Wednesday, September 29, 2010

Monetary Warfare: the United States versus China?

Martin Wolf, in his latest column writes (

“In the absence of currency adjustments, we are seeing a form of monetary warfare: in effect, the US is seeking to inflate China, and China to deflate the US. Both sides are convinced they are right; neither is succeeding; and the rest of the world suffers.”

“It is not hard to see China’s point of view: it is desperate to avoid what it views as the dire fate of Japan after the Plaza accord.”

The basic argument in favor of China’s efforts is the Japanese experience in the 1990s. It seems as if everything goes back to this Japanese experience these days.

Maybe there is another explanation. Maybe this is what China’s leaders would like us to think.

The figures behind this discussion are those related to the world’s official reserves. From January 1999 and July 2008, these rose “from $1,615 billion to $7,534 billion—a staggering increase of $5,918 billion.” Between July 2008 and February 2009 reserves shrank by $472 billion, but rose again by $1,324 billion between February 2009 and May 2010 to reach $8385 billion.

“China is overwhelmingly the dominant intervener, accounting for 40 per cent of the accumulation since February 2009. By June 2010, its reserves had reached $2,450 billion, 30 per cent of the world total and a staggering 50 per cent of its own GDP. This accumulation must be viewed as a huge export subsidy.”

“Never in human history can the government of one superpower have lent so much to that of another.”

And, this, to me, is the key point. The key point is not what happened to Japan.

It is like the large United States corporations who have accumulated a huge amount of cash and they are, for the time being, just keeping their cash on their balance sheets. The question analysts are asking is “when will the corporations begin to invest again and get the economy moving?”

I don’t believe this is the issue for the United States corporations with lots of cash on hand. I believe that these corporations sense that a major re-structuring is in the process of taking place in the United States economy. They want to play a role in this re-structuring. Thus, the game plan is not to expand production by investment in physical plant and capital. Their plan is to merge and acquire other organizations and help re-define the landscape of American industry. I believe that this consolidation is just beginning.

I believe that this also applies to the some of the cash buildup in the banking industry and one of the reasons for the accumulation of so much cash in many of America’s larger financial institutions. These institutions want to be players in the consolidation of the banking industry.

China is observing the changes taking place in the world. It needs commodity resources. It needs production capacity. It needs world presence. In needs to extend its power into the world.

China is buying commodities or assuring commodity channels throughout the world. China is buying companies throughout the world. China is seeking and paying off new political relationships throughout the world. China is helping the world re-structure.

It would seem to me that a lot of international reserves would help it achieve these goals.

And, what is the United States doing?

It is underwriting the Chinese “re-structure” machine. Quoting Wolf, “the US is seeking to inflate China.” But, one could argue, China is not trying “to deflate the US.” China is playing a game of chess with the rest of the world. It is trying to re-position itself to be in a relatively greater position of power. It is trying to reduce the relative strength of the United States in the world and build up its own place.

And, the United States government is providing China with the means to accomplish this goal!

As with Mr. Wolf, many advisors in the United States government have been mesmerized by the events that took place in Japan in the 1990s. They couch almost every discussion about current international economic conditions in terms of Japan in the 1990s. Again, they are fighting the last war.

Japan was not trying to take on the United States. China is. And, that is the difference.

And, the President and the United States government, in their myopia, are doing all that the can to help China achieve its goal.

I would disagree with Mr. Wolf. We are not in “monetary warfare.” We are in a situation where the United States is giving China exactly what it needs to challenge America in the world!

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