自杀编年史预告：以色列

费尔南德·布罗代尔中心

纽约州宾汉顿大学，美国

Fernand Braudel Center, Binghamton University

http://fbc.binghamton.edu/commentr.htm

伊曼纽尔·沃勒斯坦

（路爱国 译）

评论 第249号

2009年1月15日

自杀编年史预告：以色列

以色列国在1948年5月15日午夜时分宣告了自己的独立。联合国曾投票表决要在英国治下的巴勒斯坦建立两个国家。耶路撒冷城要成为联合国管辖的国际地区。联合国决议获得了广泛支持，特别是美国和苏联的支持。阿拉伯国家则全都对它投了反对票。

以色列国建立60年来，它的生存和扩张有赖于一个由三要素构成的总体战略：强硬军事主义、地缘政治联盟和公共关系。强硬军事主义（即现任总理埃胡德·奥尔默特[Ehud Olmert]所说的“铁腕”）来自于以色列犹太人的民族主义狂热，以及后来（尽管起初并非如此）世界各地犹太社区的强烈支持。

在地缘政治方面，以色列先是与苏联结盟（时间虽短但极其重要），随后与法国结盟（时间较长并使以色列成为核国家），最后（并且最重要地）与美国结盟。这些盟国兼后台通过供应武器给予了最重要的军事支持。但它们也给予了外交/政治支持，而美国还给予了可观的经济支持。

公共关系的目标在于获得世界舆论的广泛同情支持，早年间依靠把以色列描绘成血气方刚的大卫反抗老朽不堪的歌利亚，而后40年则依靠在二战期间纳粹大批清除欧洲犹太人问题上的罪行和怜悯。

以色列战略的所有这些要素在 1948年到1980年间都相当管用。事实上，它们变的越来越有效。但到1980年代某个时点，三个战术中每项战术的利用都开始产生反作用。以色列目前进 入了一个其战略加速衰败的阶段。以色列要推行任何其他战略可能已经太晚了，假如它这样做，它就会在地缘政治上自杀身亡。让我们回顾一下，在以色列力量成功 地上升以及在后来缓慢衰落的过程中，该战略的三个要素是如何互动的。

在以色列建立的头25年，它与阿拉 伯国家进行了4次战争。第一次是为建立犹太国而进行的1948-1949年战争。以色列宣布建立独立国家，巴勒斯坦却没有相应地也宣布建国。实际情况是， 许多阿拉伯国家对以色列宣了战。以色列最初在军事上困难重重。但是，以色列军队比外约旦以外其他阿拉伯国家的军队都更加训练有素。而且，更重要的是，他们 从代苏联行事的捷克斯洛伐克那里获得了武器。

到1949年停战时，以色列军队的 纪律性加上捷克的武器使以色列人赢得了联合国分割提议中没有包含的大片领土，包括西耶路撒冷。其他地区被周边阿拉伯国家并入。大批巴勒斯坦阿拉伯人离开或 被迫离开以色列控制的地区，变成了阿拉伯邻国里的难民，他们的后代今天仍大多生活在那里。他们曾经拥有的土地被以色列犹太人夺走了。

苏联不久就抛弃了以色列。这可能主 要是由于其领导人很快开始担心以色列建国对苏联犹太人态度的影响，从斯大林的观点看，苏联犹太人似乎过于热情，从而潜在地具有颠覆性。相应地，以色列也抛 弃了对冷战中社会主义阵营的所有同情，并清楚表明自己在政治和文化上要完全成为一个西方世界成员的热望。

法国此时正面临其三个北非殖民地的 民族解放运动，它认为以色列是一个有用的盟国。在阿尔及利亚人1954年发起自己的独立战争之后就更加如此。法国开始帮助以色列武装自己。特别是，正在 （不顾美国意愿而）发展本国核武器的法国帮助了以色列发展核武器。1956年，以色列加入法、英对埃及开战。对以色列而言，不幸的是这次战争是不顾美国反 对而发起的，美国迫使所有三个大国结束了战争。

在阿尔及利亚于1962年独立后， 法国失去了对以色列这个关系的兴趣，以色列当时干扰了法国与三个新独立的北非国家重建密切关系的努力。正是在这个时候，美国和以色列相互靠拢建立了密切关 系。1967年，埃及和以色列之间再次爆发战争，其他阿拉伯国家加入埃及一方。在这次所谓“六日战争”中，美国首次向以色列提供军用武器。

