Diatribes of Jay

This is a blog of essays on public policy. It shuns ideology and applies facts, logic and math to economic, social and political problems. It has a subject-matter index, a list of recent posts, and permalinks at the ends of posts. Comments are moderated and may take time to appear. Note: Profile updated 4/7/12

12 January 2011

Versailles or the Marshall Plan: China’s Choice

[For my post on the “Second-Amendment solution,” which appears to be popular, click here.]

History often turns on how victors treat the vanquished. After the First World War, the victorious allies decided to “punish” the loser—Germany—in the lopsided Treaty of Versailles. Woodrow Wilson, our president then, was an ex-professor just like our current president. He thought that further punishing a badly damaged loser—even though it had started the war—was a bad idea. But he couldn’t convince European leaders.

Every educated person knows what happened next. Oppressed by demands for war reparations and economic isolation, Germany’s Weimar Republic suffered the worst hyperinflation of any developed country in human history. Unemployment surged, working people became desperate, and Hitler rose to power. About two decades later, 50 million people had been killed before their time.

The Second World War, which those punitive measures helped cause, became much more widespread and devastating than the First. Luckily, the Nuclear Age arrived only at its very end. Otherwise, we might be an extinct species, done in by our own hand.

But after that catastrophic war, Woodrow Wilson’s ideals prevailed, at least on our side of the Iron Curtain. Harry Truman (as President) and former general George Marshall (as Secretary of State) implemented the Marshall Plan to rebuild Europe and Japan. No reparations were required. Despite Germany’s and Japan’s respective atrocities during the war, there was no collective punishment. The Allies punished only a small number of top leaders in each aggressor. Instead, there was a concerted attempt to rebuild the vanquished and infuse them with democratic principles as quickly as possible. The result—despite the Cold War and some punitive measures on the other side of the Iron Curtain—was the most impressive run of global peace and prosperity in human history.

Now we Americans are the clear loser in what may seem, in retrospect, to have been a thirty-year economic war with China. No one intended it to be or become a war. But it seems to have turned out that way. Our economy is reeling, and China’s is bursting with prosperity and promise. No one with any sense of reality could possibly mistake which side is the winner.

So China faces much the same question that Europe faced after World War I and we faced after World War II. Versailles or the Marshall Plan? Do you kick the loser when he’s down? Or do you pull him up and dust him off, and, in so doing, earn a future of peace, prosperity, and stability, if not necessarily gratitude?

China could easily “punish” us if it chose. It could sell its nearly $ 2 trillion of dollar-denominated notes and bonds and drive the dollar into the toilet, causing rampant inflation here at home and destabilizing world commerce. It could simply continue its past mercantilist policies until it drained away all our brains and manufacturers and left us with nothing but gamblers and swindlers. It could turn to Europe and Asia for trade, as it is already doing, but it could also turn away from us. Then our toys and electronics and parts for everything would get more expensive, and our most promising present and future market—China itself—might disappear.

But China signaled yesterday that it would not take the Versailles path. It said it would let its currency (the renminbi) float, at least for business buyers, and at least in three markets—Hong Kong, Los Angeles, and New York—with emphasis on the latter.

This is a big, big deal. China will still try to “control” its currency generally in order to insure an orderly appreciation. But you cannot have a controlled and freely traded currency at the same time. China’s announcement is therefore a clear signal that China intends to let the renminbi float completely, at some unknown time within the relatively near future. This is precisely what our government and economists have been demanding for the last several years.

China has reasons for making this move, and not all of them are altruistic. If it keeps the renminbi artificially low, the dollar and Euro will stay artificially high, inflating the prices that Chinese must pay for food, manufactured products, components and raw materials from the US and EU, and distorting the global economy. High foreign currencies also would threaten to create financial bubbles in China itself, as wealthy foreigners and foreign corporations bought up assets cheaply in China, including prime real property.

If China kept the renminbi too low, the US and/or EU might go into economic collapse, with political implications resembling those of Germany’s Weimar Republic. Already the relatively mild economic pain that we Americans are suffering threatens to motivate a fascist takeover here. So China may be avoiding the risk of global destabilization, as the nation (ours) with history’s greatest stash of reliable nuclear weapons threatens to become ungovernable, belligerent and irrational. That is, China may be avoiding the mistake of Versailles.

It doesn’t matter much which are China’s real or primary motives. The mere fact of allowing the renminbi to float, if only in Hong Kong and here in the US, is a sort of economic Marshall Plan. It will allow our products to gain better traction in markets in China and stop, if not reverse, the drain of manufacturing jobs.

But that benefit will come at a price: making Chinese products, raw materials (such as rare-earth metals) and partial assemblies more expensive here. In making its decision, China appears to be relying on the views of our economic leaders, including Tim Geithner, Ben Bernancke and the President, that the first effect will outweigh the second and so will help to revive our economy and avoid the risk of a 1930s-style fascist takeover.

It is no coincidence that China made the announcement shortly before its President, Hu Jintao, is scheduled to visit Washington. It is also no coincidence, I believe, that the announcement came but days after the murders in Tucson.

From its own long and chaotic history, China is familiar with the spread of instability like a crack in a dinner plate. It knows how the assassination of a single archduke sparked World War I, which may have seen the most prolonged, utterly senseless carnage in human history. I believe in my bones that China’s leaders now fear a fascist takeover here and better understand the real risk of one than most of us do.

China is unlike us in many ways. Its leaders don’t boast, brag or congratulate themselves on the alleged perfection of their system, their economic victory, or the wisdom of their policies, as our leaders often do. They just let their actions speak for themselves.

But make no mistake about it. If China’s mini-economic Marshall Plan works as both we and China undoubtedly hope, it could usher in an era of global prosperity like nothing our species has yet seen. Then the only foreseeable threats to human happiness worldwide would be Islamist terrorism, global warming and the exhaustion of our oil supplies. If it fails, we could be seeing the prelude to a repeat of the last century, this time with nuclear weapons.

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