He also says, as do many others, that the main impact of the falling dollar will be in Europe. ("An unequivocal loser is Europe, which has been hoping for an export-led fix to its own, largely self-inflicted, mass unemployment. The Europeans can forget about that.")
In an interview, Galbraith expanded upon this article (TomPaine.com: James K. Galbraith reflections on the falling US dollar.) He says that in depending on foreigners to finance the US debt, the US is, in effect, asking them to endorse the war in Iraq and other US foreign policy. They are very unlikely to do this indefinitely. ("[We in America] must turn away from our present over-reliance on armed forces and private bankers, far away from the fantasy of self-serving dominance for which, the markets are clearly telling us, the world will not agree to pay.") The risks of the current US position are great: "The rising unpredictability of US policy - including foreign policy - doesn't help. If one major player gets wind that others may dump, then the urge to join in becomes hard to resist. This is exactly analogous to an old-fashioned stock panic or run on the bank."
His main solutions to the current unstable and dangerous situation are interesting: (1) Abandon floating exchange rates and go back to the gold standard and (2) Stimulate consumption in third-world countries. On the first, he points to the success of the Chinese in pagging their currency to the dollar. On the second, he says: "We need an industrial strategy based on technological leadership, collective security, and smart use of the world's resources. The financial counterpart must be a new source of liquidity for many developing countries, permitting them to step up their imports, and correspondingly our exports and employment. This will probably require a new network of regional regulatory agents, empowered to enforce capital control and to take responsibility for successful development strategies among their members."
There are interesting parallels between what Galbraith says and the Chinese government says. The People's Daily Online has an interview with Chong Quan, spokesman of the Chinese Ministry of Commerce, in which Chong Quan addresses both the exchange rate and foreign investment issues. See How to look at the breakthrough of trillion US Dollars in China's foreign trade?. Regarding Galbraith's first solution, he says pegging the Chinese currency to the dollar has served the country well. It's huge accumulation of dollars gives it protection against the instablility generated by currency speculators and generally "resisting the economic risk from without." On foreign investment he says that China is now a major investor in foreign countries and its investments are growing.
Chong Quan's remarks also point out that China can realistically expect eventually to displace the US as the dominant world economy. He says the "World Investment Report 2004" of the UN Trade and Development Conference declares "China has at present become one of the two engines for the growth of the world economy." China currently has a huge volume of imports and exports amounting to one trillion dollars. It plans to invest heavily in science and technology and improve both its industrial efficiency and business acumen (management proficiency). It's goal is to develop products under Chinese patents that are high-quality and that involve high levels of technological sophistication. It wants to have its own distribution networks. It wants Chinese businesses to compete effectively with multi-national corporations.
So, it may be tough luck for the Chinese to have to do most of the work to (in effect) sustain the American economy as the dollar continues to fall in value, but in the long run it's reasonable to predict that the balance of power will shift their way as the Chinese economy continues to grow.
In this context, there's a nice article in today's Washington Post about a Chinese manufacturing plant being set up in Hungary to produce TV sets for the European market. It describes foreign investment by the Chinese and the Chinese quest for innovation and making products for which consumers will pay a premium price. Here's some of the article:
China's role as a global manufacturing center is well-established, but the scene here in western Hungary highlights the even grander plans of the country's largest companies. Urged on by China's government and armed with credit from state-owned banks and stock market listings, many are going global in a bid to gain scale, tap new markets and transform themselves into brands that can challenge the world's preeminent logos.
Chinese computer-maker Lenovo's purchase of International Business Machines Corp.'s personal computer business is only the most recent and high-profile example of a strategy being pursued by energy and consumer goods companies, as well as by high-tech firms. The appliance maker Haier has a refrigerator factory in South Carolina and distributes its goods through a deal with Wal-Mart Stores Inc. The telecommunications equipment-maker Huawei operates sales offices worldwide, carving into the margins of Cisco Systems Inc. and Nortel Networks Ltd. Chinese energy companies have bought controlling stakes in oil patches from Indonesia to Sudan; China's largest steel-maker, Baoshan Iron and Steel, has bought into iron ore mines in Brazil to ensure reliable supply, and is part of a consortium seeking control of Canada's largest mining firm, Noranda Inc.
The country is no newcomer to global acquisitions. It has looked outside its borders in the past, particularly for natural resources. But now the focus has broadened in scope and shifted to establishing China's most prominent companies as competitors in their own right, not simply low-cost suppliers to the rest of the world.
Since 2000, acquisitions of foreign assets by mainland China-based companies have climbed from a $344 million to an estimated $4 billion to $5 billion this year, with another $14 billion anticipated next year
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