The U.S.-China economic accord was the apex of globalization. It was a virtuous and seemingly self-reinforcing circle of trade and capital flows between communism's last stand and capitalism's fallen angel. The rapacious American consumer dined on China's cheap labor while the savings of Chinese workers, recycled into the Treasuries market, paid much of the bill.
But the recession has already put a big dent in that model, and the return to triple-digit oil prices will soon bury it for good.
It's not container ships heading across the Pacific to supply American Wal-Marts that have powered China's world-leading economic recovery. Wal-Mart parking lots across the U.S. remain half deserted as the American consumer gets reacquainted with double-digit unemployment.
Rather, it's shipments to China's own thriving local economy and exports to its neighboring Asian trading partners that are driving China's economic bus these days.
When China recognizes that its huge trade surplus with America is a rear-view mirror on a global economy that has since gone bust, it's likely to take the shackles off its own carefully reined currency.
Holding down the yuan-dollar exchange rate by financing Washington's massive debt only makes sense for the People's Bank of China if there are huge export gains to support. But if double-digit jobless rates, and soon triple-digit oil prices, make the U.S. market either too weak or too far away to be of consequence any more, why worry about a stronger yuan?
For a change, why not let Chinese consumers reap the benefit of a stronger currency whose purchasing power of foreign luxury goods will be that much greater?
Between 1971 and 1981, the greenback lost 40 per cent against the Japanese yen. Who's to say it couldn't lose even more against the yuan?
But if the People's Bank of China, already the single largest holder of U.S. Treasury bonds, doesn't show up at the next auction, who will?
With Washington's record deficit (not to mention exploding state-level borrowing requirements), there will certainly be no shortage of bonds to sell.
Either the Federal Reserve Board will have to turn up the printing presses and buy the bonds themselves with the money it has printed, or U.S. households are going to have to start saving like their Chinese counterparts.
One path is assured reflation, the other protracted consumer restraint. Take either one, and you will notice a big difference from the economy you used to know.
Deglobalizaton doesn't just reroute trade flows. It impacts capital flows just as well.
The U.S.-China economic nexus is about to unwind on both fronts in the smaller world that's just round the corner.