Fallows’ $ 1.4 Trillion Question

January 21st, 2008 by zen

China holds enormous reserves in dollars because their financial strategy – parking surplus cash in Treasury securities – also represents an internal political strategy of deferring acrimonious, major, spending and investment choices that might precipitate division among the elite. China’s leaders are acutely aware of their nation’s deficiencies and historical tendency toward centrifugal, regional, disintegration and keeping the country intact and the state in charge is right up there in terms of priority with sustaining a fantastic rate of GDP growth. The dollar surplus represents an agreeable, strategic, “rainy day fund” consensus choice of the elite and significant changes here will only be in response to pressures or needs that the elite of the CCP can get behind as a whole. Likely, cautious changes but possibly also too little too late.

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Posted in asia, barnett, china, connectivity, economics, federal budget, fiscal conservatism, foreign policy, globalization, James Fallows, john robb, risk, the atlantic | 8 comments

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  1. The Glittering Eye » Blog Archive » Owning the Bank:

    January 22nd, 2008 at 12:10 am

    […] Fallows has an article, The $1.4 Trillion Dollar Question in the current Atlantic Monthly (hat tip: Mark Safranski) which is very well worth your time and attention. In the article Mr. Fallows outlines the complex […]

  2. Fabius Maximus:

    January 22nd, 2008 at 1:11 am

    "parking surplus cash in Treasury securities – also represents an internal political strategy of deferring acrimonious, major, spending and investment choices that might precipitate division among the elite."

    This is not really correct.   China accumulates US dollars to peg the RMB/USD from rising, delaying the inevitable rebalancing of US – China trade and money flows.  They cannot spend this money inside China without first converting it, which would revalue the RMB/USD.  Their only choice, so long as they peg the RMB/USD, is which US asset to own:  govt bonds, corporate bonds, real property, etc.

  3. zen:

    January 22nd, 2008 at 1:48 am

    Hi FM

    Let me explain further.

    You’re right, they do peg for this reason but that flows out of the grand consensus of "four modernizations" hammered out by Deng Xiaoping on how China was going to make strategic choices regarding deferring or allowing consumption in terms of it’s future development. These were not mere budgetary yawners but had been quite literally life or death questions under Mao ZeDong for those cadres who came out against Mao’s maniacal Great Leap and spending priorities. Questions that were not settled for good until Deng passed power to his proteges. To make make major economic decisions without elite consensus – i.e. a narrow faction around Hu forces a top-down decision – is to reopen a very dangerous kind of jockeying.

  4. TMLutas:

    January 22nd, 2008 at 12:31 pm

    What Fallows doesn’t seem to address much is what this does to US psychology. What happens to the character to the average guy who gets, essentially, free money every day. 1 B / day in deferred compensation is a bit less than $1 for every PRC citizen but it’s over $3/day for every US citizen and that’s just from the PRC. Divide the monthly trade deficit by 30 days and 300M americans and you get about $6/day or $180/month in foreigner paid allowances per individual. A family of four is getting $700-$750 a month on average. Some places, that’s better money than welfare and, I would suggest, quite possibly as soul destroying. The only thing that’s a saving grace is that this unearned largess generally is invisible. There’s no "check from the world" that directly infantalizes us. On the other hand, there’s no way to avoid the largess. You can turn down a government check. Most don’t but it’s at least theoretically possible. This trade deficit subsidy is much harder to avoid.

    Fallows tiptoes through the psychological motivation for the PRC’s elite. They have good reason to believe that their personal necks are on the line.  If this arrangement unravels catastrophically, the general population will wake up and realize how much of their personal lifetime misery might have been avoided had the government not forced them to save half their true earnings using instruments that they not only did not approve but ended up being unreliable. Some members of the elite will probably not survive that realization and the number could get quite large depending on how reliable the military remained.

    So the elite, wanting to minimize casualties among their ranks, are likely to take another route. A military buildup strong on internal population control, diversification of enough of their holdings to guarantee pay for that military, and wait for the recessionary fire sales to buy up real income producing assets in the West, especially in the  US.

  5. Olazabal:

    November 6th, 2010 at 7:05 am

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  6. Winders:

    November 6th, 2010 at 9:26 am

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  7. Walling:

    December 14th, 2010 at 7:46 pm

    Such a helpful view. YouWriter should receive credit for it. Thanks

  8. Ogburn:

    December 16th, 2010 at 7:56 pm

    Nice article. Totally agree with the you. Keep it up.