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6: The Chinese Connection

It is likely impossible to understand the factors that led to the present crisis by looking at the internal economy of any single nation. The current crisis exists on the international scale, where massive imbalances in trade threaten to destabilize currencies and may lead to a shutdown in international trade.

The trouble with international financial markets is that that are limping along within the shell of their present system at a time when the world is moving to a completely new order.

The dollar, long the international currency in practice, is in danger of suffering a "profound loss of confidence" while the dominance of the US itself is rapidly fading.

Meanwhile, China is rapidly rising as the new global leader, and is "an altogether different creature" from the western countries. As its influence increases, the international economy system faces significant changes.

The measure of global imbalances

The author mentioned scale of imbalances: prior to the present crisis, the G20 economies had a "current account imbalance" of 2.3% of GDP, and during the crisis, it rose to 5.4%

He notes that America's deficit has shrunk to under 3% of GDP, and credits lower oil prices and a contraction in the domestic economy, though he suggests this could change dramatically if oil prices increase or the economy dips again.

Also, other economies also have sizable deficits in terms of GDP: UK was 4%, Australia 6%, and Spain 10%, but in terms of value, America's is the largest, at some $730 billion in 2007. In perspective, that's $3,000 for every citizen.

For any deficit to exist in one nation, a surplus must exist in another. The surpluses to balance these deficits are in three areas: oil producing countries, Asian nations, and Switzerland. OPEC nations have a 15% surplus, China and Switzerland over 10%, and Japan 5%.

The significance of this will be discussed - but first, the author wishes to establish why these deficits and surpluses are so "pernicious."

Accounting for debt

Essentially, any country that experiences a surplus is consuming less than it produces, selling the excess abroad, and saving the difference. What they are doing with that savings is investing in western financial markets.

Investing is not the same as purchasing goods or services in exchange: it is, in effect, buying ownership of production, and ownership of the stream of income that would otherwise be available to the domestic market.

Consumers in deficit markets cannot catch up by saving more - saving money means not spending it, which decreases the demand for goods and services that are not purchased. This means deprivation while weakening their own economy.

The savings glut

The notion that the world is suffering from a "savings glut" is a controversial hypothesis. The basic idea is that savings of any kind removes capital from circulation and leads to (or exacerbates) recession by depressing demand.

To pump money back into their economies, western authorities have a policy of encouraging consumers to spend, and overspending themselves (increasing budget deficits). Meanwhile, the gross amount of money that is saved, available to investing, drives down interest rates as dollars in savings seek a productive use - in a market where demand is diminished.

However, savings isn't necessarily invested in productive enterprise. If this were so, the western economies would have, by virtual of increased foreign investment, stepped up its investment in plant, machinery, and buildings. This has not occurred.

It's also likely that very low interest rates, defended by monetary authorities, are further worsening the issues: where there is little difference in the return from risky productive pursuits (building the means for future production) as opposed to debentures (holding the debt from past consumption), the result is a weaker economy.

Theorists seem to focus on one of these three phenomena (increased savings, diminished investment, tighter interest rates) but they are entirely interrelated, hence inseparable.

Direct connections

The author does not accept the suggestion that trade imbalances alone explain bubbles in financial markets, but it is rational to consider that they do have some impact.

In general, the proceeds of trade surpluses are not in the hands of individuals who might choose to spend or invest them productively, but in the central banking system, which has a marked preference for holding government bonds over investing in productive enterprise.

By contrast, consumers in debtor nations tend to finance their spending with bank debt (mortgages, loans, credit cards, etc.). That is, they did not produce for their own consumption (in which case there would have been no trade deficit), nor did their actions result in any surplus of capital in the domestic market.

It may even be possible to argue that trade imbalances not only required excess demand for consumption in the markets of debtor nations, but also in excess demand for government bonds in creditor nations.

