America’s Chance to Kick Its Asian addiction

Thursday, October 2, 2008 20:18
Posted in category Uncategorized

Did America hang itself with Asian rope? I put this to a Chinese official last week and, quick as a flash, he responded: “No. It drowned itself in Asian liquidity.”

David Piling has written an interesting op-ed in the Financial Times called America’s chance to kick its Asian addiction that looks into the “opportunity” that has been created by the financial crisis for America to cut its deficit with Asia and rebuild.

In his opinon, the role of Asia in the recent turmoil comes from:

1) Shiploads of cheap goods from China and other low-cost producers helped keep a lid on US prices.

2) Asian bank reserves of $4,300bn (£2,400bn, €3,000bn) – enough to fund Treasury secretary Hank Paulson’s bail-out six times over – combined with petrodollars to provide the US with almost endless liquidity.

And no one can deny those facts, nor the fact that these two trends were simply not sustainable (as we have seen) for the long term.

The rest of the article is well written and I think spot on in many ways, but the other paragraph that I think is work higlighting is the following:

In one sense, this is a story of Asian prudence versus US recklessness. By accumulating vast savings – China and Japan alone boast 40 per cent of global central bank reserves – Asians have lived below their means so that Americans could live beyond theirs. Asia bankrolled US budget and trade deficits and provided the cash for banks and individuals to go on a spending spree and for Washington to fight wars in Afghanistan and Iraq.

I think this paragraph highlights perhaps one of the most critical issues there is in where the US economic fell apart.  There was no fiscal responsibility… not within the administration…  not within the agencies… and certainly not within consumers.  The last 10 years have been a credit fueled spending spree of epic proportions, and while many thought it would never end, the bank called in the credit line and said enough.

I pointed out last week that bankers and politicans used to fly to China and speak about the gaps in the Chinese system, and how they needed to bring their system up to international standards.

Well.. there was another message they were always conveying, and it was essentially this – that China saved too much, and that to “balance” its economy and bring the RMB into parity, Chinese consumers had to do their part.  They needed to spend.

Again, its ironic how events have played out…

Read the article here, and feel free to leave some comments below

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4 Responses to “America’s Chance to Kick Its Asian addiction”

  1. Paul Denlinger says:

    October 4th, 2008 at 3:32 am

    This story has not yet played out.

    The next part is that wages in the US and China have to find a new mean or average. This means, at least for service jobs and many tasks which can be done online, wages in China and the US will come closer together.

    Put another way, wages in US will come closer to China standards, and Chinese wages will adjust upwards (a little, because China has such a large pool of cheap workers to draw from).

    All of which is a fancy way of saying US wages for service jobs which are location-independent will come down to near-China levels. Not a good time to be a new MBA!

    Now let’s see how US politicians explain that to the US public.

  2. ian channing says:

    October 4th, 2008 at 12:52 pm

    Any chance of a link to a version of the FT story without the subscription requirement after two paras?

  3. Rich says:

    October 4th, 2008 at 8:49 pm

    Paul

    Tom Friedman’s book the World is Flat doesn’t fully appreciate the line you are drawing, but I would agree with you. American’s (possibly Europeans in some markets) are going to see changes that are uncomfortable. I am not sure the housing prices will come back, and mean wage levels are sure to go down as people take those jobs they thought were below them 18 months ago.

    For China’s side though, I am not sure we are going to see much grown in East Coast wages – or perhaps I should say that the mean wage adjustment for China will not come from the East coast. There are a lot of firms now contracting their 3rd and 4th investment in China and the majority of those are in the middle, southwest, and northeast. this will bring prices in those 2nd / 3rd tier cities up to a level between where they are now and the east coast.

    Where it will get interesting though is that the East coast is struggling a bit, and with a lot of firms closing in Guangdong, it may even be possible to see wages Low labor and middle management) come off a bit as those pools of labor become available.

    R

  4. Rich says:

    October 4th, 2008 at 8:57 pm

    ian – I can see it fine and I am not logged in.