Posts Tagged ‘China’
The Times has the latest in a string of articles accusing China of “using global trade rules to its advantage” today. With their angry, disapproving tone and several vague references to trade imbalances, one gets the distinct impression that America (and the Times by extension) has a hard time swallowing its own medicine.
Just look at what China is being accused of:
China buys dollars and other foreign currencies — worth several hundred billion dollars a year — by selling more of its own currency, which then depresses its value. That intervention helped Chinese exports to surge 46 percent in February compared with a year earlier.
Beijing has worked to suppress a series of I.M.F. reports since 2007 documenting how the country has substantially undervalued its currency, the renminbi, said three people with detailed knowledge of China’s actions.
Horrific! Tell me, when was the last time China invaded a country for not selling its main resource in its own currency?
As for the Times’ description of the I.M.F – well, it must be read to be believed:
The International Monetary Fund acts as a kind of watchdog for global economic policy but has no power over countries like China that do not borrow money from it.
Astonishing. The IMF’s true role is that of an economic enforcer on behalf of the United States. It compels “poor” countries to take IMF loans, and when they can’t pay them back, forces the debtors to enact “structural” changes to their economy, changes usually geared towards a neo-liberal agenda. This has happened in Russia, Poland, Argentina, Chile, South Africa, Pakistan, Eastern Europe, and a raft of other countries. The IMF is not so much a “watchdog” as a “police dog”, on behalf of the United States and its “Washington Consensus” economic policies.
Then they accuse China’s “beggar-thy-neighbor” policies as being of the same sort that caused the Great Depression:
Two closely related scourges played a central role in the collapse of world trade in the 1930s: protectionism and beggar-thy-neighbor currency devaluations. World leaders set up two institutions after World War II, now known as the W.T.O. and the I.M.F., to reduce the risk of another Great Depression.
But they neglect to mention the role of US banks and the Smoot-Hawley Tariff, which the US congress enacted in 1930 and began the worldwide trend of “protectionism” during the Great Depression. I mean, this is high school level history here.
Now, there can be no doubt by this point that China is, indeed, keeping its currency devalued in order to boost its export sector. This is common knowledge. But for the Times to blame this whole situation on China belies a real bias on their part.
Remember, it would be impossible for China to keep its currency artificially devalued if the US had not run historic deficits in pursuit of tax cuts and murder in the Middle East. A very weak showing from our “newspaper of record”.
Bloomberg makes a lot of sense on Obama’s “green jobs” initiative. The problem? Most of those jobs are going to Asia.
Obama is giving billions of dollars in tax breaks to the wind and solar industries to create jobs in the U.S. even as production expands faster overseas. First Solar Inc., the world’s largest maker of thin-film solar-power modules, won $16.3 million to add 200 manufacturing jobs at its Ohio plant, yet 71 percent of its planned factory growth will go to Malaysia. The company employs 4,500 globally.
“The cost of manufacturing here is too expensive compared to Asia,” said Guy Chaffin, chief executive officer of Elite Search International, a Roseville, California-based executive search firm that has found employees for Tempe, Arizona-based First Solar and Solar Millennium AG. “As far as a flood of good jobs coming to the U.S., we’re not seeing it.”
This is serious. The Asia Times reports today that China is ready to start selling off its US Treasury Notes, ostensibly as a “punishment” for the recent US sales of arms to Taiwan. I and others previously warned about what would happen if China decided to let go of its dollar holdings – the gist is that China is the only thing standing between the US and catastrophic inflation. Previously these fears were pooh-poohed by establishment figures with the familiar arguments: “China needs us more than we need them”, “Who will China sell its surpluses to?” I even heard someone say, “Without us, the Chinese will be cavemen”. Well, it looks like China might have found itself a new trading partner, if this Asia Times article is any indication:
Dollar-denominated risk assets, including asset-backed securities and corporates, are no longer wanted at the State Administration of Foreign Exchange (SAFE), nor at China’s large commercial banks. The Chinese government has ordered its reserve managers to divest itself of riskier securities and hold only Treasuries and US agency debt with an implicit or explicit government guarantee. This already has been communicated to American securities dealers, according to market participants with direct knowledge of the events.
It is not clear whether China’s motive is simple risk aversion in the wake of a sharp widening of corporate and mortgage spreads during the past two weeks, or whether there also is a political dimension. With the expected termination of the Federal Reserve’s special facility to purchase mortgage-backed securities next month, some asset-backed spreads already have blown out, and the Chinese institutions may simply be trying to get out of the way of a widening. There is some speculation that China’s action has to do with the recent deterioration of US-Chinese relations over arm sales to Taiwan and other issues. That would be an unusual action for the Chinese to take–Beijing does not mix investment and strategic policy–and would be hard to substantiate in any event.
Where do you think we’re getting the money to prosecute these $5,000 per second conflicts in the Middle East? Where did the money for our $2,500,000,000,000 (and counting) bank bailouts come from? China. They make our money real. Without their manufacturing powerhouse backing us up, our dollars are worthless. What, you think the world is going to value our “service economy” at $13,000,000,000,000 per annum if that money weren’t backed by Chinese promises? Not likely. And now those promises are now increasingly under threat.
From the inimitable Epoch Times:
Sun Xiaodi, an environmental activist who exposed radioactive contamination of the Yangtze River, was sentenced to a forced labor camp along with his daughter. Groups supporting human rights in China are protesting the sentences.
Sun had worked as a warehouse manager at the No. 792 Uranium Mine in Gansu Province. When he became aware that the mine was discharging radioactive material directly into the Yangtze River, he spent more that a decade trying to expose the problem, according to Civil Rights and Livelihood Watch (CRLW) in China.
Sun was able to meet with foreign journalists in June 2004 to describe the environmental degradation that was occurring and provide them with relevant materials and photos of the mine. He has been under constant surveillance for his activities over the years and has been detained several times.
I suppose I need not mention that none of the American mainstream presses bothered to carry this story. Over the past few years, American newspaper readers have seen far less criticism of China’s internally repressive policies. Two years ago we had the Lead Paint Scandal and a year ago the Tainted Milk Scandal, but these were business scandals, not political. Likewise, the Tibet issue, which the American press often denounces, is a case of external repression, not internal. About the long-suffering Falun Gong or the various political pogroms which occur in China on a terrifying scale, the West hears very little. But then one can see why – as our largest creditors, we can scarce afford to rouse the money-dragon.
Perry Anderson has an excellent round-up of some recent books on the rise of China in this fortnight’s London Review of Books.
These days Orientalism has a bad name. Edward Said depicted it as a deadly mixture of fantasy and hostility brewed in the West about societies and cultures of the East. He based his portrait on Anglo-French writing about the Near East, where Islam and Christendom battled with each other for centuries before the region fell to Western imperialism in modern times. But the Far East was always another matter. Too far away to be a military or religious threat to Europe, it generated tales not of fear or loathing, but wonder. Marco Polo’s reports of China, now judged mostly hearsay, fixed fabulous images that lasted down to Columbus setting sail for the marvels of Cathay. But when real information about the country arrived in the 17th and 18th centuries, European attitudes towards China tended to remain an awed admiration, rather than fear or condescension. From Bayle and Leibniz to Voltaire and Quesnay, philosophers hailed it as an empire more civilised than Europe itself: not only richer and more populous, but more tolerant and peaceful, a land where there were no priests to practise persecution and offices of the state were filled according to merit, not birth. Even those sceptical of the more extravagant claims for the Middle Kingdom – Montesquieu or Adam Smith – remained puzzled and impressed by its wealth and order.
