The failure of bank-driven U.S. international supposed free enterprise

America is suffering from severe inflation in the price of imported oil and other goods, but that is primarily caused by the collapse of the dollar on the international currency markets. And why is that? Look at first the ridiculous deficit the Bush administration has run up by a combination of tax cuts and excessive spending. But then look at the way American banking is presumed to be the only competitive international industry, and so productive enterprises are sacrificed internationally to make deals for American banks in China and other nations.

Treasury Secretary Paulson meets with Chinese counterparts negotiators this week in Annapolis. The meeting is called the Strategic Economic Dialogue. The subject will be the way the Chinese government has pegged the renminbi to the dollar at a level that makes the dollar overvalued and forces the export of American production jobs to China. The Bush administration has been willing to trade greater banking trade with China for that loss of American production jobs.

As Annapolis will once more demonstrate, U.S. policy toward China is simply befuddled. The problem is that while the Chinese have a clear economic strategy, the U.S. global strategy is the byproduct of corporate lobbies and Wall Street political muscle.

The Chinese routinely flout the rules of the global marketplace, but under the Clinton administration, the U.S.—driven by companies eager to set up shop in China and bankers eager to cut the deals—gave China permanent most-favored-nation trading status and then let them into the World Trade Organization without insisting on reforms or setting up decent enforcement mechanisms for standards everyone knew the Chinese did not and would not follow. About the only thing the U.S. pushed for in the negotiations was to try to open up Chinese financial markets to U.S. banks, a clear reflection of a trade policy that, in Illinois Sen. Barack Obama's words, has been made for "Wall Street, not Main Street."

It isn't clear how long the old game can last. The dollar has lost about half its value to the Euro, and U.S. exports are beginning to rise. But the Chinese (and the Japanese) have pegged their currencies to the dollar and not allowed a similar adjustment (The Chinese have allowed the renminbi to rise only about 20 percent to the dollar since 2005). The result is that the U.S. trade deficits with China keep rising; the Chinese keep pocketing more and more dollars. The Chinese are importing inflation that is ever more difficult to control. And the U.S. is exporting manufacturing jobs, and now service jobs, generating a backlash against trade generally that could grow much uglier.

What America needs is a clear strategy to sustain its middle class in a global economy that has just integrated over 2 billion workers in China, India and the former Soviet Union.

NOte that statement - "What America needs is a clear strategy to sustain its middle class in a global economy that has just integrated over 2 billion workers in China, India and the former Soviet Union." So why doesn't America have such a strategy?

Because the bankers and the conservatives believe that the government should not interfere in markets. China is under no such restriction, so America is walking into a gunfight unarmed. Individual American banks cannot effectively counter such a national government strategy from China.

To eliminate the export of American production jobs the American government has to deal with the Chinese government from a coherent strategic position. At the moment the only "strategy" is to depend on the Dollar as the world's reserve currency. Unfortunately, that is rapidly disappearing as the price of oil in dollars climbs to the stratosphere.

As Annapolis will once more demonstrate, U.S. policy toward China is simply befuddled. The problem is that while the Chinese have a clear economic strategy, the U.S. global strategy is the byproduct of corporate lobbies and Wall Street political muscle.

The Chinese routinely flout the rules of the global marketplace, but under the Clinton administration, the U.S.—driven by companies eager to set up shop in China and bankers eager to cut the deals—gave China permanent most-favored-nation trading status and then let them into the World Trade Organization without insisting on reforms or setting up decent enforcement mechanisms for standards everyone knew the Chinese did not and would not follow. About the only thing the U.S. pushed for in the negotiations was to try to open up Chinese financial markets to U.S. banks, a clear reflection of a trade policy that, in Illinois Sen. Barack Obama's words, has been made for "Wall Street, not Main Street."

It isn't clear how long the old game can last. The dollar has lost about half its value to the Euro, and U.S. exports are beginning to rise. But the Chinese (and the Japanese) have pegged their currencies to the dollar and not allowed a similar adjustment (The Chinese have allowed the renminbi to rise only about 20 percent to the dollar since 2005). The result is that the U.S. trade deficits with China keep rising; the Chinese keep pocketing more and more dollars. The Chinese are importing inflation that is ever more difficult to control. And the U.S. is exporting manufacturing jobs, and now service jobs, generating a backlash against trade generally that could grow much uglier.

What America needs is a clear strategy to sustain its middle class in a global economy that has just integrated over 2 billion workers in China, India and the former Soviet Union.

Such a strategy is anethema to the conservatives and Republicans. First they believe that all economics is based on individual-level transaction decisions which are not affected by larger economic and social trends and pressures. Second they do not believe that government is competent to develop and implement such strategies. Both ideas are mostly false.

How can America benefit from the expanded trade and opportunity of a global economy, while avoiding a race to the bottom that erodes the American middle class that is the pride and the foundation of our democracy? How do we balance our relationship with China, even while engaging that country to join in the effort to address global warming? These are far more fundamental challenges to our security than the threat posed by the scattered extremists of al Qaeda.

These are NOT challenges that the so-called free market of individual American players can deal with. There desperately needs to be an American strategy for dealing with international trade while defending our middle class.