In These New Times

A new paradigm for a post-imperial world

Will China’s recovery lead to decoupling?

Posted by smeddum on February 5, 2009


February 5, 2009 

By Paul Anderson

For some the idea that China can “decouple” from the US is blasphemous.  Indeed, China has no immediate  intention of depegging from the dollar.

Wang Jian, head of the China Society of Macroeconomics, agreed that China’s growing trade with Europe was unlikely to insulate it from a drop in exports to the United States.

If US demand weakened, Europe would export less to America and, in turn, would buy less from China, Wang said.

“Global demand is ultimately driven by the United States,” he said.

More US interest rate cuts or a further fall in the dollar in response to a weakening economy would have an impact on Chinese monetary policy, Zhang said without elaborating.1

Decoupling has been one of  Peter Schiff’s set of conditions that would bring the dollar down (although Max Keiser has gone so far so as to say Peter Schiff is wrong.)

Yet the cookie is still crumbling, so to speak,  neo-liberalism’s unwinding is not yet done. The disintegration of the US economy has no end in sight.

What an interesting time we live in! By now, anyone who feels burned by the establishment, whether the Wall Street banksters (fraud kings) or USCongressional representatives (paid lobbyist clients), or USCongress banking committees (bribed Wall Street tools), or a private hedge fund conman (protected by regulators), or financial markets (victims of naked shorting), or an employer (from foreign plant & equipment investments), beware. More deception and betrayal and smokescreens and outright lies lie directly ahead. The next TARP disbursal will be much better disguised, more of the same welfare for the elite. The next stimulus plan will be loaded down by pork, earmarks, and clever disguises to enable continued bank aid with unenforceable clauses to protect the public, and namby pamby thin oversight. The tragedy is that Jack Daniels cannot take a handoff in any reconstruction from a strawman dressed as John Maynard Keynes. The other tragedy is that the US does not have adequate labor workforce to do reconstruction, nor does the US have factory capacity to fill orders on reconstruction.2

While China’s clout is growing,it is the US that has nowhere to turn, although conventional wisdom has it that China is stuck.

Others just want Mr Wen not to pull his savings out, and trigger a run on the world’s reserve currency – the dollar.

But this is a red herring. Mr Wen is like the soldier caught in no-man’s land as an advance stalls: he can make no sudden movements forwards or back. If he commits more money, he risks losing it. If he sells up, it crashes the value of his remaining savings and kills off his biggest export market to boot.3

The expectation of sudden movement from China is  the red herring. As China seeks to recover from the loss of US markets, its focus shifts, inevitably,onto its own internal market.

More importantly, after undergoing this round of economic “mutation,” China now has a deeper understanding of the vulnerability of its development model, which is excessively dependent on external demand. It is now agreed that boosting overall domestic demand, preventing drastic economic downturn and promoting economic recovery and growth are essential measures to be followed. 4

This fundamental shift in direction will put an end to dependency on the US. Reinforcing this, at some point, will be improved  relations with Europe.  Meanwhile “demand” in the US has entered into a slump. This includes the demand for US treasuries.

The U.S. Federal Reserve suggested last week that it was going to step up its treasury-buying activity, and the mainstream media interprets this as a form of market support. What it actually is evidence of growing anxiety and desperation on the part of the Fed as the realization dawns that demand for treasuries is progressively evaporating. 5

There is further evidence of this.

The Treasury Borrowing Advisory Committee expressed concern yesterday over the sharp jump in net borrowing needs – which market analysts estimate could reach $1,500bn to $2,500bn for the 2009 financial year.

Traders are particularly concerned about the appetite for Treasuries among foreign investors, who hold more than half the outstanding $5,500bn in Treasury debt.

In recent years, demand for US government debt has been stoked by developing countries running huge trade surpluses with the US and recycling dollars by buying Treasuries. However, many are facing growing pressure to stimulate their own economies and are seeing their current account surpluses decline as global demand diminishes. 6

 

The US debt needs are like the derivative market, a black hole, that the world is backing away from. How long will US demand be considered the driver of the world economy.? Or put another way,  will the US demand slump help drive the world further in a multipolar direction? 

 

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