We are steadily but surely moving towards a period of trade wars and protectionism. With the Senate approving a Bill last month to punish China for holding down its currency, Sino-US tensions have moved up by a few notches. US President Barack Obama has repeatedly criticised China — most recently at the APEC summit in Honolulu — for currency policies that he says have a distorting effect on the global economy.

But holding China chiefly responsible for US unemployment and debt amounts to glossing over structural imbalances in the US economy.

EFFECTS OF BAILOUTS

It's not Chinese policies, but the policies of the US itself that are responsible the nation's huge indebtedness, joblessness and high Current Account Deficits (CAD).

Ever since the 1980s, the US financial sector has been in trouble for some reason or the other, be it the tequila crisis, LTCM, Asian crisis, the sub-prime crisis and now, of course, the sovereign debt crisis.

And each time, the response of the US government (in fact, most Western governments for that matter) has been pretty predictable; transferring of the bank's bad debts onto its own balance-sheet, thereby increasing the sovereign debt load and the central bank happily monetising a part of it.

The problem with printing money and issuing sovereign guarantees is that these measures never increase the wealth of the society; money is a store of value for an individual, but for the society as a whole, it is just a medium to transfer wealth from one person to the other, or more generally, from one sector of the economy to another.

As a result of the government's and central bank's fire-fighting exercises during the last three decades, whenever the financial sector was saved, capital was transferred from the manufacturing and other productive sectors of the US economy and given to the financial sector. As the graphs point out, thanks to government bailouts and Fed money printing, the bloated financial sector sucked out resources from every other sector of the economy, especially the manufacturing sector.

CHINA, THE SAVIOUR

Even here, a large part of what is actually accounted for as the contribution of financial sector to the US GDP is the non-productive activity of flipping around assets and derivatives, and generating a fee income.

One can only fathom the magnitude of the numbers, considering the $ 700 trillion market, with a daily turnover of as much as $40 trillion (globally). In contrast to the contribution that the financial sector makes to the US economy, its contribution to job creation has been paltry, to say the least.

Had all these dollars that were generated to save the defunct financial sector been bottled up inside the US, the CPI levels would have exploded; instead it was because China came to its rescue by happily servicing the US citizens with cheaper goods, due to its lower labour cost and cheaper currency, that the US was able to maintain its mojo.

The symbiotic relationship, wherein the Chinese sold their goods and services for US dollars and then recycled them back to US by buying up US treasury bonds, is what gave the US government the ability to run its various social welfare programmes, and, of course, save the banks every now and then.

Post-2007, with the bailouts having become bigger, the fiscal deficits have outgrown the current account deficits.

It's not the weaker Chinese yuan that is the reason for US woes; the trouble lies with the government and the Fed “put” on the US financial sector that has led to serious misallocation of capital.

In fact, the bloated financial sector has taken away productive jobs but has still not managed to completely take away the purchasing power from the US citizens, thereby draining the vitality of the average US household. Therefore, to harp on the cheaper yuan is to turn a blind eye to the infirmities in the US system.

If a Bill is required to be passed in the US Senate, it is not against the Chinese currency manipulation, but, rather, against the Fed and the US government's policy towards what they term as “too big to fail”.

(The author is an independent financial consultant at Random Chalice Financial Research, Delhi. Views are personal.)