An Economic Pact With the Devil
Published in Süddeutsche Zeitung
(Germany) on 12 February 2009
by Ulrich Schäfer (link to original)
The global economy is in its worst crisis in eighty years. Why? The Faustian bargain that kept the United States and China together for so many years is no longer working.
Once upon a time, there was an agreement for which the whole world is paying today. The agreement was made between the United States and China. It was supposed to work like this: the Americans lived unashamedly on credit, they wallowed in their excessive lifestyle and they bought whatever they wanted. On the other side, the Chinese earned handsome sums of money catering to the American shopaholics. They sold whatever customers in Michigan or Alabama wanted: toys, textiles, shoes, computers, everything. And they took in hundreds of billions of American dollars every year doing this.
Thanks to consumption-crazed Americans, China rose to become the world’s third largest economic power, even ahead of Germany. Above all, however, China suddenly had more US dollars in its hands than any nation on earth, all in all more than $1.8 trillion. That’s more than even the Americans themselves have. The Chinese were smart enough to avoid simply hoarding all these dollars. They invested them right where they would be most profitable to them: in the United States. Peking put its currency reserves in U.S. bonds, particularly U.S. government bonds, thus allowing Americans to take on yet more debt so they could continue to buy more imports, not only from China, but from Europe as well.
Without China’s billions, the boom in the United States would not have been possible. Without these billions, Wall Street couldn’t have prospered so breathtakingly. And without the dollars Peking sent back into the United States, the American real estate market bubble couldn’t have inflated so quickly and spectacularly. But now that bubble has burst and the world is experiencing the worst economic crisis in eighty years. And the deal with the devil that kept China and the United States together, as well as the world economy afloat, has disintegrated as well. Because now the American consumer is holding on to his money, he’s sending fewer dollars to China while the government in Washington continues to take on even more debt. President Obama is already talking in terms of several trillions of dollars.
The big question now is, who’s going to pay? Who will loan Obama the money he needs to pay the bills? The banks won’t because they’re more or less already broke. The consumers won’t because they’re hanging on to their money. And China will hardly stand ready to finance America’s new debts, because the third largest economy in the world is itself plunging toward ruin with breathtaking speed.
But the propagandists in Peking are standing by their prognostication that the Chinese economy will grow by 8 percent this year. If one looks at their latest export figures, it’s hard to imagine such a growth rate. Those in power in Peking are doing everything they can to prevent a decline. They’re putting hundreds of millions of dollars into their own economy. There won’t be much left over to loan to the United States.
Economists have feared this development for a long time. They talk about “global imbalances” that are unsustainable over the long term, but putting it that way just whitewashes the problem. The communiqués emanating from the summit meetings of the seven leading economic nations have been warning the same thing for years and no one has done anything about it. Now the entire world is paying for their malfeasance.
The Chinese are also now suffering from what was once their main strength. It’s entirely possible that China might suffer the same fate as Russia, whose fate is tied to the export of oil and gas. When that collapsed, their capital reserves evaporated along with it and the ruble tanked. Napoleon once said “When China awakes, the world will tremble.” Today it’s just as true that if China fails, the world will tremble as well.
Once upon a time, there was an agreement for which the whole world is paying today. The agreement was made between the United States and China. It was supposed to work like this: the Americans lived unashamedly on credit, they wallowed in their excessive lifestyle and they bought whatever they wanted. On the other side, the Chinese earned handsome sums of money catering to the American shopaholics. They sold whatever customers in Michigan or Alabama wanted: toys, textiles, shoes, computers, everything. And they took in hundreds of billions of American dollars every year doing this.
Thanks to consumption-crazed Americans, China rose to become the world’s third largest economic power, even ahead of Germany. Above all, however, China suddenly had more US dollars in its hands than any nation on earth, all in all more than $1.8 trillion. That’s more than even the Americans themselves have. The Chinese were smart enough to avoid simply hoarding all these dollars. They invested them right where they would be most profitable to them: in the United States. Peking put its currency reserves in U.S. bonds, particularly U.S. government bonds, thus allowing Americans to take on yet more debt so they could continue to buy more imports, not only from China, but from Europe as well.
Without China’s billions, the boom in the United States would not have been possible. Without these billions, Wall Street couldn’t have prospered so breathtakingly. And without the dollars Peking sent back into the United States, the American real estate market bubble couldn’t have inflated so quickly and spectacularly. But now that bubble has burst and the world is experiencing the worst economic crisis in eighty years. And the deal with the devil that kept China and the United States together, as well as the world economy afloat, has disintegrated as well. Because now the American consumer is holding on to his money, he’s sending fewer dollars to China while the government in Washington continues to take on even more debt. President Obama is already talking in terms of several trillions of dollars.
The big question now is, who’s going to pay? Who will loan Obama the money he needs to pay the bills? The banks won’t because they’re more or less already broke. The consumers won’t because they’re hanging on to their money. And China will hardly stand ready to finance America’s new debts, because the third largest economy in the world is itself plunging toward ruin with breathtaking speed.
But the propagandists in Peking are standing by their prognostication that the Chinese economy will grow by 8 percent this year. If one looks at their latest export figures, it’s hard to imagine such a growth rate. Those in power in Peking are doing everything they can to prevent a decline. They’re putting hundreds of millions of dollars into their own economy. There won’t be much left over to loan to the United States.
Economists have feared this development for a long time. They talk about “global imbalances” that are unsustainable over the long term, but putting it that way just whitewashes the problem. The communiqués emanating from the summit meetings of the seven leading economic nations have been warning the same thing for years and no one has done anything about it. Now the entire world is paying for their malfeasance.
The Chinese are also now suffering from what was once their main strength. It’s entirely possible that China might suffer the same fate as Russia, whose fate is tied to the export of oil and gas. When that collapsed, their capital reserves evaporated along with it and the ruble tanked. Napoleon once said “When China awakes, the world will tremble.” Today it’s just as true that if China fails, the world will tremble as well.