Fallows’ $ 1.4 Trillion Question
Both Tom and John have weighed in on the important piece by James Fallows in The Atlantic Monthly, entitled “The $1.4 Trillion Dollar Question“:
“What Fallows doesn’t address in China’s vast surplus/savings is the huge and very real current sovereign debts and future mandates that are hidden in this development scheme: overseas resource dependencies demanding investment stakes, future aging costs, current and future enviro costs, future requirements to build out (and up) the poor interior, and so on.
Those are real sovereign liabilities because the people will expect some/much government help in these matters over time to ensure continued development and sustained movement up the product chain (gotta get as rich as possible before getting old).
Having said all that, Fallows’ analysis of the government’s logic is dead on. I suspect that, with all his time spent in China, we’ll see a book that does a big turn in explaining China to America. That will be a huge journalistic endeavor, and most welcome from someone with his considerable narrative talents.
As for the larger strategic question, we owe China a quiet international security order within which to develop, and sufficient partnership so as to obviate too much defense spending on their part. Eventually, Deng’s “grand compromise” of 1992 (PLA supports him on market acceleration in return for money and cover to modernize) must be tempered so that China doesn’t field a military for a war that should never happen and which it could never win. It needs to field a SysAdmin-heavy force that partners with us in mutual dependence: we can’t rule the peace with our Leviathan-heavy force, but they can’t rule war with their Leviathan-lite force either, so we must cooperate in extending and protecting globalization to our mutual advantage.”
“Fallows runs through the details of the “financial balance of terror” between the US and China and concludes that it won’t last long. However, of the reasons he listed for a collapse of the balance, he didn’t include the most likely: that China will need the money to shore up its domestic economy as the US heads into a lengthy and severe recession.
Remember, China hasn’t endured anything other than growth pain for over a decade. Further, the average Chinese citizens hasn’t reaped much from that boom. They don’t have the financial reserves to weather a crisis (and many of those that do will lose their shirts when China’s market bubble tanks). So where will this cash go over the next two years? Not into Blackstones or US Treasuries. Instead, it will be invested domestically. Into jobs and projects to shore up the little bit of legitimacy the Chinese government still has (we see a similar pattern with many of the globe’s marginally legitimate governments, from Saudi Arabia to Russia).
Frankly, I’m not sure that $1.4 trillion (the normative value of which is evaporating with each plunge in the dollar) will be enough to prevent China from disintegrating if this crisis becomes a panic.”
My two cents:
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.
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 […]
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.
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.
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.
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