Far from disappearing, global economic imbalances are set to become even bigger.
Coping with the economic consequences will be challenging enough but, as we’ve seen from the threatened outbreak of “currency wars,” the political implications are far more awkward.
This, ultimately, is a story about the ownership and control of the commanding heights of the global economy.
The United States will lose out. China and other emerging nations will make tremendous gains.
China’s ability to snap up U.S. assets will only increase in the years ahead. The Chinese economy may be only one-third the size of America’s, but it is growing at least three times more quickly.
Even if China’s surplus savings — reflected in its current account surplus — fall as a share of its own national income, rapid Chinese growth will still leave those savings rising as a share of America’s national income.
China would then have the money to buy an ever-increasing range of U.S. real estate, equities and companies. Other emerging nations might find themselves in a similar position.
This, ultimately, is the price the United States will have to pay for running a persistent current account deficit while nations in the emerging world are growing so quickly. If the current generation of American consumers is to carry on living beyond its means, America’s “family silver” will have to be sold to Chinese and other emerging investors.
Those who remember Japan’s acquisition of Rockefeller Center and Pebble Beach may say “so what?” If the U.S. were to sell assets at an inflated price to naïve investors from the emerging world, they would ultimately lose out, as the Japanese did in the 1990s.
Indeed, the Chinese may already have followed the Japanese example — not through the purchase of New York real estate or Californian golf courses, but, instead, via the acquisition of bundles of dollar-based IOUs, more commonly known as U.S. Treasuries.
Should the dollar subsequently decline, the renminbi value of China’s holdings of U.S. Treasuries would be a lot lower than it is today. A dollar decline is, thus, a neat way for the U.S. to side-step its obligations to its foreign creditors.
This “default” is at the heart of the current debate over currency wars. If the dollar dropped against the renminbi — through, for example, the pursuit of aggressive quantitative easing — China would experience renminbi losses on its holdings of Treasuries and other flimsy pieces of U.S. paper.
Why should China be prepared to tolerate these losses? As the most populous, fastest-growing, and second biggest economy in the world, with perhaps the deepest pockets, China is in a strong position to resist Washington’s currency demands. Indeed, as China’s savings surplus continues to rise relative to the size of the U.S. (and world) economy, its primary challenge — politically as well as financially — is where those savings should be invested.
Given that investing in Treasuries leaves China at huge risk of subsequent currency movements — with the U.S. always able to turn on the dollar printing press if need be — Beijing will need to consider other investment options.
China is already buying commodity assets in Africa and striking energy deals in Brazil, increasing its political and economic power in parts of the world that, in some cases, are seen to be in America’s backyard. Chinese companies have also purchased Volvo Cars (previously owned by Ford) and bits of IBM.
It is, surely, only a matter of time before China takes an even greater interest in acquiring more “real” U.S. assets — companies and real estate — which, unlike Treasuries, are likely to rise significantly in value in dollar terms should the dollar’s value drop in world markets.
If the Chinese lose their enthusiasm for purchasing IOUs, the only way for the U.S. to fund its excessive consumption is to up the sale of its family silver. Perhaps it will do so at considerable profit, as it did with Japan’s forays.
But if it chooses not to — perhaps reflecting Congressional edict — the risk is not one of modest dollar decline but, instead, a dollar meltdown, leaving America’s reserve currency status in tatters and its claims on the world’s scarce resources seriously compromised.
Global imbalances are not just a story about short-run economic instability. They ultimately reflect a shift in the global tectonic plates that will ultimately erode U.S. power and influence.
Stephen King, chief economist of HSBC.