A drastic change of opinion came in the 19th century, when Western predators became increasingly aware of the relative military weakness and economic backwardness of the Qing empire. China was certainly teeming, but it was also primitive, cruel and superstitious. Respect gave way to contempt, mingled with racist alarm – Sinomania capsizing into Sinophobia. By the early 20th century, after eight foreign forces had stormed their way to Pekin to crush the Boxer Uprising, the ‘yellow peril’ was being widely bandied about among press and politicians, as writers like Jack London or J.H. Hobson conjured up a future Chinese takeover of the world. Within another few decades, the pendulum swung back, as Pearl Buck and Madame Chiang won popular sympathy for China’s gallant struggle against Japan. After 1948, in a further rapid reversal, Red China became the focus of still greater fear and anxiety, a totalitarian nightmare more sinister even than Russia. Today, the high-speed growth of the People’s Republic is transforming Western attitudes once again, attracting excitement and enthusiasm in business and media alike, with a wave of fashion and fascination recalling the chinoiserie of rococo Europe. Sinophobia has by no means disappeared. But another round of Sinomania is in the making.
The review is nuanced, scholarly, and even-handed. Definitely worth a read.
A very wealthy friend of mine in India sat to discuss the various maladies that plague this dark and beguiling continent:
“Thank you for taking the time to speak with me. What do you make of all this Telangana business? People are really getting agitated about it. On the way here I saw an open-top truck full of activists – there was one policeman and and about twenty people shouting “Jai! Telangana!” at the top of their lungs. I guess they were being taken in or whatever, but the truck stopped at a light and they all climbed over the sides and started laying down in the road! They were shouting “Jai! Telangana! and waving flags the entire time. One SUV screeched to a halt just before hitting one of them.”
- “It’s a problem. But what you have to realize is that this has been boiling up for more than 60 years. I definitely think the central government botched this issue – in fact I can’t see how they could have done a worse job of it. All these contradictory pronouncements, the half-decisions and endless recanting – it’s making these agitations much worse. It’s clear nobody knows what they’re doing. But with that said, you really have to go back in history to understand why these people feel so strongly about this.
Why do you think Andhra Pradesh is even a a state to begin with? Nehru – the first prime minister – he wanted “linguistic” states; every language its own state. This was one of those rare instances where the wants of the population and the politician’s schemes line up perfectly. Before 1956 India was organized much as it had been under the British. But people were angry – a lot of language groups were split up – and the borders themselves were a colonial legacy. At the same time, the politicians saw the value of the idea – Hindi is by far the most prevalent language in India. If you could get all the Hindi-speakers under one political structure, the vote bank would basically decide elections. And so it has, since then. The north is mostly Hindi-speaking; you have Uttar Pradesh, Madhya Pradesh, Bihar – these are some of the largest states. With the way things are organized, the North can overrule the South. I believe you had a similar situation in America.
And you have to ask: were the borders drawn correctly? Did they do a good job? It is very ironic that Andhra Pradesh – the state from which Telangana wishes to secede – was itself the product of a bitter secession movement. Before 1956, this whole area belonged to what was then a Tamil-speaking state. Even now many Telegu villages exist in Tamil Nadu, and all over India there are villages in a similar situation. Remember, this country has 18 distinct “languages” and hundreds upon hundreds of dialects.
So when Andhra Pradesh got its independence from the Madras state, it took the Telangana region, which used to be the Hyderabad state, along with it. They spoke the same language, after all! But no one really asked Telangana if it wanted to come. Later its only rivers were dammed up to provide electricity to the coastal region, diverting them from the Telangana farmlands. That’s a major reason why they’re upset now.
We need to ask ourselves: ‘How do we want our country to be organized?’ ‘Was it even a good idea to have linguistic states’? In my opinion it was not such a great idea – and even if it was, the implementation has been atrocious. Ask me, I think the administrative divisions should be done by population or resources. I think that would make the most sense.”
“It’s interesting that you bring up Nehru. I’ve really noticed a shift in people’s attitudes regarding their erstwhile Prime Minister. Time used to be when his name was almost synonymous with god. What happened?
- “Nehru was a man whose time had come and gone, but nobody knew it. He didn’t know it – and the country certainly didn’t either. They kept voting him back in, more from habit than anything else by the end. Only now are we beginning to realize that many of the problems we just can’t seem to solve sprang up under his rule.
Who else can we blame for Partition? Jinnah, maybe – well, probably. But who gave Jinnah his voice? Who listened to him? Nehru. He was the leader of the largest – indeed, the only – mass political party India had ever known. It was certainly within his power to block Partition. But he went along with it. Why? Well, that’s a mystery – maybe he just wanted to get independence over with and – who knows? – maybe he actually thought the Muslims had a point. But I think he just didn’t care what happened to those desert-and-swamp areas; just so long as he could have his India. You know the day after Independence, he moved right into the former Viceroy’s mansion. That’s when you knew.
Think of Kashmir – Nehru’s home state. Do you think that had something to do with it being incorporated into India? They originally offered a plebiscite, but then they backed down when it looked like the Kashmiris were going to vote to become part of Pakistan. So he let the Hindu king of Kashmir decide. Hence the dispute. But what was done cannot be undone, and now Kashmir finds itself surrounded on three sides by countries who want a piece of it – Pakistan, India and China.
And think of the colossal corruption that went on under his watch! Twenty years after Nehru died, his grandson, Rajiv, calculated that out of every 100 Rupees the Indian government spends, only 15 gets to its intended target. 85% is stolen by bureaucrats! Under whom did this system start? For that matter, who consolidated the Nehru-Gandhi dynasty? Why is India being ruled by an Italian whose sole virtue is that she happened to marry Nehru’s grandson?
He was a vain man, you see. He thought the country would be lost without him; that only he knew how to rule India. So he surrounded himself with people who believed just that. And pretty soon nobody questioned it. And he kept running – and kept winning! After all, he’d convinced the whole country it was unsafe in any other hands. Your George Washington – what did he do in a similar situation? He quit after two terms. Nehru couldn’t do that – or he wouldn’t. Anyway, I can’t be sure anymore that we benefited all that much for his 18 years of rule.”
“But it’s just as you said, isn’t it? There was no one else. Nehru had to run – you know? To what extent is he responsible that no one else came forward? And at any rate, you have to admit Nehru was popular. People adored him, worshiped him even. Surely that played a role as well.”
- “It’s a vicious circle. The people here are extremely susceptible to the cult of personality. You’re surely seen the political posters last election. There’s a reason they all show only faces. Most people, that’s all they recognize. Don’t bother asking about policy. The leader is leader. It’s our duty to vote for him, and that’s that. The people blend their identities in with the leader – they believe in him, you see, because they have little else to believe in.
“Do you think this might relate to the Telangana issue? One thing I remember hearing from the protesters I spoke with was the ‘self-respect’ angle. A lot of people saw this as a battle for their self-respect. I think that’s a big appeal of this K.C. Rao, who’s apparently leading this mob – they see him as a beacon of Telangana self-respect. And I guess I notice that not only Telangana lacks self-respect, but at times Indians do as well. I’ve often heard people describing their own country as a “backwater” and their fellow citizens “second-rate people”.
