China should be spending like a Keynesian.

Throughout the post second world war period, America’s economy played the role of a shock absorber to the global economy by being the spender of the last resort. Now, with the government and private American in debt, it is up to the savers of foreign currency reserve to spend.  (i put China in the title because they are the largest holder of foreign reserves.) These savers has been buying huge stockpiles of American debt partly for the purpose of keeping  their currency cheap to encourage Americans to buy their export. Its time to spend what they have saved by cashing in their American debt to buy American export.

Buying American Export will kill 2 birds with one stone. Since many savers are developing countries where there are many opportunities to gain productivity (and living standard) by investing and spending. The productivity gain alone can easily pay for the initial investment, result in few or no debt in the long run. This is lest true for developed countries that are already sitting on the technological frontier, and are thus at the inefficient end of diminishing return scale.

Buying American, will mean that the American government wont have to embrace the Keynesian option of trying to raise even more debt to spend their way of a recession, again. It will selectively boost America’s most competitive industry while reducing American debt and spread confident all around.

Why is there no sign of this happening? A lot of this has to do with the other rational for the build up of foreign reserves by the savers. Namely, to accumulate enough dollar to counter any excessive devaluation of their currency. In current crisis, the savers are even less likely to spend their savings, without which the savers would be vulnerable to currency fluctuation.

End game. In order for the savers to be comfortable enough to spend their savings, two things need to happen. (1)  a coordinated spending plan with the participation of all major dollar holders and (2) a guarantee to bail out in case of excessive currency devaluation by stronger and more independent IMF would be needed.

related stuff to read.
On liquidity crunch – “Baby-Sitting the Economy.”
On “The Causes and Consequences of the Economic Collapse“

UPDATE 090403: G-20 Leaders To Give $1 Trillion To IMF, World Bank

G-20 participants announced a tripling of loans available to the International Monetary Fund, to $750 billion, a $250 billion expansion in a special IMF fund to help members\’ foreign exchange reserves, and $250 billion to the IMF to support trade. They also agreed to sell IMF-held gold to poor countries.

Thats an okey amount of money, but the point is that they prove that they are willing to use IMF and WB and they are willing to put resources into it. However whether this will be enough to get the savers to start spending will depend a lot on how exactly this money will be use, and who will have power over it. I personally knows too little about the inner working of the IMF and WB to offer any insight.

UPDATE 090405: World Wad
A world currency is another way to eliminate currency shocks, naturally. SDR, if its rely upon more, it has a change to become a predecessor to a world currency, just like ECU is to Euro Lets hope so.

Taiwan strait gambits read Georgia carefully

The latest from the war in Georgia

For some background on the buildup to the conflict, click here, here, here, or here.

So lucky there is a strait between China and Taiwan.

Discourse on American hegemony and Asia-Pacific geopolitics.

After America, by Ian Buruma.

Every so often, a grand thesis captures the world’s imagination, at least until it is swept away by events or by a newer, more plausible thesis. The latest one to do so, in policy think tanks, universities, foreign ministries, corporate boardrooms, editorial offices, and international conference centers, is that America’s time of global dominance is finished, and that new powers, such as China, India, and Russia, are poised to take over. It’s an idea that has had as much currency within the United States as elsewhere.

All great empires set too much store by predictions of their imminent demise. Perhaps, as the Greek poet Constantine Cavafy suggested in his poem “Waiting for the Barbarians,” empires need the sense of peril to give them a reason to go on. Why spend so much money and effort if not to keep the barbarians at bay?

Read the rest.

After reading four long pages of Ian Buruma, one thing is certain – The discourse on the relevant issues has not change at all since the time I was an international relation graduate student in the year 2003.

A good read if you are not familiar with these issues, if you are, don’t bother.