以色列1967年的胜利在很多方面 改变了基本局面。以色列轻易获胜，占领了英国托管的巴勒斯坦所有那些它已经占领的部分，再加上埃及的西奈半岛和叙利亚的戈兰高地。在司法上，此时存在着一 个以色列国，再加上以色列占领的领土。以色列开始推行在被占领土建立犹太人定居点的政策。

以色列的胜利改变了世界犹太人的态度，他们此时已经克服了对建立以色列国曾经持有的全部保留意见。他们对以色列的成就非常自豪，并开始在美国和西欧发起强大的政治运动为以色列争取政治支持。一个强调基布兹[以色列集体农场—译注]美德的血气方刚的以色列形象被放弃了，转而把强调大屠杀作为争取世界支持以色列的基本理由。

1973年，阿拉伯国家试图在所谓 赎罪日战争中扭转军事局势。这一次，在美国军事支持下，以色列又取得了战争胜利。1973年战争标志着阿拉伯国家核心作用的终结。以色列能够继续努力获得 阿拉伯国家的承认，它也确实最终得到了埃及和约旦两国的承认，但要让这一点成为保障以色列生存的方式此时已经太迟了。

正在这个时刻，一个真正的巴勒斯坦阿拉伯政治运动即巴勒斯坦解放组织(PLO)产生了，它现在是以色列的主要对手，是以色列需要与之妥协的对手。长期以来，以色列拒绝与巴解组织及其领导人亚西尔·阿拉法特打交道，而宁愿运用铁腕。起先，以色列在军事上是成功的。

铁腕政策的局限性在第一次起义[intifada]中暴露无疑，这是巴勒斯坦阿拉伯人在被占领土上的自发起义，始于1987年，持续了６年。起义的主要成果是双重的。它迫使以色列人和美国与巴解组织对话，这是一个长过程，它导致1993年达成了所谓奥斯陆协议，提出在部分被占领土上建立巴勒斯坦权力机构。

长远来看，奥斯陆协议在地缘政治上 对世界舆论的冲击不如起义重要。大卫-歌利亚形象第一次开始翻转过来。西方世界第一次开始出现对所谓两国方案的实际支持。第一次开始出现对以色列铁腕及其 对巴勒斯坦阿拉伯人所作所为的严肃批评。假如以色列原先严肃对待了以所谓“绿线”[Green Line]为基础的两国方案--即1948-1949年战争结束后的分界线，它或许已经取得了问题的解决。

但以色列总是慢一步。当它能与纳塞尔谈判的时候，它不肯谈。当它能与阿拉法特谈判的时候，它不肯谈。当阿拉法特去世而软弱无力的马哈茂德·阿巴斯继任的时候，更加好斗的哈马斯赢得了２００６年巴勒斯坦议会选举。以色列拒绝与哈马斯对话。

现在，以色列入侵了加沙，试图消灭哈马斯。假如它成功，下一个出现将是什么组织？假如—这种概率更高--它没能消灭哈马斯，一个两国方案现在还有可能实现吗？巴勒斯坦和世界舆论都在转向一国方案。而这当然是犹太复国主义计划的终结。

以色列的三要素战略正在解体。铁腕 不再奏效，正像它对乔治·布什而言在伊拉克没有奏效一样。与美国的关系是否将依然牢固？我怀疑这一点。世界舆论是否会继续同情地看待以色列？看来不会。以 色列现在能不能转向不同的战略，即作为中东有机组成部分而不是欧洲前哨与巴勒斯坦阿拉伯人的军事代表进行谈判的战略？对此而言似乎为时已晚，很可能太晚 了。从而，预告了一个自杀编年史。

[伊曼纽尔·沃勒斯坦（Immanuel Wallerstein）版权所有，Agence Global负责发行。有关版权和授权，包括翻译和张贴到非商业网站事宜，请与rights@agenceglobal.com、1.336.686.9002或1.336.286.6606联系。在不改动本评论和展示版权所有条件下，允许下载、电子转发或通过电子邮件发送他人。如欲与作者联系，可发邮件给immanuel.wallerstein@yale.edu。

每月两次发表的这些评论，旨在从长时段而不是当前头条新闻的角度，对当今世界变化做出反应。]

Commentary No. 249, Jan. 15, 2009

"Chronicle of a Suicide Foretold: The Case of Israel"

The state of Israel proclaimed its independence at midnight on May 15, 1948. The United Nations had voted to establish two states in what had been Palestine under British rule. The city of Jerusalem was supposed to be an international zone under U.N. jurisdiction. The U.N. resolution had wide support, and specifically that of the United States and the Soviet Union. The Arab states all voted against it.