- “Well to get those sentiments in context you really have to remember what India went through over the last millenium – what it’s still going through. Let’s see, we had 600 years of Muslim rule and… well, let’s say 200 years of British Empire. That’s 800 years of invasion – 800 years of foreign rule. Of slavery, really. I mean, I know people get touchy about that word but “Colonial rule” is nothing but a dressed-up euphemism. For 800 years India was made to feel like dirt, worthy only of scorn. The Muslim invasion badly wounded us, and the British nearly finished off whatever dignity we may still have retained. And it goes deeper than just the mentality – it gets into the genes. 800 years – that’s almost 30 generations of slaves. Slave genes – that’s what developed. That’s why you see such apathy among the public, such slavish devotion to the thieving politicians and thieving West.
“But it goes farther back than that, doesn’t it? What do you think of the caste system? Wasn’t that essentially inward colonialism – inward slavery? I read somewhere that something like 60% of the population were so-called “untouchables”, forbidden to interact with “caste Hindus” and relegated a life of hardship, labor and disappointment.”
- “Oh yes, the caste system is a terrible blight upon our civilization, and it still goes on today. How dare we preach peace to the world when our own house is in such frightening disarray? The Brahmins were slave-masters, yes – and the whole country bowed down to them. And you have to realize the rigidity of the system they devised. Where do you think the idea of karma came about? You hippies in the West, I hear you love talking about karma. Do you know what it means? Karma was a justification for Brahimincal tyranny – a justification for slavery. If you can make people believe that they deserve their station, that it’s no use trying for anything better, that their suffering is due to misdeeds in some imaginary previous life – well, then, you’ve got them exactly where you want them. That’s why for centuries – millennia! – there was no reform movement in Hinduism. Everyone stuck to their place, and in fact, they were proud to do so! This is where the concept of Dharma comes in – the concept of one’s “duty”. They convinced the latrine-cleaners and street sweepers that it was their duty to endure the abuse of the higher castes! You couldn’t possibly imagine a more insidious or effective ideology for controlling slaves.
“But there were reform movements, weren’t there? What about Buddhism?”
- “Buddhism, right – you know what happened to Buddhists in India, don’t you? The Brahmins kicked them all out! They were getting too uppity, and challenging Brahmincal authority. You see all the lower-castes – those 60% of Indians who were the dirt of society – they all began converting to Buddhism en masse. They began to want equality, some fairness in who does what jobs. Obviously you couldn’t have this, so the Brahmins got together and kicked them out. A thousand years later you saw the same thing happen with the Muslim invasion – all the trodden-upon members of society began to convert to Islam. At least as Muslims they’d be equal in theory – as Hindus they were nothing. Likewise when the British showed up with their Christianity. So Hinduism got some big chunks taken out of it – but the system of control was so ingrained that most people stayed. In fact, we didn’t really get a reformer until Swami Vivekananda, and that was in the 19th century, 3000 years after the Vedic Civilization! And then you had Gandhi, who I’m sure meant well, but… well look at the condition of many Indians today. 500,000,000 without regular food supplies. Clearly the reforms haven’t worked.”
“I want to know your views on Pakistan and China. The Pakistani intelligence service – the ISI – is widely blamed for the 26/11 attacks on Mumbai. They’re taking aid from both America and China, and seem to have a single-minded desire for India’s destruction. Will India and Pakistan ever get along? What is the role of the US in all of this?”
- “I’ll say this about Pakistan – they’ve got some clever rulers. Clever! Sometimes I wonder why their people are so impoverished, since their leaders seem to be so smart. But I guess it isn’t cleverness per se – merely dull opportunism. They’re clever like a bully is clever. They understand power. I mean look at the game they’re playing right now; pitting America and China up against one another. And America is playing the same game – pitting Pakistan and India against each other. All that money America gives to Pakistan – you think it actually goes toward “combating terrorism?” No! It goes to commit atrocities in India. The 26/11 attackers were paid for with American dollars.
But at the same time, America wants India as a bulwark against China. So they court us with civilian nuclear deals and “technical assistance”. To tell you the truth, I really resent that India needs America’s permission to build nuclear reactors – that we’re forced to play their one-sided game. But how can we refuse? They go to Pakistan otherwise. America certainly looks as if it’s warming up to India – but they want to keep a Pakistan strong, too. It’s in America’s interest to keep the Indo-Pakistani rivalry going; only then can America take advantage of both. You’ve heard the phrase ‘divide and rule’? So, no, I don’t see peace between India and Pakistan – at least not for the foreseeable future.
Similarly, China wants a strong Pakistan to keep India weak, which makes perfect sense. China sees India as a threat – not a traditional threat, mind you, but like this nuisance to the east that can only slow their growth. Recently we had a diplomatic situation with China wherein they wanted to dam up a shared river – cutting off flow to India. We really had no choice but to let them do it. And it’s only a matter of time before all the rivers will be dammed. The next wars will be over water. Remember that.
We in India don’t have the political will to meet these threats – in fact, we’d just as soon not hear of them. We’re too wrapped in our own cocoons – too beholden to the grip of tradition to notice or care.”
“That’s a little unfair, isn’t it? I mean, you have to admit that ‘development’ (such as it is) is occuring in India. Millions of people are getting their lives lifted out of poverty. Literacy rates are up, unemployment is down, and people really seem to be breaking out of this cycle of tradition. Wouldn’t you say?”
- Don’t make me laugh! Whatever “development” you see is solely due to the West – due to a desire to emulate the West. What kind of indigenous “development” have you seen in your time here? You think we’re “developed” because rich people can eat Pizza Hut now? You think Microsoft and Wal-Mart constitute social change? We’re exactly in the same position we were in under the British, only now we pledge allegiance to America instead. But the the hundreds of millions of Indian peasants, who still find themselves ground under the heel of starvation and want, this decade of “prosperity” has meant nothing to them. And always remember that these gains of the Indian middle class cannot last. We dithered for too long – we got into the game too late. Most of the oil has already been burned, most of the coal already extracted. We’re playing this ridicilous game of “catch-up to the West”, but the joke is on us. India will never be a first-rate global power. Maybe if we ask nicely China and America will let us into the club. But we’ll always be second-rate. We’ve got too much baggage – too much dead weight.
Sometimes I think we’d be better off as a one-party state, like China or your America. Here nothing ever gets done. We debate and debate, compromise and vote, and in the end we end up with half-decisions, or more usually, no decision at all. This Telangana issue is just one example. I think we have too much democracy. We need someone to tell us what to do – that much is painfully clear. First it was the British, and now America – they say jump, we say ‘how high?’; they say ‘develop’, we say ‘right away, sahib.’
“That’s pretty bleak. Anything else you’d like to add?”
- “We’ve been independent for 60 years. It’s astonishing that we haven’t even begun to solve any of our problems – in fact, they’ve gotten far worse under our watch. Overpopulation, starvation, bonded labor, inequality – these were all crimes we laid at the feet of the British. Who are we to blame now?”
The Times gives a nice in-depth scoop on yet another tainted milk scandal in China. The same industrial contaminant, melamine, again found its way into thousands of dairy products, ice creams, frozen yogurts, etc. The last time this was publicized was in 2008, but apparently contamination has occurred continuously throughout. More than 300,000 people were sickened in the 2008 outbreak, and the Chinese government felt itself compelled to execute 2 people over it. As they say, heads will roll.
