Currency Wars_ The Making of the Next Global Crisis - James Rickards [69]
So a process of elimination led the Obama administration to see that if consumption, investment and government spending were out of play, the only way to get the economy moving was through net exports—there was nothing else left. In the State of the Union address on January 27, 2010, President Obama announced the National Export Initiative, intended to double U.S. exports in five years. Achieving this could have profound effects. A doubling of exports could add 1.3 percent to U.S. GDP, moving growth from an anemic 2.6 percent to a much more robust 3.9 percent or higher, which might be enough to accelerate the downward trajectory of unemployment. Doubling exports was a desirable goal if it could be achieved. But could it? If so, at what cost to our trading partners and the delicate balance of growth around the world?
At this point U.S. economic policy crashed headlong into the currency wars. The traditional and fastest way to increase exports had always been to cheapen the currency, exactly what Montagu Norman did in England in 1931 and what Richard Nixon did in the United States in 1971. America and the world had been there before and the global results had been catastrophic. Once again a cheap dollar was the preferred policy and once again the world saw a catastrophe in the making.
China’s GDP composition was in some ways the mirror image of the United States. Instead of the towering 70 percent level of the United States, consumption was only 38 percent of the Chinese economy. Conversely, net exports, which produced a negative 3 percent drag on the U.S. economy, actually added 3.6 percent to the Chinese total. China’s growth was heavily driven by investment, which totaled 48 percent of GDP versus only 12 percent for the United States. Given these mirror image economies, a simple rebalancing seemed in order. If China could increase consumption, in part by buying goods and services from the United States, including software, video games and Hollywood films, then both countries could grow. All that needed to change was the consumption and export mix. China would dial up consumption and dial down net exports, while the United States did the opposite. Those new export sales to China would create jobs in the United States for good measure. This could not be done through exchange rates alone; however, Geithner said repeatedly that upward revaluation of the yuan was an important part of the overall policy approach.
One reason the Chinese did not consume more was that their social safety net was weak, so individuals saved excessively to pay for their own retirement and health care. Another factor working against Chinese consumption was a millennia-old Confucian culture that discouraged ostentatious displays of wealth. Yet U.S. policy makers were not looking for a prospending cultural revolution; something more modest would suffice. Just a few percentage points of increase in consumption by China in favor of U.S. exports could allow the United States to ignite a self-sustaining recovery.
This was to be a strange kind of rebalancing: the increased Chinese consumption and increased U.S. net exports would come entirely at China’s expense. China would have to make all of the adjustments, with regard to their currency, their social safety net and twenty-five hundred years of Confucian culture, while the United States would do nothing and reap the benefits of increased net exports to a fast-growing internal Chinese market. This was a particularly soft option for the United States. It required no tangible effort by the United States to improve