In the sixty years of its existence, the state of Israel has depended for its survival and expansion on an overall strategy that combined three elements: macho militarism, geopolitical alliances, and public relations. The macho militarism (what current Prime Minister Ehud Olmert calls the "iron fist") was made possible by the nationalist fervor of Jewish Israelis, and eventually (although not initially) by the very strong support of Jewish communities elsewhere in the world.

Geopolitically, Israel first forged an alliance with the Soviet Union (which was brief but crucial), then with France (which lasted a longer time and allowed Israel to become a nuclear power), and finally (and most importantly) with the United States. These allies, who were also patrons, offered most importantly military support through the provision of weapons. But they also offered diplomatic/political support, and in the case of the United States considerable economic support.

The public relations was aimed at obtaining sympathetic support from a wide swath of world public opinion, based in the early years on a portrait of Israel as a pioneering David against a retrograde Goliath, and in the last forty years on guilt and compassion over the massive Nazi extermination of European Jewry during the Second World War.

All these elements of Israeli strategy worked well from 1948 to the 1980s. Indeed, they were increasingly more effective. But somewhere in the 1980s, the use of each of the three tactics began to be counterproductive. Israel has now entered into a phase of the precipitate decline of its strategy. It may be too late for Israel to pursue any alternative strategy, in which case it will have committed geopolitical suicide. Let us trace how the three elements in the strategy interacted, first during the successful upward swing, then during the slow decline of Israel's power.

For the first twenty-five years of its existence, Israel engaged in four wars with Arab states. The first was the 1948-1949 war to establish the Jewish state. The Israeli declaration of an independent state was not matched by a Palestinian declaration to establish a state. Rather, a number of Arab governments declared war on Israel. Israel was initially in military difficulty. However, the Israeli military were far better trained than those of the Arab countries, with the exception of Transjordan. And, crucially, they obtained arms from Czechoslovakia, acting as the agent of the Soviet Union.

By the time of the truce in 1949, the discipline of the Israeli forces combined with the Czech arms enabled the Israelis to win considerable territory not included in the partition proposals of the United Nations, including west Jerusalem. The other areas were incorporated by the surrounding Arab states. A large number of Palestinian Arabs left or were forced to leave areas under the control of the Israelis and became refugees in neighboring Arab countries, where their descendants still largely live today. The land they had owned was taken by Jewish Israelis.

The Soviet Union soon dropped Israel. This was probably primarily because its leaders quickly became afraid of the impact of the creation of the state on the attitudes of Soviet Jewry, who seemed overly enthusiastic and hence potentially subversive from Stalin's point of view. Israel in turn dropped any sympathy for the socialist camp in the Cold War, and made clear its fervent desire to be considered a full-fledged member of the Western world, politically and culturally.

France at this time was faced with national liberation movements in its three North African colonies, and saw in Israel a useful ally. This was especially true after the Algerians launched their war of independence in 1954. France began to help Israel arm itself. In particular, France, which was developing its own nuclear weapons (against U.S. wishes), helped Israel do the same. In 1956, Israel joined France and Great Britain in a war against Egypt. Unfortunately for Israel, this war was launched against U.S. opposition, and the United States forced all three powers to end it.

After Algeria became independent in 1962, France lost interest in the Israeli connection, which now interfered with its attempts to renew closer relations with the three now independent North African states. It was at this point that the United States and Israel turned to each other to forge close links. In 1967, war broke out again between Egypt and Israel, and other Arab states joined Egypt. In this so-called Six Day War, the United States for the first time gave military weapons to Israel.

The 1967 Israeli victory changed the basic situation in many respects. Israel had won the war handily, occupying all those parts of the British mandate of Palestine that it had occupied before, plus Egypt's Sinai Peninsula and Syria's Golan Heights. Juridically, there was now a state of Israel plus Israel's occupied territories. Israel began a policy of establishing

Jewish settlements in the occupied territories.

