The Continuance of the Savings Glut

With President Obama in China and the issue of the dollar-renminbi exchange rate presumably on the agenda, there has been a great deal of commentary about the threatening peril of the Chinese savings glut1. Here was Paul Krugman late in October on how the savings glut — the condition and a leading cause of the 2007-2008 financial crisis — remains unabated, continuing to propagate its distortions throughout the world economy2:

Until around 2001, you could argue that [the target value of the yuan was reasonable]: China’s overall trade position wasn’t too far out of balance. From then onward, however, the policy of keeping the yuan-dollar rate fixed came to look increasingly bizarre. First of all, the dollar slid in value, especially against the euro, so that by keeping the yuan / dollar rate fixed, Chinese officials were, in effect, devaluing their currency against everyone else’s. Meanwhile, productivity in China’s export industries soared; combined with the de facto devaluation, this made Chinese goods extremely cheap on world markets.

The result was a huge Chinese trade surplus. If supply and demand had been allowed to prevail, the value of China’s currency would have risen sharply. But Chinese authorities didn’t let it rise. They kept it down by selling vast quantities of the currency, acquiring in return an enormous hoard of foreign assets, mostly in dollars, currently worth about $2.1 trillion.

Many economists, myself included, believe that China’s asset-buying spree helped inflate the housing bubble, setting the stage for the global financial crisis. But China’s insistence on keeping the yuan / dollar rate fixed, even when the dollar declines, may be doing even more harm now.

Although there has been a lot of doomsaying about the falling dollar, that decline is actually both natural and desirable. America needs a weaker dollar to help reduce its trade deficit, and it’s getting that weaker dollar as nervous investors, who flocked into the presumed safety of U.S. debt at the peak of the crisis, have started putting their money to work elsewhere.

But China has been keeping its currency pegged to the dollar — which means that a country with a huge trade surplus and a rapidly recovering economy, a country whose currency should be rising in value, is in effect engineering a large devaluation instead.

And that’s a particularly bad thing to do at a time when the world economy remains deeply depressed due to inadequate overall demand. By pursuing a weak-currency policy, China is siphoning some of that inadequate demand away from other nations, which is hurting growth almost everywhere.

For thirty years now the prevailing grand social bargain in the United States has been that outsourcing and offshoring will be the means whereby capital will capture an increased portion of national income and the resultant consumer goods price deflation will substitute for the also resultant wage stagnation. In shorthand, this might be called the Reagan Revolution, though Reagan only brokered the deal. The conditions that gave rise to parties militating against the preceding post-war social bargain lay much deeper in the structure of the post-war international order. This social bargain is the basis of the financial problems of the U.S. as well as of the China problem.

The savings glut is not merely a problem with China, but in its Chinese component it is driven by two factors, neither of which is likely to be resolved by U.S. action. First, owing to population growth and the massive migration from rural farms to urban wage labor, China needs to create around 25 million new jobs per year. The memory of Tiananmen Square demonstrations of 1989 remains potent in the mind of Chinese Communist Party officials. It is widely believed among Chinese officials that preventing a repeat of the unrest of 1989 and hence the survival of the Party depends on the ability of the Chinese economy to provide jobs for these millions, preventing them from becoming a mass of disaffected urban unemployed. Second, the savings glut exists as a part of China’s long-term grand strategy of pursing peaceful development first and regional political realignment only once they have attained sufficient economic and military weight. For the U.S., the G-8, the IMF or whoever to ask China to abandon its policy of undervaluing the renminbi is to ask the Chinese government to commit suicide and to accept their second-tier world-political status; it is to ask them to run the highest order of political risk as an act of charity to the rest of the world. We cannot rely on China doing the U.S. any macroeconomic favors here. The only way to eliminate the macroeconomic conditions of the next financial crisis is to get our own house in order.

On the right and amidst the Lou Dobbs crowd you here these constant sidelong remarks about China holding the strings of America’s economic future. But this is not the result of some insidious plot on the part of China to acquire a financial WMD stuffed full of T-bills for deployment against the U.S. at some opportune occasion (like a WMD, to actually use it would result in mutually assured destruction). This is result of the Wal-Mart low-wage, low prices, long supply chain model of doing business (surprise: the day-to-day purchasing decisions of millions of people reach up to the commanding heights of world finance). We can try to brow-beat China to forego the opportunities of the system that we have created, but the origin of that system reaches down into what is now, under the midwifery of the right, claimed as the American way of life. And perhaps we have decided that getting off on a bad foot with the world’s next superpower is preferable to confronting our own economic culture.


  1. Dominique Strauss-Kahn, the Director of the IMF, made a speech on the subject in Beijing, The International Monetary System: Reforms to Enhance Stability and Governance, International Finance Forum, Beijing, 16 November 2009; Krugman, Paul, “World Out of Balance,” The New York Times, 16 November 2009, p. A25; Wolf, Martin, “Grim Truths Obama Should Have Told Hu,” Financial Times, 17 November 2009.

