Posted on 03/22/2008 9:41:31 PM PDT by manilaman
US waging economic war against China
Outside the Box By JOHN MANGUN
Why have the prices of commodities like oil and gold risen so dramatically in the last year? Why has the dollar fallen so much? Normal business cycle? Bad management from the world’s financial institutions? And why hasn’t the world’s largest and strongest economy, backed by the most powerful government, been able to change the course of the situation? Perhaps the larger picture is that the United States is waging an economic war against China.
The New York stock market rallied some 400 points Tuesday night, prompting an increase in prices across Asia. Even the Philippines participated a little. US stock prices reacted favorably to the news that the Federal Reserve lowered interest rates. Bloomberg: “The Fed has cut the benchmark lending rate by 2 percentage points this year, the most aggressive easing since the federal funds rate became an explicit target of policy in the late 1980s.”
But don’t get too excited because you must look not just at the “big” picture, but the “whole” picture.
Conventional and common wisdom talks about the recession facing the United States and the potential that an economic slowdown is confronting the globe. There is little indication that a “normal” economic slowdown is happening; normal meaning that production is dropping. It is not so much that production is going down but that the end-result of production, buying, is dropping. If you look around the world at virtually every country in every economic and wealth group, people are wealthier today on the average than at any other time in history. But if people are wealthier, why aren’t they purchasing? One word: inflation.
Prices are going through the roof around the world. Well, that is obviously the fault of high oil prices, right? For example, Kuwait reports that inflation is at a 15-year high. China is very worried and the United States is ignoring the issue in favor of trying to keep the financial system sound.
World inflation has been in a downtrend since 1990, but prices are expected to show heavy increases in 2008, potentially reversing a 15-year movement. Traditionally, high interest rates were a strong indication of inflation trends. In the last 20 years, inflation was best illustrated by a weak dollar and strong gold and commodity prices. And we now have the dollar at historic lows and gold at historic highs, with both of these trends showing little likelihood of changing.
Then we must ask, why is this happening? Why have the prices of commodities like oil and gold risen so dramatically in the last year? Why has the dollar fallen so much? Normal business cycle? Bad management from the world’s financial institutions? And why hasn’t the world’s largest and strongest economy, backed by the most powerful government, been able to change the course of the situation?
Perhaps the larger picture is that the United States is waging an economic war against China.
The United States could strengthen the value of the dollar. It has not. China is hurt because now Chinese products are very expensive in the United States, and this will reduce the US trade deficit with China. China must import huge amounts of oil and strategic metals which are very much more expensive now. China holds hundreds of millions of physical dollars, the value of which is now much less.
China has refused to revalue its currency to a realistic level to improve its trade position with the United States. China has used its huge dollar reserves as a sword against the United States by threatening to sell those dollars, and thereby causing the dollar to drop in value. In effect, the United States is using China’s strength against China.
In order for China to maintain the levels of its trade with the United States, it will be forced to lower the value of its currency. However, if it does that, it faces two major problems. Foreign direct investment (FDI) into China would become less expensive, and China is worried that more and cheaper FDI would spur China’s inflation. Further, a devalued currency would reduce the profit to China for its exported goods.
If China keeps it currency at its present levels, the United States will buy less. The United States wanted a stronger yuan to reduce trade, which China was unwilling to do. That objective is now achieved by a weaker dollar.
China’s dollar holdings are worth much less when buying goods like oil and metals that China depends on for its development and growth. Further, China has been talking and trying for some time to diversify its foreign-reserve holdings form dollars to other currencies and gold. Now, their dollars are worth much less when buying gold, yen and euros.
The current crisis hitting the financial institutions looks to me like a normal business-cycle shakeout not unlike the dot-com IPO fiasco of the 1990s, the savings-and-loan and foreign-country debt crisis of the 1980s and the personal credit crisis of the 1970s.
Back then, the US government bailed out Wall Street, Mexico and the banks, among others, without receiving much in return. This time, the “crisis” is being used to further the US economic position, long-term position, particularly with regard to China. From Sun Tzu: “All warfare is based on deception.” -- Business Mirror http://businessmirror.com.ph/0320-222008/opinion05.html
The Dollar is devaluing because of the twin deficits, not some war plan.
I’d like to think the weak dollar was part of some secret strategery on the part of the Bush adminstration, but frankly I doubt it. I just don’t think anybody there is thinking about the long term, nationalistic interest of the USA.
Yes, trashing our own economy makes so much more sense as a strategy than tougher trade agreements.
The world's greatest creditor nation - Japan. The world's greatest debtor - you guessed it the US.
Bush's steadfastness with the Iraqi war proves the above statement isn't true.
With China as part of the WTO (and formerly, most favored status), “tougher trade agreements” are impossible to implement.
You go to war with the economic tools you have, not with the ones you wish you had.
