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  • China's Rise Exaggerated- A rational Analysis of China's Future Prospects

    A rational editorial about China's future prospects from someone who has traveled very frequently between the US and China for almost 30 years.

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    A Long Wait at the Gate to Greatness

    By John Pomfret
    Sunday, July 27, 2008; B01

    Nikita Khrushchev said the Soviet Union would bury us, but these days, everybody seems to think that China is the one wielding the shovel. The People's Republic is on the march -- economically, militarily, even ideologically. Economists expect its GDP to surpass America's by 2025; its submarine fleet is reportedly growing five times faster than Washington's; even its capitalist authoritarianism is called a real alternative to the West's liberal democracy. China, the drumbeat goes, is poised to become the 800-pound gorilla of the international system, ready to dominate the 21st century the way the United States dominated the 20th.

    Except that it's not.

    Ever since I returned to the United States in 2004 from my last posting to China, as this newspaper's Beijing bureau chief, I've been struck by the breathless way we talk about that country. So often, our perceptions of the place have more to do with how we look at ourselves than with what's actually happening over there. Worried about the U.S. education system? China's becomes a model. Fretting about our military readiness? China's missiles pose a threat. Concerned about slipping U.S. global influence? China seems ready to take our place.

    But is China really going to be another superpower? I doubt it.

    It's not that I'm a China-basher, like those who predict its collapse because they despise its system and assume that it will go the way of the Soviet Union. I first went to China in 1980 as a student, and I've followed its remarkable transformation over the past 28 years. I met my wife there and call it a second home. I'm hardly expecting China to implode. But its dream of dominating the century isn't going to become a reality anytime soon.

    Too many constraints are built into the country's social, economic and political systems. For four big reasons -- dire demographics, an overrated economy, an environment under siege and an ideology that doesn't travel well -- China is more likely to remain the muscle-bound adolescent of the international system than to become the master of the world.

    In the West, China is known as "the factory to the world," the land of unlimited labor where millions are eager to leave the hardscrabble countryside for a chance to tighten screws in microwaves or assemble Apple's latest gizmo. If the country is going to rise to superpowerdom, says conventional wisdom, it will do so on the back of its massive workforce.

    But there's a hitch: China's demographics stink. No country is aging faster than the People's Republic, which is on track to become the first nation in the world to get old before it gets rich. Because of the Communist Party's notorious one-child-per-family policy, the average number of children born to a Chinese woman has dropped from 5.8 in the 1970s to 1.8 today -- below the rate of 2.1 that would keep the population stable. Meanwhile, life expectancy has shot up, from just 35 in 1949 to more than 73 today. Economists worry that as the working-age population shrinks, labor costs will rise, significantly eroding one of China's key competitive advantages.

    Worse, Chinese demographers such as Li Jianmin of Nankai University now predict a crisis in dealing with China's elderly, a group that will balloon from 100 million people older than 60 today to 334 million by 2050, including a staggering 100 million age 80 or older. How will China care for them? With pensions? Fewer than 30 percent of China's urban dwellers have them, and none of the country's 700 million farmers do. And China's state-funded pension system makes Social Security look like Fort Knox. Nicholas Eberstadt, a demographer and economist at the American Enterprise Institute, calls China's demographic time bomb "a slow-motion humanitarian tragedy in the making" that will "probably require a rewrite of the narrative of the rising China."

    I count myself lucky to have witnessed China's economic rise first-hand and seen its successes etched on the bodies of my Chinese classmates. When I first met them in the early 1980s, my fellow students were hard and thin as rails; when I found them again almost 20 years later, they proudly sported what the Chinese call the "boss belly." They now golfed and lolled around in swanky saunas.

    But in our exuberance over these incredible economic changes, we seem to have forgotten that past performance doesn't guarantee future results. Not a month goes by without some Washington think tank crowing that China's economy is overtaking America's. The Carnegie Endowment for International Peace is the latest, predicting earlier this month that the Chinese economy would be twice the size of ours by the middle of the century.

    There are two problems with predictions like these. First, in the universe where these reports are generated, China's graphs always go up, never down. Second, while the documents may include some nuance, it vanishes when the studies are reported to the rest of us.

    One important nuance we keep forgetting is the sheer size of China's population: about 1.3 billion, more than four times that of the United States. China should have a big economy. But on a per capita basis, the country isn't a dragon; it's a medium-size lizard, sitting in 109th place on the International Monetary Fund's World Economic Outlook Database, squarely between Swaziland and Morocco. China's economy is large, but its average living standard is low, and it will stay that way for a very long time, even assuming that the economy continues to grow at impressive rates.

