Campaign For LIberty
Wednesday, Dec 16th, 2009
President Obama recently completed his first presidential trip to China. Even the New York Times had to concede that the United States’ position relative to China has sunk to a dismal new low. According to that establishment mainstay, Obama went to China “assuming the role of profligate spender coming to pay respects to his banker” (NYT, 11/14/2009).
But the situation is far worse even than the mainstream media makes it out to be. We were not some overleveraged small business owner going, hat-in-hand, to the local savings and loan. The entire geopolitical balance of power is at stake in this relationship.
The Chinese government is America’s largest external creditor, holding upwards of $1 trillion worth of US Treasury notes. Of the many ways our countries’ affairs are intertwined and interactive, this is the most crucial dimension.
Nonetheless, to hear the Obama administration tell it, America is still on at least equal relational footing with China. It is somehow a symbiotic relationship of equals, a “strategic partnership.”
Funny, then, how deferentially President Obama behaved toward the Chinese during this recent visit. He consented to a staged press conference, at which questions from reporters were not allowed. In the lead-up to the trip, Obama declined to meet with the Dalai Lama when the Tibetan leader made his rounds of the capital. (It was the first time since before 1991 that the lama did not see the sitting president on a Washington visit.) While in China, Obama made no public mention of Tibet, and no public mention of the lately stepped-up repression of the Falun Gong religious sect. Nor was there acknowledgement that, contrary to custom, China neglected to release a token dissident or two in advance of an American president’s arrival. Instead, the government rounded up a few dozen troublemakers.
In fact, a brief tribute to the utilitarian benefits of internet freedom, uttered at a town hall meeting broadcast to an infinitesimal sliver of the Chinese public, was about as far as Obama was willing to go in addressing China’s human rights situation. This is curious, considering how often the president complained about China’s mistreatment of its citizenry on the 2008 campaign trail.
Also during the campaign, Obama insisted he would use, “all diplomatic means at (his) disposal to achieve change in China’s manipulation of the value of its currency.” Though various members of his administration have lately sent mixed messages on this, Obama has a professed interest in a stronger Chinese renminbi relative to the dollar. (He has bought into the rather short-sighted theory that a stronger renminbi would boost consumption of US-produced goods in China, and lower consumption of Chinese-produced goods here at home.)
But talk of China altering its currency policy was seemingly swept aside in even the private, high-level exchanges on this trip. Virtually all of the “demands” one would typically expect from a left-leaning American president were nowhere to be seen.
So it is a bit hard to accept that Obama himself believes that the US and China are negotiating from positions of similar strength. Where is the give-and-take that characterizes eye-to-eye relationships? Really, it does not seem like China is interested in negotiating about anything at all.
Granted, it is probably not wise for our presidents to go around the world haranguing foreign leaders, even in the best of times. But it hurts to see our head of state fail to request concessions on account of America’s relative weakness.
Obama’s unprecedented behavior does not necessarily mean that we have zero leverage over the Chinese. Much has been made of how intensely China depends on continued access to our markets. But even on the face of it, we would stand to lose at least as much as the Chinese if we were to start putting up import barriers. Given the ominous inflationary pressures that The Fed has baked into our system this past year, our political class would under no circumstance be willing to risk the steep increase in domestic prices that would accompany a trade war. There are blips of protectionism here and there — the administration took action this fall against Chinese-made tires and industrial pipes — but no rational country in our position would dare do anything serious along these lines.
Anyway, it’s not like Americans are uniquely qualified to be consumers. Plenty of gigantic consumer markets are emerging around the world, including China’s own.
No, the only real leverage we have over China is our control over that mountain of debt. (Sad to say, that type of leverage was previously the exclusive privilege of third world nations.)
The Chinese are showing increasing skittishness about their “investment” in us. It must be unsettling to have such a huge amount of their wealth under our purview, in light of the fantastical financial behavior we have lately exhibited. Obama administration insiders have marveled at how Chinese officials pepper them with extremely detailed questions about how current health care proposals might affect the US deficit. (It’s nice that someone cares. . . ) At a press conference in March of this year, Chinese Prime Minister Wen Jinbao said, “Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried.”
Rather hilariously, the American response to Wen’s concern, delivered by Press Secretary Robert Gibbs, was, “There is no safer investment in the world than in the United States.” It is painful to contemplate, but it is almost inconceivable at this point that we will be able to indefinitely service our current debt load, let alone pay down the principal. By some estimates, the US government has $70+ trillion in unfunded future domestic liabilities. And despite a prevailing feeling that we “made it through” last year’s credit crisis, there are all sorts of structural financial problems looming on the horizon. Adam Smith himself observed that once a nation hits a certain point, the notion that its debt will ever be paid-as-agreed is implausible. And it is a safe bet that, as a foreign entity, China will be among the last in line even if some sort of solid debt settlement is conceived.