Congress has been threatening tariffs for a couple years now and nothing has come of it.
Rove is a GENIUS!!!!
Congress is impotent. And with all the ChiCom money flowing to the Clintons over the years, if she winds up stealing the nomination, you can be sure we’ll be sending our military secrets to China in addition to our dollars!
Congress is impotent
Actually, that’s not true, either. They just passed the toy safety bill that will put a serious dent in Chinese production.
Bottomline — the whole current economic mess, including subprime mortgages, weird Wall Street financial instruments, highly-leveraged hedge funds, etc. is are not part of some grand, long term design to wage war economic war against China.
I should have included the word “economic” in my statement. That was what this article is about, so that’s what I was referring to.
I can’t really pass judgment on the policy if it in fact really exists. All I know is that debasing your currency is a very dicey matter that requires the utmost in caution. I am reminded of the mental patient holding a gun to his head and waring the staff, “Come close and I’ll shoot.” However, on the other hand, the must still have some value. If we do the McDonald’s comparison test of how much a big mac costs in the US and the EU, we find that for the same burger the cost is over double in the EU. Therefore the disparity in values indicates that the dollar is trading at way too depressed a level vis a vis the Euro. Next, the weak dollar is absolutely killing manufacturing in the EU. BMW is shifting major production over here and you can expect many other Euro manufacturers to follow their lead. Airbust is really screwed since all of their planes are sold in dollars.
Got it.
I’ve been of the opinion from the first month that the dollar fell, way back when, that this is part of a long term strategy.
Don’t have any proof beyond what is mentioned in this article though, and he doesn’t have any real proof either, just assertions.
During the boom time, this works as a leverage China can use to push around U.S. However, when the bad time hits, this leverage turns against China. China would fall harder and farther. These days, China even manage to dabble on financial speculation even with their short history of market economy. They feel they reached the top and nobody can touch them. However, their confidence is illusionary. They have even shakier economic system, with less talent to cope with potential crisis. They are now hooked into volatile financial system. This makes things only worse.
The devaluation of dollar now is not directed against China. It might have been true last year. The devaluation is now the necessity if Fed wants to entertain any hope of salvaging financial system. China made tons of money from U.S. spending binge bankrolled by ridiculously big asset bubble, propped up by foreign capital inflow to U.S. financial market. Now that asset bubble is popping and consumption is going south, the dollar is tanking, and investors are flocking to commodities raising their price sky high. However, principal driver of commodity price-hike is vastly increased demand from China and India.
These events are not orchestrated by U.S. to hurt China. U.S. is just trying to dig out of the looming catastrophe. China got caught just as any other countries in the world. However, China is more vulnerable than others because of the way their economy and society work.
China has been the biggest beneficiary of U.S. push for globalism. Now that U.S. economy is going down, it could suffer from the biggest fallout, if you factor in social/political damage as well as economic loss.
This development is structural. It is preordained by the way two economies have been interacting.
bump
This also has the effect of making all that American debt the Chinese bought up.... worth a whole lot less than what they thought it was...
I thought that is was the other way around...
All of this is a problem... how?
1: IMHO, the dollar has been overvalued since the 90s.
2: The European industries sold arms to our enemies in the ME. Why should I feel sad for them getting the shaft? As far as I am concerned, those that sold arms to Iraq after Desert Storm (French and German companies) need to go bankrupt.
3: Remember all that foreign outsourcing people were complaining about? Well, it no longer makes sense, so the jobs are coming back.
Say wha? The Chinese will just be more careful about the lead paint for a while until the dust clears. The serious dent is coming from manufacturers deciding to keep more work in the US. It will take years though. A lot of capacity as well as know-how has been lost in the past 30 years. Many of the most industrious recent college grads head for investment banking or law firms. It’s going to take a long while before actually making stuff regains cache with the younger set.
I don’t claim that subprime mortgages, weird Wall Street financial instruments or highly-leveraged hedge funds are part of some grand plan. I would say they are the result of government policies that encouraged an “ownership society” that President Bush has mentioned quite often. Qualifying people who were previously unqualified to own homes requires some financial trickery and having the government back up those mortgages (Fannie and Freddie) involves issues of “moral hazard” for us the taxpayers. There is also a correlation between defaults and areas of high concentration of illegal aliens. Again, not a grand plan to batter China but certainly a result of inaction of the federal government.
The economic mess is only really a mess on Wall Street. I’m not saying high gas prices don’t hurt, but I still see lots and lots of V8 SUVs driving to the mall. It’s a sad fact (for me who as an engineer, who appreciates efficiency) that the average gas mileage for passenger vehicles is lower now than 20 years ago. As a percent of income, gas prices are not as damaging to the family pocketbook as they were in the 80’s. When that happens, we’ll know pain.
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