Financial Mutually Assured Destruction

Noam Scheiber has a fascinating article on Chinese worries about the U.S. budget deficit and American policymakers’ efforts to calm those fears. The piece doesn’t really point to a hard-and-fast conclusion about how to resolve the situation and that’s more or less the problem:

The day China consumes more, relies less on exports, and accumulates far fewer dollars as a result can’t come soon enough. There’s a certain mutually-assured-destruction quality to our current relationship — Larry Summers calls it the “balance of financial terror” — in which one false move by either side could bring down both economies, and probably the entire global financial system, too. This makes dialogue a necessity. But what it really does is make you pine for a way back from the edge.

As The Atlantic’s James Fallows has pointed out, even if both sides behave responsibly, there’s the persistent risk of miscalculation — or maybe a rumor that triggers a bond market sell-off China didn’t intend. During the cold war, the hotline Kennedy and Khrushchev established was genuinely stabilizing, but it would have been far more stabilizing had the United States and Soviet Union stopped training thousands of nuclear warheads at one another. If, to stick with the analogy, the U.S.­-China relationship is only in the early 1960s, then it’s going to be a long couple of decades indeed.

It strikes me that any rational person looking at how the health care debate has unfolded is going to grow substantially more skeptical about the ability of the United States to pass major legislation in general. What’s more, if you contrast the health care situation with the relative ease with which it was possible to enact debt-financed tax cuts (in 2001 and 2003) and a debt-financed increase in Medicare spending (in 2003) you’re not going to get super-optimistic about the prospects of deficit reducing legislation passing in the future.