CHINA FLOATS, AMERICA SINKS

Baltimore Chronicle ^ | July 22, 2005. | Greg Palast

[hedgetrimmer]

In case you haven't the least idea what the heck it means for China to "float" its currency, let me put it in the language we economists use: China's float don't mean squat. Yet our President, a guy whose marks in Economics 101 are too embarrassing to publish here, ran out to hail the fact that buying Chinese money will now cost more dollars.

The White House line to the media, swallowed whole, is that by making Chinese money (yuan) more expensive to buy with dollars, Americans will buy fewer computers and toys from China--and US employment will rise.

This will happen when we find Saddam's Weapons of Mass Destruction.

Economics Lesson #1: You can't change the value of goods by changing the value of the currency on the price tag. As my comrade Art Laffer wrote me, "If cheap currency makes your products more competitive, all automobiles would be made in Russia." Driven a Lada lately?

Economics Lesson #2: Don't take economics lessons from George Bush. Or Milton Friedman. Or Thomas Friedman. What that means, class, is don't believe the big, hot pile of hype that China's zooming economy is the result of that Red nation's adopting free market economic policies.

If China is now a capitalist free-market state, then I'm Mariah Carey. China's economy has soared because it stubbornly refused the Free--and Friedman-Market mumbo-jumbo that government should stop controlling, owning and regulating the industry.

China's announcement that it would raise the cost of the yuan covered over a more important notice: China would bar foreign control of its steel sector. China's leaders have built a powerhouse steel industry larger than ours by directing the funding, output, location and ownership of all factories. And rather than "freeing" the industry through opening their borders to foreign competition, the Chinese, for steel and every other product, have shut their borders tight to foreigners except as it suits China’s own industries.

China won't join NAFTA or CAFTA or any of those free-trade clubs. In China, Chinese industry comes first. And it's still, Mssrs. Friedman, the Peoples’ republic. Those Wal-Mart fashion designs called, chillingly, "New Order," are made in factories owned by the PLA, the Chinese Peoples' Liberation Army.

China's government, by rejecting free-market fundamentalism, can easily conquer American markets, where protection is now deemed passé. And that is why the yuan has kicked the dollar's butt.

In an interview just before he won the Nobel Prize in economics, Joe Stiglitz explained to me that China's huge financial surge--a stunning 9.5% jump in GDP this year--began with the government's funding and nurturing rural cooperatives, fledgling agricultural and industry protected behind high, high trade barriers.

It is true that China's growth got a boost from ending the bloodsoaked self-flagellating madness of Mao's Cultural Revolution. And China, when it chooses, makes use of markets and market pricing to distribute resources. The truth is, Chinese markets are as free as my kids: they can do whatever they want unless I say they can't.

Yes, China is adopting elements of "capitalism." And that's the ugly part: real estate speculation in Shanghai making millionaires of Communist party boss relatives and bank shenanigans worthy of a Neil Bush.

It is not the Guangdong skyscrapers and speculative bubble which allows China to sell us $162 billion more goods a year than we sell them. It is that China's government, by rejecting free-market fundamentalism, can easily conquer American markets, where protection is now deemed passé.

And that is why the yuan has kicked the dollar's butt.

America’s only response is to have Alan Greenspan push up real interest rates so we can buy back our own dollars the Chinese won in the export game. The domestic result: US wages drifting down to Mexican maquiladora levels.

Am I praising China? Forget about it. This is one evil dictatorship which jails union organizers and beats, shackles and tortures those who don't kowtow to the wishes of Chairman Rob--Wal-Mart chief Robson Walton. (Funny how Mr. Bush never mentions the D-word, Democracy, to our Chinese suppliers.)

Class dismissed.

[vannrox]

The author of this article has a very outdated understanding of China. China is far more complex than how he thinks it is. In the June 2005 (Vol 15, No 06)of China Economic Review, there is a great article titled "Taking measure of the Yuan". It is on page 20. I urge anyone interested in the full issues related to China to read this article.

[Hillarys Gate Cult]

Where I stopped reading this biased crap.

I stopped reading when I got to the name "Greg Palast". I don't care what any lib god of the minute has to say.

[snarks_when_bored]

A few months ago, somebody posted a photo of President Bush seated next to China's President, Hu Jintao, and asked for captions. I wrote something along the following lines:

Hu Jintao:	All your bonds are belong to us!
George Bush:	Suckerrrrrrrr!

[durasell]

I'm not certain they even have to go to war with us at this point. If they stop financing our debt, then our economy takes a mighty hit.

