DJ: Controversially, in your new book, How The West Was Lost (Allen Lane, £14.99), you suggest that America could opt for a kind of suicidal, extreme option of protectionism, erecting new barriers, perhaps even defaulting on its debts to China. Do you really think that would be a sensible way of dealing with this challenge?

DM: No, I don't. I'm not recommending them: I say that they are options. There are many economists on Wall Street and in the City of London who would argue very convincingly that the United States has already embarked on a stealth default through the exchange rate. And where protectionism is concerned, again, it is farcical speaking to an African. While I was in China last November, a Chinese person was brought to task about the exchange rate manipulation by an American. And the Chinese person replied: "How dare an American accost us about protectionism in front of an African when we know that America and Europe have been the leaders of protectionism — particularly in agriculture subsidies?" How do you square that circle? That is not to say that just because we already have protectionism that protectionism is a good thing — I'm just saying we live in the real world. I believe in the free movement of trade and capital and even labour, but the reality is that protectionism exists and so therefore it's not off the table. There are studies that show large swathes of Americans urging politicians to talk about protectionism — we've got 30 million-odd people out of work in the manufacturing sector, jobs they say aren't coming back. How do you sort this out? It's a real constraint in the developed world.

NF: There's one problem though — traditional protectionism is in fact illegal. The rules of the World Trade Organisation meant that when the Bush administration temporarily slapped on steel tariffs, it had to take them off pretty quickly. One of the issues here is what we mean by protectionism. I don't think we have the option — even if we wanted it — to go back to the 1930s and Smoot-Hawley. We are talking really about exchange rate manipulation, and since the Chinese have been practising that now for the best part of a decade, it would be odd if no one else were tempted to join in. So the real issue is who wins the race to the bottom in the flat currency competition, who can most out-devalue the competition. I think this has got quite interesting lately because the Europeans didn't stick to the script. The script said they were supposed to have a really strong euro and be mugs like the Japanese but, with brilliant Machiavellian ingenuity, the Germans orchestrated a massive sovereign debt crisis in peripheral Europe to try to drive the euro down. You can hear the crocodile tears in Bavaria at this crisis since it's been very, very good for them. So the new protectionism is actually a game of quantitative easing, which is the new euphemism for printing money. 

DM: But again with protectionism, people are focused on more tactical, short-term issues. I'll give you an example. There's very clear, anti-trust legislation that governs corporations buying an asset. So if BP were to try to take over Exxon Mobil, there's clear anti-trust legislation that is triggered. But the legal infrastructure of the international system has not kept up with some of the things that China is doing. There is no similar anti-trust legislation for a state going around and buying assets, which is why China, very cleverly, has bought all these resources around the world. It is virtually impossible to take them to task. There may come a time — and this is where the Chinese are brilliant, they've played this chess game several moves in advance — when people start saying that this is effectively anti-trust, the Chinese state purchasing all this land or purchasing all these minerals. But in fact, what they are doing now is not buying the assets on the ground any more, just the off-take. They are locking in long-term contracts — 30-year, 50-year, 100-year contracts. That to me is another form of protectionism. We don't know how it will play out.