    The big number wheeled out to prove that China is eating our economic lunch is the U.S. trade deficit with China, which last year hit $256 billion. But again, where's the missing nuance? Nearly 60 percent of China's total exports are churned out by companies not owned by Chinese (including plenty of U.S. ones). When it comes to high-tech exports such as computers and electronic goods, 89 percent of China's exports come from non-Chinese-owned companies. China is part of the global system, but it's still the low-cost assembly and manufacturing part -- and foreign, not Chinese, firms are reaping the lion's share of the profits.

    When my family and I left China in 2004, we moved to Los Angeles, the smog capital of the United States. No sooner had we set foot in southern California than my son's asthma attacks and chronic chest infections -- so worryingly frequent in Beijing -- stopped. When people asked me why we'd moved to L.A., I started joking, "For the air."

    China's environmental woes are no joke. This year, China will surpass the United States as the world's No. 1 emitter of greenhouse gases. It continues to be the largest depleter of the ozone layer. And it's the largest polluter of the Pacific Ocean. But in the accepted China narrative, the country's environmental problems will merely mean a few breathing complications for the odd sprinter at the Beijing games. In fact, they could block the country's rise.

    The problem is huge: Sixteen of the world's 20 most polluted cities are in China, 70 percent of the country's lakes and rivers are polluted, and half the population lacks clean drinking water. The constant smoggy haze over northern China diminishes crop yields. By 2030, the nation will face a water shortage equal to the amount it consumes today; factories in the northwest have already been forced out of business because there just isn't any water. Even Chinese government economists estimate that environmental troubles shave 10 percent off the country's gross domestic product each year. Somehow, though, the effect this calamity is having on China's rise doesn't quite register in the West .

    And then there's "Kung Fu Panda." That Hollywood movie embodies the final reason why China won't be a superpower: Beijing's animating ideas just aren't that animating.

    In recent years, we've been bombarded with articles and books about China's rising global ideological influence. (One typical title: "Charm Offensive: How China's Soft Power Is Transforming the World.") These works portray China's model -- a one-party state with a juggernaut economy -- as highly attractive to elites in many developing nations, although China's dreary current crop of acolytes (Zimbabwe, Burma and Sudan) don't amount to much of a threat.

    But consider the case of the high-kicking panda who uses ancient Chinese teachings to turn himself into a kung fu warrior. That recent Hollywood smash broke Chinese box-office records -- and caused no end of hand-wringing among the country's glitterati. "The film's protagonist is China's national treasure, and all the elements are Chinese, but why didn't we make such a film?" Wu Jiang, president of the China National Peking Opera Company, told the official New China News Agency.

    The content may be Chinese, but the irreverence and creativity of "Kung Fu Panda" are 100 percent American. That highlights another weakness in the argument about China's inevitable rise: The place remains an authoritarian state run by a party that limits the free flow of information, stifles ingenuity and doesn't understand how to self-correct. Blockbusters don't grow out of the barrel of a gun. Neither do superpowers in the age of globalization.

    And yet we seem to revel in overestimating China. One recent evening, I was at a party where a senior aide to a Democratic senator was discussing the business deal earlier this year in which a Chinese state-owned investment company had bought a big chunk of the Blackstone Group, a U.S. investment firm. The Chinese company has lost more than $1 billion, but the aide wouldn't believe that it was just a bum investment. "It's got to be part of a broader plan," she insisted. "It's China."

    I tried to convince her otherwise. I don't think I succeeded.

    [email protected]

    John Pomfret is the editor of Outlook. He is a former Beijing bureau chief of The Washington Post and the author of "Chinese Lessons: Five Classmates and the Story of the New China."
    Source:
    A Long Wait at the Gate to Greatness

    Pomfret states exactly what I have long believed, that as Americans, we have long projected our uncertainties and imperfections to our rivals, real or imagined.

    When I was 10 years old in the early 90's, I remember the dire predictions of impending Japanese supremacy where an extremely diligent Japanese work ethic (buying up Hawaii and our famous commercial landmarks) would overtake us economically. Well, after they stagnated after the early 90's we forgot all about them.

    Sometimes, the near hysteria coming from many American politicians and influential think tanks and organizations really frustrates me. I hope this piece brings some perspective to an issue now given over to hyperbole.