The Israeli victory transformed the attitude of world Jewry, which now overcame whatever reservations it had had about the creation of the state of Israel. They took great pride in its accomplishments and began to undertake major political campaigns in the United States and western Europe to secure political support for Israel. The image of a pioneering Israel with emphasis on the virtues of the kibbutz was abandoned in favor of an emphasis on the Holocaust as the basic justification for world support of Israel.

In 1973, the Arab states sought to redress the military situation in the so-called Yom Kippur war. This time again, Israel won the war, with U.S. arms support. The 1973 war marked the end of the central role of the Arab states. Israel could continue to try to get recognition from Arab states, and it did succeed eventually with both Egypt and Jordan, but it was now too late for this to be a way to secure Israel's existence.

As of this point, there emerged a serious Palestinian Arab political movement, the Palestine Liberation Organization (PLO), which was now the key opponent of Israel, the one with whom Israel needed to come to terms. For a long time, Israel refused to deal with the PLO and its leader Yasser Arafat, preferring the iron fist. And at first, it was militarily successful.

The limits of the iron fist policy were made evident by the first intifada, a spontaneous uprising of Palestinian Arabs inside the occupied territories, which began in 1987 and lasted six years. The basic achievement of the intifada was twofold. It forced the Israelis and the United States to talk to the PLO, a long process that led to the so-called Oslo Accords of 1993, which provided for the creation of the Palestinian Authority in part of the occupied territories.

The Oslo Accords in the long run were geopolitically less important than the impact of the intifada on world public opinion. For the first time, the David-Goliath image began to be inverted. For the first time, there began to be serious support in the Western world for the so-called two-state solution. For the first time, there began to be serious criticism of Israel's iron fist and its practices vis-à-vis the Arab Palestinians. Had Israel been serious about a two-state solution based on the so-called Green Line - the line of division at the end of the 1948-1949 war - it probably would have achieved a settlement.

Israel however was always one step behind. When it could have negotiated with Nasser, it wouldn't. When it could have negotiated with Arafat, it wouldn't. When Arafat died and was succeeded by the ineffectual Mahmoud Abbas, the more militant Hamas won the Palestinian parliamentary elections in 2006. Israel refused to talk to Hamas.

Now, Israel has invaded Gaza, seeking to destroy Hamas. If it succeeds, what organization will come next? If, as is more probable, it fails to destroy Hamas, is a two-state solution now possible? Both Palestinian and world public opinion is moving towards the one-state solution. And this is of course the end of the Zionist project.

The three-element strategy of Israel is decomposing. The iron fist no longer succeeds, much as it didn't for George Bush in Iraq. Will the United States link remain firm? I doubt it. And will world public opinion continue to look sympathetically on Israel? It seems not. Can Israel now switch to an alternative strategy, of negotiating with the militant representatives of the Arab Palestinians, as an integral constituent of the Middle East, and not as an outpost of Europe? It seems quite late for that, quite possibly too late. Hence, the chronicle of a suicide foretold.

by Immanuel Wallerstein

[Copyright by Immanuel Wallerstein, distributed by Agence Global. For rights and permissions, including translations and posting to non-commercial sites, and contact: rights@agenceglobal.com, 1.336.686.9002 or 1.336.286.6606. Permission is granted to download, forward electronically, or e-mail to others, provided the essay remains intact and the copyright note is displayed. To contact author, write: immanuel.wallerstein@yale.edu.

These commentaries, published twice monthly, are intended to be reflections on the contemporary world scene, as seen from the perspective not of the immediate headlines but of the long term.]

From the Editor

As China racked up an impressive record of economic growth over the last 30 years, a myth sprouted that Beijing had invented a new model for eradicating poverty from the developing world. While other East Asian "miracles" also experienced their own adolescent growth spurts, China was remarkable for the way in which it compressed social and economic change into such a short period, while at the same time the Communist Party fended off demands for political reform. Especially in the last decade, the technocrats dazzled the world by always managing to bring growth in above target.

