Here are some comments that are long over due. Ambrose Evans-Pritchard suggests in the Telegraph that the Asian nations need to get a grip on reality and stop bashing Washington over reckless fiscal and monetary policies and realize that their survival as viable economies depend on the success of those policies.
Mr. Evans-Pritchard recounts the now tedious plaints from Asia concerning the risks their reserves are being subject to as well as the drumbeat for a new world currency regime. He then suggests that if Japan and China are truly successful in taking down the U.S. bond market they will have sown the seeds of their own destruction.
If Asia’s leaders give free rein to frustrations and crater the US bond market, they will ensure their own political destruction. Japan already risks descent into demographic death, deflation, and debt atrophy (its public debt is nearing 200pc of GDP). China’s regime depends on perma-boom for post-Maoist legitimacy. Could it survive the wrath of jobless graduates and rural migrants if it provokes America into erecting trade barriers, killing the globalisation goose that lays the golden egg?
American can if necessary retreat into its vast home market and rebuild its industrial base, well-armed with 12 aircraft carrier battle groups.
The last 12 months should be lesson enough that Asia cannot yet stand on its own two feet. Its mercantilist export model remains a “high-beta” play on the West, to use trader parlance.
A few weeks ago, I wrote a post questioning whether the Asian export model would survive. My thoughts then and now are that yes it will. Over time the economies of Asia have to develop their domestic economies but in the near-term the U.S. would revert more or less to mean and demand for Asia’s exports would revive. Asia has a strongly vested interest in things playing out this way and should they choose to take their threats to the next level might well kill the only chance they have at survival.
Evans-Pritchard points out what Japan and China decry is largely a product of their own making:
Let us not forget how we got here. Japan amassed a quarter trillion dollars of US bonds from January 2003 to March 2004 in a frantic effort to drive down the yen and stave off deflation. It has not yet won that battle. Producer prices fell to minus 3.8pc in April, a 22-year low.
China’s holdings of US bonds are a consequence of its own policy of holding down the yuan to boost exports. Beijing may rage about America’s “helicopter” stimulus, but what would have happened to the factories of Guangdong if the Fed had not taken emergency action or if the US Treasury had allowed the banks to collapse? China wants it both ways.
It may seem fanciful that America would turn inward and recreate its economy but dismissing that eventuality completely would be a mistake. From the rescue of GM and Chrysler to the “Buy American” provisions of various pieces of legislation, there is a feeling about that we need to see to our own. Obama’s calls for the renegotiation of NAFTA during the campaign were not met with jeers. None of this is lost on the political class. There is no natural constituency for globalization or multilateralism in the U.S., quite the contrary the average American is uncomfortable with the concepts and their perceived results. It would not take much to push the country towards isolationism.
The Asians may very well see a dimunition in the value of their reserves before this is all over. They would do well to ask themselves whether that might be the least costly alternative.