Monday, September 21, 2009


The American Interest | Is even the fastest growing of America’s rivals really a credible alternative to the United States? Rapidly though it is growing, China is bedeviled by three serious ailments: demographic imbalance, environmental degradation and political corruption. China’s military is not remotely ready to mount a serious challenge to American dominance in the Pacific. And, crucially, it is far from clear that China is ready to wean its manufacturing sector completely off the U.S. export market. After three years of very mild renminbi appreciation, the People’s Bank of China seems to be contemplating renewed intervention to keep the currency weak relative to the dollar. That means China will continue to sell renminbi for dollars, further enlarging its already large portfolio of U.S. bonds.

There is a paradox at the heart of this crisis. In many ways it is a crisis that has “Made in America” stamped all over it. Yet in the very worst moments of panic this fall, investors made it clear that they continue to regard U.S. government debt as a “safe haven” in uncertain times; hence the recent dollar rally. Huge though the costs of the current crisis may prove to be, there is a way of presenting them that may yet suffice to reassure the rest of the world that America can afford it. After all, the Federal debt in public hands remains equivalent to below 40 percent of U.S. GDP, a significantly lower figure than in many European economies or Japan. (The vastly larger unfunded liabilities of the Medicare and Social Security systems remain, fortunately, off balance sheet.)

Of course, this crisis could yet prove to be the safe haven’s last gasp, especially if Congress runs amok with supplementary bailouts and stimulus packages, and the international bond market finally writes the United States off as just another Latin American economy. There seemed very little awareness at the mid-November G-20 summit in Washington that uncoordinated interest rate cuts and stimulus packages could unleash a fresh bout of volatility in international currency and bond markets. The possibility remains, too, that the coming explosion of U.S. Federal debt could finally trigger the dreaded dollar rout, especially if the Chinese decide that the export game is up and their only hope is a policy of “market socialism in one country.” Yet this still seems a less likely scenario than a continuation of Chimerica.

True, the financial hubris of recent years has been followed by a terrible nemesis. The age of leverage has ended not with a whimper but a deafening bang. Nonetheless, it is much too early to conclude that in geopolitical terms the American century is over, or that China solo is about to take over from Chimerica. Power is always relative, and a crisis that hits the periphery of the global economy harder than the core must logically increase the power of the core. Nemesis, too, can be exported.