The Governor of the Peoples Bank of China has argued that the reserve currency status of the dollar is one of the leading causes of the bubble and subsequent crisis because Asian countries "have had little alternative" but to pour their money into dollar markets. The author disagrees - there are many things that could have been done with their surpluses, and have done much to artificially deflate their own currencies against the dollar to gain a trade advantage.

The two exacerbate one another - deflating domestic currency whole investing in the dollar both serve to make domestic investment unattractive. Had they invested domestically, then their foreign currencies would be higher when compared to the dollar.

Active and passive

It's likely that blaming the entire problem on the creditor nations is unjust and incorrect - it takes two to tango, and the deficit countries bear some responsibility. But the author suggests that this is only in an accounting sense.

Countries rarely, if ever, have the intention of running at a deficit. They may embark on policies that result in a deficit, but even then they attempt to minimize them, consistent with maintaining the benefits of the policies that created them.

(EN: I cannot agree with this. Just as people run into debt issues when they bottom to fulfill their present desires with wanton disregard for the payment that will be due in future, so do entire countries practice short-sighted and irrational behavior. If there is a difference, it is that a person learns from his mistakes, but countries do not. Government is a body of people who are constantly replaced with newcomers who ignore the past or arrogantly assume themselves to be smarter than their predecessors and believe they can do the same thing without suffering the same consequences.)

That is to say that debtor nations fall into debt as a side-effect of other policies, whereas creditor nations often intentionally seek to run a surplus as a matter of policy. The reason is that wealth confers power and future advantage while debts confer weakness and future disadvantage.

It would seem that all nations would be interested in correcting the imbalance to ensure the growth of production and continued flow of trade, but this is not so. When there are severe imbalances in trade, countries are desperate to correct the imbalance - but the balance can only be restored by returning the surplus. Creditor nations, quite happy with the situation, are not inclined to help their debtors repay them but instead wish to maintain and defend their advantage.

And this has been shown in history: consider that Europe was drained of its gold, and later of its silver, by trading it away to the Orient. Commodity currencies gave way to debt-backed currencies - so what we see in the present day is that Asian countries now hold debt instead of metal.

Why concern ourselves about it?

The question arises: is this really a problem that needs to be solved? Consumers are enjoying cheap imported goods, the surplus countries merely horde wealth without spending it, and if ever they do choose to spend, it will be a boost to the world economy. Most laymen are largely indifferent - and a good many economists have the same attitudes.

However, this indifference seems unwise to the author. He has not opposition to international trade, nor does he see that the cultural proclivity to horde is a particular issue for those who horde. But when you consider the impact to debtor nations, the surplus to some is a deficit for everyone.

The problem isn't so much international trade as "intertemporal" trade. When money is saved, it is available for future consumption. It is presumed that when that money is spent in the future, there will be goods and services available in sufficient quantity to spend the accumulated savings. Meanwhile, the amount set aside from production in the present is based on diminished demand (the amount saved is not spent, so demand for products is lower) and thus fails to develop capacity for meeting an increase in future demand.

What results when a flood of money enters a market that does not have capacity to produce goods us rampant inflation: more currency chasing fewer goods. This occurs whether there is a flood of new money, or when the "new" money is melted from a glacier of savings.

That is, while consumers enjoy consumption of cheap goods from abroad, it fails to develop domestic productive capacity, and as such the two feed upon themselves - to the point that consumers do not merely enjoy imports, but need them for the lack of domestic production.

If America were able to generate domestic demand to offset the demand "sucked out" of the system and saved in other nations, things would likely work out fine. But as we have seen, this is not occurring, and the result is the consequences we presently see.

Accommodation and Exploitation

On the macro-level, credit can only be extended when someone has something to lend. That is, in order to buy the debentures of a debtor government, the creditor government must have something to lend - it must run at a surplus to do so. But also, the ability to extend credit depends on others who have a need for it - who are running at a deficit.

To concretize it, there would be no demand for auto loans if everyone who needed a vehicle had the cash to buy it. There would be no way to obtain a loan for a vehicle if no-one had any money to lend.

