United We Stand, United We Fall

I read this article by Bill Bonner on how America, Europe and Japan are increasingly becoming what he calls the “submerging economies” (as in they-are-drowning-in-debt). As opposed to the “emerging economies” like China.

But Bonner seems to forget where China gets its money. They make most of their money through exports. Everything you see today has a “Made in China” tag on it. Guess who is buying those goods? It’s those submerging economies. If they collapse, who does China sell to?

Plus, if America does go under, nobody would accept American money. And that’s a problem for China since they hold more dollars than any country other than the US itself! 2 trillion dollars or so. Chunks of that money are invested in Uncle Sam’s bonds and stocks. All of which would be worthless if the US collapses!

Chinese domestic consumption is not too big yet. If they want to offset the decrease in Western consumption, they need their people to consume more. Spend more. But the Chinese (like most Asians) have a tendency to save, not spend. It would require a behavioural change.

Maybe that’s why China now started looking the other way when employees strike for higher wages. They hope that higher wages would translate into greater spending by those employees. But the flip side is that as Chinese wages increase, the cost of what they produce for and sell to the West goes up. That in turn would reduce the West’s consumption. It’s a vicious cycle.

China shouldn’t be gloating: for all economic purposes, they are married to the US. Niall Ferguson got it right when he referred to the two as a single entity, Chimerica.

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