China and the US: Mutually Assured Destruction!

China is trying to get some momentum going on some kind of a new global currency. Good luck on that. I don't see anybody even shifting big time to the euro, and it was kind of a profound statement that as the world slipped into a deep recession, the dollar started appreciating.

I have blogged before about this, and have quoted James Fallows quite a bit.
Paul Krugman has his comments on it in his NY Times column. Frankly, there is nothing new in Krugman's column--nothing new that Fallows did not describe in his two pieces in the Atlantic. Almost as if Krugman just woke up to this issue; given his Nobel and his public intellectual perch, well, I suppose most of us will always expect a Nobel-prize winning idea in every column, which is not fair to Krugman .... Anyway, an excerpt from Krugman:

So what Mr. Zhou’s proposal actually amounts to is a plea that someone rescue China from the consequences of its own investment mistakes. That’s not going to happen.

And the call for some magical solution to the problem of China’s excess of dollars suggests something else: that China’s leaders haven’t come to grips with the fact that the rules of the game have changed in a fundamental way.

Two years ago, we lived in a world in which China could save much more than it invested and dispose of the excess savings in America. That world is gone.

Yet the day after his new-reserve-currency speech, Mr. Zhou gave another speech in which he seemed to assert that China’s extremely high savings rate is immutable, a result of Confucianism, which values “anti-extravagance.” Meanwhile, “it is not the right time” for the United States to save more. In other words, let’s go on as we were.

That’s also not going to happen.

The bottom line is that China hasn’t yet faced up to the wrenching changes that will be needed to deal with this global crisis. The same could, of course, be said of the Japanese, the Europeans — and us.

Bonus for reading until here :-)
The following is an excerpt from Larry Summers' speech five years ago!

I am reluctantly convinced that the most serious problem we have faced in the last 50 years is that of low national saving, resulting dependence on foreign capital, and fiscal sustainability, which has far-reaching implications for the US and the global economy. ....

[Let] us imagine that it were possible at this level of national saving to continue to borrow on this substantial scale to finance investment and that this situation were sustainable into the indefinite future, a situation of which none of us can be confident. Is it healthy for the US economy or for the global system? I would suggest not for three reasons. ....

First, it’s not our capital. The saving rate is what reflects the accumulation of wealth by Americans, and if we are not saving, regardless of how much investment we finance, the returns from that investment will not be available for the United States. Now Pete Peterson would argue—and I think he is right—that the saving rate that is appropriate today in the United States is one that is substantially greater than the rate that was appropriate 10, 20, or 30 years ago because the baby boom generation will begin retiring in 2011. Even if he is not right in that supposition, it is hard to see why wealth and savings should be lower than they have been at any point historically, or how they are going to get better automatically.

Second, a situation of substantial dependence on foreign capital and a substantial current account and trade deficit, when it has taken place in the United States, has historically at every point been associated with a substantial increase in protectionist pressure. Whether the protectionist pressure derives from the relative level of the dollar or the relative level of the trade deficit is a question that econometricians and politicians can debate—I don’t think the data really permit a distinction—but it is hard to believe that the protectionist pressures would be as serious as they are if the United States did not have a trade deficit of the current magnitude, and it is hard to believe that trade deficits of the current magnitude will not lead to increases in protectionist pressure in the future.

The third troubling aspect of this dependence on foreign capital is its geopolitical significance. Here it is most difficult to speak with definitiveness. There is surely something odd about the world’s greatest power being the world’s greatest debtor. In order to finance prevailing levels of consumption and investment, must the United States be as dependent as it is on the discretionary acts of what are inevitably political entities in other countries? It is true and can be argued forcefully that the incentive for Japan or China to dump treasury bills at a rapid rate is not very strong, given the consequences that it would have for their own economies. That is a powerful argument, and it is a reason a prudent person would avoid immediate concern. But it surely cannot be prudent for us as a country to rely on a kind of balance of financial terror to hold back reserve sales that would threaten our stability. (emphasis added)