China and the U.S. Embark on a Perilous Trip

China and the U.S. Embark on a Perilous Trip
By LOUIS UCHITELLE
Published: July 23, 2005
"The circumstances seem to be as dangerous and intractable as any I can remember," Mr. Volcker said Thursday, repeating an earlier warning in a February speech. "If people lose confidence in the dollar as a store of value, or lose confidence in the political strength of the United States relative to other countries, there is going to be trouble. I'm not saying a crisis is inevitable or that an orderly adjustment is impossible, but at some point big adjustments will have to be made."

Even gradually reducing the value of the dollar by an amount large enough - say 30 percent to 40 percent - so that Americans are finally discouraged from buying increasingly expensive Asian goods, may have unpleasant consequences. Among other dangers there is the risk that China will cut back on its purchases of American government securities, contributing to a sharp rise in long-term interest rates.
-Imagine a recession combined with the government inability to borrow money from other countries at an inexpensive rate. In Keynesian economics that’s what you do. Deficit spend in bad times. Now we have a mountain of debt that wasn’t invested in American infrastructure. Plus, raising oil prices will put even more crunch on our ability to reinvest in America. Our world standing in education, infrastructure, and energy policy are abysmal. They will also only get worse. The 1990’s will be remember as an almost golden time to be an American. Military spending down, leading the world in IT technology, the best university system in the world, government surpluses. We could have turned these into insurmountable leads on the rest of the world for the 21st century. But no, we blew it. China and India each produce more than twice as many engineers as the US. Japan, with half the population produces an equal amount. The average French worker is 5% more productive than an American worker. The difference is we work 40 hours while the French work 34 and take 6 weeks off. I don’t mean to be pessimistic but we are screwed.
The challenge will come once the price of imports begins to rise. At that point, Americans will have to produce for themselves much more of what they consume - or pay a lot more for the privilege of importing. Ideally, the process would involve America's becoming a much bigger producing nation, even stepping up its exports to Asia, while Asia - and especially China - takes on more of the role of consumer.
That is essentially the view of the Bush administration as outlined by Ben S. Bernanke, the newly appointed chairman of President Bush's Council of Economic Advisers. "We probably have little choice except to be patient as we work to create" the necessary conditions for a reversal of roles, he said in a recent speech.
That is not an easy transformation. Americans now produce only about 75 percent of the merchandise they purchase, importing the rest. That is down from 90 percent or so a decade ago, according to various studies. The percentage was even higher in the late 1980's, the last time the dollar went through a long, similarly managed decline - in those pre-euro days - against the German, French and Japanese currencies.
As the dollar fell, manufacturing did revive in the United States. Exports jumped and the trade deficit shrank, but the interest rate manipulation involved in managing the currency helped to produce the stock market crash in October 1987, or so some economists argue.
-Let me point out how America is not special in these circumstances. In the 16th century, the Spanish suffered the same type of decline, the wealthiest and most technologically advanced country in Europe became a second rate power by 1700. Next were the dutch, all manufacturing in Spain was outscourced to Holland. The Dutch were able to ride that for several decades and shifted the inflow of foreign currency in order to create a banking system. Unfortunately, that creates social inequality and it really sucked to be the bottom 90% of the population in 18th century Holland. (Remember, during the Revolutionary War, Ben Franklin and John Adams were sent to get loans from the dutch to finance the war.) But that didn’t last. Manufacturing moved from Holland to England. The English were able to ride that pony for 200 years until 2 world wars and the migration of manufacturing to the United States. (Financed by English banks and currency inflow surplus into the US. Kind of like what’s happening now in China.) China and India have big problems, primarily energy, demographics, health, and environmental degradation. But they aren’t the only competitors. Look at Germany, everyone says Germany is falling behind. Last year, Germany produced $970 billion worth of exports. China produced around $300 to $350 billion. Walmart accounted for 25% of that alone. Germany has lower fossil fuel dependency costs, better schools, and better infrastructure. Japan has those benefits as well. They have a bad demographics problem but guess what? All those engineers have come in handy in order to convert their manufacturing from humans to robots. In 5 years they will produce goods cheaper and at a higher quality than the Chinese without requiring human labor. Wake-up sheepeople, we lost our chance in the 1990’s, now we have to work double time just to keep up.