Issue #43
Last Update December 24, 2005
International The China Gamble by Gerry Krownstein May 18, 2005 A dangerous game is being played with China. The second-largest holder of Uncle Sam's IOUs is being told to decouple its currency from the dollar to make its exports less attractive to American buyers and thus improve our balance of payments deficit. If China does this, and we are extremely lucky, we will see a small decrease in imports and a small increase in exports. The risk, however, is enormous; a decline in the dollar versus the Yuan may accellerate China's debt diversification into other currencies, and encourage other Asian holders of dollar debt to do so as well. Since our record internal and international deficits are largely being financed by Asian economies (China and Japan together account for over $900 billion of the roughly $1.1 trillion held by foreign nations), any strong movement out of the dollar could lead to a world-wide dollar collapse and an American hyper-inflation, followed by large American (and perhaps world-wide) unemployment.
Though Chinese cooperation in resolving difficult issues in international trade and currency rates is critical to our well-being as a nation, our government's arrogant tone and ham-handed maneuvering in these areas and over the problems with North Korea is raising Chinese hackles and making cooperation more and more unlikely.
The Bush administration seems to have a single strategy when its policies go awry: more of the same. “Stay the course” may be a good sound bite, but the only way to get out of a hole is to stop digging and start climbing. The real tragedy of the situation is that, although transforming the budget and trade deficits to surpluses would be extremely difficult, making a substantial reduction in the size of each deficit is relatively easy, and would restore international confidence in our currency and our economy.
A major reduction in oil imports would have an enormous impact on the trade deficit. The Bush administration has opted for additional domestic supply to do this, but such additional oil resources just don't exist in any great quantity. Alternative energy sources (including coal transformation as well as expanding renewable sources) will take time to develop, especially if our choice includes the preservation of our planet as a habitable place. Improved efficiency in energy usage, the tool that destroyed the OPEC squeeze of the late 70's, can be brought to bear quickly and would be tremendously effective, but it is a course to which President Bush does not even pay lip service. Net petroleum imports are around $60 billion per year and account for the largest part of our trade imbalance. Ironically, the US exports oil even while it is importing it; a reduction in petroleum imports would free more for export, helping both sides of the balance of payments equation. Since Asia, and especially China and Japan, are petroleum importers, and since China's increasing energy needs are part of the reason for the run-up in petroleum prices, domestic energy conservation would have a significant impact on our international status and help retain the dollar as the preferred international currency.
Domestically, our record budget deficits can be traced to two major items: massive tax cuts for the wealthy (and increased tax loopholes for corporations), and overseas military adventurism. By the administration's own figures, the ten year cost of the tax cuts will be about $2 trillion in foregone revenue; that's without even counting in corporate giveaways that have the impact of tax cuts without the name, and without allowing for the administration's propensity for underestimating the unfavorable impact of its own policies. There are a few tax cut provisions that should be retained, mostly affecting the middle class and lower, but these are minor in economic impact; rolling back the majority of the Bush cuts benefitting major corporations and the top 5% of our citizenry would go a long way towards closing the budget gap.
Reducing our military expenditures is another matter. With over $300 billion spent to date on an unnecessary war in Iraq (not to mention 1600 American lives and thousands more American wounded) we are neither more secure nor more respected. Our image as a haven of freedom has been juxtaposed to our image as killers of the innocent, jailors with no respect for domestic or international law, and inept torturers with not even good information about our enemies as a result. The money spent can't be recouped, and certainly the lives can't be restored. The war that was supposed to pay for itself out of Iraqi oil sales has become a great monetary drain. Stopping that drain would require leaving Iraq to its own devises. The result would be unpredictable, but the worst case results would be no more unaffordable than the current situation. The maxim “you break it, you own it” has never been more true, and if the results
The only solution may be a phased withdrawal of American troops after the adoption of an Iraqi constitution. The Shiites and Kurds are more than strong enough to deal with a Suni population that, despite its minority status, has made their lives hell over the past decades. If democracy includes self-determination, Iraq must be its own salvation.
The tragedy is that many of the problems we face today were known when President Bush took office, and could have been avoided, or at least an earlier start could have been made on resolving them, at a great savings in time and money. A regime that proudly boasts that it makes its own reality will learn that reality is not under its control, but it will never admit to it: it will never admit that the Iraqi invasion was an ideologically-motivated blunder and that thousands have died in vain; it will not admit that a struggling economy is the result of its economic policies; it will not admit that the debt burdens our children will struggle with is of its own making. It is the American people who are paying for and will continue to pay for their fantasies.
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