  • #2
    Originally posted by Equilibrium View Post
    A rational editorial about China's future prospects from someone who has traveled very frequently between the US and China for almost 30 years.



    Source:
    A Long Wait at the Gate to Greatness

    Pomfret states exactly what I have long believed, that as Americans, we have long projected our uncertainties and imperfections to our rivals, real or imagined.

    When I was 10 years old in the early 90's, I remember the dire predictions of impending Japanese supremacy where an extremely diligent Japanese work ethic (buying up Hawaii and our famous commercial landmarks) would overtake us economically. Well, after they stagnated after the early 90's we forgot all about them.

    Sometimes, the near hysteria coming from many American politicians and influential think tanks and organizations really frustrates me. I hope this piece brings some perspective to an issue now given over to hyperbole.
    Everything the author said and what you said is true. We do overestimate China like how we overestimated Japan and the Soviet Union. But that's how we keep ourselves motivated. Imagine if there were no worries about the Soviets or the Japanese, we wouldn't be where we are today, still on top of the world. China will keep us on our toes to continue to innovate and dominate.
    "Only Nixon can go to China." -- Old Vulcan proverb.

    Comment


    • #3
      Originally posted by gunnut View Post
      Everything the author said and what you said is true. We do overestimate China like how we overestimated Japan and the Soviet Union. But that's how we keep ourselves motivated. Imagine if there were no worries about the Soviets or the Japanese, we wouldn't be where we are today, still on top of the world. China will keep us on our toes to continue to innovate and dominate.

      I agree. We as Americans have often sought inspiration for action in the international arena. But some of the more radical alarmists out there make it sound as if it is already foreordained. Which is patently ridiculous.

      I know individuals such as these they existed during the Cold War, the pessimistic 70's with Nixon's resignation, stagflation and the oil crises as well as the 1980's with people such as Paul Kennedy with his "Rise and Fall of the Great Powers". It just seems that more attention is paid to the more vocal and extreme individuals- creating a vicious cycle of more extreme claims.
      Last edited by Equilibrium; 28 Jul 08,, 19:06.

      Comment


      • #4
        Originally posted by gunnut View Post
        Everything the author said and what you said is true. We do overestimate China like how we overestimated Japan and the Soviet Union. But that's how we keep ourselves motivated.

        Only an American can call paranoia a virtue (while keeping a straight face!) :)

        Imagine if there were no worries about the Soviets or the Japanese, we wouldn't be where we are today, still on top of the world. China will keep us on our toes to continue to innovate and dominate.
        More of the innovation and less of the domination, I suggest.
        Semper in excretum. Solum profunda variat.

        Comment


        • #5
          Better overestimate than underestimate the enemy\rival whatsoever

          Comment


          • #6
            Originally posted by glyn View Post
            Only an American can call paranoia a virtue (while keeping a straight face!)
            Just because we think everyone is aftering us doesn't mean we're paranoid. :P

            Originally posted by glyn View Post
            More of the innovation and less of the domination, I suggest.
            Someone has to dominate so it might as well be us. It's a thankless job but we do it anyways and we do it well. We will dominate the world with our innovations. Can you imagine this world without the GPS and the internet? This world could be far worse...
            "Only Nixon can go to China." -- Old Vulcan proverb.

            Comment


            • #7
              Originally posted by Equilibrium View Post
              I agree. We as Americans have often sought inspiration for action in the international arena. But some of the more radical alarmists out there make it sound as if it is already foreordained. Which is patently ridiculous.

              I know individuals such as these they existed during the Cold War, the pessimistic 70's with Nixon's resignation, stagflation and the oil crises as well as the 1980's with people such as Paul Kennedy with his "Rise and Fall of the Great Powers". It just seems that more attention is paid to the more vocal and extreme individuals- creating a vicious cycle of more extreme claims.
              There was real concern in the '70s regarding America's role in the world, and its fear of being eclipsed by the USSR. The US had lost a war in Vietnam, there was stagflation etc. If Reagan had not turned the US around in the '80s, then the US may not be considered a super-power today.

              As for your article on China, it is one article by one man; take into account his bias, his expertise, and his examples (Kung Fu Panada...really?) Yes China has problems like pollution, but they are addressing them. As for your false analogy with Japan; the danger with Japan was its economic dominance, despite having little natural resources, and one-third the population of the US (and one-tenth the population of China). But there was never a fear of Japanese military dominance given that Japan sits under the nuclear umbrella of the US, has US military forces stationed there, and has as enshrined constitutional prinicples non-aggression.

