It seems that, unlike the cooperative and collaborative attitudes of countries during the earlier stage of the global crisis, when there was a big panic and a free fall in prices, there isn’t enough compromise yet regarding the content, order and magnitude of the required radical reforms in finance, global warming, energy and environmental issues.
The lack of “understanding” is even more visible in correcting current global macroeconomic imbalances. There are two major abnormal countries in the word. They are obviously China and the US. China is an abnormal country in many respects. In terms of converging to the practices of a free market economy, China is not normal. In terms of environmental, human rights and almost any other democratic criterion, China is again an abnormal country. It should be beyond question that in this era of global interdependency, these kinds of abnormalities bring an amazing “competitive advantage” to such a big country and that it therefore exports many problems to the rest of the word, such as trade deficits, a demise of many local industries, and unemployment. In this regard there is an explicit China problem today in the world, with even larger issues to follow.
The period of saturation of the Chinese economy in the sense of becoming another mature economy will take longer, so no country will be able to pay the cost of the burden that China will impose. In my view, “China as an opportunity” perception has already died.
China could be seen as a “doctor” for the US, another abnormal and sick giant of the world economy. The US, with ever deteriorating triple deficits (current account deficit, budget deficit and saving deficit), is one of the big barrower countries. The rate of public debt has already reached 100 percent of gross domestic product (GDP). It is expected to exceed 115 percent of GDP in the coming few years. Simply forget about the “triples As” of the US, which are artificially attributed by the rating agencies under the control of the American establishment, the worst news is that there is no reliable exit strategy from this vicious cycle. The ever declining dollar has also not helped the US current account deficit improve significantly. Moreover, as the value of the dollar continues declining, America’s capacity to pay its debts through dollar weakens. This and the current economic slowdown forces the Americans to print even more dollars.
This in turn fuels several other side effects. First of all, the US’s twin sister -- China, of course -- does not want to continue financing the US as the value of $2.5 trillion reserves declines. Under current conditions, I would also like to take the default options for the US economy into consideration. In fact, we saw the signs of this option in 1997, when Japan was passing through a big economic malaise after the failure of Yamaichi Securities, a Japanese equivalent of America’s Lehman Brothers. At the time, there were demands for Japan, in need of money, to convert some of its huge American bonds into liquidity in order to recapitalize banks under big non-performing bad loans. As a reaction that that, some explanations came from the US side saying that this may only be possible for the long term because in the short term, it was unlikely that America would exchange American bonds for cash. This option, in my view, is on the table for the Chinese as well.
I will expand my discussions on this issue in further detail in my next column.
