News & Analysis
Trade War: China Versus the West?
China has succumbed to hubris. It has mistaken the soft diplomacy of Barack Obama for weakness, mistaken the US credit crisis for decline, and mistaken its own mercantilist bubble for ascendancy. There are echoes of Anglo-German spats before the First World War, when Wilhelmine Berlin so badly misjudged the strategic balance of power and over-played its hand. Within a month the US Treasury must rule whether China is a "currency manipulator", triggering sanctions under US law. This has been finessed before, but we are in a new world now with America's U6 unemployment at 16.8%. "It's going to be really hard for them yet again to fudge on the obvious fact that China is manipulating. Without a credible threat, we're not going to get anywhere," said Paul Krugman (pictured left), this year's Nobel economist. China's premier Wen Jiabao is defiant. ... "Some say China has got more arrogant and tough. Some put forward the theory of China's so-called triumphalism'. My conscience is untainted despite slanders from outside," he said. Days earlier the State Council accusing America of serial villainy. "In the US, civil and political rights of citizens are severely restricted and violated by the government. Workers' rights are seriously violated," it said. "The US with its strong military power has pursued hegemony in the world, trampling upon the sovereignty of other countries and trespassing their human rights," it said. "At a time when the world is suffering a serious human rights disaster caused by the U.S. subprime crisis-induced global financial crisis, the U.S. government revels in accusing other countries." And so forth. Is the Politiburo smoking weed? – UK Telegraph
Dominant Social Theme: The Chinese are acting uppity. Too bad for them.
Free-Market Analysis: So China and the West are headed for a protectionist spat over an under-performing yuan? We have some difficulty believing this. China and America in particular have a 21st century symbiotic relationship, though the hostile posturing may be helpful to the political classes. In fact, the rhetoric has apparently been kicked up a notch, according to the Telegraph, as follows: "Beijing [has shown a] willingness to up the ante. It has vowed sanctions against any US firm that takes part in a $6.4bn weapons contract for Taiwan, a threat to ban Boeing from China and a new level of escalation in the Taiwan dispute."
But this is a prelude to ... a trade war? China will dump its trillion dollars in US holdings and decimate the world's fiat economy, such as it is. Again, we have some trouble with the concept. China's homegrown elites are struggling hard to keep the economy afloat. If the economy sinks, so do the fortunes of the communist government. China's authoritarian regime has got plenty of troubles now. And the social compact – which stipulates that Chinese citizens will not try to change the government so long as the government does not try to tamper with the success of the current mixed-market model – is a fragile one. Here's some more from the article:
We have talked ourselves into believing that China is already a hyper-power. It may become one: it is not one yet. ... [But] Michael Pettis from Beijing University argues that China's reserves of $2.4 trillion – arguably $3 trillion – are a sign of weakness, not strength. Only twice before in modern history has a country has amassed such a stash equal 5% to 6% of global GDP: the US in the 1920s, and Japan in the 1980s. Each time preceeded depression.
The reserves cannot be used internally to support China's economy. They are dead weight, beyond any level needed for macro-credibility. Indeed, they are the ultimate indictment of China's dysfunctional strategy, which is to buy $30bn to $40bn of foreign bonds every month to hold down the yuan, refusing to let the economy adjust to trade realities. The result is over-investment in plants, flooding the world with goods at wafer-thin export margins. China's over-capacity in steel is now greater than Europe's output.
This is catching up with China in any case. Professor Victor Shuh from Northerwestern University warns that the 8,000 financing vehicles used by China's local governments to stretch credit limits have built up debts and commitments of $3.5 trillion, mostly linked to infrastructure. He says the banks may require a bail-out nearing half a trillion dollars. As America's creditor – owner of some $1.4bn of US Treasuries, agency bonds, and US instruments – China can exert leverage. But this is not what it seems. If the Politburo deploys its illusory power, Washington can pull the plug on China's export economy instantly by shutting markets. Who holds whom to ransom?
At the Daily Bell, (as we are pleased to point out) we argued long before it was fashionable that China was in a terminal bubble, fueled by at least 25-30 years worth of unbridled monetary stimulation. Recently, the Chinese dumped trillions MORE into their already molten economy. And this is on top of the yuan currency manipulation that is triggered by purchases of American dollars that keep that currency "artificially" low. (Artifice being in the eye of the beholder in a fiat/central banking economy).
