Monday, May 16, 2005

A very good article by Morgan Stanley's chief economist, Stephen Roach, appears in TIME Asia. He discusses how Congress (on both sides of the aisle) appears to be readying to launch a trade war with China. The demand? That China revalue its currency -- something that is not likely to happen.

It's a no-brainer for politicians as many of them are not trained in economics (otherwise they'd realize the folly of their ways) and yet what they do fully comprehend is that this economic recovery has been the weakest on record when it comes to hiring and providing growing wages. Millions of Americans are not participating in this near-ghost-like recovery so what better than for politicians to feed off of this misery and hoist up a boogeyman.

The problem is China is not the problem. If anything, we should be thanking them. If it weren't for China, we'd have much less access to low-cost, high-quality products (thank you Walmart!), inflation would therefore be much higher, and also they buy our debt, helping to fund our whopping deficit. In addition, as Roach points out, the corporations in China are not Chinese per say but rather multinational corporations. It's like the scene in the classic movie, "Network," when Ned Beatty explains that there are no countries, but instead just huge multinational firms.

Sorry to say but we have met the enemy and we are they. The Fed's low rates after the internet bubble collapse has fueled and lengthened the American appetite for consumption. Greenspan has simply delayed the pain (Volcker has recently stated such publicly). Also, as Roach states, if the federal budget deficit were not as huge, our trade deficit would be lower, thus the politicians are also to blame.

I'll write more about this tomorrow, but make no mistake, this topic is a big one and it shows some disconcerting signs of becoming a game of U.S./China chicken.

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