Fed's mistake was to extrapolate

To be sure, China also eased monetary policy. But such efforts fell well short of those of the Fed, with no zero-interest-rate or quantitative-easing gambits - only standard reductions in policy rates (five cuts in late 2008) and reserve requirements (four adjustments).

The most important thing to note is that there was no extrapolation mania in Beijing. Chinese officials viewed their actions in 2008-09 as one-off measures, and they have been much quicker than their US counterparts to face up to the perils of policies initiated in the depths of the crisis. In the US, denial runs deep.

Unlike the Fed, which continues to dismiss the potential negative repercussions of QE on asset markets and the real economy - both at home and abroad - China's authorities have been far more cognizant of new risks incurred during and after the crisis. They have moved swiftly to address many of them, especially those posed by excess leverage, shadow banking, and property markets.

The jury is out on whether Chinese officials have done enough. I think that they have, though I concede that mine is a minority view today. In the face of the current growth slowdown, China might well have reverted to its earlier, crisis-tested approach; that it did not is another example of the willingness of its leaders to resist extrapolation and chart a different course.

China has already delivered on that front by abandoning a growth model that had successfully guided the country's economic development for more than 30 years. It recognized the need to switch from a model that focused mainly on export-and investment-led production (via manufacturing) to one led by private consumption (via services). That change will give China a much better chance of avoiding the dreaded "middle-income trap", which ensnares most developing economies, precisely because their policymakers mistakenly believe that the recipe for early-stage takeoff growth is sufficient to achieve developed-country status.

The US and Chinese cases do not exist in a vacuum. As I stress in my new book, the codependency of China and the US ties them together inextricably. The question then arises as to the consequences of two different policy strategies - US stasis and Chinese rebalancing.

The outcome is likely to be an "asymmetrical rebalancing". As China changes its economic model, it will shift from surplus saving to saving absorption - deploying its assets to fund a social safety net and thereby temper fear-driven precautionary household saving. Conversely, the US seems intent on maintaining its current course - believing that the low-saving, excess-consumption model that worked so well in the past will continue to operate smoothly in the future.

There will be consequences in reconciling these two approaches. As China redirects its surplus saving to support its own citizens, it will have less left over to support saving-short Americans. And that is likely to affect the terms on which the US attracts foreign funding, leading to a weaker dollar, higher interest rates, rising inflation, or some combination of all three. In response, US economic headwinds will stiffen all the more.

It is often said that a crisis should never be wasted: Politicians, policymakers, and regulators should embrace the moment of deep distress and take on the heavy burden of structural repair. China seems to be doing that; the US is not. Codependency points to an unavoidable conclusion: The US is about to become trapped in the perils of linear thinking.

The author, a faculty member at Yale University and former Chairman of Morgan Stanley Asia, is the author of a new book Unbalanced: The Codependency of America and China. Project Syndicate

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