When it comes to the national economy, consider also the diminishing effect that savings have on demand: not only has the manufacturer sold you a car and given you the credit to buy it, you have lost your job because the manufacturer stopped buying supplies from your own employer and set the money aside instead. If you were aware in advance that this would happen, the offer might not seem quite so attractive.

Or worse, if you had lost your job already but still needed a car, you would be in a position to take on debt at a higher rate - hoping that the period of unemployment will be brief and you can repay the loan, with accumulated interest, when you are able to get back to work.

On the macro level, the debtor markets have largely chosen to keep spending and hoping to find work.

Is it right to blame this entirely on the debtor? His motivation was to fill his needs, and becoming indebted was a consequence. Consider also the motivation of the creditor/saver - which was to make others indebted to him while at the same time decreasing or eliminating his debtors' means to repay the debt.

In fairness, the debtor nations have not made good use of the money they have received from abroad: they largely chose to consume it rather than invest in the productive capability that would enable them to repay and escape their debt.

The bubble connection

There is a connection between the surpluses/deficits in markets and the bubbles that result, primarily in the deficit markets - but it would be oversimplifying the phenomenon to suggest this was the root or sole cause.

For the present situation, the real estate bubble would not have occurred without an external contribution - that is, if banks were not able to package up bad mortgages and sell them off to an eager buyer, they would have had to assume the risk themselves and would likely have been more circumspect about the value of properties and the creditworthiness of debtors.

The bubble might have occurred without that external support, but it would not have inflated to the scale we witnessed. The degree to which it expanded required a great deal of outsider support from external markets.

Moreover, "bubbles are all about illusions." Specifically, the delusion that people can have prosperity at the expense of others. The customer gets goods and services on credit, without having to pay for them, and some anonymous source in the faceless global economy will be left holding the bag when the bill cannot be paid.

For a bubble to exist on such a scale, it must be done with the willful participation of many corporations, governments, and monetary authorities, who are not gullible bumpkins, but who instead recognize that the situation is unsustainable, but believe themselves to be a bit smarter than anyone else, conniving how they can profit at the expense of others while helping the problem to fester.

Neither are the surplus markets entirely innocent: they depressed the value of their currency to cheapen their goods in foreign markets, bought up huge amounts of bad debt, and provided a flow of credit to debtors who were already overextended to keep them spending. The "victims" were no less conniving than anyone else.

Motives and explanations

The motivations of a nation that wishes to accumulate a surplus are questionable. It's often an obsession with financial balances and the desire to have more for the sake of having more. It's likely that investment is seen as an end in itself.

The purpose of productive activity is to obtain something that is needed or wanted for consumption. When you produce more than you consume, you have a surplus of goods that can be consumed in the future (or that will go to waste). To pursue a surplus beyond the needs of future consumption is a dysfunctional waste of effort. The dysfunction becomes far more obvious when domestic production is done for foreign consumption while the domestic population suffers deprivation.

A debtor nation has the benefit of consumption without the necessity of production - the appeal of which is obvious. When people can enjoy goods and services in exchange for "pieces of paper" that represent future claims that may not be fulfilled, its people have the sense of greater prosperity. What is the benefit of receiving and hoarding these pieces of paper?

For a market to be balanced, production be balanced to meet consumption. Any deficit or surplus is an aberration that represents poor planning or poor execution. It is inevitable that deficits and surpluses should arise, as the result of mistakes, and it is believer that they will be short-term and small.

However, the deficits and surpluses in global markets presently are by no means small, and do not show sign of being short-lived. Some markets, many of them in fact, have managed to accumulate huge variances and maintain them for quite a long time. And the market itself does not seem to be deploying any corrective measures.

