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The Crumbling Sino-American Axis
The July meeting of the U.S.-China Strategic Economic Partnership ended with the usual polite speeches and pledges of continuing cooperation. This disguised but did not entirely covered the fact that the partnership is headed for collapse.
The immediate cause is that the respective policies of both partners are mutually incompatible.
The Americans are determined to go on printing and spending money by the boatload while the Chinese are adamant about preserving the value of their huge trove of dollar-denominated assets. There is not one square inch of common ground. As a result both parties are remaining very civil while simultaneously playing chicken as to who can intimidate the other.
There is a remote possibility that the global recession will end quickly and the old status quo restored to general satisfaction. But current reality points to massive U.S. deficits stretching far into the future and leading inexorably to the dollar depreciation the Chinese adamantly oppose.
But even the most optimistic economic scenario will at best gain only a short respite. Beyond the immediate issue of dollar value lurks the fact that key economic policies on both sides are nearing the end of their useful life.
Let us look at China first. The fiction here is that a thriving economy can be built without enriching the great mass of the population.
Aware of the collapse of the Soviet Union under the weight of its economic inefficiency, the Chinese government has created a semi-capitalist sector within its own command economy. But this sector is based on the export model, which requires other states to pay for China's development while simultaneously creating massive financial imbalances.
Worse, it requires China to keep the bulk of its population poor in order to maintain its labor cost advantage. While some wealth has trickled down to the bottom, social and economic inequality has risen much faster. This is the very formula that has led to massive revolts and government collapses throughout Chinese history. China is not stable and getting less so.
The U.S., for its part, has bet that manufacturing and industrial activity can be replaced by finance.
To that effect it has allowed its financial system to grow far beyond its original role as intermediary between providers and users of capital.
This policy has over the last decades made the U.S. financial system a world and an industry unto itself, with operations only tenuously connected to the real economy. Because of the potential of high profits resulting from speculative operations much of the investment capital needed by the real economy is siphoned into the purely financial sector.
Speculative financial operations produce both huge profits and enormous losses, making an autonomous financial industry inherently unstable. The U.S. government has chosen to ignore this fact during the current crisis, bailing the financial sector out at enormous expense, borne by taxpayers.
This by itself guarantees that the hoped for economic recovery will be deprived of the funding needed to generate economic activity and increased employment.
It is thus likely that the vast and expensive rescue effort undertaken by the government will achieve little or nothing, with a severe political backlash leading to major policy changes.
If current policies on both sides are maintained, the probable outcome for the U.S.-China axis is that both partners will become increasingly dysfunctional, gradually rendering the axis irrelevant. And if the fundamental policies are changed the symbiotic relationship between the United States and China will fade, and with that the Sino-American axis will dissolve into thin air.
In either case the much hyped relationship between the two powers and their economies has little or no future. History will most likely judge that it was a bad idea from the start.
About the Author Jacek Popiel's career spanned military service and international business development. His new book outlines how energy, economics and politics converge on the current world scene. For more articles and information: http://www.viableenergynow.com
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