So. . . why does China continue to give us money? Surely they no longer believe that American IOUs are the soundest place for their wealth.
Criminologists claim that there sometimes comes a point in the process of a confidence game when the mark continues to play along with the scam despite seemingly impossible-to-deny evidence that he is being had. The mark becomes psychologically invested in the operation. He has to believe.
Succumbing to such a phenomenon would suggest quite a crack in the hard-eyed realism we have come to expect from the Chinese leadership. Still, that might be part of the explanation.
Do the Chinese believe that the US economy will collapse without its continued largesse? Some elements of the many-tentacled Chinese government might have fallen into such a loss-aversion mentality by now. But because any collapse will likely be precipitated by the debt load itself, it seems illogical that encouraging more fiscal ill-discipline will cure what ails us.
Besides, we are not some sort of client state of China’s. Barack Obama can call China a “partner” till he is blue in the face, but in fact China is our rival. The president might be technically correct when he asserts that “in an interconnected world, power does not need to be a zero-sum game.” It does not need to be, but are we sure China sees things that way? They have seemed very happy to step as far as possible into the small vacuum our incipient weakening has already created. The Pentagon sees China’s military build-up as a challenge to the US presence in Asia. And, displaying its global reach, China has set up resource extraction operations in places as far afield as sub-Saharan Africa.
Indeed, China would very much like to occupy the position that we have held for the past twenty years, that of sole world superpower. And just as our ascent depended on the downfall of the Soviet Union, so the collapse of the US economy would herald the era of Chinese supremacy.
So if China’s seemingly limitless largesse is not intended to prevent our collapse, and they even have an interest in our decline, is it possible that there are dark motives at work here? Perhaps some part of the Chinese government realizes, very consciously, that smothering us with an impossible debt will destroy our credibility with the rest of the world, whatever the specific nature of our eventual default. The humiliation of an effective bankruptcy would certainly serve as the nail in the coffin of US global hegemony.
China would surely get through the initial shock of an American default (or asset-debasing debt monetization). Loss of all or even part of their $1-2 trillion total US investment would be a blow, to be sure, but not an existential threat. China does have a housing bubble of its own to reckon with, but at the moment it appears to be leading the Pacific Rim out of recession. China is even taking unilateral steps to get its pollution problem under control. And as Peter Schiff pointed out recently, a spike in the value of the renminbi relative to the dollar might actually prove to be a boon to China’s economy.
Those who raise the specter of internal dissent, should China’s finances hit a rough patch, are probably not properly accounting for the fact that most Chinese are already poor. For all that country’s economic strength, its per capita annual income is just $3200. It is the loyal, docile, and largely nationalistic middle class who would likely suffer most from a disruption caused by a US economic cataclysm.
The far-sighted, patient, strategic planners in China’s government are undoubtedly already anticipating the day when outsized trade surpluses will end. The current export-intensive model under which the Chinese economy operates will have to be somewhat reoriented but, as already mentioned, there are plenty of places in the world with the taste and nascent ability to consume on a large scale. As such, the millions of low-wage Chinese workers will not face mass, sustained deprivation should US markets contract.
There is no way to see far enough behind the curtain of China’s famously opaque policy machine to know what the key players in the government are really thinking. Even if it is conscious policy in some quarters, killing the US with kindness is probably not a coherent government goal. But intentional or not, the Chinese have come upon a terrific means of getting us out of the way without aggression. The way things are going, China will even be in a position to have a strong hand in managing our decline. In a roundabout way, our debt might end up being the best investment that China has ever made!
World dominance is a dubious privilege, as it seems China is on track to find out for itself. And some republic-minded Americans believe that a tumble from our pedestal is the only means by which wayward domestic political attitudes will ever be righted.
But perception is important, and the most dire consequence of our self-inflicted fall from grace — for peoples the world over — will be the discernment that totalitarian neomercantilism has trumped nominal American values. The days of the US as shining city on the hill will draw to a close, at least for the foreseeable future.
Of course, things did not have to be this way. We could have, and should have, known better. Debt as Trojan horse is not an unprecedented means of domination. The first world, by way of the IMF and World Bank, has for decades been manipulating the third world through suffocating debt loads. Of all countries, the US should have learned the biblical Proverb well: “the borrower is servant to the lender.”