US's road to recovery runs through Beijing

US’s road to recovery runs through Beijing
By Francesco Sisci and David P Goldman

English author G K Chesterton rhymed about “the night we went to Bannockburn by way of Brighton Pier”, and it may seem no less whimsical to argue that the United States’ road to recovery, as well as Barack Obama’s path to presidential greatness, run through China.

In the rush to prop up America’s financial institutions, foreign economic policy seems remote from Washington’s agenda. America wants to revive the mortgage market and consumer spending. The effort is doomed to failure. For a quarter of a century the American consumer has been the locomotive of the world economy, and now the locomotive has derailed and taken he rest of the world economy with it.

Recovery requires a great change in direction of capital flows. For the past decade, poor people in the developing world have financed the consumption of rich people in America. America has borrowed nearly $1 trillion a year, mostly from the developing world, and used these funds to import consumer goods and buy homes at low interest rates. The result is a solvency crisis of the American household, which shows up as a solvency crisis for financial institutions. If we reckon the retirement needs of households as a liability, the household sector is as good as bankrupt.

No recovery is possible unless American households can save, and they cannot save in an economic contraction when incomes spiral downwards. To save, Americans must sell goods and services to someone else, and a glance at the globe makes clear who that must be: nearly half the world’s population, and most of the world’s capacity for economic growth, is concentrated in China and the Pacific Littoral.

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Hard to find words for this one, the idea that Chinese consumers buying American made goods is a possilbe solution to the global downturn is incredible, and even more so printed in the Asian Times. This is the stuff of fairytales. While China has lots of potential to consume, to think that it can be truned into a consumer driven ecenomy is a step beyond IMO, similalry that the American economy could be supported supplying it. The article seems to use this as justification for opening up the purchase of American banks by the Chinese, no problem there but not for those reasons.