              The US remains wary of China, because though China may not be a sworn enemy of the US it isn't exactly an ally either. Economically and militarily, even culturally China strives for peer competition with the US. Remember the Chinese have been around a lot longer than America, and are more patient. I think it was Mao who said China could wait a hundred years to deal with Taiwan, but in the end they would deal with it.

              Comment


              • #8
                Yep, I've been saying it for years. As went the Mighty Japan Ghost of the 1980s, so will go the Mighty China Ghost of the early 21st century.

                To compete successfully with America you have to be like America. A simple lesson that not enough people seem to understand. I mean, flip it around and ask - could America compete with China, or the old Soviet Union, in the arena of closed, ruthless, authoritarian Empire? No, of course not - we're not built for that kind of thing.

                And so to compete successfully with America you have to be a slightly screwball, risk-embracing, and open society. An open Russia would have been a fantastic partner and strong competitor. As the EU becomes more authoritarian and closed its strength as a competitor will wane. My favorite for a true equal and competitive entity is some sort of Indian-Australian co-op. I think that's where the real "next big deal" will come from.

                But China? Give me a break.

                -dale

                Comment


                • #9
                  Originally posted by dalem View Post
                  could America compete with China, or the old Soviet Union, in the arena of closed, ruthless, authoritarian Empire? No, of course not - we're not built for that kind of thing.

                  -dale
                  We could if we elect Obama...
                  "Only Nixon can go to China." -- Old Vulcan proverb.

                  Comment


                  • #10
                    Originally posted by Herodotus View Post
                    There was real concern in the '70s regarding America's role in the world, and its fear of being eclipsed by the USSR. The US had lost a war in Vietnam, there was stagflation etc. If Reagan had not turned the US around in the '80s, then the US may not be considered a super-power today.

                    As for your article on China, it is one article by one man; take into account his bias, his expertise, and his examples (Kung Fu Panada...really?) Yes China has problems like pollution, but they are addressing them. As for your false analogy with Japan; the danger with Japan was its economic dominance, despite having little natural resources, and one-third the population of the US (and one-tenth the population of China). But there was never a fear of Japanese military dominance given that Japan sits under the nuclear umbrella of the US, has US military forces stationed there, and has as enshrined constitutional prinicples non-aggression.

                    The US remains wary of China, because though China may not be a sworn enemy of the US it isn't exactly an ally either. Economically and militarily, even culturally China strives for peer competition with the US. Remember the Chinese have been around a lot longer than America, and are more patient. I think it was Mao who said China could wait a hundred years to deal with Taiwan, but in the end they would deal with it.

                    I also believe that the Soviets aspiring to towards strategic military parity during the 70's. But the concept of "malaise" as a largely self-inflicted American condition just took the Soviet threat as one factor.

                    The fear at the time was the Japan would use our nuclear umbrella and pacifist constitution to guarantee its security and dedicate its resources towards becoming a predominant economic power. But that was nothing new; this same thinking led President Nixon to remove the US from the gold standard in 1969-70 as the European nations were avoiding fulfilling their defense obligations under NATO and using the US security umbrella to support their economies at the cost of the US.

                    The general theme of my post is that alarmists have always ascribed to ourselves the most disadvantageous position possible and building up our competitors, real or imagined with almost omnipotent or omniscient qualities. While we may know differently, I fear that many Americans may think otherwise and therefore continue our historic tendency to alternate between excessive exaltation internationally with isolationism when frustration and premonitions of failure meet our visions.

                    Its not the message that preoccupies me, but rather the analysis of the messenger with the biggest bullhorn.

                    Comment


                    • #11
                      Originally posted by Equilibrium View Post
                      I also believe that the Soviets aspiring to towards strategic military parity during the 70's. But the concept of "malaise" as a largely self-inflicted American condition just took the Soviet threat as one factor.

                      The fear at the time was the Japan would use our nuclear umbrella and pacifist constitution to guarantee its security and dedicate its resources towards becoming a predominant economic power. But that was nothing new; this same thinking led President Nixon to remove the US from the gold standard in 1969-70 as the European nations were avoiding fulfilling their defense obligations under NATO and using the US security umbrella to support their economies at the cost of the US.

