Yesterday (Monday October 18th) I watched an old friend and very wise man, Jack Wadsworth, interviewed on Bloomberg TV on the subject of China – its currency, economy and relations with the US.
I have known Jack since he was running Asia for Morgan Stanley in the mid and late 90s. I first saw him at a party for clients and was struck by the thought that if a war started and we all had to join the Navy and Jack had command of a vessel, I would want to serve on it. (I still feel that way.) Jack has run his own venture capital firm that has started about 30 new companies in China in the last half decade. He knows whereof he speaks.
On Bloomberg he had the same air of quiet composure, concern, confidence and good humor that always seems to characterize him. He did his best to persuade his interviewer that the real issue is not whether China adjusts her currency upward as Americans and their politicians would like, but whether America recognizes a labor rate differential in the world that requires our adjustment.
The idea is pretty straightforward – if a country competitor has labor rates that are roughly one-tenth of yours, you have a problem. Their currency adjustment alone is not going to fix it. You have to address it.
I listened to Jack trying patiently to explain this in the mini-bites of information that modern television news coverage allows. I have been involved with Jack in numerous meetings to discuss this issue: how the US-China dynamic should concern all of us, because if it goes off the rails, we (the world economy) all go together.
With U.S. mid-term elections approaching, a rising political theme is that China has to do something about its currency in our favor, and then somehow things will be different, better, “fixed.” Most troubling is the ring of 1930s protectionism implied – or actively expressed – if “they” don’t do what we want.
Jack’s quiet message – though I doubt it was heard through the veil of “tell me a happy truth that makes us feel better” – was simply that China cannot solve our problem. Its currency may be 5-10% undervalued, but we have a 10-1 imbalance to consider.
I would feel encouraged if I thought the American body politic can face this music and begin to dance together, but I do not. The Obama administration, public employee unions, the unemployed, Tea Party activists etc are not likely to come together with an attitude of “America has a problem that it must fix.” Wall Street and those profiting from currency market machinations could care less, as they will win no matter who loses. (Okay, some may lose there, but not the ones who should.)
Rather, we will seek outside causes for our ills and play a blame game as further difficulties come home to roost. The Greeks protest austerity. The French strike to defend their retirement age. And the US will find its own ways to defend the status quo. I predict we will look to others to blame instead of into the mirror, failing to consider that we have seen the enemy and it isn’t “them.”
What does that mean? Our currency will keep getting weaker, unemployment will remain at these levels or worsen, stock and currency markets will continue to fluctuate, and the hole the US has been digging will deepen, the reckoning yet to come.
View the clip of Jack Wadsworth speaking about China on Bloomberg here.