Now we are learning that the growth, while not exactly a mirage, was unsustainable. As Michael Pettis writes in this issue, in hindsight the decade from 1998-2008 looks more like an aberration than the dawning of a new era. After the 1997 crisis, Asian governments responded by accumulating ever larger foreign-exchange reserves. This fueled a global expansion of liquidity that led to self-reinforcing trends of rising investment in Asia and rising consumption in the U.S.

Stephen Green analyzes China’s predicament and finds that it is much worse than the official statistics would suggest. Various proxy indicators show the economy has fallen off a cliff. Growth in the next year will be well below the level needed to keep mass unemployment at bay.

The point here is not to assign blame, although there are lessons here for policy makers. The immediate priority is what to do now. And Mr. Pettis warns that the bulk of the readjustment is going to fall on China, much as it did on the U.S. in the 1930s. Either domestic demand will pick up to absorb the overcapacity or production will drop.

It is in everybody’s interest to lessen the impact of this transition and avoid a repeat of the spiraling protectionism of the 1930s. Razeen Sally, Fredrik Erixon and Greg Rushford describe the mounting temptation in Asia and the West to go down that road.

A solution will require a more flexible response than we have seen so far from the Hu administration, which as Willy Lam describes seems to be hunkering down with Maoist rhetoric and measures to turn back the clock on already circumscribed civil liberties.

There is still time to do as Mr. Pettis suggests—strike a grand bargain with the U.S. and EU that gives China a couple years’ breathing room, in return for a package of reforms aimed at a long-term rebalancing of the economy. Sure, the chances of this happening are small. But the China model is already finished. The question is whether the country can avoid a decade of lost growth and social unrest.

H.R.

China’s Great Demand Challenge

by Michael Pettis

Posted January 9, 2009

Global balance of payments has been dominated by the trade and investment relationship between two countries, China and the United States. This relationship is now undergoing a major shift; to the extent that their economic policies do not accommodate this shift, they are likely to fail, in much the same way that economic policy failed in the 1930s. The consequence for the world, and especially for China, could be terrible.

China runs a massive trade surplus with the U.S. and, in recycling this surplus, a correspondingly large capital-account deficit. This recycling has been the main source of the global liquidity that has engulfed the world recently, as well as a constraining factor in the global balance of payments. It is impossible for either country to adjust any part of the balance without a major counterbalancing adjustment from the other, but it is far from clear that policy makers on either side, especially in China, have a clear grasp of the issue. The result is likely to be a steep drop in global growth, much of it borne by China, and possibly even a collapse in global trade.

Other countries have played a role in this imbalance, of course, but with a few important exceptions they have fallen broadly into two camps whose characteristics are typified either by China or the U.S. One set of countries, like the U.S., has had booming domestic consumption and high and rising trade deficits. Their highly sophisticated financial systems intermediated the surge in underlying liquidity into the consumer loans that permitted the consumption binge. The second set of countries, like China, have excessively high savings and domestic investment rates, resulting in a huge and rising surplus of production over consumption, the balance of which is exported abroad.

Until recently, excess U.S. demand and excess Chinese supply were in a temporarily stable balance. As part of running a trade surplus, China necessarily accumulated dollars, which had to be exported to (invested in) the U.S. This capital export did not occur in the form of private investment—indeed it was exacerbated by Chinese net imports of private capital—but rather as forced accumulation of foreign-currency reserves, which were recycled back to the U.S. largely in the form of purchases of U.S. Treasurys and other dollar assets by China’s central bank, the People’s Bank of China. Since China had effectively pegged its currency to the dollar, the PBoC had no choice but to accumulate reserves in this manner.

The recycling process also functioned as a great liquidity generator for the world. In the U.S. the torrent of inward-bound liquidity boosted real-estate and stock-market prices. As they surged, substantially raising the wealth of U.S. households, these became increasingly willing to divert a rising share of their income to consumption. At the same time rising liquidity always forces financial institutions to adjust their balance sheets to accommodate money growth, and the most common way is to increase outstanding loans. With banks eager to lend, and households eager to monetize their assets in order to fund consumption, it was only a question of time before household borrowing ballooned.

