Of Trade Deficits And Capital Surpluses

In the middle of 2020, foreign investors owned a little more than $13 trillion more of US assets (stocks, bonds, and brick-and-mortar) than Americans owned of foreign assets. It is the other side of chronic current account deficits, the broad measure of trade. By this measure, the US is the world's largest debtor. It spurs much teeth-gnashing angst for reformists of all stripes.  

Not so fast, says Michael Pettis and Matthew Klein in their book, "Trade Wars are Class Wars." They tell us that the problem is not that the US lives beyond its means, but other countries, especially Germany and China, suppress domestic-demand and buy US financial assets instead of US goods. It produces an overvalued dollar that aggravates the trade imbalance and spurs financial crisis. 

The book is another contribution to the literary genre that externalizes America's problems and blames others for the US's challenges. The genotype can be traced to the founding of the country. Some historians have even suggested that US slavery was commercially successful and sustainable because of the UK's demand for cotton. In this vein, the American Civil War is understood as the third war for independence from Great Britain. And we thought Brexit was a drawn-out affair.  

Whether in the great game of international relations or our personal lives, blaming others generates heat but not much light. It may assuage the ego, but the course of action that follows is suspect. On a personal level, blaming the other produces resistance and defensive formations. Psychologists do not recommend such a course. One is encouraged to take responsibility and change the things within ourselves, rather than lecture the other on what s/he should be doing. In international relations blaming others for harm is the fodder of wars, cold and hot. The US is among the richest and most powerful countries in the world. The gap between it and the rest of the world has been reduced. Still, in absolute terms, the US economy had never been bigger than on the eve of the pandemic, and unemployment and underemployment were the lowest in a generation. The cloak of victimhood does not rest easily on the US shoulders.  

Klein and Pettis seek to reverse centuries of precedent driven by realpolitik. The burden of the adjustment process falls to the debtor, not the creditor. This was a critical issue at Bretton Woods, for example. Keynes defended the interests of the debtors. He famously lost to Harry Dexter White, the US chief negotiator who defended creditors, chiefly America.  

Now that the US is a net debtor and a seemingly ever-increasing one, its stance must change, and the authors provide the narrative. They complain of the injustice of the creditors, i.e. creditor countries suppress domestic demand, export their surplus, and recycle the proceeds into the US dollar and Treasuries, creating an overvalued dollar and low-interest rates, which spur serial financial bubbles.    

The book ends with an endorsement of Keynes' bancor. At the Jackson Hole confab in August 2019, former Bank of Canada and Bank of England Governor Mark Carney resurrected Keynes' bancor and modernized it to propose a digital reserve asset backed by the major countries to supplant the dollar, and claimed in America's heartland that the greenback was a "destabilizing" force. It is splendidly politically naive. What made Bretton Woods possible was most certainly not a kumbaya moment. Rather, it was the asymmetries of power that allowed the hegemon to insist on new rules of engagement and the construction of post-war institutions that embodied its interests as the chief creditor. 

It is like Aesop's fable about mice being terrorized by a cat. The mice have a town hall meeting to look for a solution. After much debate, one mouse shared a brilliant idea."Let's tie a bell around the cat's neck, and whenever it was nearby, we would hear it."The proposal was met with much favor and applause until a volunteer was sought to tie the bell to the cat.  

The many Americans who still feel uncomfortable with the idea of classes can rest assured that the class war that the title refers to is not so much a US phenomenon as it is about German and Chinese society. Indeed, the authors do not even take up the United States proper until chapter 6 ("The American Exception The Exorbitant Burden and the Persistent Deficit") three-quarters of the way through the text. Even then, there is little analysis of US society. It is mostly devoted to capital market developments. Indeed one learns more about the credit booms of the 1820s and the financial crisis of 1873 and how China wrestles with the excesses of its rapid modernization that has seen per capita GDP increase by more than eight-fold in a generation than about the class antagonisms in the US. 

Despite the rave reviews, the absence of two words captures my broader argument. Gini, which is a measure of income disparity, and Reagan, the US 40th President who presided over the shift from current account surplus to deficit, are completely missing. The "class wars" in the title is a form of click-bait. The authors are not really interested in-class analysis of German, Chinese, or American society. They do not look at the disparities of income, wealth, or power. Practically no time or effort is spent on analyzing the institutional strength of labor or capital. There is no assessment of unionization or strike activity or mass demonstrations.  

From reading Pettis and Klein, one would never know that medium and large German businesses must have labor representatives on their supervisory boards (up to half, which are responsible for strategic decisions include investment and senior hiring decisions, are elected by workers). Unheard of in the US, German workers also elect representatives to "work councils" that deal with the day-to-day decisions, like overtime pay, major layoffs, and evaluation. Surely this would be included in a serious analysis of German class relations.  

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Read more by Marc on his site Marc to Market.

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