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opinion

In 1972, when Richard Nixon visited Beijing, his country was embroiled in a war in Vietnam, but its principal adversary was the Soviet Union; China was an economic pipsqueak and a military irrelevance. The U.S. economy was so much bigger than China's that a telescope would have been needed to see it.

Nearly three decades later, Barack Obama visits China as a supplicant. His country, now fighting two wars, is in financial hock, especially to China.

The tale of one country's rise, and the other's relative decline, is the defining storyline of our time and the foreseeable future, changing power relationships, altering international institutions and affecting domestic economies.

China enjoys surpluses everywhere - budget, trade, current account, foreign-exchange reserves - whereas the U.S. has deficits on budget, trade and current account. China sits on $2-trillion (U.S.) and is casting about where and how to spend it, whereas the U.S. is heading for $9-trillion of debt in the next decade (according to the Congressional Budgetary Office) with no serious idea how to stop borrowing.

The Chinese save, in part because their country offers neither a national pension nor a health-care plan; Americans spend beyond their means, or at least they did until the recession arrived. A nation in constant hock cannot dictate much, if anything, to the country from which it borrows.

China is very touchy about this accusation, but there is no doubt that it has artificially pegged its currency. Trade flows, economic growth numbers and every other economic indicator suggests the Chinese yuan is undervalued by 20 per cent to 40 per cent, because a lower yuan assists the country's export-led growth strategy. Yes, the yuan has declined, but by not nearly as much as if it had been allowed to float freely, as does the U.S. dollar.

The greenback, of course, has been declining in value, and will continue to do so, given U.S. trade deficits and the country's massive borrowing requirements. This will make U.S. exports more competitive, but it will also make life tougher for Canadians and other exporters who have depended on that market.

Worldwide, therefore, things are out of whack, with the Chinese manipulating their currency in a way that will be detrimental to everyone else's currencies that will rise.

The Americans, of course, have been their own worst enemies. Their budget deficits have promoted larger trade and current account deficits. Why? Because they have excessively stimulated domestic demand (as in the housing sector, epicentre of the economic collapse) and pulled in foreign financing.

For the moment, with recession having stopped growth, interest rates are low. But to keep huge amounts of borrowed money flowing into the U.S., interest rates are going to rise, and so will interest payments on the burgeoning debt.

The Chinese, as the largest foreign holders of U.S. dollars, can be excused if they're slightly nervous about their monetary client's future behaviour.

Will the U.S. monetary authorities decide to let inflation rise, because the political arm of government cannot grapple with deficits - in which case, the value of U.S. holdings in China declines? Will the Chinese decide they already have lent enough to the U.S. and begin intensifying their diversification strategy?

Although the interests of lender and borrower are, to some extent, symbiotic, the lender usually has more options than the borrower: to stimulate domestic purchasing, lend money to others, buy assets elsewhere, spend money on arms - in other words, to strengthen itself at home and abroad.

The U.S., alas, is struggling to govern itself properly even with a brilliant President, which must give everyone pause, including the Chinese. Such a great country is having enormous trouble dealing with just one of its major policy challenges, health care, with a raft of others looming, including climate change, Social Security, education, immigration - to say nothing of its calamitous fiscal situation.

Then there is the proposal now before the President to increase forces in Afghanistan, at a cost the U.S. treasury can ill afford and with very little likelihood that this doomed mission can succeed, even by the most minimal definitions of success.

Richard Nixon would have known about the temptations of deepening a war. He would not have believed China's position vis-à-vis the U.S., only a generation later.

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