The article reports that Chinese outlets are quoting the head of the Guandong Dairy Association as saying the contamination was kept quiet “in order to safeguard the good name of the dairy industry.“
This, I think, is significant. In the former Soviet Union and Mao-era China, scandals like these occurred at an unprecedented rate – and on a far larger scale. The failure of Stalin’s collectivization, the horrific famine attendant the “Great Leap Forward”, and China’s sham “backyard steel” industry were massive blunders that caused untold human suffering. (The Great Leap Forward alone killed 30,000,000 Chinese peasants.) But what’s striking about these mistakes was that they continued long after the plan’s stupidity became clear. Khrushchev tried planting maize in Russia and kept trying after years of crop failures. Mao continued to force his peasants to make steel in their backyards, long after it became clear that they could only produce worthless pig iron. What made these leaders so blind?
One theory is the hierarchical power structure of both countries. Power there was strictly a top-down affair; everyone had a boss, everyone a subordinate. And the bosses had unusual latitude in “firing” their subordinates. In those countries (especially during their “great terror” phases; 1936-1945 in the Soviet Union, and 1966-1976 in China) being “fired” meant you were actually shot.
As a result, a culture of abject terror developed – if you were an inspector or some other bureaucrat, you simply couldn’t report bad news, or at least report it and expect not to be arrested the next day. So you had these spectacular failures in practice – but on paper the economy was still chugging along; growing, in fact, at an unprecedented rate. Solzhenitsyn writes extensively about this system (called Tufkta) in Russia, and I can only imagine it was similar in China.
Over the years, these once-totalitarian countries began to ease the internal repression. They were still nominally one-party states, and you could still get in trouble for joining the wrong organization (see the Falun Gong in China) – but so long as you did your job and weren’t overtly anti-government, you could reasonably expect to avoid being arrested. Yet the same culture of Tuftka, of fudging the numbers to make things “look better” persisted. Hence China’s dizzying (and dubious) GDP growth.
China’s bureaucracy is not well-suited to solving problems like tainted milk. The opportunities for corner-cutting, for graft, are just too great – and after all, its ruling party doesn’t exactly have to stand for election. It will be interesting to see how they reassure the world of the quality of their products; whether they’ll execute a few more low-level functionaries to show us they mean business. For it’s clear that China seeks the world market. And it’s equally clear that Europe and America (as well as China’s domestic population) are not interested in a tainted product.
Bloomberg with a terrifying report:
Jan. 15 (Bloomberg) — Nissan Motor Co.’s factory in central China is making cars almost 24 hours a day, yet Pan Xiaowei still waited three months for her new Tiida compact to arrive at the dealership.
“It wasn’t like this a couple of years ago,” said Pan, 34, whose husband runs a property development company in Shandong province. “We used to buy and get a car straight away, and now you have to pre-order and wait.”
China overtook the U.S. last year as the world’s largest automobile market with sales surging 46 percent to 13.6 million, according to the China Association of Automobile Manufacturers. Nissan, Ford Motor Co. and Honda Motor Co. are running their Chinese factories at full capacity, with overtime and weekend shifts, and still can’t deliver enough cars.
“Based on our current growth rate and planning assumptions, the capacity of our two facilities will not be able to accommodate the expected future demand for our products,” Nigel Harris, general manager of Ford’s venture with Chongqing Changan Automobile Co., said in an e-mail.
This is not good. The article also mentions that cars are “ceasing to be a luxury item and are instead becoming a standard consumer product.” And there’s 1000 million of them.
Incidentally, China is already dealing with some major traffic issues, as the Daily Mail demonstrates:
I imagine they’ll be seeing more of this. A few weeks ago, The Nation ran a correspondence piece from Christopher Hayes in China entitled “The Great Leap“. In the opening paragraphs he lets us in on the magnitude of China’s automobile frenzy:
At a tour of a car factory in Chongqing, the guide from Chang’an Motors pointed to the boxy gray minivans rolling off the assembly line and, beaming, said, “There are 800 million Chinese peasants who need these cars!”
He’s right, of course. China “should not be expected to stay forever as a bicycle kingdom,” as Yu Qingtai, special representative for climate change negotiations, told us. But 800 million new cars–think about that for a moment.
Until we shake off this neo-imperial paradigm of “development”, I fear the “third-world” will forever be deceived into chasing an impossible dream, and irrevocably poison themselves in doing so.
So everyone is talking about Google’s latest threats to China. If you somehow haven’t already heard, Google is suddenly pissed at Chinese policy for some reason and is now threatening to leave. I think the Chinese government hacked some e-mails or something? Anyway, Google just isn’t going to take it anymore.
This news is in its speculative stage (just a little baby!) but already it’s grown into a behemoth, dominating the business sections of The Times, The Journal, pretty much every other “serious” newspaper, and of course, all the myriad blogs. What makes this development so puzzling, and what few have bothered to mention, is that until now Google.cn has cooperated fully with China’s censorship program, removing results to searches containing words such as “Tiananmen square massacre”, “Tibet”, “democracy”, “protest”, and so forth. In the past, they have received copious criticism for this blatant disregard for their (supposed) motto of “free information”.
In its blog, Google briefly mentions that it will no longer cooperate with the Chinese censorship program, and then launches into a harangue regarding hacked e-mails and “attacks” on Google’s infrastructure:
We have evidence to suggest that a primary goal of the attackers was accessing the Gmail accounts of Chinese human rights activists. Based on our investigation to date we believe their attack did not achieve that objective. Only two Gmail accounts appear to have been accessed, and that activity was limited to account information (such as the date the account was created) and subject line, rather than the content of emails themselves.
As part of this investigation but independent of the attack on Google, we have discovered that the accounts of dozens of U.S.-, China- and Europe-based Gmail users who are advocates of human rights in China appear to have been routinely accessed by third parties. These accounts have not been accessed through any security breach at Google, but most likely via phishing scams or malware placed on the users’ computers.
Okay. I understand why Google might want to backpedal on its cooperation with China’s censorship programs. It was never a good idea to begin with, ran completely opposed to Google’s stated aims, and sparked a lot of really bad publicity. But why not say as much? Why the feigned surprise and outrage over China’s “hacking” of Google e-mail accounts? Obviously the Chinese Government has some kind of beef with human-rights activists (and Google should know: they voluntarily censored the words “human rights” in their Chinese searches for four years) – was Google really that surprised that the Chinese government decided to take a peek into some dissident G-mail accounts?
And this further begs the question – will Google apply this standard to all countries, or just China? As they well know, the UK also has a warrantless surveillance program, with specific clauses for e-mail. In the UK, the exact practices which so offended Google in China (accessing accounts via “phishing scams or malware”) are legal and apparently occur as I write.
The Times of London reports in an article entitled “Police set to step-up hacking of home PCs” that the UK police are also hacking e-mails:
Police might also send an e-mail to a suspect’s computer. The message would include an attachment that contained a virus or “malware”. If the attachment was opened, the remote search facility would be covertly activated. Alternatively, police could park outside a suspect’s home and hack into his or her hard drive using the wireless network.
Oh… Yeah, that’s pretty much what China is doing. I wonder if Google will set up a huge press conference to announce it’s pulling out of Britain now.
And remember, the US still has warrantless wiretapping on its books, which means that in addition to e-mail, the US government can listen in on phone calls and regular conversations without approval from a judge. Obviously this means the US government can also hack e-mails (even Google e-mails) at its whim. Will Google write a new blog post to decry these “attacks and surveillance”, prompting them to “review the feasibility of operations in the US”? Somehow I doubt it.
So hooray, I guess, for Google finally standing up to the Chinese police state. One only wishes it would do the same for other surveillance states.
Hillary Clinton announced a $100 billion fund to help “developing” countries cope with the effects of climate change at Copenhagen today. The EU had already promised $200 billion for the same purpose, and I suppose the US was shamed into throwing its own symbolic dime into the hat.