  2. Krugman, Paul, “The Chinese Disconnect,” The New York Times, 23 October 2009, p. A35

The Beijing Olympics Did Not Take Place

One of the amusing stories coming out of the 2008 Beijing Olympics opening ceremonies is that it turns out that a portion of the video feed of the fireworks display was actually a computer simulation spliced into the broadcast. The fireworks were set off, but planners determined that they wouldn’t be able to film them as well as they would have liked, so they manufactured a version of them according to how they wanted them to have been filmed (Spencer, Richard, “Beijing Olympic 2008 opening ceremony giant firework footprints ‘faked’,” Daily Telegraph, 10 August 2008):

Gao Xiaolong, head of the visual effects team for the ceremony, said it had taken almost a year to create the 55-second sequence. Meticulous efforts were made to ensure the sequence was as unnoticeable as possible: they sought advice from the Beijing meteorological office as to how to recreate the hazy effects of Beijing’s smog at night, and inserted a slight camera shake effect to simulate the idea that it was filmed from a helicopter.

But what does it even mean to say that portions of the event were “faked”? The whole thing was illusion and artifice. Obviously significant portions of the event were computer graphics. The scroll that served as the mat for a significant portion of the floor show included computer graphics to create the image of its rolling. The projection of the Earth inside the globe was computer graphics and the unfurling scroll around the perimeter of the stadium as the final flamebearer faux-ran to the Olympic torch was computer graphics.

Increasingly computer graphics will come to be the norm, what’s really “real” and the merely material world will become the anomaly. Already we’re at the point where the big story about the latest Batman film was not the CG, but that the stuff that would usually be CG wasn’t CG (e.g. Brown, Scott, “Dark Knight Director Shuns Digital Effects For the Real Thing,” Wired, vol. 16, no. 7, July 2008, pp. 122-127). Already people are talking about augmented reality. The problem that I have with, say, Google maps and other special data, is that it’s stuck in a little box in my hand. Where it belongs is overlayed onto the world. Real-world objects are the ultimate representational tokens.

Movable type, opening ceremonies of the Bejing Olympics, 8 August 2008

Or, to turn things around, my favorite performance of the night was the “movable type” arrangement of 897 actuating blocks that raised and lowered to create patterns like a waving flag and ripples in a pond. My first reaction was that it must be computer control that created the images of waves and ripples. I wondered at how much that many hydraulic lifts must have cost and tried to imagine the programming that could produce those patters. The first time the camera panned low and showed human legs standing and squatting I was amazed.

This was an instance of “natural” things “simulating” machines. What we were watching was giant wooden pixels. What was amazing about this performance was that humans could achieve this machine-like level of control and precision.

1994, David Turnley, James Nachtwey, 1994 elections in South Africa

But of course I don’t need to go to bizarre lengths. The more traditional means of artifice are well documented. There’s a reason that they call it media (middle, medium).

State Resource Acquisition

As long as I am kicking Thomas Barnett, I should mention his article on the creation of AfriCom in the July issue of Esquire (“The Americans Have Landed,” Esquire, vol. 148, no. 1, July 2007, pp. 113-117, 134-137). It generated a bit of attention when it first came out (e.g. Plumer, Brad, “Surging Into Africa” and “More on Africa Command,” both 24 July 2007; Farley, Robert, “Africom,” TAPPED, The American Prospect, 24 July 2007; Yglesias, Matthew, “Africa Command,” The, 24 July 2007).

Mr. Barnett pushes around a few theories about why AfriCom, but dismisses my own (“AfriCom: The New Scramble for Africa,” smarties, 1 May 2007) with some hand-waving:

There’s oil here, but the United States would get its share whether Africa burns or not, and it’s actually fairly quiet right now.

The Chinese are here en masse, typically embedded with regimes we can’t stand or can’t stand us, like Sudan and Zimbabwe. But the Chinese aren’t particularly liked in Africa and seem to have no designs for empire here. Beijing just wants its energy and minerals, and that penetration, such as it is, doesn’t warrant Africa Command, either.

The theory by which Mr. Barnett dismisses the idea that AfriCom is an economic-strategic countermove against China is that it’s unnecessary because we can all get access to the recourses we demand through the market. The problem with too facile a dismissal of this theory is that states have never wholly committed themselves to one theory of resource acquisition.

Throughout most of history governing institutions have been mercantilist and have lived by beggar-thy-neighbor. The way that a state and its clients acquired resources was by seizing them. It was only with the advent of modern liberalism that a firm division between the state and the economy emerged, but it was a slow process and up through the Second World War many a state pursued a policy of economic expansion through conquest. It was widely believed by many liberals that imperialist and economic competition was the cause of the First and Second World Wars. Hence at the end of the Second World War the United States decided to root out imperialism and replace it with a global system of open markets. Henceforth states would get out of the business of resource acquisition and it would be an entirely private activity conducted through the peaceful means of the market, not conquest. Roosevelt hated imperialism and sought to smash the European and Japanese colonial empires and made decolonization a central mission of the United Nations. Also GATT and the belated WTO were to be integral parts of this new liberal international system on par with the United Nations, the IMF and the World Bank, to prevent war and ensure smooth, open economic access — missions perceived as integral to one another by Roosevelt and his men.

