Business Tools Blog

GenYBlogger posted an interesting blog on the US’s co-dependence on China.

She pointed me to an article written by James Fallows in the Atlantic, The $1.4 Trillion Question.  James compares the US situation with China to the  ”mutually assured destruction” of the Cold War Russia.

China can’t afford to stop feeding dollars to Americans, because China’s own dollar holdings would be devastated if it did. As long as that logic holds, the system works. As soon as it doesn’t, we have a big problem.

But that assumes that all things remain rational.  What if they don’t?  Fallows speculates:

China’s lopsided growth-ahead in exports, behind in schooling, the environment, and everything else-makes the country socially less stable as it grows richer. Meanwhile, its expansion disrupts industries and provokes tensions in the rest of the world. The billions of dollars China pumps into the United States each week strangely seem to make it harder rather than easier for Americans to face their own structural problems. One day, something snaps. Suppose the CIC makes another bad bet-not another Blackstone but another WorldCom, with billions of dollars of Chinese people’s assets irretrievably wiped out. They will need someone to blame, and Americans, for their part, are already primed to blame China back.

So, the shock comes. Does it inevitably cause a cataclysm? No one can know until it’s too late. The important question to ask about the U.S.-China relationship, the economist Eswar Prasad, of Cornell, recently wrote in a paper about financial imbalances, is whether it has “enough flexibility to withstand and recover from large shocks, either internal or external.” He suggested that the contained tensions were so great that the answer could be no.

Today’s American system values upheaval; it’s been a while since we’ve seen too much of it. But Americans who lived through the Depression knew the pain real disruption can bring. Today’s Chinese, looking back on their country’s last century, know, too. With a lack of tragic imagination, Americans have drifted into an arrangement that is comfortable while it lasts, and could last for a while more. But not much longer.

So what is the real cost of growing the deficit?  It seems intangible when Washington talks about it.  When haven’t we had a deficit that is too large to contemplate?  But the real cost could be our growing dependence on China, where China could pull the rug out from under us and cause economic collapse.