For nearly two decades, China and the United States have been locked into a dangerous growth paradigm. Beijing undervalues the yuan to boost export, limit imports and accommodate migration from farms to cities.
With dollars earned from trade surpluses, Beijing subsidizes imports of key raw materials like oil and credit to state-owned enterprises and provincial governments to accelerate industrialization and infrastructure investments. And Beijing buys U.S. private sector bonds and Treasury securities.
The annual U.S. trade deficit with China is about $345 billion -- and that represents a huge drain on demand for U.S. goods and services and the principal reason the American economy is growing slowly.
Until 2008, Americans avoided recession by consuming more than they produced -- homeowners borrowed ever large amounts to finance a spending binge. Led by China, foreign investors provided the funds by buying U.S. securities and Wall Street banks recycled this money by underwriting "creative mortgage products."
When the Ponzi scheme collapsed, Washington bailed out the banks and the Obama administration engineered a weak recovery by running up federal spending and deficits.
In China, the largest beneficiaries of modernization have been the families of communist party officials and U.S. multinationals -- such as Caterpillar and General Motors -- which have located operations in the Middle Kingdom.
The iron alliance of conservative interests within the Communist Party and politically influential U.S. multinationals precludes radical changes in Beijing's growth strategy or pressure from the Obama administration to instigate needed changes in Chinese policies.
Meanwhile, Wall Street financiers block genuine bank reforms that would free up lending to U.S. small businesses and continue to pay themselves ever larger bonuses.
Europe suffers from similar dysfunctions.
For many years, the euro has been undervalued for Germany and other northern states, making their exports artificially cheap, and overvalued for Spain, Italy and Greece, making their economies uncompetitive. The latter piled up trade deficits, financed by the Spaniards borrowing against their homes and the Italian and Greek governments borrowing from German and other northern-European banks.
Now, the austerity imposed by Germany on southern Europe only throws their economies into deeper recession and does little to affect the structural changes needed -- for the southern economies to recover they must export more to the north, and Germany, Holland and the others must accept trade deficits to facilitate this. Such solutions are never discussed at meetings among European leaders to resolve the debt crisis.
The U.S. and global economies are growing at less than 2 percent in 2012 and the same is expected in 2013 -- too little to both accommodate productivity advances and avoid new unemployment.
The sales of U.S. blue chips -- the Standard and Poor's companies that make up 80 percent of U.S. publicly traded companies -- are declining for the first time since the recession ended and layoffs are likely at these companies next year if the pace of demand doesn't pick up.
Only currency adjustments between the United States and China and replacing Dodd-Frank with genuine bank reforms can avoid another U.S. recession -- one that throws the already weak global economy into the great abyss.
Four years with President Barack Obama speaks loudly that he doesn't have the stomach to effect changes with China or on Wall Street. At least Republican candidate Mitt Romney promises to tackle the China problem and new Wall Street reforms.
The choice is between the failed and the untried.
Americans shouldn't double down on the unsuccessful policies but rather bet on Mr. Romney.
(Peter Morici is an economist and professor at the Smith School of Business, University of Maryland, and widely published columnist.)
(United Press International's "Outside View" commentaries are written by outside contributors who specialize in a variety of important issues. The views expressed do not necessarily reflect those of United Press International. In the interests of creating an open forum, original submissions are invited.)