February 24, 2006

Geopolitical Tradeoffs

Great comments today from Morgan Stanley chief economist Stephen Roach on the whole Dubai-China-America political whining. As Roach puts it America entered negative savings rate terriory last year for the first time since the lowest year of the Great Depression and can't afford to make political hay with our creditors.

Roach explains: "Thank to China, America actually got a rather extraordinary deal for its trade deficit dollar in 2005 -- a net balance of some $200 billion of low-cost, high-quality Chinese goods that expanded the purchasing power of US consumers. If, however, Washington politicians now choose to close down trade with China by imposing high tariffs or forcing a major Chinese currency revaluation -- precisely the tact of a bipartisan coalition headed up by Senators Schumer (D-NY) and Graham (R-SC) -- those actions could well backfire. Absent the China supply line, the trade deficit for a saving-short US economy wouldn’t shrink as the politicians seem to imply. Instead, due to America’s outsize external funding needs, the trade deficit would remain large and merely gravitate to a higher-cost producer -- imposing the functional equivalent of a tax on the American consumer. Similarly, if Washington were to kill the bid by Dubai Ports World, another source of capital inflows would be required to fill the external funding gap. But maybe the next investor would ask for tougher financing terms."

More to the point:

" But who is really to blame in all this? At the end of the day, America’s saving shortfall -- the origin of destabilizing capital and trade flows -- is a by-product of conscious choices made by the US body politic. The Federal budget deficit, which has accounted for the bulk of the plunge in national saving over the past six years, is made in Washington -- not in Beijing. The negative personal saving rate is an outgrowth of pro-consumption tax policies -- again made in Washington. US politicians are the source of resistance to tax reforms, such as a consumption tax, that might address the deficiencies of private saving. Of course, politicians never want to admit that they are the problem. Instead, they prefer to pin the blame on others -- in this case, China and Dubai. "

Read the whole post at the MS Global Economic Forum.

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