A race between China and the U.S. to see who falls first

Good Tidings in 2011_English_Caixin

By the middle of 2011, most analysts may declare that the world has finally put the financial crisis behind.The reality is quite different. The global economy is kept afloat by massive monetary and fiscal stimulus around the world. The main problem in the global economy – high costs and declining competitiveness in the developed world, and inflation plus asset bubbles in the developing world continue unabated. Either inflation in the developing world or unsustainable sovereign debt in the developed world will spark the next crisis.

China has an opportunity to gain immunity against the next crisis.

The last crisis started in the U.S. If China hadn’t reformed a decade ago, it could have started in China. An economic crisis in China would have prolonged the U.S.’s economic cycle by bringing down oil and other commodity prices, which would have improved the U.S.’s cash flow.

The most likely candidates to trigger the next global crisis are the U.S.’s sovereign debt or China’s inflation. When one goes down first, the other can prolong its economic cycle. China may have won the last race. To win the next one, China must tackle its inflation problem, which is ultimately a political and structural issue, in 2011. If China does, the U.S. will again be the cause for the next global crisis. China will suffer from declining exports but benefit from lower oil prices.

On the other hand, if China has a hard landing, the U.S.’s trade deficit can drop dramatically, maybe by 50 percent, due to lower import prices. It would boost the dollar’s value and bring down the U.S.’s treasury yield. The U.S. can have lower financing costs and lower expenditures. The combination allows the U.S. to enjoy a period of good growth.

One could describe the global economy as a race between the U.S. and China, to see who goes down first.

This coming year is China’s opportunity.


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2 comments on “A race between China and the U.S. to see who falls first

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  1. Interesting article. Actually quite otimistic in a way. Xie argues that the misfortune of one will extend the business cycle of the other. But he also provideds the basis for a scenario in which both fail more or less simultaneosly.

    The real intention for the new Obama tax cut is to get him re-elected in 2012.

    The ineffectiveness of the recent measures casts doubts on the [Chinese] government’s sincerity in fighting inflation

  2. Actually quite optimistic in a way.

    But optimistic for whom?

    Xie is, I think, one of the most interest macro-economists in the world, at least among those writing for a lay audience (I wouldn’t know about the others, of course – being as lay as the next guy), but he’s also very conventional in his basic assumptions. I’d love to see 5 match races between him and Mike Hudson, who seems to agree with Xie about everything except what the real rules are and therefore what the real goals of politics/policy ought to be. Xie looks at Europe and says, like all but the most “progressive” economists, that state expenditures are unsustainable and must be cut – as they are being cut, leading to political-social strife. Hudson looks at Europe and says it’s the assumptions of neoliberalism, which point to the destruction of the neoliberal edifice (in those cuts – see Latvia, Ireland…), are unsustainable. So it’s either Xie and the financial system that Xie’s own analysis elsewhere declares dead weight, or something that rises from the ashes of that financial system (Iceland?).

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