China as Scapegoat

It looks like it's not only baseball season, but the season that politicans look for scapegoats. Many politicans and so-called economists like Paul Krugman claim they have have found the cause of America's economic woes.

After more than a decade of stagnant real wages, a stagnant stock market and now rising levels of unemployment, Americans want answers. It's too bad they are not getting the right answers.

They are being told that it's all because of the trade deficit, particularly with China. It's not politicians' borrowing and spending money they don't have, debt that the next several generations of Americans will be paying for. Nor is it greed gone wild on Wall Street.

Nope, it's those "crafty" Chinese. Those "sly" Chinese are manipulating their currency - the yuan - to take advantage of the United States. The United States is, of course, without sin and pure.

However appealing this argument is to politicans, it is based on faulty economics...something rather common in the halls of Congress.

In 2008-09, the United States had trade deficits with more than 90 countries! It is a multilateral trade deficit, not just one with China. Yet, the United States is demanding that China sharply revalue its currency upwards or the US will put tariffs on Chinese products.

Ignoring the possibility of an ensuing trade war, this will only have the effect of raising the prices of the many Chinese goods imported into the US. This will only hurt the already struggling lower and middle classes.

And what do you think the multinational companies which manufacture goods in China will do? They will simply move their production facilities to lower cost countries like Vietnam or India.

China will let its currency move upward, but only gradually. The Chinese saw how a quick, sharp revaluation of the yen (under pressure from the United States) nearly destroyed the Japanese economy.

And by the way, the US "solution" did little to to stop Japanese imports into the country. US consumers simply wanted Japanese products.

Economist Stephen Roach said it best "The US would be far better served if it faced up to why it is confronted with a massive multilateral trade deficit. America's core economic problem is saving, not China."

The net national savings rate fell to a MINUS 2.5 per cent of national income in 2009. That means America must import capital from abroad to fund its future growth - and run current account and trade deficits to attract the necessary foreign capital.

In simple terms, America has been living beyond its means. America needs to make cuts in government spending. But politicans don't want to face up to this reality - they are expanding entitlements at the same time they are blaming China for America's woes.

Stephen Roach had a warning, "It would not be the first time that political denial was premised on bad economics. But the consequences of such a blunder - trade frictions and protectionism - would make the crisis of 2008-09 look like child's play"