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.
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.