Meanwhile in China, as foreign currency poured into the country via its trade surplus, the PBoC had to create local money with which to purchase the inflow. In China most new money creation ends up in banks, and banks primarily fund investment rather than consumer spending. With investment surging, industrial production grew faster than consumption. A country’s trade surplus is the gap between its production and its consumption, and as this gap grew, so did China’s trade surplus, which resulted in even more foreign currency pouring into the country, thus reinforcing the cycle. In this balance, sometimes dubbed Bretton Woods II, Chinese overcapacity was matched with American overconsumption, and Chinese official lending was matched with U.S. household borrowing. This ensured that the current-account flows were matched with the capital-account flows.

The Great Imbalance

Many analysts think of the U.S. economy as the engine that drives the rest of the world, but this is not always true. Sometimes changes or distortions in one part of the world can force adjustments elsewhere, and as the world’s largest and most open economy, with an astonishingly flexible financial system, it is often the U.S. that absorbs imbalances originating elsewhere.

We see this most obviously in U.S. trade figures. For most of last 60 years, with two exceptions, the U.S. current-account surplus or deficit has remained within 1% of GDP. The first exception occurred in the mid-1980s, when the deficit rose to nearly 3.5% of GDP in 1986-87 before declining sharply and running into a small surplus in 1990. The second began in 1994, around the time of the Mexican crisis, when the U.S. current-account deficit climbed to around 1.6% of GDP, declined for two years, and then took off in 1997-98, after which time it raced forward in straight line to peak at around 6% of GDP.

If the U.S. trade deficit were driven simply by a U.S. consumption binge, as is often claimed, it is hard to see why it would have followed a pattern of general stability over many decades marked by two surges–a small one from 1984-88 and a very large one after 1997. If it was driven by changes in Asian savings and trade policies, this pattern becomes easier to understand. The 1980s surge was driven largely by domestic Japanese policies and conditions and is a fascinating case study in itself, but it is the post-1997 surge that is much more interesting and relevant to the current crisis.

Of course, 1997 was the year in which several Asian countries experienced terrifying financial crises and sharp economic contractions. One of the main lessons Asian policy makers learned was that too much dollar debt and not enough dollar reserves put a country at serious risk of a balance-sheet crisis. To protect themselves from a repeat, many Asian governments engineered trade surpluses and began amassing large foreign-currency reserves by managing trade policy and the value of their currencies.

This resulted in what some have called a global capital-flow "paradox." Historically, capital-poor developing countries have been net importers of capital, but in recent years developing countries have been large and growing net exporters of capital to rich countries. For most of the last 50 years official capital exports, in the form of foreign- currency reserve accumulation, were significantly less than net private-capital imports. But in 1998, official capital exports among developing countries began to take off, and by the following year exceeded net private-capital imports. Since then, except for a small decline in 2001, net capital exports from developing countries surged almost in a straight line to around $700 billion annually (combining $1.2 trillion of reserve accumulation versus $0.5 trillion of net private inflows).

But the global balance of payments must balance. As Asian trade surpluses and net capital exports surged, some other part of the world had to equilibrate these adjustments by running large trade deficits and importing capital. The U.S. did exactly this, and the U.S. trade deficit soared after 1997, while at the same time U.S. household savings collapsed.

Now the party is over. The old balance of payments has broken down, and the world is lurching to find a stable new balance. One necessary consequence of the financial crisis must be an increase in U.S. household-savings rates. Collapsing real estate and stock markets have caused household wealth to decline sharply, and households must save more than ever out of current income to replenish their wealth. But even if consumers wanted to continue spending, American commercial banks–caught in one of the worst credit crunches in recent history–are no longer willing to lend for consumption. The U.S. household savings rate has nowhere to go but up.

By how much will U.S. household savings increase? For most of the past 60 years until the early 1990s, household savings rates have varied between 6% and 10% of GDP, except for a brief period during the economic crisis of the 1970s when household savings went as high as 13% of GDP. In the early 1990s, the savings rate began declining slowly, and then virtually collapsed after 1997 when household savings fell to well under 2% of GDP.

Although we can’t say for sure, it is probably safe to argue that U.S. savings rates will climb back at least to earlier average levels, or even temporarily exceed those levels, as American households rebuild their shattered balance sheets. If they return only to 8%, the midpoint of earlier savings rates, this implies that U.S. household savings must rise by some amount equal to 6% of GDP, or, to put it another way, that all other things being equal, household consumption must decline by at least that amount.