It would be foolish to speculate at this point that the Chinese leadership does not fully appreciate the difficulties that China faces. Who does not, after all, remember when the royal Japanese palace grounds were said to be worth more than certain countries back in the 1980s. (We're exaggerating but not by much.) That was before Japan embarked on a 30-year "recession" that is still ongoing so far as we can tell. How can the same not happen to China when almost exactly the same policies seem in play and the governmental bureaucracy is even more cumbersome?
What then is motivating the reportedly tougher Chinese attitude toward the West? We think it's more likely desperation than hubris. Thirty years ago, Chinese policy makers could not be blamed for a lack of understanding regarding the awesome power of fiat money and central banking. But today, having wielded that power to full-effect they are facing its limits. What goes up must come down, and when the Chinese economy goes down (and it will) the fingers will be leveled squarely at the leadership. Knowing this, the political class fights back as it always does, by fanning the flames of nationalism and creating an outside enemy on which citizens can focus their rage and resentment. Even trade war rhetoric can prove useful within this context.
From our standpoint, the idea that China and the West are at loggerheads is about as real as the "war on terror" that the American military-industrial complex keeps manufacturing. It is abundantly clear at this point that Western elites are moving toward ever more aggressive globalization. The Chinese elites are not immune to this siren call, anymore than disparate power nexuses are in the West. In an ever-more centralized world, China will loom as a power player, the logical leader of an Asian block, just the way Germany and France lead a European block and the US leads an Americas block.
The Anglo-American elites in our opinion have taken a qualified risk by blowing up the economies of the West through the incredibly destructive machinations of central banking. While it has been satisfying to watch them backtrack (too much too soon?) for fear of a real social rebellion, the destabilization continues apace. There is no way to generate these massive regional blocks except by DESTABILIZING the nations that are to support them – and thus it will continue to occur even as every rhetorical and media device is employed to promote the idea that those participating in the destabilizing are actually engaged in ameliorating it. They are not. And the game has ceased to be entertaining for many. Millions in Europe and America, and in China too, are increasingly aware of the manipulations that inevitably accompany mercantilist public/private central banking.
Conclusion: In the Internet era, the strategies employed by the power elite are increasingly visible. On the one hand, if the Anglo-American power elite succeeds in further global consolidations, the ramifications are specific and clear from an investment point of view. The truly global Anglo corporations will become ever-more profitable (Coca-Cola, Exxon, Boeing, etc.) and gold and silver less so. But if as we suspect, the elite's dominant social themes are unraveling along with its hope for a more unified world, then the future is a good deal more uncertain. Within this context, a variety of faux-conflicts will be carefully presented. But, either way, the real enemies of 21st century internationalist-minded nation-states remain their own citizens.
Posted by Raging Tiger on 03/16/10 12:03 AM
"China and America in particular have a 21st century symbiotic relationship"?
Let me see. Presently Americans borrow money from China to buy Chinese-manufactured consumer goods. The relationship is not symbiotic but parasitic.
Chinese should let Yuan appreciate, boost their own purchasing power and buy their own goods instead of shipping them to US for a bunch of worthless IOU's, pardon Dollars, that Obama and Bernanke are creating out of thin air.
Posted by Mpresley on 03/15/10 08:32 PM
"...when the Chinese economy goes down (and it will) the fingers will be leveled squarely at the leadership."
When Mao ruled as emperor, China was poor; what intrinsic wealth existed was stolen by the CCP, and misery was king. While a few high ranking officials lived relatively well, no one was "rich." At least in the Western sense. Also, the country was isolated, communication tightly controlled, and "citizen" participation in organized events were always orchestrated at the pleasure of the Party.
Mao (through cronies such as Lin Biao) more or less controlled the PLA (army) and that was that. And this was only about 30-35 years ago. Amazing.
Now, China has many very wealthy people. Walk through main street Shenzhen with nothing to do? Then visit the Bentley dealership and then buy your girlfriend a Gucci bag or two at the mall. If the mainland crashes and if all is lost (remember, the Chinese are big savers), then ugly is not even going to be the right word to describe it.
