Thank God for small favors: somebody finally disciplining the US on debt

ARTICLE: "Peking Over Our Shoulder: Our Chinese shareholders get nosy," by Noam Scheiber, The New Republic, 23 September 2009.

Piece starts with descriptions of the recent strat and econ dialogue.

The thrust of the piece:

For decades, while the United States has prodded China on any number of internal issues, the reverse has rarely been true, except for the vaguest exhortations. The notion that we might take advice from a developing country--even one as large and rapidly industrializing as China--would have been a blow to our self-image, at least if it weren't so laughable. Within a few short years, though, Washington has come face to face with a daunting new reality: Not only are the Chinese raising questions about our domestic policies, but we suddenly have to listen. "The U.S. had all the answers once upon a time," says a senior administration official. "But China's not the apprentice anymore."

The New Core sets the new rules.

The great fear in China, reflected in a recent bestselling economic conspiracy book, is that we run up all this debt and then simply allow inflation to take care of the rest.

The good news: "Still, on balance, the bureaucratic class in China has fairly nuanced views of U.S.-China financial relations."

Hmmm, that makes one of us.

The truth: Americans hold the majority of U.S. debt, so don't expect them to allow any inflationary escape.

The Chinese also found Bernanke's rescue to be completely logical.

I will attest to that as well, based on interactions.

The Chinese actually like to compare our response with theirs, as if we're the only two adults in the room (which I kind of like).

Another key point we see more and more: don't underestimate how constrained the Chinese leadership feels when it comes to respecting popular anger. Thus the reliance on the tool of calculated outbursts that we've seen with Wen and Hu in recent years. Northwestern's Victor Shih (who's most excellent): "Their room to maneuver is constrained by public opinion."

Interesting factoid: Geithner studied Chinese at Peking U in the early 1980s--junior year abroad. Very cool.

Great line from Geithner interview: never presume to understand China's self-interest better than the Chinese themselves, which he calls a "ridiculous conceit."

I couldn't agree more. You can argue and cajole and play provocateur with your visions, but expecting the Chinese to be anything but Chinese is a complete waste of time. They will change and evolve as they see fit. You simply have to trust everybody to be exactly who they are--my favorite interpersonal principle after the Golden Rule.

The key, according to Geithner:

You have to assume they know where their interests lie, and you have to figure out where the constraints are [as a result]--to try to make it compelling to them.

I know a lot of people can't stand Geithner, but I've always liked him a lot and admired his thinking, and I'm very happy he survived his baptism by fire, because he seems such a good fit with Obama. I know Geithner's younger brother, Jonathan, from my days at CNA and he's very similar--a very straightforward and self-aware sort of intelligence that's inherently trustworthy.

The piece then explores the sales job by Peter Orzag and Geithner at the dialogue regarding the Obama administration's commitment to deficit reduction. Geithner: "My basic approach is to make sure there's no way they're going to care about this stuff more than we do."

That's a huge point, because the Chinese officials have to go back and defend their dollar holdings.

The dialogue was barely covered in the U.S., but it was a big deal in the Chinese media (yet another example of how badly served we are by our TV-dominated media).

Good list to remember at the end: why the Chinese save so freakishly is because "consumer credit is scarce, insurance is rudimentary, and their social infrastructure is threadbare." Very elegant description.

Great piece overall. Pound for pound, full of good analysis.