Tuesday, September 29, 2009

Volker says China's rise highlights U.S. decline



“You cannot be dependent upon these countries for three to four trillion dollars of your debt and think that they’re going to be passive observers of whatever you do.” -Paul Volker

It’s amazing to think that Paul Volker, one of the most revered economic figures of recent times, simply does not understand macroeconomics.

China’s holdings of U.S. Treasuries are are reflection of the cost, in dollars, that it took to suppress their currency, along with the wages and living standards of their own citizens, in order to support a largely export-driven growth model. If China did not want to accumulate dollars it did not have to create real assets (goods) and export them to Americans in exchange for the dollar. It had to have been their desire to “net save” in the U.S. currency or else they wouldn’t have done it. They could have just as easily boosted domestic investment and implemented policies to increase wages and consumption and grown output and employment in that fashion. For whatever reason, they chose not to.

However, China is going down this path now, not because they want to, necessarily, but because they see the United States as no longer willing to sustain output and employment at sufficient levels to maintain their own export product. Perhaps it’s because we have policy makers like Paul Volker.

Bottom line: with people like Volker fashioning U.S. policy, it's better to invest in China. Get my China Report here.

2 comments:

googleheim said...

Right on.

When 200+ year ago American was a tobacco cotton republic of the UK, American was growing sure even when UK was in "decline" could have those historial bubbles that are referenced for posteriority.

We were an economic sublet to the UK.

China is an economic sublet to the USA.

Volcker doesn't understand that the only leverage China has is that it is waging the USA dog by being it's tail end.

Sure but China's currency is undervalued so it is a reverse Argentina but no big deal

Ryan Harris said...

As people all over the world lift themselves out of poverty and increase the prosperity of their nations, their first investment choice for their newly earned savings remains the United States Dollar & Treasuries. I'd say that their vote of confidence with their savings speaks volumes about the strength of our system of laws, business, markets and technology. Billions more in the world participating in our market system will only strengthen our country in the long run. Volker, Rogers, Schiff and the others don't understand the rules of this game and preach of a bleak diminished future. Our system had crashes and crisis of confidence periodically throughout the 20th century and we only grew stronger. Europe is more prosperous than ever because of the USA's participation in their system. In the same way the USA will be stronger than ever because of China's participation in our system.