Should America Kowtow to China?

By Marshall Auerback of New Deal 2.0 Do the Chinese really fund our deficit? Or is this more Neo-classical money mythology? Another Presidential junket to Asia and another one of the usual lectures from China, decrying our “ profligate ways ”. Today’s Wall Street Journal reports :, “ China’s top banking regulator issued a sharp critique of U.S. financial management only hours before President Barack Obama commenced his first visit to the Asian giant, highlighting economic and trade tensions that threaten to overshadow the trip .” According to Liu Mingkang, chairman of the China Banking Regulatory Commission, a weak U.S. dollar and low U.S. interest rates had led to “ massive speculation ” that was inflating asset bubbles around the world. It has created “ unavoidable risks for the recovery of the global economy, especially emerging economies ,” Mr. Liu said. The situation is “ seriously impacting global asset prices and encouraging speculation in stock and property markets .” Well, “ them’s fightin’ words ”, as we say over here. And of course, the President and his advisors are supposed to accept this criticism mildly because in the words of the NY Times , the US has assumed “ the role of profligate spender coming to pay his respects to his banker .” The Times actually does believe this to be true. They refer to China’s role as America’s largest “ creditor ” as a “ stark fact ”. They do not seem to understand that simply because a country issuing debt which it creates, it does not depend on bond holders to “ fund ” anything. Bonds are simply a savings alternative to cash offered by the monetary authorities, as we shall seek to illustrate below . It is less clear to us whether the Chinese actually believe this guff, or simply articulate it for public consumption. China has made a choice: for a variety of reasons, it has adopted an export-oriented growth strategy, and largely achieved this through closely managing its currency, the remnimbi, against the dollar. One can query the choice, as many would argue that it is more economically and socially desirable for China to consume its own economic output. According to Professor Bill Mitchell, for example, “ once the Chinese citizens rise up and demand more access to their own resources instead of flogging them off to the rest of the world…then the game will be up. They will stop accumulating financial assets in our currencies and we will find it harder to run [current account deficits] against them .” But there have undoubtedly been certain benefits that have accrued…