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November 10, 2010

QE 2 and the G-2
Posted by David Shorr

Chinese-renminbi-yuan-versus-american-dollar2Seoul--  I've come to Seoul for the G-20 summit, where the aim is to find a modus vivendi between the major exporting and consuming economies, but all the talk is about currency wars. In particular, Fed Chairman Bernanke's injection of hundreds of billions into the US economy ("quantitative easing" or "QE2" in wonkspeak) has drawn charges that Washington is abusing its monetary advantage. One interesting angle on the debate is to view it within varying concepts of the US-China relationship. How you view the so-called "G-2" of course casts the situation in a different light. Are the United States and China geopolitical rivals, business partners, or leading lights of the community of nations?

Strategic Rivals. The hard-core nationalist perspective would say the heck with China's distaste for US policy (or anyone else's, for that matter). If it's good for us and bad for them, then good. And if they don't like it, they can...

What I always wonder, with respect to the unilateralist view, is whether interdependence or international credibility ever factor into the equation. Can things that are bad for others become bad for us, even if they seemed good for us at the outset? Does America ever need to base its policy on a need to replenish its moral authority or do its bit for the global common good?

Business Partners. China's accumulation of treasury bonds is sometimes portrayed as classic financing by a merchant of its customer. It's just like J.C. Penney (did they give us a 10% discount on our initial purchases when we signed up for an account?). Or you can look at it like an investment. In this light, the Fed's move threatens not only to weaken the dollar and strengthen the Chinese yuan, it also reduces the value of all the debt / investment China has built up. One can imagine China saying, "what are doing to us here; you're killing us. Is this any way to treat an investor?"

Then there is the third image of the G-2, a personal favorite...

Pillars of the World Community. This perspective focuses on the international system as a whole and nations' shared interest in solving the major problems on the agenda. From this vantage, the US and China are prime beneficiaries of a globalized economy, with commensurate responsibilities for its overal health.

Which brings us to the issue of global economic imbalances -- or, "strong, sustainable, and balanced growth" (yes, that's SSBG) in the official parlance. The global economy could get seriously out of whack if major economies are too heavily oriented toward domestic consumer consumption and borrowing (the US) or exports and lending (China and Germany). Eventually, the borrowers will get into too deep of a hole.

By outlining the SSBG agenda at last year's Pittsburgh G-20 summit, the world leaders agreed that they all see the difficulty here. Having established this framework and identified the sources and remedies, the task now is to go from defining the problem to spurring a response. There are a number of ideas under discussion, but no agreement on how to proceed.

What kind of backdrop does this give to Ben Bernanke's quantitative easing? True enough, it's unilateral action -- but it's action on a problem where multilateral cooperation has been slow in materializing. Two important notes here. First of all, economic rebalancing means moving the US to more exports and less selling of over-valued bonds. Second, there is the obvious irony of China's complaints. So now China is accusing the United States of manipulating our currency? Really?? One of the interesting recent shifts in the debate is that China's hypocracy in slamming the Fed makes the rest of the world less inclined to tiptoe around Beijing's sensitivities.

I don't mean to deny China's stakes here. Shifting to reduce dependence on exports is a scary prospect, and the Chinese Communist Party has put itself on the gerbil wheel of annual 8-10% growth.  I just want to note that moving to boost domestic consumption is actually meant to improve economic security and living standards for the Chinese people. This isn't about keeping Chinese workers down.

The whole idea of the US and China as a "G-2" global power condominium was always somewhat over-hyped. Even so, the two countries' policies and postures are really consequential for the world as a whole.  It's probably not an exaggeration to call it the world's most important bilateral relationship.  


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