It must be the time change, or maybe something they put in the water because I'm starting to think like you guys more and more. Good going, Daily Bell.
Reply from The Daily Bell
We thought you were going to disagree with us, but judging from the end of your feedback, maybe you didn't ... For a country to go from poor to rich in 35 years is not normal and can only be happening thanks to hyped-up fiat money and over-generous mercantilist central banking policies. And fiat ALWAYS crashes. Always.
Posted by Gul on 03/15/10 07:51 PM
I have a saying; "Politics is like a pond of sewage; only the scum rises to the top".
I am sure that applies to global politics also; because how else could the non-free market elitists have controlled the last one hundred years.
You could also say if anyone throws some of that scum (rhymes with hit) then some of it will be thrown in retort or retribution.
Posted by Lance E. Schultz on 03/15/10 03:21 PM
"While they scramble to get stupid countries [and individuals] to give up real assets."
"There is no fix to this, there is just posturing on both sides before everybody defaults."
Brillaint! Just brilliant!
Ah yes, such is the REAL paralyzing ends and the only possible outcome which could be expected from Keynes bretton based means. To establish a basis of exchange whose purpose was designed to convince mankind to trade the former real wages of his labors for a riddle. But when we retrace his steps through this wilderness it is quite difficult indeed to identify on which day he crossed over into believing Black was White and White was Black.
But greivous fellow you must see the intent of THIS riddle was not designed to destroy his concept of what is real but rather his concept of what is not. For you see Ms. NolaM's right again...
"In the end, there ain't gonna be enough substance to stick on the end of a pin."
On that day, what's silly man to do with his reason? Does not the Baker kneed the bread until it has been made pliable to his liking before forming it?
Posted by Biresh on 03/15/10 12:54 PM
Arming Taiwan, Openly welcoming Dalai Lama, threatening Iran with sanctions and war. United States is a very good friend. Now when the emerging superpower is flexing is muscles, the west is having trouble. USA forgets that it has lost its manufacturing base and consumes like hell. China won't help it for long.
Posted by NolaM on 03/15/10 12:16 PM
A must read for anyone wanting to invest in or understand China and their currency policy. The Twenty Trillion Dollar Chinese Paper Trick ......by Jimmy Lee
Click to view link
I am not affiliated in any way. I just finished reading this book last week. Worth the $20.
China sells products in USD. When their businessmen get paid for their products, They trade them with no exchange for Ywan... Ywan is used in country and devalued.
US Dollars are put into the Sovereign wealth fund and the needed Ywan is printed up digitally. Neat little double entry trick... every Chinese product bought globally adds to this farce.
Before this book I never thought to ask... where did China's sovereign wealth fund come from?
Many countries have Oil or Minerals...Retirement savings...
Where did China get theirs? Hmmmn. The Dollars that China is accumulating are counterfeit as is ALL currency the other countries print.
For one central Bank to be pointing the finger at another and calling them crooked? Laugh.There is no fix to this, there is posturing on both sides before everybody defaults. The rest is just noise. IMO... While they scramble to get stupid countries to give up real assets.
Paying for physical entities with electronic digits...nice scam...
Get physical Gold and Silver. No ETF ..
Any Stock, or markets, valued in currency is like trying to catch imaginary butterflies. You can expend a lot of time and energy waving the net around? Might even work up a breeze?
In the end, there ain't gonna be enough substance to stick on the end of a pin.
Buy the book...he is a little bit of a contemptuous 'hater' but overlook that? It is a mine of data...Hey! I just did a book report... Does this mean extra credits so I don't have to go to economic summer school?
Reply from The Daily Bell
Thanks for the book report. Sounds very interesting!
Posted by Chuck Dahmer on 03/15/10 12:04 PM
Excellent assessment by TDB.
However, I'm not as optimistic that the unraveling will be apparent to those citizens (dupes) who have already enabled global mercantilism through their incessant cries for more government control through global taxation.
The communication tool -- i.e., Internet -- that could save future generations from potential disaster is lost to those already indoctrinated to accept authority rather than weigh and reason its shortcomings.
The odds don't seem to be in favor of sanity.