(EN: It occurs to me at this moment that the definition of "markets" is largely arbitrary. Panic because China has a surplus while America has a deficit. If nations achieve even balances, then panic because Texas has a surplus while California runs at a deficit. If states achieve balances, panic because Dallas has a surplus while Austin has a deficit. If cities are balanced, panic because people on one neighborhood have a surplus while people in another have a deficit. If neighborhoods are balanced, panic because one household has a surplus while another has a deficit. It all seems entirely arbitrary and ultimately meaningless. So I likely need to set this book aside for a while, but I don't think this observation can be entirely set aside.)

The producers of liquid gold

The author considers oil-producing nations, which gather surpluses by selling their natural resources to other nations. He suggests that "a large part of the shock ... was the result of huge increases in oil prices," which compounded the problem.

(EN: A quick check of the causes of this: demand has increased more sharply than supply, driving up the price of oil. The period of 2008-2009 showed decreases in both supply and demand - but overall it has not been a quick shock but a slow divergence of supply and demand over time.)

Given that oil is the most significant commodity in international trade, it serves as a model and indicator for trade itself - but more significantly, as the fuel of the industrialized world, it can bee seen as a metaphor for production and capital itself and the consequences of production, consumption, and the effects of surplus and deficit in international trade.

Consider the differences between Russia, Norway, and the countries of the Middle East:

In theory, these nations could well afford to produce less oil, or sell it at a lower price, to export only as much as is necessary to import goods for domestic consumption. But instead, much of the revenue generated from oil is stored in state coffers - for example, Russia has a tax on oil of about 85%.

For some, the justification for maintaining a surplus and building wealth is to accumulate capital resources to establish new industry when the oil runs dry. Some countries are investing in future capacity rather than setting the cash aside to do it later - the author suggests that Dubai is an example of the latter.

And conceded, not all countries with massive oil revenues have built up their coffers or run at a surplus: many countries spend on "everything from [unused] armaments to [empty] hospitals" and burn through the revenue quickly, with little benefit to their population.

Saudi Arabia in the 1970s is an excellent example of the schizophrenia of surplus wealth: the country built up to a surplus of $23 billion in 1974. In 1975, they switched to spending mode based on the belief that high oil prices would persist - such that when they went back down, they consumed their surplus and went into the red by $2 billion in 1978. For the next few years, they dialed back spending and had restored an account surplus of 26% of GDP in 1980.

The burghers of Mitteleuropa

Considered as a whole, the Eurozone does not loom large in the litany of global imbalances. Collectively, the nations in that economic bloc do not generate a significant surplus or deficit - but individually, there are dramatic imbalances among members. Spain and Greece run at crippling deficits (10% and 14% respectively) whereas Germany runs at a 7.7% surplus.

(EN: I think this points to my earlier comment about the definition of markets - whenever economists find the books to be in balance at one level, they can stir up panic by redefining markets on a lower level.)

The bulk of Germany's surplus relates to the behavior of its consumers - or the lack thereof. German consumers are highly conservative and the level of consumer spending has barely budged in a decade. In part, it is because wages been flat, but it is mostly due to spending behavior: German households on average save around 11% of their income (double that of other developed nations), and German savings are generally not invested in business.

(EN: A bit of a diversion, but I checked this number and noticed a stark contrast. Savings rates are 5% in most developed nations, 10% in Germany ad a few neighboring countries [Switzerland and Belgium], but 38% in China and 33% in India.)

It's suggested that the reason for consumer savings is an aging population and widespread concern about the public pension system, but this alone does not explain savings behavior (the same is true in the United States). The problem is that Germans do no consider their account surplus to be a problem, at least for them, and their attitude seems to be that if everyone else followed their excellent example, there would not be a global crisis.

This merely shows a lack of economic intelligence: for one nation to run at a surplus, another must run at a deficit. Specifically, the surplus of Germany counterbalances the deficits of Greece and Spain - on an individual level, the German citizen has become wealthy by impoverishing his Greek and Spanish neighbors. Whom, then, should they impoverish to benefit themselves. There cannot be parasites but for hosts - and were everyone a parasite, there would be no-one to fed upon.