[hedgetrimmer]

Here is what they are saying in Bangladesh (again, this is for comment and discussion):

While China's regime is clearly authoritarian, so is Saudi Arabia's The latter is governed by a repressive feudal monarchy with an appalling human rights record. It is linked to the export of terrorism. It is linked to the export of terrorism. It is so far from being a free market economy that it has still not qualified to join the World Trade Organisation (WTO). Yet Washington not only tolerates Saudi leaders, it cossets them.

The US needs to keep the Saudi regime sweet because of its oil. But to assume, as American China-bashers implicitly do, that the US does not need China and can bend it to its own will is self-delusion. The two countries are deeply interdependent. China's need for US exports and inward investment is mirrored by is importance as a prime source of funding for the US budget and current account deficits. To rage about China's designs on a medium-sized energy company, while relying on it to pay for the upkeep of federal government -- including its defence programmes -- verges on the surreal.

http://www.bangladesh-web.com/news/view.php?hidDate=2005-07-07&hidType=EDT&hidRecord=0000000000000000051340

[Hillarys Gate Cult]

The only thing we need to know about the author is that he's one of the DUmmies greatest heroes.

[L,TOWM]

That is to say, it's always a good policy not to through a brick through the window of the bank that holds you mortgage.

Why? Unless there is some kind of call feature in your mortgage, the bank can't do squat, except ask you to buy another window. Once the loan has been made, you've got what you want and they sweat, wondering if you are going to pay them back. Then it is the lender's turn to be worried about what the borrower does for the next ___ years.

Ask your self two questions: Do you wonder more about your credit card balance or your investment account balance(s)?

If your stock or bond tanks, does the issuer of your investment call you and beg you not to sell it, like your credit card card company calls you looking for its payment if you miss a month?

In many ways, the borrower is sitting in the driver's seat -- after they get the loan.

[Dat Mon]

"I don't care, I still think you are a troll."

Shooot...trolls is nuthin...

Wait til you meet up wid dem pod people...watch out buddy!

[durasell]

Okay, wrong analogy. Let me put it another way -- if they don't show up to the party and buy our bonds, then we have to increase interest rates. In order to finance those increased interest rates, the rates to bank have to increase. When interest rates start edging above seven percent for a mortgage, the you may see a collapse in housing prices.

And yes, I know the old saying, owe the bank $10,000 and they own you. Owe them $10 million and you own them.

China, however, is a special case. The leaders really don't have to answer to anyone.

[hedgetrimmer]

FYI


On Thursday, the U.S.-China Economic and Security Review Commission, a congressionally mandated watchdog panel, met on Capitol Hill to review China's diplomatic, economic and military objectives. Witnesses warned that China's efforts to nail down oil reserves are likely to rankle Americans.

Since 1993, "China has traversed the globe in a relentless quest for energy sources to fuel its booming economy," said Gal(cq) Luft, executive director of the Institute for the Analysis of Global Security. He said China will continue to engage in "aggressive competition" for oil.


Many lawmakers fear that China is seeking oil so that it can fuel the rapid growth that would pay for a military buildup.

Earlier this week in its annual report on Chinese military power, the Defense Department said China's rapidly modernizing military may pose a threat to the region surrounding it. The summary said the Chinese People's Liberation Army seems to be making "preparations to fight and win short-duration, high-intensity conflicts along China's periphery."

Luft noted that as a result of China entering into an energy deal with Iran last October, it blocked a U.S. attempt to refer Iran's nuclear program to the United Nations Security Council. That showed "China is interested in a militarily strong, even nuclear, Iran that could challenge U.S. domination of the Persian Gulf," he said.

http://www.gjsentinel.com/biz/content/shared/news/world/stories/07/22CHINA_US.html

[hedgetrimmer]

What say you?

***

But some economists worry that China may have unleashed economic forces that will eventually worsen inflation in the United States by making imports not just from China but all of Asia more expensive for Americans.

The biggest initial impact on consumers may come in toy prices, since about 75 percent of toys sold in the United States come from China.

There also is concern that interest rates will be rising, too, as the Chinese curb the massive purchases of U.S. Treasury bonds they have been making as part of their campaign to keep the yuan fixed in value against the dollar.

