When President Obama travels in Asia in the coming week, he will find a region whose healthy economic growth is being targeted by American companies such as General Electric, Ford and Intel. Politically, Obama will largely find his hosts looking to counterbalance China’s growing influence and welcoming more U.S. involvement.
Yet can the U.S., facing very large budget and trade deficits, a weakening currency and a divided government at home, afford that role? What are some of the risks ahead for the U.S vis-à-vis China and Asia? We talked to long-time risk consultant Robert Broadfoot, managing director of Political & Economic Risk Consultancy of Hong Kong. Excerpts from the interview in Shanghai follow.
Q. What are some of the risks facing the U.S. as the dollar depreciates against Asian currencies?
A. The biggest risk to the U.S., longer term, is that the U.S. is thinking in economic terms for the dollar. The U.S. somehow believes that China and other countries would be so badly hurt by not investing further assets into U.S. Treasury bills that they couldn’t conceive of doing otherwise. The U.S. somehow thinks that you can use the easy printing of money to help the U.S. get through its problems without downside risks. The U.S. somehow thinks its problems are encapsulated in a Chinese RMB that is too tied to the dollar. They don’t recognize that the essence of the U.S. problem is domestic in the United States.
So what you wind up with is the U.S. going through a period (when) they no longer have the money to project their power as they would like to project it. It’s not simply that the U.S. economy is weaker, but that the U.S. will not be able to assert its international points of view, like in Iraq and Iran. You have Mrs. Clinton who says, “We have an interest in the islands of East Asia.” Well, it’s one thing to have an interest; it’s another to have the financial capability to support that. If your general public won’t allow you to go on that type of a spending program to support those policies, you can’t do those policies.
The U.S. then becomes a much weaker international country because it can talk big, but really can’t support that talk with the actions because it’s too poor of a country to do so.
There’s also some risk that (with) the dollar weakening and Asian currencies strengthening, Asian demand for a lot of commodities picks up because real purchasing power is going up. Actually, there is a risk of inflation there that is being understated.
Q. Can you elaborate on that?
A. The fact is that if China really wanted to make the U.S. look bad, there are two scenarios. One is that the U.S. says, “We think you should appreciate (your) currency because you’re causing our problems.” And China then says, “Okay, we’ll do what you say. Because Washington pressured us, we’re going to allow our currency to go to 5:1.”
Now what would happen overnight is the cost of oil, iron ore and coal for China in local currency terms would go down. China’s demand for these international commodities, therefore, goes up. So you get inflation in oil, inflation in coal, and inflation in food, in U.S. dollar terms. So you have the United States with a 10% inflation rate of commodity prices because China did what the U.S. wanted on the exchange rate. How will that fly in Washington? Are you going to blame China for allowing the currency to appreciate?
(The second scenario is:) If China continues to ignore (the U.S.) and does what it wants with its currency so it can demonstrate to the Chinese people that “I just don’t do necessarily what the US says; we’re doing our policy for Chinese interest” -- if China continues with that approach, the U.S. continues to print money, and the U.S. insists on maintaining a low interest rate to stimulate the economy, then you can have a situation where the U.S. deficit continues to grow, and sooner or later that will have repercussions on other countries’ willingness to put more assets in the U.S.
So all of the sudden, U.S. interest rates may then go up because people won’t give them money. What happens to the U.S. economy then? It gets into, potentially, a recession. Then China (could say,) “All right, let’s revalue.” So you have the U.S. in recession, and you get surging commodity prices. You get the U.S. with a double whammy: surging commodity prices and rising local interest rates. It goes from a first-rate power to a third-rate power in a very short period of time.