So, for the record: the US will spend upwards of $2,000 billion bailing out its banks and another $3,000 billion prosecuting its murderous rampage in Iraq, Afghanistan and Pakistan. But to help poor countries suffering from the effects of climate change (of which the US stands as the primary culprit), only $100 billion can be found.
Hopeful observers of the Copenhagen climate talks have been holding their breath to see when the first major dispute between China and the US would erupt. The two countries, after all, come to the conference with irreconcilable goals – the US wants the world to forget that most of the CO2 already in the atmosphere was made in America, while China wants the US to quit hoggin’ all the carbon, and let someone else try burning for a while. It seemed only a matter of time before these two viewpoints clashed, and behold, they just have.
China refuses to allow international inspectors to see firsthand its promised carbon cuts, which is leading many to assume that, like their vaunted GDP figures, their emission reductions will be true on paper only. The US also believes that China’s stated target (a reduction of “carbon intensity” by 40 percent) is “disappointingly low”. Carbon intensity means emissions per unit GDP, so carbon emissions could still grow precipitously, even if “intensity” is cut, provided GDP also grows (a safe bet, given China’s decade-long 8% annual growth).
This, of course, makes the US “reluctant” to adopt emissions cuts of their own, and it is clear that without a firm committment from both the US and China, the Copenhagen talks will have been a failure. After all, Zimbabwe isn’t exactly the one we need to convince.
One question which every American needs to answer, but which few have so far been willing to concerns per capita emissions, of which the US stands at the head. US per capita emissions are 4 times that of China and more than 10 times that of India. What gives an American the right to emit four times as much carbon as a person from China? Don’t bother asking our delegates to Copenhagen! (They either don’t know, or don’t care.)
If you have been following the recent media saliva-thon regarding The Obama’s recent trip to China, you may be under the impression that the trip was an utter failure, an abject round of grovelling and slavering, and an unmistakable sign of both Obama’s incompetence and America’s irrevocable decline. That is the predominant message the US mainstream apparently wishes to get across, with its endless narrative of Obama as a “profligate spender coming to pay respects to his banker”.
Once we in the US agree upon a story, we tend to believe it in the face of contravening evidence (WMDs anyone?). How else to explain our ignoring of this article in China’s (state-run) China Daily? If one takes its message at face value, this article indicates a major victory for the Obama Administration.
From the article:
The vice-foreign minister said the RMB rate’s flexibility may widen, echoing the nation’s central bank a month ago.
The announcement by Vice-Foreign Minister Zhang Zhijun comes after the People’s Bank of China, which has the power to oversee the yuan and financial institutions, said it was in the process of reforming the exchange rate system.
China is also starting to receive more international pressure to let its currency appreciate. The nation adopted the policy of loosely pegging the RMB to the US dollar since the financial recession began.
“China will increase the flexibility of the RMB exchange rate at a controllable level in the future,” Zhang said, “based on the market demand and with reference to a basket of currencies.”
China Daily is essentially the equivalent of Pravda in the Soviet Union – a state-run publication whose role is to inform the public and businessmen on official government policy (aside from the ‘state-run’ part, not at all dissimilar to our US media). Of course, their articles are written in byzantine journal-ese and one won’t find the slightest breath of dissent within its pages, but over the years it has grown useful in deciphering what the Chinese leadership wishes to say publicly.
Thus the surprise. For more than two years now, China has steadfastly refused to allow its currency to appreciate, an act which nearly every other country considers cheating (or “aggressive monetary policy”). By keeping its currency pegged to the dollar at favorable rates, China puts its export market on steroids. The US has made its position on this practice abundantly clear; our Treasury Secretary castigated China for it literally on his first day, and our leading Nobel Laureates write accusatory op-eds in our state-run newspapers demanding that “something be done”.
Now, a few lines in a China Daily hardly pass for a substantive policy announcement, but one is led to think that Obama and his Chinese doppelganger had a nice little chat while he was over there, and they made some kind of agreement regarding China’s “currency manipulation”.
If China allows its currency to appreciate, they will have acceded to Obama’s central (though unstated) goal in visiting Asia. They will also have begun to do their part in reducing our monstrous and unsustainable trade deficit. However it is also clear that any currency re-valuation on the part of China will spell hardship for America’s “middle class” (that is, the bottom 95%). We depend on cheap products from China to a wholly unhealthy extent, in much the same manner as a heroin user. When inexpensive Chinese currency is no longer an option, import prices are bound to inflate. Of course, this matters little to our policymakers at the top; their interest is in preventing the further hemorrhaging of value from the dollar, thus securing their overseas investments.
So! Good news, I guess?
Paul Krugman’s recent bellicosity in The New York Times has seen much discussion, though more for its economic implications than its political. The tone with which he writes reflects a growing indignation among our policy circles toward China’s monetary dealings. Krugman asserts, essentially, that China cheats, and most of our policy makers (most notably, Timothy Geither) seem to agree. Krugman’s offering is worth discussing in detail because it presents, in a form to be consumed by the public, a significant debate occurring on an international level.
Like most of the economic establishment, Krugman believes that a so-called “weak” dollar should actually benefit the US economy. A “weak” currency, he says, inherently supports exports (since the dollar would be valued favorably against foreign currencies), and would encourage employment in those industries. He rightly disparages those “conservative” demagogues who decry the falling dollar as an unmitigated evil which confers no incidental benefits.
Krugman argues, however, that China, by keeping its currency at a fixed value against the dollar, also benefits from the weakening, and in a manner much more pronounced. Their currency is set to be very cheap against the dollar, and by mandating that its value against the dollar doesn’t shift, they can ensure their currency remains the “weakest”, and their export industry thus the strongest. When the dollar tanked last summer China experienced an unprecedented boom in its exports. Our Treasury Secretary has openly called this practice “currency manipulation”, and the Chairman of our Federal Reserve can makes speeches about “international imbalances” with everyone getting the message.
Krugman even lays the blame for the global economic crisis at the feet of China’s monetary policy, saying:
Many economists, myself included, believe that China’s asset-buying spree helped inflate the housing bubble, setting the stage for the global financial crisis. But China’s insistence on keeping the yuan/dollar rate fixed, even when the dollar declines, may be doing even more harm now.
In the end he paints a rather bleak picture, asserting that “Something must be done about China’s currency”, but leaving the specifics of it up to our capable policy handlers. Unfortunately, the options we have for dealing with this situation are severely restricted. As the world’s largest holder of US currency, China remains a problem which, if handled improperly, could cost $2.5 Trillion dollars.
It is telling that Krugman implicitly blames China for its trade imbalance, neglecting to acknowledge that disproportionate exports require a ready buyer. In particular, America gratefully shipped most of its manufacturing jobs across the Pacific during the years 1998-2008 while its corporate class enjoyed an accumulation of wealth unheard-of since the 1920s. By pursuing an import-centric monetary policy (the “strong dollar” model), America did more than its part in inflating the severe trade imbalance we see today.
Finger-pointing aside, it is clear that returning to some semblance of balanced trade requires an active effort from both parties, something for which Krugman and our prevailing economic establishment only advocate a one-half response. They would like China to re-value its currency to a more “fair” proportion to the dollar while at the same time ensuring that all executive decisions and high-level positions remain in the US. The massive US trade deficit, which began under Bush II and largely financed our tax cuts and wars abroad, hardly factors into the equation.
