US PRESSURE on Beijing to revalue its yuan is now dominating the news, but China is only following Japan as a manifestation of a much bigger problem. Globalization is broken. As currently structured, it is undermining US productive capability and becoming unsustainable.
Without fundamental change in the rules of globalization, any conceivable yuan revaluation now won't have much impact on world economic imbalances. Remember that economists said a 20-30 percent revaluation of Japan's yen (then at 260 yen to the dollar) would balance trade in the 1980s. But the yen has more than doubled since then, and Japan still maintains a large trade surplus both globally and with the United States, as do all of the world's major economies.
The real problem is that globalization is a different game for many countries than it is for America. While China's peg of the yuan to the dollar is now the focus of criticism, most Asian countries have long managed their currencies to remain weak against the dollar in order to stimulate their exports. Japan has spent over $300 billion in currency intervention in recent years to keep the dollar up and the yen and export prices down. In addition, many countries offer tax holidays, financial incentives, and protected markets to attract new facilities in ''strategic" industries that no one expects to move just because currencies fluctuate.
These actions follow from policies specifically aimed at accumulating large trade and dollar surpluses as a matter both of stimulating growth from exports and of assuring national economic sovereignty by avoiding dependence on foreign lenders.
While US state governors extend financial incentives to attract investment, they have only peanuts to offer compared to foreign countries, and, of course, do not control their own currencies. The federal government has long shown no interest in attracting foreign factories to or keeping US factories on its shores. Rather, America's emphasis is entirely on consumption-led growth. Banks aggressively offer credit cards to students with only part-time jobs. Home equity loans with tax deductible interest payments are used to pay for vacation trips. Not only does the White House call for tax cuts in wartime, but tells consumers it's their patriotic duty to buy more. Americans at all levels really do believe that debt and deficits don't matter.
The confluence of America's consumerism with the strategic, export-led growth policies of many other countries has produced a world with one net consumer, the United States, which now consumes about $700 billion a year more than it produces. All other major economies are net sellers, depending directly or indirectly on US-bound exports for much or all of their growth. Because America consumes more than it makes, it must borrow from abroad to finance its excess consumption. In a kind of vendor finance program, a few foreign central banks provide the financing by buying US Treasury bills and other US assets. Continued...