CAMBRIDGE, Mass. — When will China finally realize that it cannot accumulate dollars forever? It already has more than $2 trillion. Do the Chinese really want to be sitting on $4 trillion in another five to 10 years? With the U.S. government staring at the long-term costs of the financial bailout, as well as inexorably rising entitlement costs, shouldn't the Chinese worry about a repeat of Europe's experience from the 1970s?
During the 1950s and 1960s, Europeans amassed a huge stash of U.S. Treasury bills in an effort to maintain fixed exchange-rate pegs, much as China has done today. Unfortunately, the purchasing power of Europe's dollars shriveled during the 1970s, when the costs of waging the Vietnam War and a surge in oil prices ultimately contributed to a calamitous rise in inflation.
Perhaps the Chinese should not worry. After all, the world leaders who just gathered at the G20 summit in Pittsburgh said that they would take every measure to prevent such a thing from happening again. A key pillar of their prevention strategy is to scale back "global imbalances," a euphemism for the huge U.S. trade deficit and the corresponding trade surpluses elsewhere, not least China.