The US-China Dialogue of the Deaf

NEW YORK – The visit on January 19 of China’s president, Hu Jintao, is coming at a time when economic conflict between the United States and China has become one of the most worrying global developments. Throughout last year, the US pressed China to revalue the renminbi, while China blamed the US Federal Reserve policy of “quantitative easing” for currency-market turmoil. The two sides are talking past each other, though both are making valid points.

The global imbalances that were at the root at the Crash of 2008 have not been corrected – indeed, some have grown larger. The US still consumes more than it produces, running a chronic trade deficit. Consumption remains too high, at nearly 70% of GDP, compared to an unsustainably low 35.6% of GDP in China. Households are over-indebted and must save more.

The US economy needs higher productivity, but US corporations, which are operating very profitably, are accumulating cash instead of investing it – with quantitative easing aimed at heading off deflation. In China, by contrast, bank lending needs to be reigned in, but regulatory efforts have been hindered by off-balance-sheet financing and the development of an informal quasi-banking sector. The economy is showing signs of over-heating.

These imbalances could be reduced by the US using fiscal rather than monetary stimulus, and China allowing the renminbi to appreciate in an orderly manner. But domestic politics in both countries stand in the way.