Stephen Roach Speaks Out On American Dependency On China

The Sino-American Codependency Trap

Increasingly reliant on each other for sustainable economic growth, the United States and China have fallen into a classic codependency trap, bristling at changes in the rules of engagement. The symptoms of this insidious pathology were on clear display during Chinese President Xi Jinping’s recent visit to America. Little was accomplished, and the path ahead remains treacherous.

Codependency between America and China was born in the late 1970s, when the US was in the grips of wrenching stagflation, and the Chinese economy was in shambles following the Cultural Revolution. Both countries needed new recipes for revival and growth, and turned to each other in a marriage of convenience. China provided cheap goods that enabled income-constrained American consumers to make ends meet, and the US provided the external demand that underpinned Deng Xiaoping’s export-led growth strategy.

Over the years, this arrangement morphed into a deeper relationship. Lacking in saving and wanting to grow, the US relied increasingly on China’s vast reservoir of surplus saving to make ends meet. Anchoring its currency to the dollar, the Chinese built up a huge stake in US Treasuries, which helped America fund record budget deficits.

America provided China with both stability and growth anchors. China enabled the US to sidestep the mounting perils of subpar saving, reckless fiscal policy, and weak household income growth.

But economic codependency is as unstable as human codependency. One partner eventually changes, while the other is left hanging, feeling scorned.

China is now changing, and America doesn’t like it. 

My view: 

Stephen Roach hits the proverbial nail on the head in this article.  

The unhealthy relationship between China and the United States has become toxic.

Spending at all levels in the US; personal, corporate, and government has grown at unsustainable levels for probably 40 years.

While the US appears economically strong, much of that perception is due to debt fueled American consumption.

As Jim Grant pointed out succinctly in a recent interview, debt pushes forward consumption of goods and services and pushes back recognition of business failure.

The present economy in both the US and Canada, is so leveraged up that the necessary deleveraging will be both painful and destabilizing.

We could use an axiom of Grant's theorem on debt and say that as debt deleverages through default and sale of assets to liquidate it, consumption of goods is pushed backward.

This is the problem the Federal Reserve faces with its intended interest rate hikes.  If it hikes rates, consumers are hit and the economy goes backwards.  If it hikes, the US dollar goes up and the already subpar level of exports goes down also driving the economy backward.

So the Fed is trapped.  It can not lower rates that are already near zero.  And it can't raise rates in a fragile environment.

While a token rate hike is possible for political cover at some point, the fundamentals point toward QE4 over the intermediate term in an effort to maintain the unsustainable status quo.