Still, most analysts argued that the overall impact on the U.S. and world economies will be extremely positive by trimming America's huge deficits, which pose a threat to global financial stability.

http://www.nctimes.com/articles/2005/07/23/business/news/19_14_387_21_05.txt

[hedgetrimmer]

So they give away our manufacturing through "free trade" and now they have to get it back. Does this sound like "free trade" or a command economy to you?
****

That satisfies America's desire to consume and Asia's desire to step up production and employment for its vast population. But America's indebtedness to the rest of the world is rising at an annual rate approaching $700 billion. Everyone agrees that this rising indebtedness cannot continue to at such a pace. The pessimists say this imbalance will almost certainly lead to a sharp, painful correction; the optimists, a camp that includes much of Wall Street and all of the economists in the Bush administration, argue that the present arrangement is quite sustainable.

"The Asians have no choice but to hold onto our dollars," Glassman said. "If they dumped them, they would be jeopardizing their own development."

The challenge will come once the price of imports begins to rise. At that point, Americans will have to produce for themselves much more of what they consume, or pay a lot more for the privilege. Ideally, the process would involve America becoming a much bigger producing nation, even stepping up its exports to Asia, while Asia, and especially China, takes up the role of consumer.

That is essentially the view of the Bush administration as outlined by Ben Bernanke, the newly appointed chairman of President George W. Bush's Council of Economic Advisers. "We probably have little choice except to be patient as we work to create" the necessary conditions for a reversal of roles, he said in a recent speech.

That is not an easy transformation. Americans now produce only about 75 percent of the merchandise they purchase, importing the rest. That is down from 90 percent or so a decade ago, according to various studies. The percentage was even higher in the late 1980s, the last time the dollar went through a long, similarly managed decline - in those pre-euro days against the German, French and Japanese currencies.

As the dollar fell, manufacturing did revive in the United States. Exports jumped and the trade deficit shrank, but the interest rate manipulation involved in managing the currency helped to produce the stock market crash in October 1987, or so some economists argue. This time the housing bubble could burst if the flow of dollars lent from Asia were to slow too abruptly.

The result would be a shortage of money to lend and a rise in mortgage interest rates, which are tied to the yields on the Treasuries that the Japanese and Chinese often buy in the lending process.

That would not be a happy ending, but Henry Kaufman, the economist and money manager - reflecting the optimism on Wall Street that revaluation and gradual adjustment will work - argues that China and Japan benefit in other lucrative ways from lending to the United States.

http://www.iht.com/articles/2005/07/22/business/dollar.php

[graycamel]

...then Americans will only be able to afford Chinese made junk.

[hedgetrimmer]

Good evening and check out # 32

[durasell]

For many, many Americans only being able to afford chinese made junk is the current reality. I've seen many threads posted on this board praising wal-mart because it allowed them to raise kids, i.e. buy clothing, etc.

[dila813]

We will all laugh in 1-2 years about this ridiculous article. The Chinese are a super bad debt country.

They spend 1.20+ for every dollar they get.

They know it, it is all about getting dollars.

[staytrue]

the borrower is sitting in the driver's seat -- after they get the loan.

The borrower must pay interest. The lender receives interest. I think the lender is better off as long as the borrower can not declare bankruptcy, and the US govt. can not do that for if they did the consequences would be terrible for china and the US.

[graycamel]

The reason China's economy is booming is because of it's economic type. It's NOT communist except in name. It's more militarist-facsist. It's getting more like Japan before and during WWII. When China was Communist (under Mousie Dung) the economy went nowhere. Yes, there are tight controls on business, such as written approval by the government to hire anybody. Then again there is no actual freedom, just perceived freedom, compared to what they had under chairdumb Mao.
Greg leaves chat room.

[DB]

That works both ways.

It is far, FAR, better to be holding the assets than the IOUs.

It isn't like they can repo those assets back.

If push comes to shove they're left holding worthless paper.

Not exactly in their best interest either.

[Dat Mon]

JMHO...but I don't think you can evaluate China's economic and monetary policy strictly in economic terms...as Western economists seem to be doing.

China has fused its strategic military, political, and economic agendas together into one cohesive government managed and directed effort.

I believe that China is seeking to push us to the tipping point where critical manufacturing and infrastructure tied to defense becomes cost prohibitive.

Effectively, this equates to raising the cost of implementing a high tech space based missile defense system to a prohibitively high level...so as to maintain their nuclear blackmail in an asymmetric threat scenario. They will never be able to match our overall nuclear strike capability in the near future...so they want to maintain the option of nuking enough cities to make our involvement in stopping their future aggression too risky.

I think China wanted to maintain the addictive cheap imports to the US for as long as possible...no matter what the internal economic pressure that caused to their own economy. They sorta blinked...but probably considered this revaluation a temporary tactical retreat.