(EN: I have the sense that a flaw in the chain of causation leads to this conclusion - the surpluses in some nations are not caused by deficits in others, but the other way around. That is, production above consumption does not cause a deficit to exist in another economy. The deficit is caused by production below consumption in one nation, leading to importing from other markets, leading to surplus in the nation that supplies what is not produced on the importing market. While I hate to admit it, the Anglos are partially right: if everyone else produced as much as they needed to consume, there would be no deficit, and no demand of goods from other countries. Having no place to sell off surplus, it would go to waste and there would be no incentive to create surplus.)

Asian surpluses

The surpluses of Asia likewise stem from different sources in different markets, and so merit a bit more granular examination.

Consider Japan: a higher domestic demand and a higher exchange rate for the yen "would make a valuable contribution to the overall solution." (EN: Which is immediately a paradox, as increased demand without increased production will lead to devaluation of a currency.) However, this can't be expected because Japan has been a surplus economy since 1980 - and suggests that its high rate of savings will be naturally reduced as the population ages and retires, spending out their savings while curtailing their production. Not to mention that the Japanese government has accrued significant debts and authorities have little interest in stimulating activity that would raise interest rates paid to creditors.

The author dismisses India: it is likely important for the future but does not figure much into the current discussion because it has a significant deficit. (EN: But per my earlier research, has average household savings near 40%, which should make it at least a little curious, though likely contradictory to the author's thesis.)

The main focus is on China (Smaller nations often referred to as "tigers" - Korea, Taiwan, Hong Kong, Singapore, Malaysia, Thailand, Indonesia, and the Philippines - are in the same situation). China has been running a surplus of about 10^ of GDO, and is a sizable economy that accounts for 5% of the world GDP.

The author dismisses the notion that a surplus is a natural consequence of the circumstances of the nation. The typical view of the "natural order of things" in economics is for larger economies to invest money in younger, poorer, and rapidly growing ones. Smaller nations are similar to colonial economies, which have vast productive capabilities by remain indebted to their mother nations who, arguably, relieve them of the fruit of their labors.

But in spit of its immensity, China's economy is not typical of other western nations, and it is a young, poor, and rapidly growing economy in spite of its size. Neither is China indebted to any mother nation, but had the capital to invest in its own productive capabilities from past ages (consider that China relieved Europe of so much of its gold in the eighteenth and nineteenth centuries that European nations switched to a silver standard).

Nor is it true that China had always run a huge current account surplus. Since its emergence from communist rule, China has run at a modest surplus, which rose from 1.5% of GDP to 10% after the turn of the century, as did most of the smaller nations of Asia (who actually ran modest deficits until only recently).

The crisis of 1997

The had been a financial boom in Asia as the result of foreign investment, which came to an abrupt end in 1997 as investors pulled out of the region. Asian currencies plunged in value, domestic investment dried up as well, and unemployment soared.

In response, domestic consumption dried up - which resulted in economic surpluses. Korea, for example, went from a 4% deficit in 1996 to a 12% surplus in 1998. This occurred because, while there was a drop in consumption, particularly of imported goods, while production and exportation carried on.

The 1997 crisis does not explain why surpluses remained a decade later when growth and prosperity were restored - though the author suggests it's a result of monetary policy: having seen their currencies damaged by a sudden shift, Asian governments decided to run at a surplus as a hedge against a possible recurrence. When countries are run at a surplus, they are no longer reliant on inflows of foreign capital from the rest of the world.

Mongolian Hoarding

However, even if production were domestically financed, this does not stabilize the currency against fluctuations - to do so, many governments and central banks amass hoards of foreign currency assets - which is exactly what occurred as China and other Asian countries set about building their holdings of foreign assets, principally dollars.

China, for example, created a reserve of $2 trillion, or about $2,000 per citizen. This may not seem like much, but given that there are a billion people in China and the average annual income is $2,200, it is an enormous reserve. For all of Asia, the reserve of foreign currency is "approaching" $5 trillion, but from $560 billion in 1997.

