Volker says China's rise highlights U.S. decline

“You cannot be dependent upon these countries for three to four trillion dollars of your debt and think that they’re going to be passive observers of whatever you do.” -Paul Volker

It’s amazing to think that Paul Volker, one of the most revered economic figures of recent times, simply does not understand macroeconomics.

China’s holdings of U.S. Treasuries are are reflection of the cost, in dollars, that it took to suppress their currency, along with the wages and living standards of their own citizens, in order to support a largely export-driven growth model. If China did not want to accumulate dollars it did not have to create real assets (goods) and export them to Americans in exchange for the dollar. It had to have been their desire to “net save” in the U.S. currency or else they wouldn’t have done it. They could have just as easily boosted domestic investment and implemented policies to increase wages and consumption and grown output and employment in that fashion. For whatever reason, they chose not to.

However, China is going down this path now, not because they want to, necessarily, but because they see the United States as no longer willing to sustain output and employment at sufficient levels to maintain their own export product. Perhaps it’s because we have policy makers like Paul Volker.

Bottom line: with people like Volker fashioning U.S. policy, it's better to invest in China. Get my China Report here.