Cheap money from China helped create the bubble that has now burst spectacularly. Beijing’s policy of keeping its currency artificially low allowed it to rack up massive trade surpluses - cash which was recycled to help Americans live beyond their means.
Given this, one might have thought the G20 leaders gathering in London would be focusing on preventing such imbalances in the future. In fact, it looks like they are going to shirk the issue. That’s largely because confronting it would cause a diplomatic row. After Tim Geithner, the US Treasury Secretary, suggested the Chinese were manipulating their currency in January, Beijing accused the Americans of lax regulation and excessive consumption.
The G20’s draft communiqué pussy-foots around the topic, merely committing the countries to get the IMF to conduct “candid” surveillance of their economies and the impact of their policies on each other.
Optimists may hope that Beijing has learned its lesson. China’s exports have slumped as US and other debtor nations have tightened their belts. But don’t count on it. Candid surveillance should therefore be supplemented by two other items of self-help – once the immediate crisis is over.
First, so long as the US continues to run a trade deficit, it should run a government budget surplus. That should mitigate any renewed attempt by Americans to live beyond their means. And, if and when another crisis hits, at least the government’s finances will be in better shape.
Second, again after the immediate crisis is over, the US should try to refinance its existing debt by selling the Chinese extremely long-dated dollar bonds. If it could lock in cheap funding in its own currency, it would no longer have to fear that Beijing might pull the rug out from under it.
The Chinese, of course, may not go for this. The governor of the Bank of China has, after all, already started talking about the need for a new global reserve currency. But Beijing cannot have it both ways. If it really promotes an alternative currency, the dollar will sink - which, in turn, will help rebalance world trade.