                      The general theme of my post is that alarmists have always ascribed to ourselves the most disadvantageous position possible and building up our competitors, real or imagined with almost omnipotent or omniscient qualities. While we may know differently, I fear that many Americans may think otherwise and therefore continue our historic tendency to alternate between excessive exaltation internationally with isolationism when frustration and premonitions of failure meet our visions.

                      Its not the message that preoccupies me, but rather the analysis of the messenger with the biggest bullhorn.

                      The threat of the USSR was very real, I don't think it was exaggerated at all, or did you not pay attention in modern history class. That the Soviets fell did surprise some analysts, but it fell only after reproachment with the West. And no one really ascribed to them omniscience, you will have to provide a link to that; though 10,000 nuclear weapons are a great equalizer.

                      The gold standard was removed in 1973 and had little to do with NATO defense obligations. France left NATO's military structure in 1966 and the Germans were concerned that the US would abandon them during detente. You will also have to provide evidence that the US feared Japan using US security to become an economic power (I mean didn't the US prop up the economy of Japan for decades after WWII), why would we fear it? Also you got the time-frame wrong, it was the 1980s not early 1990s that Japan's economy peaked. Paul Kennedy wrote his book in 1987 IIRC, by 1990 Japan's economy was in free-fall:

                      After the September 1985 Plaza Accord, the yen's appreciation hit the export sector hard, reducing economic growth from 4.4 percent in 1985 to 2.9 percent in 1986 (EIU 2001).1 The government attempted to offset the stronger yen by drastically easing monetary policy between January 1986 and February 1987. During this period, the Bank of Japan (BOJ) cut the discount rate in half from 5 percent to 2.5 percent. Following the economic stimulus, asset prices in the real estate and stock markets inflated, creating one of the biggest financial bubbles in history. The government responded by tightening monetary policy, raising rates five times, to 6 percent in 1989 and 1990. After these increases, the market collapsed.

                      The Nikkei stock market index fell more than 60 percent—from a high of 40,000 at the end of 1989 to under 15,000 by 1992. It rose somewhat during the mid-1990s on hopes that the economy would soon recover, but as the economic outlook continued to worsen, share prices again fell. The Nikkei fell below 12,000 by March 2001. Real estate prices also plummeted during the recession—by 80 percent from 1991 to 1998 (Herbener 1999).

                      Explaining Japan's Recession - Benjamin Powell - Mises Institute

                      Comment


                      • #12
                        Originally posted by Herodotus View Post
                        The threat of the USSR was very real, I don't think it was exaggerated at all, or did you not pay attention in modern history class. That the Soviets fell did surprise some analysts, but it fell only after reproachment with the West. And no one really ascribed to them omniscience, you will have to provide a link to that; though 10,000 nuclear weapons are a great equalizer.

                        The gold standard was removed in 1973 and had little to do with NATO defense obligations. France left NATO's military structure in 1966 and the Germans were concerned that the US would abandon them during detente. You will also have to provide evidence that the US feared Japan using US security to become an economic power (I mean didn't the US prop up the economy of Japan for decades after WWII), why would we fear it? Also you got the time-frame wrong, it was the 1980s not early 1990s that Japan's economy peaked. Paul Kennedy wrote his book in 1987 IIRC, by 1990 Japan's economy was in free-fall:




                        Explaining Japan's Recession - Benjamin Powell - Mises Institute
                        Perhaps you are confusing my assertions with those I am criticizing.

                        I never doubted the threat the Soviets presented- let's just say that my current capacity involves dealing with the legacies of the Soviet Union.

                        I never claimed that the peak of Japanese economic power was in the early 90's, I did imply it was in the late '80's early '90's timeframe. I hope you do understand that I have not been discussing realities or my analysis of them but rather contemporary impressions of international trends and events and popular US perception of our relation to them.

                        I did not want to get into the details of a long winded lesson, but here goes:

                        Nixon disabled the US gold standard in August 1971 in response to allied (primarily Japanese and German) manipulations of US currency under the Bretton Woods system in a time when they either by law or policy were unable or unwilling to commit to their defense obligations.

                        The US economy produced the liquidity for trade and economic expansion by runnig massive deficits since the end of WWII. By 1970 a structural crisis in NATO had presented itself. As the German economic power was reaching new heights, the European were turning away from the US in engaging in individual detente with the Soviets (Germany's Ostpolitik, etc.). Japan and Germany were the largest accumulators of dollars at the time.

