Americans - Greedy Capitalists or Naive Victims

The old argument goes something like this: Americas buy more than they sell because they can't make decent cars, toasters or bread to put in it. Also because Americans are greedy and/or lazy hence they will forever spend more than they earn.

In contrast to this, economists such as Bruce Greenwald at Columbia University put forward this argument:
America wants to be the international transaction (reserve) currency (oil and other inter-country transactions), hence everyone wants dollars since everyone will accept dollars. Since everyone wants dollars, not just to buy stuff, but to hold as reserves, the demand for dollars is artificially high and hence the dollar is overvalued. This, he explains, happened to Sterling in the 20s and 30s leading to high unemployment in the U.K. since their overvalued currency made them uncompetitive. To make it more personal, lets assume that China has made the executive decision to sell more to America than it buys (which it has) and will constantly devalue its currency until this happens (which they do). Hence, no matter how clever the American engineers are, or how hard the people work, currencies will be manipulated until the U.S. buys more than it sells.

Now here is the odd thing. Normally, the dollar flowing unilaterally to China would mean that China would be filling up with Dollars, devaluing the Dollar against the Yuan. This would normally right itself eventually when the dollar devalues enough to fix the trade deficit (as U.S. goods get cheaper) and dollars are sent back to the U.S. to buy stuff. But instead of the dollar being used to buying U.S. goods and services, its flowing back to the U.S. to buy government debt and other securities. The dollar ends back on U.S. soil but the "goods" China bought was a claim against future U.S. production. China gets stiffed if it doesn't take up its claim on U.S. production some day. When it does come time to take up its claim, there is a really good chance the dollar will be devalued, so China will get stiffed anyway.


This is a fascinating argument that says that the U.S. currency cannot naturally adjust in a way to allow exports to match imports over the long term. So even if the U.S. tightens its belt, spends less, works harder and smarter for less, suddenly the Chinese imports will get even cheaper so that more money still goes to China that comes from China. China will take steps to that the currency will be just low enough to out-cheap the U.S. In this way, China suffers in that it cannot pass the true value of its production onto its people, instead leaves their own people significantly worse off and diverts the difference into U.S. investments to prevent the Yuan from appreciating.

This wasn't such a big deal when China (and other Asian countries) were dwarfs compared to the U.S. but now, they have turned in to 800 pound gorillas and this makes the practice unsustainable. As America's employment and production fall the currency cannot adjust and devalue and instead continues to appreciate on the global market, things can only spiral worse, especially as everyone else scrambles to devalue.

China now holds roughly half a trillion of U.S. debt. They have a great weapon over the U.S. head. They can (temporarily) tank the U.S. currency by dumping them on the global market, only that tanking the U.S. currency could hurt them and their investment more than it hurts the U.S.

China is also getting annoyed with the wildly fluctuating and weakening U.S. dollar and now is making noises about making the basket of currencies called "Special Drawing Rights"(SDR) securities by the IMF the international reserve currency. Nobody else really wants to be "it" in terms of the reserve currency so even on the "SDR" wikipedia page, there is a section on "why not to use SDRs as the reserve currency".

So China is a in a conundrum. It can pretend that its strategic devaluing of its own currency is not damaging the U.S. and continue to take steps that and completely unsustainable, or they can, heaven forbid, stop manipulating their currency and allow the Chinese people take the dollars they are earning and spend them on the world market for themselves on stuff and not promissory notes from the U.S. government. But, alas, could China live with spending as much as it earns