TW: Continuing the focus on what I perceive to be the most challenging aspect of these crises- world wide economic decisions that will benefit all rather than deteriorating into nationalistic free-for-alls which can cause economic havoc and worse.
This Pettis piece focuses on the absolute necessity for China (and while he focuses on China since that is where he works and lives, one could partially extrapolate his points to others such as Japan and Germany and obviously the consuming nations such as the U.S. must as well) to recognize the need to change their economic models. China's model is focused on exports, their knee-jerk reaction is to encourage greater competitiveness with their exports. But making their exports cheaper through investment or subsidies only feeds more goods into an already saturated world market. This is deflationary and risks counter moves by consuming nations (i.e. the US and Europe) to stem the inflow of imports.
China and others may have more to lose in these crises than the U.S. but do they understand this and will they be able to avoid their own nationalistic tendencies?
From Michael Pettis' blog:
"...I have been arguing that a US slowdown would cause a very rapid slowdown in China
...maybe there really is a growing recognition that as a fundamental part of the global imbalance, China is going to have to adjust its economic model just as dramatically as the US. Both countries relied heavily on the same source of growth – infinite leverage on the part of consuming US households – and this was clearly unsustainable. But so far I am not sure that this message is likely to be believed in China.
Not only am I pessimistic, then, about Chinese policymakers’ willingness to confront reality, but my trip to Washington also left me very worried about US policymakers...The impression I got was that there are a lot of smart people very worried about how quickly policymakers are going to react.
I have already suggested that I think it is pointless to hope that Europe – or indeed other Asian countries – refrain from protectionist behavior or provide needed leadership, and my great hope has been that the new US administration surges forward and begins to design not just a short term solution that addresses the current collapse (I know, I know, much easier said than done, but the crisis part will end soon enough nonetheless), but also a longer term plan about what the new institutional framework will look like. But I don’t think this is happening.
Many people I spoke to last week were really bewildered by China’s role, and although many of them were extremely sophisticated in their understanding, they gave me the impression that policymakers are going through an almost existential crisis and have lost all confidence. The world needs US leadership more than ever, and the US is in a very strong position to provide it for at least three reasons. For all the problems of the economic contraction, the US will probably suffer less than other countries, it will emerge more quickly than the rest of the world, and it commands by far the largest amount of the most valuable resource in the world: net demand.
...I am not suggesting that the US is in great shape. I am suggesting that world is in worse shape, and the US has the flexibility and resources to reshape the global balance.
This seems to be something that not many people in Washington believe. The lack of confidence is so deep that several times I heard people refer knowingly to the Chinese fiscal stimulus (yes, that vague, risky, and hard-to-understand stimulus package) as the “gold standard” of economic stimulus packages. Gold standard? Really? The only way this can be true is if every other stimulus package in the world is total garbage. Perhaps it is.
...I suspect that things will continue drifting downward for the next year or so, until it is that much harder for anyone to work out a reasonable plan that doesn’t involve a great deal of hostility and mistrust."
http://mpettis.com/2009/02/the-us-government-frozen-in-the-headlights/
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