                        The US was forced to increasingly subsidize its allies while its allies were running account surpluses and refused to allow the US to devalue the dollar and easily resolve the balance of payments issue. They even went as far to declare that they would reciprocate in kind amount should the US devalue.

                        Nixon basically pursued a policy of "benign neglect" in a game of chicken, letting the US amass large budget deficits and spark inflation abroad. The Germans and the Japanese accumulated record amounts of dollars until the fixed exchange system collapsed. In 1970, the US entered a recession while the Europeans countered by establishing the unified EEC currencies.

                        The NATO allies at this time were also resisting any effort to mandate the expansion of conventional forces by claiming that NATO's tactical nuclear weapons were the only hope of deterring and resisting Soviet conventional forces- placing greater burdens on the US on continental defense while already assuming large global defense responsibilities in SEA with the SEATO nations, financing the ARVN and giving the South Vietnamese the world's then fourth largest airforce. The allies spent relatively small percentages of their ever expanding GDP on defense.

                        After the August 1971 destandardization, Nixon also installed, I believe, a 10% universal import tarriff to undermine the allied nations' import subsidies. The Europeans and the Japanese had been outmaneuvered and conceeded in the Smithsonian Agreement in December 1971 to an across the board revaluation of currencies. The US, rather than German or Japanese manipulation would have greater power to determine the value of the US dollar with all other currencies being re-pegged to it.

                        See the following:
                        Smithsonian Agreement - Wikipedia, the free encyclopedia

                        It's wikipedia, but you will get the gestalt of the realities that led to the agreement.

                        The continental NATO/ OECD nations tried to in 1973 to depress their currencies at the cost of the US dollar against the Smithsonian accords but the Arab Oil Embargo forced the Europeans to abandon the effort before it provoked a crisis. But it presented a new US strategic crisis as the two main challengers to the US, Germany and Japan recovered quickly from the oil crisis, but the rest of the industrialized world on which the US order hinged was struggling in difficulty. This paradox presented a crisis in the European alliance system that the Soviets were only too eager to try to exploit.

                        Again, don't confuse the positions of those I have stated in previous posts with my analysis. The Soviets were engaging in a battle of strategic global predominance against us. I have read western reports of the time that the Soviets were an unstoppable force. Only later when the Soviet Union collapse did we see that they had sacrificed their essence economically to try to keep up with us militarily.

                        The Japanese concern, at least culturally in the US reached its peak shortly after 1991. I have in my posession a home video of me on Christmas day of that year where plainly overhead is a TV news broadcast of Japanese purchases in Hawaii and Guam and their increasing economic influence in the US.
                        Last edited by Equilibrium; 29 Jul 08,, 04:06.

                        Comment


                        • #13
                          A doll manufactured by Chinese companies, sold at price of 1 dollar each to the US companies. US companies will sell at price of 10 dollars in the market. So Chinese companies own 1 dollar, and China get all the pollution those manufacturing process cause. But US companies own 9 dollars from selling Chinese manufactured by dolls. This is a typical model of China and US economy relationship. And this is the so called "world factories". Is this kind of China going to be world power or surpass US ? I don't think so.

                          Comment


                          • #14
                            Originally posted by Equilibrium View Post
                            Perhaps you are confusing my assertions with those I am criticizing.

                            I never doubted the threat the Soviets presented- let's just say that my current capacity involves dealing with the legacies of the Soviet Union.

                            I never claimed that the peak of Japanese economic power was in the early 90's, I did imply it was in the late '80's early '90's timeframe. I hope you do understand that I have not been discussing realities or my analysis of them but rather contemporary impressions of international trends and events and popular US perception of our relation to them.

                            I did not want to get into the details of a long winded lesson, but here goes:

                            Nixon disabled the US gold standard in August 1971 in response to allied (primarily Japanese and German) manipulations of US currency under the Bretton Woods system in a time when they either by law or policy were unable or unwilling to commit to their defense obligations.

                            The US economy produced the liquidity for trade and economic expansion by runnig massive deficits since the end of WWII. By 1970 a structural crisis in NATO had presented itself. As the German economic power was reaching new heights, the European were turning away from the US in engaging in individual detente with the Soviets (Germany's Ostpolitik, etc.). Japan and Germany were the largest accumulators of dollars at the time.

                            The US was forced to increasingly subsidize its allies while its allies were running account surpluses and refused to allow the US to devalue the dollar and easily resolve the balance of payments issue. They even went as far to declare that they would reciprocate in kind amount should the US devalue.

