ROBERT SIEGEL, Host:
By this time tomorrow, the U.S. trade deficit with China will increase by a billion dollars. We'll buy stuff from them, they'll mostly park our dollars in state-controlled institutions, and they'll use those dollars to buy U.S. treasury notes. That way, we can both buy more than we sell and have our government spend more than it brings in in taxes. The Chinese can buy a lot less than they could and save like mega scrooge instead. What's behind this strange symbiosis, this global trillion dollar codependency of the spender and the saver, cast each nation as an animal and it could be written by Aesop?
Since he's not available, we're asking James Fallows about it instead. He lives in China nowadays and he writes for the Atlantic Monthly. Welcome.
JAMES FALLOWS: Thank you. I'm approximately as old as Aesop, so I'm glad to be here.
SIEGEL: In the January-February issue of the Atlantic, you write an article called "The $1.4 trillion question: What do we owe China?" And the first question is, when some Chinese enterprise sells some widgets at Wal-Mart and the latest wad of dollars go overseas, who gets to decide where to spend the money?
FALLOWS: The crucial decision actually is made by the Chinese government. And much of the Chinese economy is now uncontrolled. But this basic decision of what happens with all the dough they're taking in from us is still under government control. And in essence, what happens is you spend that dollar at Wal-Mart or CVS, they contract with their supplier in China for certain amount of things in dollars. But the Chinese subcontractor can't use dollars in this normal life. They have to use renminbi, the Chinese currency. So they trade it in the local bank and that's where the control takes over.
But in many real economies, banks would just be able to do whatever they want with this. They could exchange it for dollars, they could use it overseas. But the Chinese government is in control of the exchange system, and that's how they're able to decide how much they'll send back to us, how much they'll meter out for the domestic uses, et cetera.
SIEGEL: So what the Chinese do with all these dollars they're making is not a market-driven decision by millions of Chinese entrepreneurs. This is national Chinese policy?
FALLOWS: Correct. Now, if you look at the Chinese economy as whole, it is seeding more of its total output probably than ever - any economy ever has before. It's roughly half of the total output of China is not consumed by Chinese people. And that's not because individual Chinese families are not wanting more things or more clothes or more cars or bigger apartments. It's because the way the Chinese central government manages the big inflow of foreign currency is a crucial decision to send it back, you know, for foreign investments, largely in the U.S.
SIEGEL: Let's examine that decision, because it's sort of easy, if not very flattering, to understand what's in this relationship for us, we Americans. In effect, we get to live on credit. We get - as a people, we get to live beyond our means off it. What's in it for China to have its people live effectively below their means?
FALLOWS: Oh, there are essentially, two, you know, wildly problems of China being sort of constrained in this way are obvious if you see the poverty of many people in China. There are two problems the government considers worst that they avoid. One is, what it could do what most countries would do is simply exchange the money on the open currency market. That would dramatically raise the value of the Chinese currency versus the U.S. dollar. And in the long run, that wouldn't destroy China's export economy, but it would change things.
The factories would be disrupted. They'd have to move to different parts of the country. So they don't want to leave it to the free currency exchange and they don't want to spend much more than they are internally in China, because they feel as if the domestic economy is right on the borderline between growing faster than any economy has and having sort of Weimar Republic inflation.
You know, inflation is the great bogeyman that people in the Chinese government are afraid of. And so, since both of those problems seem worst to them than having constraint in Chinese consumers, they solved the problem by parking it in U.S. assets even though those dwindle year by year in value compared to Chinese currency.
SIEGEL: Thereby take the bump side of the business cycle that might otherwise effect economy.
SIEGEL: How long can this go on? I mean, it's in the U.S. interest, I suppose, to buy more things. But is there some obvious limit to this cycle?
FALLOWS: Well, it's one of these situations that - I quote Lawrence Summers, a former Harvard president and Treasury secretary, saying this is sort of like the nuclear balance during the Cold War. That as long as it goes on, it goes on. And each country does fine. In the nuclear era, what kept the United States and Soviet Union under control is the knowledge that if they attack the other, they'd be destroying themselves. Something similar, in a way, applies between China and the U.S. now where each has the power to profoundly hurt the others' economy.
The way China would be hurt is if it stops sending us dollars is that all the assets it has now in dollars would become worth much less to a fall of the dollar. So as long as there's no extrinsic shock to the system, it can go on for a while. The things that might change it are some shock that we can't foresee. You know, policy disagreement over Taiwan or some strain inside China where people there think, wait a minute, we need more of our own money because we're getting older, because we need more sewers, we need more of the stuff that China doesn't have. And so it's been stable month by month, but it looks unstable in the long run. I just can't say exactly when.
SIEGEL: Well, James Fallows, thanks for spending a part of your home leave with us.
FALLOWS: My pleasure, thank you.
SIEGEL: That's James Fallows of the Atlantic Monthly whose article in the January/February issue is titled "The $1.4 Trillion Dollar Question." Well, where's it at right now?
FALLOWS: Yes. The way the stat shows, it's now $1.53 trillion and going up a billion a day.
SIEGEL: Thanks a lot.
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