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Shared Fate Beckons China, US

Dan Steinbock
June 17, 2011
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Old disagreements do remain between China and the United States after the third Sino-US Strategic and Economic Dialogue (S&ED), but the consensus is that the overall atmosphere during the meeting was constructive, realistic and even cautiously optimistic.

The third S&ED was held under the relative calm of some signs of recovery in the United States and relatively robust growth in China, which may not be the case with the next round of the dialogue.

The economic environment is likely to be shadowed by darker clouds in the next few months. So the task is to prepare and sustain the dialogue through rising turbulence.

After the US debt surpassed $10 trillion, the National Debt Clock in Times Square, New York City, ran out of digits, and the share of each American family ballooned to more than $86,000.

During the global financial crisis, informed Americans thought that the lessons had been learned, that there would be no return to business as usual, and that the US' growth trajectory would have to change. Simply put, the US would have to invest and save more - and consume less.

But today, the US public debt subject to legal limit has risen to about $14.3 trillion, which translates into almost $130,000 per taxpayer. The bottom line: the problem of public debt in the US is neither new nor easily resolvable.

The US debt dilemma began to evolve in the 1980s - years before the S&ED, the global financial crisis, China's membership in the World Trade Organization, and even the Clinton-Gore era.

Like the global financial crisis, the soaring US debt evolved during the Ronald Reagan administration, the low interest rates of the Alan Greenspan years and the laissez-faire mantra of deregulation, privatization and liberalization.

The US debt as percentage of GDP decreased steadily from the World War II peak of 118 percent to 36 percent in 1981. During the Reagan-George H. Bush years, it almost doubled, jumping to 66 percent of GDP in 1993. It was cut by 10 percent during Bill Clinton's presidency.

But the return to the laissez-faire during the George W. Bush era caused the debt to jump by a stunning 27 percent. When Barack Obama entered the White House, US debt had reached 84 percent of GDP. With the global financial crisis, private sector losses were shifted to the public sector, and the debt soared again. And by the end of 2011, US debt is likely to climb to more than 103 percent of GDP.

Historically, economic growth begins to slow down when the level of debt exceeds 90 percent. The economic downturn, the bailout packages, the wars in Iraq and Afghanistan, and the war against terrorism have all added to recent increases in the debt. But the principal reason why the debt has soared is the George W. Bush-era tax cuts, which provide minimum stimulus for recovery, but contribute the maximum to deepening income polarization.

Unfortunately, the debt dilemma is not about to vanish. This is only the beginning. In the absence of effective healthcare reform, the US debt crisis will begin to escalate after the mid-2010s because of America's aging population.

Not so long ago, US Treasury Secretary Timothy F. Geithner urged congressional leaders to take the debt issue seriously because the legal debt limit of $14.3 trillion would be met in May and could be extended only till early July.

Soon after the death of Osama bin Laden, Geithner wrote to congressional leaders again saying that, because of "stronger-than-expected tax receipts" and by taking "extraordinary measures", the US can continue to borrow until Aug 2, after reaching the legal debt limit.

But the simple truth remains that one can live beyond one's means some of the time, but not all of the time.

Today, US-Chinese economic relationship is symbiotic. Despite recent trimming of its holdings, China remains the largest foreign holder of US Treasury securities, with a $1.2-trillion portfolio. China also has $3 trillion in currency reserves.

Understandably, China is closely watching the debate over raising the US debt ceiling and wants the Obama administration to take more measures to curb the deficit. With the current legal limits, the US can avoid an unprecedented default on national debt possibly only for another two to three months. In the near future, however, Washington will be swept by a debate on US debt, and this debate will be very, very divisive.

At the same time, the Obama administration has been hoping to re-ignite growth by doubling exports in the next five years. Yet, the US' two closest trade partners - the European Union and Japan - are struggling with massive debt problems of their own. In Japan, the impact of the triple disaster will be long-term. In the eurozone, the debt crisis is structural and deteriorating.

In brief, the third S&ED demonstrated increasing maturity, and even cautious optimism. It is vital to build on this sense of shared fate in the coming months because the fourth dialogue may well take place under darkening economic clouds.

Dan Steinbock is research director of International Business at the India, China and America Institute, an independent think tank in the US, and visiting fellow at Shanghai Institutes for International Studies

Source: China Daily

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