If you need to know where we are, it is not 1930, despite what the establishment thinks; but the mid-1920’s. That decade of surges and downturns, last minute deals, and the desperate attempts to hold on to a world order that is slipping through the fingers of those who had inherited it. In 1925, the United Kingdom, then the hegemonic power on the planet, attempted to rescue the old pricing system within a revised gold standard. It seemed to work.
However, what really happened was a rescue of the very social system that had careened into "The Great War;" and then walked away afterwards, convinced that it had been a temporary aberration, a series of unfortunate events.
The recent uprisings in the Uighar area of China might be dismissed as being ethnic friction; however, the following story is not so easy to dismiss:
The privatisation of a state steel company has been scrapped after an executive was beaten to death by workers angry at the threat to their jobs from a takeover of their firm, according to a Hong Kong rights group.
The violent riot in north-east China late last week involved up to 30,000 workers, a reminder of the ongoing sensitivity about lay-offs from state firms in industries targeted for consolidation.
The government laid off about 50m workers in state enterprises in the 1990s, equal to the combined workforces of Italy and France at the time, but many firms still retain bloated staffing rosters.
The problem that China has is that it has three economies. One is the gleaming export economy that produces 50% of Chinese GDP, the other is the old state economy that provides support and infrastructure for that economy, and then there is a vast subsistence economy. The outside world wants to buy up assets that the first world Chinese economy wants, and it would support a Yuan that is much stronger than the value of the currency today; that is, they want to buy up the state sector factories, and turn them into private sector export factories. However, that means layoffs and loss of control. China has controlled this change very carefully, not wanting to be Thatcherized. But it cannot slow it too much, because the ability to support and develop the third world economy of China requires as much of the economy to be upgraded as quickly as possible. The complex bureaucratic language of China has meant mixed signals, where executives have been welcomed in, and then sometimes charged with crimes.
China’s course through this downturn is to attempt to spur its own domestic economy, and catch the people who fall out of the second world employment sector by putting them to work making roads and other accoutrements of the new China. It means disruption and dislocation, and hence, unrest.
On Monday, the next round of the Strategic and Economic Dialog [SED] begins with the US wanting to do two things: press for China to open markets, and open assets to US investment; which, not coincidentally, will strengthen the Yuan. It needs to do this without China slowing its pace of buying dollar instruments. China is sitting on its own powder keg: it must develop and balance the three economies. It wants access to strategic assets and entry into the top ranks of nations. Already the SED is being dubbed the "G-2," and is recognized as the key economic détente. This has spurred concern, even jealousy, on the part of US allies. China’s growth has lead India to seek military as well as economic countermeasures.
The reality is that China is playing a weak hand with a very long suit: it is the global engine of both disinflation and support for the dollar. In a sense it is playing part of the role the US did in the 1920’s, offering the great future of industrial growth and investment magnet, as well as the financial last line of support. In 1925, the hegemonic power set its economic course on self-destruct and was propped up by the American ability to lend. The financial powers that we have become convinced that they can do now what was failed then: bailout the old order without causing an implosion. Back slaps all around for "the Great Preventer" and the claim that they have averted Great Depression 2.0.
But this presumes that this was the physical crisis, as opposed to the paper crisis. It also supposes that China will be more able to navigate complexity for which it is not politically ready, than the US could in the 1918-1932 period. Both assumptions are questionable, and not in line with either qualitative or quantitative measures.
The crisis began in 1997; and has not, in any real sense, abated since then. China and the US are very far from treating each other in a manner which will produce the close coordination required to avert a next, deeper, crisis.