Reply from The Daily Bell
Thanks. Time will tell. Again, we don't consider ourselves optimistic, just considering both sides and taking the 'Net's potential (not certain) impact into account.
Posted by V. Heddins on 03/15/10 09:29 AM
Compromise time, Sell California to China for their $3 trillion USD and then they can name it Chinafornia and we'll see if Arnold can pronounce that.
Posted by Bill Ross on 03/15/10 09:00 AM
"a more unified world..."Requires "balance of power".
This is totally beyond parochial, corrupt "rule of man" and requires the "rule of law", a position our far wiser ancestors (criminals included) were reluctantly forced to concede, since the alternative is: nobody survives the conflict and instability which precludes civilization (the rules by which we cooperate for MUTUAL self-interest):
Posted by Ichabod on 03/15/10 07:28 AM
In the brief TV snapshot I saw of Krugman, he actually said "the baseball bat" is needed as a credible threat when other means fail. He clearly takes for himself the preferred collectivist tactic: coercion. That will be used whenever they think they can get away with it. It's blaming the Chinese for the US rigid adherence to failed Keynesian socialist economic philosophy pure and simple.
I recall the first blame was laid on the US citizens; they weren't spending enough. That's still on the news everyday. When will consumers spend? A spokesman in China offered this: why not just pay workers more? Then the money would be in their pockets to spend. I don't know this man's name but he's showing more wisdom than the good professor who gets no prizes in economics from the honest money perspective.
On Fox Saturday Belinda Butler in response to a comment from a participant who mentioned Keynes, said "We won't discuss Keynes here."
Well, why not? It needs discussing. That is at the core of this failure. That and intellectual and moral failure brought on by the "free" money for money center banks which also emanates from Keynesian principles.
A close observation of China shows more realistic measures to curb so called "bubbles" than used in the US where we created the Keynesian dollar currency bubble with the printing press.
To correct that, a clamp down on citizens is forthcoming in ways that will make evident a lack of commitment to protect their rights on the part of the government. That's why such a focus now on health care.
Presented as a cost saving measure the citizens know that there will be more not less cost in the bill presented this week. There will be coercion in the bill too. Count on it.
Just draw up your list of coercive measure as you examine the bill's contents. It will be a vast loss of rights. In that the Chinese are correct. But truth always brings forth anger (Augustine's Confessions). And we will see an angry response from the administration.
Reply from The Daily Bell
Very nice. A feedbacker familiar with Augustine. Our readers are just the best.
Posted by Benjamin on 03/15/10 06:56 AM
I've a pet theory, and I wonder if the 'Bell shares it...
Do you think that, in the future, the United States will be sold? With all of our foreign debt, and little to trade with (especially if we go to a green economy), we certainly could not pay the debts with more paper. Land is the only thing left, and what do you know...
China is crowded with 1.3 billion people, and the U.S. full of untapped resources. Oh, and the fact they've gone into debt to buy ours means the government there is indebted to it's people. They'll want to be paid back. It's a no-brainer, really. It is also the perfect recipe for causing both foreign and domestic conflict, for both countries!
Of course, that is only one possible outcome. But as it is, the only way the U.S. can repay is through selling land. It's all we have left!
Reply from The Daily Bell
No, in our opinion, the US is more likely to repudiate debt than "sell" land. It's happened before.
Posted by Pat Fields on 03/15/10 06:25 AM
From my viewpoint of casual, though reflective, observation, I see China as merely a fortunate sort of bum having found a wad of money lost in the gutter of world commerce.
The Euro-American sphere has fallen philosophical prey to collectivist dementia and in consequence, through its attendant avaricious taxes, has driven all its manufacturing (wealth producing) facilities into China's gleeful embrace.
Now, it's pretty well established that highly successful individuals who lose fortunes have the critical knowledge and skills to regain that wealth in short order if only they desire to have it back. So it is in corollary with societies.
When the impossibility of collectivist ends sinks in to the general consciousness (as it certainly must), a restoration of Capitalist social order and free trade value determinations will take hold again in The West and China's ancient obsession with totalitarianist, doctrinal predilections will put the Chinese People back to rummaging in the commercial rubbish bins of world trade.