President Bush should give copies of Robert Sidelsky’s biography of John Maynard Keynes to Japanese Prime Minister Koizumi and Chinese President Hu Jintao. Then he should read one himself.
It’s not that these leaders need to learn Keynesian theory. Sidelsky’s opus is an excellent history of international economics from 1914 through 1946. Many contemporary institutions and policy issues have deep roots in that period and we should avoid repeating bad mistakes made then.
The important lessons are simple ones. First, if a nation accepts investments from other countries, it must also buy more goods and services from those other countries than it sells them.
The second is the converse: If a nation imports more than it exports, other nations will inevitably buy some of its investment assets — from stocks and bonds to physical buildings.
Third, if one country lends large sums to a second country, the only way these loans can be repaid is if the lender eventually accepts buying more from abroad than selling abroad.
The British and American economies were connected from the start. Throughout the 1800s, the United States imported more from Britain than it exported to that nation. The money came back in British financing for canals, railroads, mines and factories. The first incarnation of Minnesota-based Pillsbury as a British-owned company dates from this era.
These trade and financial positions reversed rapidly in World War I. Britain exported virtually nothing to the United States and imported tremendous quantities of war materials and food. It paid for these imports by selling off British investments in North America and with huge loans from U.S. banks.
In the 1920s, Britain was supposed to repay these loans. The nation could only come up with the money by exporting more to the United States than it imported. The United States, however, refused to accept this necessary trade deficit with Britain. The reciprocal antics that ensued corroded U.S.-British relations and contributed to the severity of the Depression.
Right now China and Japan are financing their own exports to the United States by lending us money, just as we once financed exports to a shattered Europe with Marshall Plan grants and loans.
China and Japan do that by buying up dollars to keep the dollar from dropping in value compared to their own currencies. They invest these dollars in U.S. Treasury bonds. If they stop buying dollars and Treasuries, their exports inevitably would fall.
Bush needs to know that if the U.S. trade deficit with Asia narrows, there will be less Asian funding of the enormous budget deficits we are incurring because of his ill-advised fiscal policy. He might welcome less attention on “jobs lost to China” but the corollary is that a smaller trade deficit will put upward pressure on U.S. interest rates. Bush and the Asian leaders cannot change these harsh realities, but they should understand them.
© 2003 Edward Lotterman
Chanarambie Consulting, Inc.