But this liberal vision was a utopian fantasy of a sort in that states were never about to wholly abandon the economic foundation of their strength — and hence their survival — to the vagaries of the market. So states have wavered between theories of resource acquisition: open markets versus conquest.

The United States has been the most advanced liberal state and in the Twentieth Century became the guarantor of system of open markets. The majority of the military actions of the United States have been in support of this global system of markets. Nearly all of its interventions in Central America have been over worries that some critical resource was about to be removed from apolitical market access by a populist socialist. The U.S. intervened in Second World War Europe — among other reasons — to prevent Hitler from doing to the United States what Napoleon attempted to do to England with his continental system. The U.S. tempted Japan to war because it was unthinkable to the U.S. and other interested parties that Japan should monopolize the resources of half the Pacific rim and half of Asia. For nearly inverse reasons the United States went to war in Vietnam because it recognized — as demonstrated by Japan’s behavior leading up to the Second World War — that Japan’s economic interest in Southeast Asia was too significant for the resources of that region to fall behind the iron curtain (there were two contending world systems at that time). The First Gulf War was to prevent the emergence of too powerful an oil monopoly — sort of the Pentagon doing to greater Iraq what the FCC did to Ma Bell in 1982.

The United States is not about to trust its economic wellbeing to serendipity: it’s going to manage it — and that means a lot of things, but one thing that it means is the military. But the United States is acting — in part — on behalf of the liberal international order. That the U.S. is required to intervene as much as it does — or perceives that it has to — suggests that a lot of states the world over still want to lapse from the open market back to conquest as a means for laying hand on their necessities. On the other hand, perhaps the U.S. is a player, only posing as the referee the better to play (Calvinball?).

In Africa it may be the case that the liberal order can provide everyone what they want — or at least everyone doing the divvying up; whether the parceling of Africa’s resources will have any benefit for the Africans themselves remains to be seen. But no state — not even the primary advocate and guarantor of the liberal international order — is about to stake its future on the hope that unfettered market access is going to play out in a straightforward way (I’ve written about this before; see “China’s Strategy for Resource Competition,” smarties, 30 March 2005, bullet two). Even in this world of open markets — or especially in this world of open markets — sanctions and economic exclusion have always played a role. So states make nice and play the diplomatic game of tit-for-tat, preparing to clamp down should the time come. Favors are proffered and chits collected — for a rainy day. A few military bargains will be struck and maybe some men and hardware will be put in place so that everyone knows how things stand. No state is going to idle while a positive sum game plays out against its favor. In the event of a crisis, states are either the quick or the dead. In Africa what we are seeing is the laying out of the pieces on the board and the early maneuvers.

Neocons Love Hillary

As if it weren’t enough that business loves Hillary, she’s William Kristol’s top Dem as well. As he tells the Washington Post (Kornblut, Anne E., “Clinton’s Foreign Policy Balancing Act,” 7 August 2007, p. A4):

Obama is becoming the antiwar candidate, and Hillary Clinton is becoming the responsible Democrat who could become commander in chief in a post-9/11 world.

It’s not exactly an endorsement, but as Matthew Yglesias points out (“Clinton Wins Coveted Bill Kristol Endorsement,” The Atlantic OnLine, 7 August 2007), when Bill Kristol says you’re the war candidate, you’re the war candidate.

And if you need still more, at today’s debate she lambasted her opponents for being too open with the electorate and the world about their foreign policy objectives:

Well, I do not believe people running for president should engage in hypotheticals and it may well be that the strategy that we have to pursue on the basis of actionable intelligence — but, remember, we’ve had some real difficult experiences with actionable intelligence — might lead to a certain action. But I think it is a very big mistake to telegraph that, and to destabilize the Musharraf regime which is fighting for its life against the Islamist extremists who are in bed with Al Qaeda and Taliban. And remember: Pakistan has nuclear weapons. The last thing we want is to have Al Qaeda-like followers in charge of Pakistan and having access to nuclear weapons. You can think big, but remember you shouldn’t always say everything you think if you’re running for president, because it has consequences across the world. And we don’t need that right now.

Of course, this sentiment won’t stop Senator Clinton from posturing on trade issues at the expense of Chinese sensitivities — the Chinese being an economically precarious leadership similarly likely to react poorly to too loose a U.S. tongue. And despite the fact that once in office a Hillary Clinton administration — or any other Democratic administration — will immediately revert to the same policy of economic liberalization that the U.S. has pursued toward China for the last 35 years, the campaign will discount future foreign policy damage for a few populist points at home with a clear conscience.