Global Connect

Does red make me look fat?

You better be asking for higher taxes soon, or you really do like China’s rise. Personally, China’s rise doesn’t irk me as it may for some of you. In reality, it’s not too surprising. I mean, when your country (the U.S. that is) holds over 50% of world output after World War II, was the world’s currency until the 1970s, and could really call the shots- there really is no place to go besides down. Relatively down that is. In his book, “The Post-American World,” Fareed Zakaria makes it clear that globalization and the increased economic integration really isn’t about the downfall of the United States as it is about everyone else catching up. For you xenophobes, I’m sorry, but this means China, India, Brazil, Russia, South Africa, and some other places as well. It’s simple economics. We as Americans like to prescribe complex meanings to really simple situations. We end up with far more complex consequences and then C-SPAN ends up getting 5% of the market share on political news instead of 0.7%. We pay attention when things don’t go our way. It’s not our fault though, we’re Americans. Don’t worry though, we still are the world’s largest single economy, are the main world’s reserve currency, and still call most the shots. Just don’t expect it forever.

Anyway, so you are probably wondering why I say we need higher taxes or really embrace China. James Fallows and Benjamin Cohen do a swell job on describing the situation. Let’s look at the dollar (as Cohen wrote about). Really, when we purchase something made in China, a portion of the dollar travels overseas into a factory where assets are partially confiscated by the state for “development purposes” by a local financial board. These are then used to purchase T-bills on auction in the U.S., or put on reserve. In other words, China is using our own money to buy our own debt- its called debt recycling. Don’t blame China though, we freak out on any news that they aren’t going to show up to these auctions. Furthermore, China’s currency is pegged to ours at an artificially low rate (subsidized by American debt dollars they buy from us), making their export markets more competitive than ours- period. So, we all have something to lose if the relationship goes South- China can’t grow at 10% a year and America can’t spend, and spend, and spend. Not to mention that this symbiotic relationship is China keeping much of its population poor for the sake of putting dollars into you and I’s hands. So, if we want to keep up our lifestyles- put up a Chinese flag next to your American one on the 4th of July, but if not- then you better be asking for some other revenue stream to fix the budget and trade deficits. Next time you vote, ask for higher interest rates and taxes, otherwise you aren’t going to get that far.

Remember: its simple economics.