The first step to solving a problem, after recognizing it, is to locate its sources. If we agree that the US-China trade imbalance is a problem, we cannot solve it by focusing on China’s culpability while ignoring our own.
Motley Fool gives us an excellent rundown of the arguments in favor of Dollar hyperinflation next decade.
Give it a read, and get ready to start papering your walls with Ben Franklin’s handsome likeness!
I wrote in a previous entry about the population crisis currently in the offing, and I wanted to put down a few more remarks regarding its implications from a humanist perspective. The trends of the 20th century have thrown much of what we hold as sacred truth into serious question. In particular, I am concerned with what exponential growth implies for our long-cherished beliefs of “freedom”, “equality”, and “the greatest good for the greatest number”. For if the evidence before us is correct, we are analogous to a germ or a peculiar strain of bacteria, and we are no different in substance to that bloom of algae over the pond next door. Having held a stable population under 1 Billion units for our entire previous existence, we passed that mark in 1804 and have quickly doubled since, hitting 2 Billion in 1927, 3 Billion in 1959, 4 Billion in 1974, and so forth up to today, where we stand at just under 7 Billion. Clearly some questions need answering.
Nearly all modern conceptions of morality have a strong dose of humanism at their root. Certainly all ideologies “to the left” have appealed at one point or another to a self-evident nobility of mankind. Modern humanism derives from the enlightenment philosophers, but one can trace its origins to the birth of monotheism, the human-centric universe, and the benevolent creator deity. One finds always a strong undercurrent of human exceptionalism, the belief of man apart from his surroundings and capable of choosing his own destiny.
We want to believe we are different from the other manifestations of life, and even those who smugly declare that “man is an animal” do not truly believe this to be so. It is convenient enough to compare aspects of our behavior – our will to dominate, for instance, or our obedience to authority – to that of the lion or sheep. Some would go further to observe that our essential characteristics – the propensity to multiply or the DNA structure – are found throughout the animal and floral kingdoms, and conclude we are no different. But very few would dare compare humanity to those of the lower orders, the bacteria and fungi. Few can deny that there is “something more” humanity possesses, some special trait usually called a “soul”, or if you are a scientist, “cognition”.
Thence flows much of our philosophies regarding “brotherhood of man”, “deliverance from suffering”, and so forth. “I think, therefore I am” implies much more than an affirmation of existence. It declares our separation from the natural realm, our unique and fundamental essence. It would be as if a housefly were to declare: “No other creature can fly or feed as I do. This is my natural essence and the only way I can be sure I exist. All matter exists outside of me, and my “essence” exists wholly outside the physical realm.” and then proceed to multiply at an exponential rate.
All our humanistic ideals, our desire to make the world a better place (for people), the philosophy that “man is the measure of all things”, and the conviction that man is an animal apart stem from Descartes’ famous declaration, refutations for which have since become apparent. Cognitive science dismantled, partially, the idea of mental phenomena as wholly separate from the physical realm, while our frightening proliferation across the globe throws the concept of human society removed from nature into serious question. And from these observations flow a few salient implications:
1) That plant and animal life is incompatible with human existence, save for those species directly involved with human survival.
By this I mean all lions, tigers, zebra, snakes, primates, etc. The only surviving animals will be the cow, the horse, the sheep, the chicken, etc. This trend already has a name (The Holocene Extinction Event), and has progressed to a marked extent, some sources estimating up to 250 unique species extinctions per day. Likewise our last remaining great forests, the Amazon and Congo, are being extracted at a rate of several thousand square miles per year, further exacerbating the problem. The point here is that such developments are inevitable – or at least highly encouraged – under exponential human population growth. It is significant that much of the deforested land has been converted to farms and cattle pasture.
2) That humanistic impulses to eliminate poverty, deprivation, suffering, etc. have a hidden restriction.
The restriction, of course, being the constant addition of new humans and the constant depletion of non-renewable resources. The poorest countries in the world also have the highest rates of growth, so efforts to eliminate poverty are always hampered by the ever-increasing number of persons actually in poverty. Likewise, many of the things we consider to reduce poverty – steady food, shelter, transportation, running water – have energy implications which are frightening to contemplate. As oil and coal are virtually the only sources, the question becomes: is there enough?
3) That resistance to climate change is anti-human in nature.
By this I mean that the expulsion of carbon dioxide is necessary for the proliferation and comfort of human beings – and if we are to stop emitting CO2, we must necessarily reduce our numbers or standard of living, or both.
We live now in a frightening world of resource depletion, exponential growth, and overpopulation. The most salient question of the 21st century is whether or not we can reconcile our humanistic beliefs with the situation before us.
The Hindu gives us an excellent preview of China’s upcoming military demonstration. Ostensibly in celebration of “National Day”, the exercise occurs at a time of economic confrontation between China and the US.
From the article:
Next week, Tiananmen Square will host military drones, satellite launchers and new radar systems, reflecting the transition of China’s armed forces from a lumbering, unwieldy military unit, one that was “lax and bloated” in former leader Deng Xiaoping’s words, to a sleeker, more high-tech outfit.
Showcasing the new weapons systems would serve two purposes: displaying the military’s prowess “to build national sentiment” at home and sending a message abroad of the army’s capabilities, said Brigadier Arun Sahgal of the Institute of Peace and Conflict Studies, New Delhi.
“To the U.S., the message is that we are fast bridging the technological gap,” he said. “To major Asian powers, namely India and Japan, there is a coercive context in terms of conventional and strategic asymmetry.”
Needless to say this is not a good sign, coming, as it does, on the heels of a serious trade dispute. “Deterrence” is a fine excuse for militarism, but it is invariably false – no one builds an army not to use it. Ask any empire, starting with the US.
So this is how China plans to release itself from its dollar obligations.
China, for the past decade and more, has gorged itself on US Treasury Securities, investing heavily in the dollar and amassing by now over $2 Trillion in US assets. They represent the single largest holder of US dollars, and they’re not happy about it.
Oh, it was well and good while the US consumer economy boomed (up to 2007), but now that our economy has slowed, our deficit has soared, and our National Debt has loosed from the realm of reality, China is seeking a way out of its US holdings.
Indeed, as early as March 2008 China expressed its “worry” as to the health of their US investments and the ability of the US to pay back its debt. They have since sounded a steady drumbeat in favor of an international currency, or even a basket of currencies. A recent spat over tariffs exacerbated the tension. It should suffice to say that China is deeply unhappy with its investments in the US dollar, and, after seeing Obama’s $9.2 Trillion deficit projections, seriously doubts that the US will be able to pay back its debt.
At the same time, China is trapped. They hold $2 Trillion in securities and cannot get rid of them. As the largest holder of US assets, the rest of the world takes their lead when it comes to US investments. If China were to suddenly sell their US Treasuries, or even hint that they were about to, the rest of the world would likely follow suit, crashing the dollar and rendering China’s investments worthless.
Likewise, the US economy itself would collapse, along with our consumer power, should China decide to dump its US assets. Since China’s economy is “export-oriented” (their prosperity depends on a huge export vs. import ratio), collapsing the dollar all at once would be tantamount to shooting themselves in the foot.
So for the time being, China has no choice but to play our game. But there are indications that they’ve decided upon a solution: a Global Shopping Spree. The idea, so far as one can ascertain, seems to be to spend as much as possible on commodities and hard resources (as opposed to “soft” resources, such as security-backed assets), thus converting their dollars (which they perceive as worthless) into tangible items (factories, coal, oil, etc.)