                            Nixon basically pursued a policy of "benign neglect" in a game of chicken, letting the US amass large budget deficits and spark inflation abroad. The Germans and the Japanese accumulated record amounts of dollars until the fixed exchange system collapsed. In 1970, the US entered a recession while the Europeans countered by establishing the unified EEC currencies.

                            The NATO allies at this time were also resisting any effort to mandate the expansion of conventional forces by claiming that NATO's tactical nuclear weapons were the only hope of deterring and resisting Soviet conventional forces- placing greater burdens on the US on continental defense while already assuming large global defense responsibilities in SEA with the SEATO nations, financing the ARVN and giving the South Vietnamese the world's then fourth largest airforce. The allies spent relatively small percentages of their ever expanding GDP on defense.

                            After the August 1971 destandardization, Nixon also installed, I believe, a 10% universal import tarriff to undermine the allied nations' import subsidies. The Europeans and the Japanese had been outmaneuvered and conceeded in the Smithsonian Agreement in December 1971 to an across the board revaluation of currencies. The US, rather than German or Japanese manipulation would have greater power to determine the value of the US dollar with all other currencies being re-pegged to it.

                            See the following:
                            Smithsonian Agreement - Wikipedia, the free encyclopedia

                            It's wikipedia, but you will get the gestalt of the realities that led to the agreement.

                            The continental NATO/ OECD nations tried to in 1973 to depress their currencies at the cost of the US dollar against the Smithsonian accords but the Arab Oil Embargo forced the Europeans to abandon the effort before it provoked a crisis. But it presented a new US strategic crisis as the two main challengers to the US, Germany and Japan recovered quickly from the oil crisis, but the rest of the industrialized world on which the US order hinged was struggling in difficulty. This paradox presented a crisis in the European alliance system that the Soviets were only too eager to try to exploit.

                            Again, don't confuse the positions of those I have stated in previous posts with my analysis. The Soviets were engaging in a battle of strategic global predominance against us. I have read western reports of the time that the Soviets were an unstoppable force. Only later when the Soviet Union collapse did we see that they had sacrificed their essence economically to try to keep up with us militarily.

                            The Japanese concern, at least culturally in the US reached its peak shortly after 1991. I have in my posession a home video of me on Christmas day of that year where plainly overhead is a TV news broadcast of Japanese purchases in Hawaii and Guam and their increasing economic influence in the US.

                            Do you have any links for this besides wikipedia (an unsourced wikipedia article at that)? The linkage between the removal of the dollar from the gold standard and NATO allies and unfounded US concern that it will be eclipsed is where I am confused. Also personal antedoctes are fun but not something you want to use as evidence to back up assertions.

                            Comment


                            • #15
                              Originally posted by Herodotus View Post
                              Do you have any links for this besides wikipedia (an unsourced wikipedia article at that)? The linkage between the removal of the dollar from the gold standard and NATO allies and unfounded US concern that it will be eclipsed is where I am confused.

                              Read this analysis- it will have a haemorrage of sources for your pleasure.
                              http://www.cercles.com/n5/larres.pdf

                              The first two pages describe the strategic challenges that precipitated teh crisis.

                              See the IMF history of financial agreements below:

                              IMF Chronology
                              August 15, 1971

                              United States informs IMF it will no longer freely buy and sell gold to settle international transactions. Par values and convertibility of the dollar—two main features of the Bretton Woods system—cease to exist.

                              December 18, 1971

                              After four months of negotiations, Smithsonian Agreement provides for realignment of industrial country currencies and increase in price of gold. IMF establishes temporary regime of central rates and wider margins.

                              July 26, 1972

                              Board of Governors adopts resolution establishing a Committee on Reform of the International Monetary System, known as the Committee of 20.

                              March 19, 1973

                              "Generalized floating" begins as European Community countries introduce joint float for their currencies against U.S. dollar.
                              The connection is obvious, the US global commitment to defend its weaker allies under the framework of agreements during and after WWII as a superpower were creating pressure on the US as its allied powers recovered economically and sought to enhance their economic influence by holding the US to the system that butressed the post-war international order that was creating the crisis in the first place.

                              Also personal antedoctes are fun but not something you want to use as evidence to back up assertions.
                              Am I writing a paper or writing on a message board dear professor?

                              I'll remeber that when I defend my Ph. D thesis in front of my board next week

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