The author suggests that Asian central banks did this by selling their own currency in exchange for foreign currency. (EN: I use "suggests" here because he provides no support for this assertion, and I've read other suggestions of hordes were amassed: buying foreign investments, or setting payment terms in dollars. The net effect would be the same, but the mechanism would be more indirect. Hence the lack of panicked headlines about the Chinese buying up dollars on the foreign exchange. This is what leads me to the notion of history repeating: China sucked the money out of Europe centuries ago, forcing the Europeans to switch from gold coin to silver, then to abandoning the metallic standard altogether.)

Given that its people are very poor, why does China horde so much capital? The author cannot accept the notion that China's industrialization has given it an extreme cost advantage in supplying the market with goods. Chinese authorities have "intervened massively" to hold down their currencies against the dollar to keep their exports cheap and continue their account surpluses.

In the natural order of things, maintaining a surplus would cause the value of their own currency to rise - just as being in deficit decreases the value of currency. So this notion that efficiency in the commercial sector alone is indicative that the hoarding is not a side-effect, but an intentional goal.

Resisting equilibrium

The textbook solution to an overabundance of domestic production would be to increase the exchange rate and allow the currency to fluctuate accordingly - one without the other "would be unsatisfactory."

A higher exchange rate would make exports less affordable abroad and foreign imports more affordable domestically, leading to a decrease in production as the markets sought balance. This does not necessarily lead to increased unemployment with judicious management, as the higher wages paid to domestic workers result in no change in the overall level of demand and employment.

So again, why do the Chinese authorities seek to run at substantial surpluses? One explanation is they do not consider export surplus in the same way as western economists do, and follow a theory that suggests that the size and success of export industries are crucial to economic growth.

Given history, the turnaround of Asian economies by means of exporting, and the success of Japan, Taiwan, Korea, and the rest of the "tigers," success in exporting seems to be a viable and sustainable path. This seems reasonable, but the author feels it is not sufficient.

Maintaining a high level of exports can be done without hoarding the proceeds - the surplus could just as easily be passed along to the workers to improve their standard of living - and it is clear that the goal of the authorities is to pursue a surplus and create a horde, which is in line with mercantilism.

There is also the notion that surpluses are sought to maintain domestic employment - but this is specious. The location of the consumer does not have any bearing on the need of the producer for labor. Full employment can be achieved in an isolated market, as people consume all they produce and, given the level of poverty in China, there is ample domestic demand to consume the supply if the workers had the means. In a sense, the horde developed by the Chinese government has been taken not from the international community, but from its own citizens.

The allure of reserves

Maintaining a surplus, itself, is not necessarily the goal, but may itself be the means to a more long-term goal of establishing a substantial reserve.

Given the crisis of 1997, it may be desirable to create a reserve to be used to mitigate downturns. It is also arguable that holding the debts of other countries gives the Chinese political clout. An investing the reserves in foreign enterprise gives China the benefit of colonialism (drawing off the wealth of workers overseas) without the political responsibility to maintain order in her colonies.

In any case, it seems that the interests of the Chinese government do not necessarily coincide with the interest of the Chinese people: the profits of exportation are not used to improve their welfare or increase their standard of living.

In any case, there is the question of the reason China is pursuing such large reserves. On the micro level, a person saves to finance future consumption - whether short-term (saving up for a vacation) or long term (saving for retirement). On the macro level, governments should likewise amass a war chest with an eye toward a fulfilling a specific future need. As yet, there is no sign that the Chinese authorities are doing so, but are amassing reserves simply to have reserves.

Reigning in prosperity

Another explanation suggests that while authorities have the capability of increasing production to satisfy demand, they lack the capability to stimulate demand itself - and as such export to the existing demand overseas because they cannot create demand domestically.