Something must happen to equilibrate this decline in U.S. household consumption. Either consumption in other sectors of the U.S. economy–i.e., the government, since businesses are also contracting–must expand by that amount, or consumption by foreign countries, with China bearing the brunt, must expand by that amount (and foreign savings decline). To the extent that neither happens, global overproduction–which consists mainly of Chinese overproduction–must decline by that amount. This is just a way of saying that if net American consumption declines, either consumption must rise somewhere else, or production must fall.

In the best possible world Chinese consumption would rise by exactly the same amount as U.S. consumption drops, and we would quickly reach a new stable balance, with one major difference: The U.S. trade deficit would decline, and the amount of capital exported by China to the U.S. would decline by exactly the same amount (the PBoC would accumulate fewer reserves). But if that doesn’t happen, total global consumption must decline, and the world economy slow–in fact as it slows global income will decline with it, so that both savings and consumption could decline, trapping the world in a downward spiral of unstable adjustment.

However, given that the U.S. economy is about 3.3 times the size of China’s, and consumption accounts for less than 50% of China’s income, Chinese consumption would have to rise by nearly 40% (or roughly 19% of GDP) in order to accommodate an increase in U.S. savings equal to 6% of U.S. GDP. This is clearly unlikely. Of course there is more to the world than simply U.S. household demand and Chinese government demand. There are several other factors that will affect the adjustment. Among the positive ones:

• U.S. fiscal expansion will absorb some of the decline in U.S. household demand.

• The Chinese trade surplus has been equal to about one-half to two-thirds of the U.S. trade deficit, so in principle China should only absorb that share of the global adjustment, while other surplus countries, especially opec via lower commodity prices, absorb the balance.

Among the negative factors:

• Assuming a 6% increase in U.S. household savings, to 8% of GDP, is probably conservative. Goldman Sachs predicts that household savings will rise to 10% of GDP.

• It is not just U.S. households and the government that matter. U.S. businesses affect demand too, and they are likely to contract, thereby increasing the total contraction in U.S. demand.

• The world’s major economies–Europe, and Japan–as well as many of the smaller economies–Latin America, Russia and Eastern Europe–are more likely to exacerbate global demand contraction, with several of them facing capital outflows (and hence a reversal of their trade deficits into surpluses, which adds to global overcapacity).

It’s 1929 Again

Although there are great differences between 1929 and 2008, the global payments imbalances that led up to the current crisis were nonetheless similar in many ways to the imbalances of the 1920s. A few countries, dominated by one very large one, ran massive current-account surpluses and in the process rapidly accumulated reserves. In the 1920s it was the U.S. that played the role that China is playing today. The U.S. economy was plagued in the 1920s with overcapacity caused by substantial increases in U.S. labor productivity. This in turn was a consequence of significant investment in the agricultural and industrial sectors and mass migration from the countryside to the cities.

Although U.S. capacity surged in the 1920s, domestic demand did not rise nearly as quickly. As a consequence, the U.S. ran large annual trade surpluses ranging from 1% to 3% of GDP during the 1920s, or 0.4% of global GDP (China, although only 6% of world GDP, has run trade surpluses of roughly the same magnitude). U.S. overcapacity didn’t matter when there was sufficient foreign demand. It could be exported, mostly to Europe, while foreign bond issues floated by foreign countries in New York permitted deficit countries to finance their net purchases.

But as the U.S. continued investing in and increasing capacity, without increasing domestic demand quickly enough, it was inevitable that something eventually had to adjust. The financial crisis of 1929-31 was part of that adjustment process. When bond markets collapsed as part of the crash, bonds issued by foreign borrowers were among those that fell the most. This, of course, made it impossible for most foreign borrowers to continue raising money, and by effectively cutting off funding for the trade-deficit countries, it eliminated their ability to absorb excess U.S. capacity.

The drop in foreign demand required a countervailing U.S. adjustment. Either the U.S. had to increase domestic consumption, or it had to cut back domestic production, but there was unfortunately more to the crisis than simply the drop in foreign demand. With the collapse of parts of the domestic U.S. banking system, domestic private consumption also fell. The slack in demand should have been taken up by U.S. fiscal expansion, but instead of expanding aggressively, as John Maynard Keynes advised, President Roosevelt expanded cautiously. When the credit crunch came and the world was awash in American-made goods that no one was willing or able to buy, it was unreasonable, as Keynes argued bitterly, to expect the rest of the world to continue purchasing U.S. goods, especially since the financing of their consumption had been interrupted.