Once they’re satisfied they can simply dump their Treasury bonds, and provided they can stoke domestic consumption to make up for a decline in US consumption (we’ll all be poor by that point, remember), they should emerge as the undisputed economic hegemon.
From the article I link in the opening paragraph:
Late last month, PetroChina made a $1.9-billion bid for a majority share of two Alberta oilsands projects–a deal to buy a 60% interest in Athabasca Oil Sands Corp.’s MacKay River and Dover projects.
CIC made its first major investment in a Canadian company in July when it acquired a 17.2% stake in Teck Resources, Canada’s largest diversified mining, mineral processing and metallurgical company. Teck also holds a 20% interest in the Fort Hills oilsands project owned by Petro-Canada.
(CIC is the Chinese Investment Corporation).
China has also expressed interest in converting its dollars into US property assets:
As the CIC turns its attention to America’s damaged real estate assets, there is little information regarding how much the fund is willing to invest, but the potential firepower of the sovereign fund is huge. Some have suggested that it could be upwards of $10-billion (or more) by 2014.
The CIC this year has invested money in a real-estate trust in Australia and bought an indirect stake in Canary Wharf Group in London. In addition, it has put some money into a global property fund run by Morgan Stanley. Clearly, China will continue to pour billions, if not trillions, of dollars into direct investments around the world.
I wonder how hard it is to learn Chinese.
The banker from the previous post also commented upon China Question (i.e. “is it a good idea to borrow so much money from China?) His answer repeated almost verbatim the answer I previously received from several of his industrial colleagues.
Without the US (runs the standard interpretation), China would have no market for its goods, and thus, for China to prosper, the US must also prosper.
He continued to remark that no other country has the raw purchasing power of America. Our GDP outstrips the next largest by a factor of three. Only the combined European Union has a larger economic output than ours.
(A graph, to illustrate. The Y-axis is in millions of US dollars.)
It’s clear that no other country has the power to fuel China’s growth. If they wish to rise their people from the depths of poverty they must do so through us. Who else can they sell to? Therefore, my friend triumphantly concluded, China will do nothing to sabotage our economy.
Tellingly, however, he made the statement: “We need them and they need us – maybe they need us a little less, but the fact remains.”
He winced when I noted that these figures are based on dollar-centric monetary system. There was a possibility, he conceded, that China may wish to supplant the dollar as global currency with another, or even its own.
But this was “at least five years down the line”, he declared.
I just spoke with a relatively high-ranking investment banker who said he was “extremely worried” about dollar inflation. He said double-digit inflation within the next five years was a “certainty”, and mentioned some compelling reasons as to why it hasn’t happened yet.
First, the role of China in purchasing our debt cannot be overstated. They are the lifeblood of our liquidity. The dollars they pump into the Treasury have had a huge effect in keeping US interest rates low.
Also, my friend pointed to the Federal Reserve’s prime lending rate, which has been kept artificially at zero percent for almost a year now. This essentially amounts to free money to whosoever wishes for it. Needless to say the lending rate cannot be kept at zero indefinitely, and when it rises, my friend said he expects inflation to shoot upward as well.
His advice? Invest in gold.
Earlier I suggested that the Fed’s decision to drastically increase the money supply would debase the dollar, and ultimately render it worthless. When considered along with our debt to China, the monetary “magic” the Fed has just engaged makes fears of inflation, even of a prolonged inflationary cycle, rather justified. And yet the people who forge our financial policy, the businessmen of Citigroup, AIG, Goldman, et al. will not even entertain the notion of such an event. The link above outlines the major arguments they use to convince themselves of the impossibility that the dollar should significantly inflate. They are compelling, no doubt, but ultimately fallacious. Though they make liberal use of popular economic misconceptions (then again, so do most squealers of hyperinflation), their arguments do not stand to reasonable scrutiny.
The first and most powerful argument put forth by the anti-inflationists (most powerful because for the moment it happens to be true), is that we are nowhere near an inflationary cycle – in fact, prices are in a free-fall: what we are experiencing right now is deflation, on a large scale. In one sense such claims are undoubtedly correct – the whole reason for this crisis was the rapid, irrevocable deflation of securitized assets. Bundles of loans including sub-prime and prime mortgages, credit cards, student loans, car loans, etc. which in June 2008 were worth, say, $100,000, found themselves trading for pennies by November. Thus our banks saw their entire profits for the last decade totally cleared from their books. They panicked, and held a gun to our tax-paying heads, threatening economic devastation if they did not get the cash infusions needed to become profitable once again. Since securitized assets were our banks’ prized possessions, their losses compelled the financial sector to hoard whatever cash they had left on hand. Thus the mantra repeated by the Treasury Department that the economy’s major problem is that “our banks won’t lend”. Lower credit implies lower industrial output, so commodities began to deflate in price as well. By this argument, whatever currency the Obama Administration happened to print is insignificant compared to the wealth that had just been “destroyed”, and inflation should present no worry whatsoever. The numbers analysts generally float are $ 4 Trillion in “destroyed wealth” vs. $2 Trillion in printed money. The created funds don’t cover the destroyed funds, so we shall deflate if we don’t create more.
Of course that line of reasoning employs several fallacies, the most glaring of which I highlighted in quotation marks. Wall Street’s greatest sorrow over the last year has been what they termed “destruction of wealth”. They refer, in that buzzword euphemism, to the fact that AAA-rated pieces of paper once worth millions are now so worthless that only a child would want one (so that he may draw on the back). Banks that once thought themselves to be doing so well that they handed out million-dollar bonuses to the mail clerk, abruptly learned of their financial ruin one sad day in September. Their wealth had been “destroyed”, so to speak, by the vagaries of the market.
But did such “wealth” really exist in the first place? It is not a trivial question. A country who has had its factories bombed can rightfully declare that its wealth was “destroyed”. Once there was a factory churning out products, now it is a smoky ruin. But if a few friends and I decide at one point to treat Monopoly dollars as real cash for inter-group transactions, slave for it, fight for it, think ourselves rich for it, and then suddenly realize it’s only Monopoly money and worthless after all, was our perceived wealth “destroyed”? Wouldn’t it be more accurate to say that it never existed in the first place? This analysis is more plausible than it would first appear – since our departure from the gold standard, our fiat currency has essentially been Monopoly money agreed upon by all. Of course, the US purchased such unanimous agreement by military means.
The question becomes less academic and more concrete when considered in context of our Treasury’s commitment to the financial sector. It would be useful to summarize briefly what the Treasury Dept. and the Fed have done over the past year. The stated goal of their actions, in numerous speeches from President Obama, Treasury Sec. Geithner and Fed Chair Bernake, was to infuse enough Federal Dollars into the financial industry to make up for the losses they incurred via asset deflation and to “get our banks lending again”. To that end, the Federal Reserve has exerted all its twofold powers (controlling the interest rate and injecting cash into the economy) in an effort to make our banks appear profitable, when in fact they had just spent their money on imaginary assets. That was the ultimate goal of every bailout we have seen so far. Their worries assuaged, their books balanced, the financial sector should once again issue credit (“the lifeblood of our economy”, as President Obama said), greasing the wheels of commerce and setting the economy right in its ever-upward spiral.