"That too seems implausible." We can witness in other economies (such as America in the 1990s) that demand can be increased merely by facilitating the means by which people obtain the goods they wish to consume - namely, in the form of credit that can be stimulated by reductions in interest rates and a looser fiscal policy. It is within their means to do so.

Where a country runs at a deficit, its incentive is to increase production to satisfy demand and restore balance. But where a country runs at a surplus, its incentive ought to be to increase demand to consume the output of production.

There is ample opportunity for consumption in China - its people are very deprived, and consumer spending accounts for only 35% of GDP, whereas in western nations it is between 60% and 70%.

It is also possible that the Chinese are already pursuing this goal at a moderate pace, as household spending has increased by around 9% over the past couple of years, and it could be that the authorities are merely seeking to ease the transition. However, the author can see no motive for reigning in prosperity: political problems have never arisen in a nation where things became suddenly better.

Dislocation and distribution

Another "eminently plausible" explanation for the Chinese economic policies is the desire for material equality, which is well in line with the communist perspective: dramatic changes in economies, for better or for worse, result in dramatic disparities in the distribution of wealth in a society.

That is, when there is an explosion in profit for producers, it results in an immediate increase in the personal wealth of investors that takes considerable time to trickle down to the lower classes of society. It is also possible for there to be shifts among industries that create great wealth of entrepreneurs but cause rapid decreases in the established companies that the new ones obsolete - hence some prosper while others lose their jobs. Also, given the unpredictable nature of innovation, it is difficult to tell precisely where it will occur and manage the atrophy.

While plausible, this theory is not very compelling. It may be desirable to prevent upheavals by moving slowly, but the Chinese do not seem to be moving at all. Moreover, innovation doesn't occur quite so suddenly and established industries generally have ample time to make the transition without government assistance.

The allure of inertia

It's generally true of human nature that we see no need to change when things seem to be going well. The economic policies of China have not had an ill effect, at least to themselves, and it's far easier to allow the situation to perpetuate than to make any changes at all - but instead stick to what seems to be successful.

China has failed to make much progress, but it has made progress. It has failed to effect a dramatic improvement in the welfare of its people, but they are no worse off than they had been before. We only have a sense of loss when things have worsened, not when they fail to improve.

However, "China is sitting on a time bomb." It can maintain its current policy so long as there are foreign nations to feed upon - and when the parasite has killed its host, the parasite also suffers. The surpluses that China has enjoyed for the past ten years are echoed in deficits in countries that pay for their imports - and when it has rotted away their ability to buy, or when western governments find a solution to their deficit problems in advance of complete economic collapse, China will find itself without a market on which to feed.

That is to say that indifference can only be maintained on the assumption that the status quo is sustainable ... and clearly it is not.

The dollar trap

It's all very well to suggest that China should allow its currency to rise - but this would be to the benefit of foreign markets, and would erode the value of their own foreign currency holdings, principally held in dollars that would then become less valuable in exchange for Chinese Yuan.

But on the other hand, if America continues running huge government deficits to prop up their own economy, if effect borrowing from the Chinese surpluses, the more likely that some level of default will occur.

America may openly renege on its obligations, or covertly renege by debasing the dollar. In that case, the Chinese government will still suffer an enormous loss in the value of its reserves.

But it is inevitable that China cannot sustain a parasitic relationship with the west, and can only seek to influence the way in which equilibrium will be reestablished.

The Asian connection

Ultimately, the author sees the Asian story as an overreaction to the crisis of 1997 that, instead of correcting the imbalances, merely shifted them too far in the opposite direction - inflating yet another bubble that is bound to eventually burst.

The notion of restoring balance seems, from the Asian perspective, like ceding the advantage they have gained, to the benefit of other countries and the detriment of their own growing power in global markets.

As such, the west cannot count on Asia to put things aright, but must work on their own to pursue their interests - meanwhile being attentive to the mistakes that the east has made, with an eye to avoid falling into the same trap.

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