/2008

If this were read in the Office of the President-elect this morning, it would probably cause an immediate ban on the presence of the day's copy of Asia Times, but go and read this very level-headed look at two big nations whose policies are acting against the grain of the crisis.

A great example: an obvious place for America to reduce its enormous current account deficit would be to develop its own oil resources, such as Rocky Mountain shale (1 trillion barrels, the largest reserve on Earth). Answer from the Washington? Sure, go ahead; but be sure to ask the governors of Colorado and Wyoming for permission. We won't do that for you and we won't provide any money or tax benefits. In other words, bring back a proposal for wind-powered cars and tide-powered furnaces. Oil represents close to half of the current account deficit, with the money going to fund our adversaries. Hey, way to go!

It isn't complicated. Two neighbors, living side by side. One, Mr. Johnson, who's just lost his job at Lehman Brothers, owes seven hundred thousand on an ARM mortgage for a house now worth five hundred thousand and has a 6-year-old Lincoln. The other, Mr. Chan, an SVP at the Southern Company, has half a million in quick assets, a paid-off house, and a 14-year-old Buick. Who would a rational car dealer offer a car loan to? On the evidence, not speculation, Ben Bernanke would give it to the guy closing on bankruptcy. A bank in China wouldn't give a loan to either. Needless to say, neither banker is acting rationally.

Chan Akya is a smart guy. Take a read of his other articles (linked in the piece on China and the US).

Luther