So in short: The US Treasury is printing trillions dollars to distribute amongst the financial sector in order to make investments which they once thought valuable – but in reality turned out to be worthless – worth trillions once more. When a petty criminal turns worthless paper into dollars, most people call it counterfeiting, but a venerable establishment such as the United States Government deserves a more benign phrase – fine, call it a “bailout”. Spending of this sort is inflationary by its very nature: we are re-creating “destroyed wealth” that never existed in the first place. I have heard counter-arguments posit that securitized assets are surely worth something, even if the value is not so high as it reached at the height of the bubble. But such claims are beside the point. Our government is not trying to restore those assets to some reasoned “real” value – they are trying to restore them to the value they attained just before the crash: several orders of magnitude higher than the “real” value would be.
Then why no inflation already? The money has been printed, yet asset and commodities still deflate in dollar-terms. Here is where the second major fallacy of the anti-inflationists comes in. They either refuse to believe in or decline to mention the iron grip China has over our economic livelihood. China owns us, in every sense of the phrase. The dollar still trades at nominal value, still holds its place as the currency of global commerce solely by the good graces of its eastern benefactor. As the single largest holder of US Treasury assets, the world looks to China in order to gauge the US economy’s health. The moment they decide to divest from the US, it is reasonable to assume many other nations will also. That is when this round of Treasury printing will make its effects known. Our inflation rate is kept low and our dollar remains valuable only for China’s willingness and ability to absorb our debt. Once this is no longer true, we may as well start papering our walls with Benjamin Franklin’s handsome likeness.
The big question is “when”, and while I admit I have heard many self-proclaimed economists predict dollar hyperinflation within a year or two, I have not heard any reasonable explanation for why it should occur then, and not in ten years. The truth is that the timing depends entirely on China, whose motives are inscrutable. China owns $2 Trillion in US debt now and continues to buy it. I think the only true statement one can make about when China will decide to sink the US economy is that they will do so when the perceived benefit of such an action (priced in dollars) outweighs the value of their US assets.
International politics and global finance are largely a resource game. If China were of the opinion, for instance, that scuttling the US would gain them influence in resource-rich countries, and the value of said resources would be greater than $2 Trillion, then out those Treasury assets would go! One can think of a dozen similar scenarios. Though such a day may be hard to predict exactly, I don’t think there should be any doubt that one year hence or ten, it is coming.
One parting thought: Why is it that China agreed to finance our adventures in Iraq and Afghanistan? Did they somehow also think it would be a good idea? Or was it only a good idea for them?
President Bush’s decision to print $700 Billion, President Obama’s decision to do the same, and Bernake’s recent infusion of an extra $1 Trillion into the economy were met by the public with a collective head scratch. “Well, alright, I suppose…” the thought surely went, “if it’ll fix economy, why not? But I wonder where that money will come from.” The Fed has the power to print money in extreme circumstances, so most have contented themselves with the explanation that the money ‘came out of thin air’. I believe the technical term is ‘Quantitative easing’. But strictly speaking, this isn’t true. In order for the dollar to have value – for it truly to be money – the rest of the world must perceive it as such. Thus far the world has had no choice but to believe in the dollar’s value. All the truly valuable things – gold, oil, IMF loans, etc. were primarily priced in dollars, forcing them to do business with the US – usually at a steep disadvantage. Various US military actions, most notably Vietnam, Central America and Iraq, along with covert US support of friendly dictators further ensured the rule of the dollar. However a new day dawns – a new set of circumstances with a growing alternative to dollar hegemony. In light of that, printing money was likely the worst response our leaders could have taken in response to this financial imbroglio.
Up until now the dollar has been the standard reserve currency due largely to a lack of alternative. The US was virtually the last robust economy left after World War II, and shrewdly issued its currency to anyone who would accept it. The dollar was especially attractive then because the US held large stores of gold and promised investors that they could trade $35 for an ounce of it any time they wanted out of the arrangement – the long-forgotten gold standard. More importantly, the US made sure that oil would be priced exclusively in dollars via their interventions in Iran, Saudi Arabia, Egypt, and other countries. This ensured that any nation who wished to have an industrial revolution would necessarily have to go through the US in order to do so. In 1971, the US reneged on its gold standard obligation, but by then it had ensured the world would be so dependent on the US for economic growth that they had no choice but to remain silent. Thus the dollar proliferated throughout the world, and the US used all its available military and political influence to ensure that it would be the world’s only reserve currency. So long as that remained true, the US economy would have ultimate insurance – since all other currencies were backed by the dollar, the nations of the world have a strong vested interest in US economic stability. A dollar collapse would imply their currency’s collapse as well. When oil inflated in 2008, the rest of the world found themselves obligated to devalue their own currency to bring it in line with the inflating dollar, which they quietly agreed to do during an emergency meeting in September.
Since 2007 the Federal reserve has printed approximately $2.5 Trillion, and has made clear to our financial sector that their mon etarycommitment is essentially unlimited. Many estimates of the total cost of this crisis run into the tens of trillions of dollars. In March, China’s Premier expressed “grave concern” as to China’s investment in US Treasury Bonds, soon after the announcement of another trillion in printed cash. Though the US media gave the Premier’s remarks only perfunctory coverage, these ‘concerns’ have serious implications for US monetary policy. More disheartening are China’s repeated calls for a new global reserve currency. At first such calls were ignored, even laughed at, but as the crisis unfolds they become harder and harder to disregard. At the very least one can say that China is unhappy with its investments in the US Treasury, and it would not be a large stretch to put forth that they may be looking for an alternative, or even to supplant the dollar with their own currency.
But what about the $2 Trillion in US debt of which China is the proud holder? This is the argument commonly put forth by high-level investors with whom I have discussed these issues. They claim that China needs a robust US economy even more than the US needs China to invest in its bonds, that an attempt by China to supersede the US would be tantamount to financial suicide, rendering a bulk of their investments worthless. It is the Mutually-Assured Destruction model for the 21st Century. But it does not hold to scrutiny. Evidently the Chinese leadership does not consider it advantageous to dump their US assets, or they would already have done so. But for how long did my conversation partners think this would remain true? The time may easily come when China decides to simply cut their losses. Given that the Obama Administration has announced multi-trillion dollar deficits for the next decade, that time is not very difficult to forsee. Depending on the moment and manner in which they dump their US investments,those losses might not turn out to be so great. If, for instance, China can convince the rest of the world to drop their dollar assets at the same time they do, and simultaneously re-invest in the Yuan, the money China loses to US debt will be offset by the influx of new investment from the rest of the world.
This would not be so difficult as it sounds. In fact, with one move, China can simultaneously achieve both of its goals: striking a death blow to US dollar hegemony and installing the Yuan as the new global store of value. All they must do is make two announcements, preferably in one day. First, that they immediately seek to unload their investments in the US government, and second that the Yuan will trade at double its current value in relation to the dollar on a specific day in a few months. Perhaps they’ll read this essay and call it The Day of the Yuan. I admit I am an ordinary, newspaper-reading layman with no special knowledge of macroeconomics, but in my uninformed opinion there would ensue a run on US currency followed by a frenzy for the Yuan, were China to enact such a policy.
Hyper-inflation is a dirty word among business circles. No one I’ve encountered who makes their living by trading money will entertain the notion that the dollar may enter a severe inflationary cycle. But it is the necessary extension of a collective, immediate disbelief in the value of a currency. Most historical examples of hyperinflation, from Germany in the 20s, to Yugoslavia in the 90s, to Zimbabwe today, were preceded by vast inflationary spending – be it through costly wars or simply printing currency. The US has done the former for decades and has just embarked on a visible demonstration of the latter, but the implications of such actions are widely disregarded. There exists a belief that normal economic rules, even ones learned in high-school, do not apply to the US – a belief of which we are likely about to be disabused.