As little as a decade ago you needed special training to be able to understand the fact that America was a superpower in decline, buying time for itself with borrowed money. To see that reality you needed a working knowledge of the gold standard and know something about the Bretton Woods regime of fixed exchange rates and its abandonment in 1971. You would need to understand how a fixed and undervalued currency in China could lead to a virtually endless recycling of Chinese trade surpluses into American debt instruments, a curious phenomenon that was dubbed ‘Bretton Woods II’ in some sections of literature. You needed to understand the meanings of esoteric words like ‘seigniorage privilege’ and minimally technical formulations like ‘the n-1 problem’.
Today all you need is a pair of eyes and ears. Listen to the lecture the Chinese have just given to Uncle Sam, every word of which is worth weighing carefully. Here are some of my favourite lines from the official comment published in Chinese state controlled media: “China, the largest creditor of the world’s sole superpower, has every right now to demand the US to address its structural debt problems and ensure the safety of China’s dollar assets”. And also this: “To cure its addiction to debts, the US needs to re-establish the common sense principle that one should live within its means”.
After lecturing the superpower to “live within its means,” the commentary goes on to touch two hot buttons. In one line it says that “international supervision over the issue of US dollars should be introduced…” and in another line, it calls for “substantial cuts… to the US gigantic military expenditure and bloated social welfare costs”. This may be the first time the Chinese finger has wagged so clearly and publicly at the superpower, but it’s not the first time these themes have been touched on by the Chinese government. In 2009, for instance, China’s central bank governor called for creating a new reserve currency to replace the dollar. Days later, the Chinese government began a push for far-reaching monetary reforms at a G20 summit in London, with western governments struggling to reckon with the depths of their economic crisis as the backdrop. To get an idea of how far things have come between the US and their Chinese creditors, recall that in the 1990s it was an annual ritual for the Clinton administration to first issue a certification that China was not engaging in human rights violations before renewing America’s most-favoured-nation trade status with the emerging Asian powerhouse. In 1994, Clinton formally dropped the linkage between human rights and trade, arguing that America’s relationship with China was far bigger than “just human rights”, and trade issues would not be subordinated to other issues. With the turn of the century, the next big issue that American politicians picked with the Chinese was the value of the yuan, the Chinese currency, that many American leaders argue has been kept artificially undervalued to promote Chinese products in global markets. By some estimates presented last year, China was spending more than a billion dollars a day to keep its currency from appreciating, thereby ensuring that its products would be the cheapest in the world.
For many years, American leaders tried to make this an issue between the governments of the two countries. The International Monetary Fund has stated as recently as a month ago that the Chinese yuan “remains substantially undervalued” and the US government continued its pressure to get China to allow the yuan to rise as late as January of 2011. But then they folded their hand as the Treasury department released a report saying categorically that China was not a “currency manipulator”. In every stand-off with the Chinese government, America has ultimately folded its hand. Eyes and ears are all you need now to know that the economic strength of the world’s sole superpower has withered before its eyes. For over two decades now, the US has urged other countries to trim wasteful expenditures, to limit government commitments in light of fiscal reality, to be more responsible in running up debt to pay for runaway spending. Today, its largest creditor is telling the US that the time has come for America to heed its own advice. In other words, America needs to undergo the kind of structural adjustment that it has crafted for the rest of the world, that it hoisted upon Russia in the 1990s, Latin America in the 1980s, East Asia following the financial crisis of 1997. Its time for America to swallow some of its own medicine, and discover the awful taste of choosing between what commitments to retain and which ones to dump.
Published in The Express Tribune, August 11th, 2011.