Since U.S. production exceeded consumption, the need for demand creation, according to Keynes, most logically resided in the U.S. But Washington had other ideas. In 1927 and 1928 there were already unemployment pressures, and the 1929 collapse in demand exacerbated those pressures. This prompted U.S. senators to respond in 1930 with the notorious Smoot-Hawley Tariff Act aimed at boosting demand for domestic production. They attempted to divert demand for foreign goods to U.S. goods–basically to export their overcapacity–and in so doing force the brunt of the adjustment onto their trading partners. Their trading partners, not surprisingly, retaliated by closing their own borders to trade, causing international trade to decline by nearly 70% in three years, thereby shifting the brunt of the adjustment back onto the U.S.

The trade tariff made things worse not just because impediments to trade are costly to the global economy, but rather because it set off a trade war in which other countries forced the U.S. broadly into balance. In two years, U.S. merchandise exports declined 53%, while the trade surplus declined by 63%. Excess production over consumption had to be resolved largely within the U.S., and since much domestic investment had been aimed at the export sector, the collapse in exports brought a concomitant decline in domestic investment. The U.S. either had to engineer a substantial increase in domestic demand by fiscal means, as Keynes demanded, or adjust via a drop in production and employment. It did the latter.

Today China is facing a similar problem. With the collapse of bank intermediation, U.S. households and businesses are cutting consumption and raising savings. This is a necessary adjustment. Most analysts, perhaps thinking they are echoing Keynes’s analysis of the problem in the 1930s, call on the U.S. government to engage in massive fiscal expansion to replace lost private demand. But this is not what Keynes would have recommended. If declining U.S. private consumption is met with increasing public consumption, the world will simply continue playing the game that has already led into so much trouble. The only difference would be that instead of having one side of the global imbalance accommodated by private over-consumption and rising debt, it would be accommodated by public overconsumption and rising debt. Demand must be created by the trade-surplus countries that have, to date, relied on net exports to protect themselves from their overcapacity. They must force demand up quickly in order to close the gap, and since expecting private consumption to rise quickly enough is unrealistic, it has to be public consumption–a large fiscal deficit.

Might China and smaller Asian countries repeat the U.S. mistake of the 1930s? Perhaps. Beijing already seems to be in the process of defending its ability to export overcapacity. Although there has been an attempt to boost fiscal spending, most analysts argue that this so far has been too feeble to matter much. On the other hand it has tried to protect and strengthen its export sector by lowering export taxes and reducing interest costs, which lower the financing cost for producers and have little impact on consumers.

This cannot work for long. The proper place for new demand to originate is, as in the 1930s, in trade-surplus countries. They should be engaged in expanding demand, not expanding supply. If they try to export their way out of a slowdown, there will almost certainly be another trade backlash, in which case the full force of the adjustment will be borne by the trade-surplus countries, again as in the 1930s—with the proviso that although China’s trade surplus as a share of global GDP is comparable to the U.S. trade surplus in the 1920s, China is a much smaller economy, and so its trade surplus represents a much higher share of its GDP.

In order to make the transition workable and avoid trade friction, the world’s major economies must engineer a joint program of fiscal expansion. The trade-deficit countries should expand moderately so as to slow down the adjustment period and to give maximum traction to fiscal expansion on the part of the trade-surplus countries. China must be given at least three or four years to make concerted efforts to boost domestic demand to the point where global imbalances are more manageable.

The problem is that U.S. (and European) demand contraction is occurring at a shockingly rapid pace. There is a real risk that the adjustment process in China will careen out of control. In order to manage this risk, U.S., European, Japanese and Chinese policy makers must quickly come to a firm understanding of how significant the global adjustment is and how dangerous the process will be for China, and design a multiyear plan of demand expansion in which China is given time to adjust its overcapacity. If major economies focus only on domestic adjustment, China will almost certainly choose the path of defending its ability to export overcapacity onto the rest of the world, while the trade -deficit countries will discover the expansionary impact of trade constraints. In that case it is hard to imagine how China and the world can avoid disaster.

Michael Pettis is a finance professor at Peking University and the author of The Volatility Machine (Oxford University Press, 2001).