Does the Future Belong to China?
The rate of Chinese economic development has given rise to admiration from people the world over. However, there are many who believe that the country’s economy will not be able to last at the present speed…Hans Sennholz wonders if a crash is imminent – or if China will become the next economic superpower…
"China is on a rising path and America welcomes the emergence of a strong and peaceful and prosperous China." This tactful remark by President Bush during his 2002 visit to Beijing undoubtedly reflects the thought and good will of many Americans. They are awed by what they believe to be the world’s fastest growing economy of 1.3 billion people, four times America’s population.
Other Americans, however, are rather fearful of the Chinese transformation from a poor backward and stagnant country to a world power. They are pondering and wondering whether China is moving toward a peaceful, democratic market order, or merely from a moribund communistic system to a more energetic nationalistic or even fascistic system. If the new China is advancing along such paths, the future may merely be the troubled past again, entering through another gate.
A growing point of contention and confrontation is China’s monetary policy. The bank of China is maintaining a decade-old exchange rate of 8.28 yuan to the U.S. dollar, which apparently undervalues the yuan while it overvalues the dollar. No matter how the Federal Reserve System inflates and depreciates the dollar, Chinese monetary authorities are keeping in step with the Fed. Chinese authorities obviously like exchange rate stability that has enabled the Chinese economy to adjust to the world market and expand in an orderly fashion. But the world economy is rather unstable. The United States is suffering huge trade deficits that are rising continually; according to Organization for Economic Cooperation and Development (OECD) estimates, they may reach $900 billion or 6.7% of US GDP in 2006. The risk of a monetary disaster surely is rising steadily.
China’s Monetary Policy: China Blames America; America Blames China
Many Americans are quick to lay the blame on the doorsteps of China; the Chinese naturally find fault with American money managers. They may point out that the American trade deficits, which have flooded the world with American dollars, are the inevitable consequence of Federal Reserve monetary policy. To lower interest rates far below market rates is to increase the demand for money. While such a policy would devastate a national currency, it merely floods the world with the primary world currency, the U.S. dollar. Adjustments to global imbalances are rather slow, but they are bound to come.
Asian central banks in particular are inundated with American IOUs, holding some 60 percent of all international dollar reserves. If they should decide to unload their reserves and move into euros or any other currency, the dollar would crash, that is, suddenly lose a large share of its international value. It would inflict instant losses on all dollar holders, upset all bond and stock markets, and depress the world economy. The two biggest dollar holders and creditors, Japan and China, would be the biggest losers, which undoubtedly makes them fearful and reluctant to initiate any unloading and dumping of their dollars. A Japanese or Chinese government that means to strike the United States for any reason could easily trigger the dumping. The crash would be heard around the globe and the effects be felt worldwide.
Economic wars tend to prevent capital from finding productive employment; they may even consume it, causing labor productivity and levels of living to stagnate or even decline. Such wars harbor a danger far greater yet than simple retaliation and economic depression. They may trigger bloody wars between the retaliating parties. Surely, most Western countries are rather hesitant and slow in striking at their neighbors; it takes a majority of political representatives to declare and wage war. But China is no democracy; it is led by a handful of party autocrats who command the largest army in the world. They’ve possessed an armory of atomic weapons since 1967, and have known how to send intercontinental missiles on their way since 1970. To aggrieve them with painful trade restrictions and sudden withdrawals of business capital may have ominous consequences. Moreover, they harbor an old grievance in the form of the U.S. military alliance with a secessionist part of China, the island of Taiwan. This old hurt, together with new economic injuries inflicted by American trade restrictions, could strain and ultimately exhaust the patience of the autocrats. In reaction, they may shape the history of the 21st century.
China’s Monetary Policy: Sounding the Alarm
There are a few Americans – chiefly political scientists and military officials – who are sounding the alarm about the Chinese threat. They are speaking largely in political and military terms. China is gradually expanding its military might, purchasing modern equipment from Russia, although the amount of arms spending merely is a fraction of the Pentagon’s annual defense budget. But these amounts may change quickly; they are determined by a few autocrats in Beijing. Some political scientists are dismayed, especially by the total supremacy of the Chinese Communist Party, together with the long Chinese tradition of autocratic rule. In 2004, the People’s National Congress, while it made minor concessions to the market order, expressly confirmed the fundamental principles of Chinese power: the leadership of the Communist Party, the people’s dictatorship, the socialist road, and Marxian-Leninist-Mao teaching. Few American observers are alarmed by such proclamations.
Communist power has meant bloody terrorism, deadly purges, lethal prison, forced labor and mass executions. According to some estimates, from 1917 to 1976, global communism has taken the lives of some 110 million people, which compares with 35 million killed in all 20th century wars. Fighting "exploitation" and "imperialism," communist regimes have purged capitalists, the rich and the landlords, intellectuals and clergymen, the rightists, tyrants, and counterrevolutionaries.
Marxism-Leninism is alive and well, not only in China, but also in North Korea, Vietnam, Laos, some African countries, Cuba, and in the minds of many South and Central American politicians and revolutionaries. It pollutes the minds of many European and American academics, intellectuals, and politicians. Its terminology may differ from language to language and may change over time, but its arguments about "class struggle" turn up again and again in many political and economic discussions. In China, the Communist Party (with some 50 million members) presently seems to be divided about its calling and direction. Some Party leaders favor the new direction toward rapid improvement in productivity and accumulation of national wealth, while others are actively promoting old policies designed to achieve fair distribution of all income and wealth. Some seek to maintain a good relationship with the United States and its Asian neighbors; others emphasize the importance of national power and military might.
They all are faithful students of Marxism-Leninism-Maoism, always ready to follow the party line. When provoked, they may seize the foreign capital that found its way to China in recent years. Closing ranks again, they may want to lead the proletariat of the world to sweep away capitalism and point the way to "the dictatorship of the proletariat." Indeed, they may become the greatest threat the West has ever faced.
for The Daily Reckoning
June 01, 2005
It’s no secret that China is doing the unthinkable – edging America out as the superhero of the economic world. Not only are our friends in the Far East growing at a blistering pace, they are doing it at the expense of the American economy.
Dr. Hans Sennholz is president emeritus of The Foundation for Economic Education (FEE) in Irvington, NY. His essays and articles have appeared in over thirty- six major German journals and newspapers, and 500 more that reach American audiences. Dr. Sennholz is also the author of 17 books covering the Great Depression, Gold, Central Banking and Monetary Policy.
"Millionaire Ranks Hit New High," says the Wall Street Journal. Not since 1998 – near the peak of the dotcom bubble – have so many people gotten rich.
"The number of U.S. households with a net worth of $1 million or more rose 21% in 2004, according to a survey released yesterday by Spectrem Group, a wealth-research firm in Chicago," continues the article.
"There now are 7.5 million millionaire households in the U.S., breaking the record set in 1999 of 7.1 million. The study excluded the valueof primary residences, but included second homes and other real estate.
"A separate study, also released yesterday, by Boston Consulting Group found that the U.S. continues to lead the world in creating new millionaires. The number of households in the U.S. with liquid assets of $20 million or more is increasing by 3,000 households a year."
Once again, we are confronted by a contradiction, a paradox, or a damned lie.
Overall, the American economy is in decline. It "grows." But its growing is progress on the downhill slope. It is like a man on his deathbed advancing to the grave. Every day brings it closer – at a rate of about $2 billion per day. Earnings are stagnant. People spend more than they earn…while their biggest living expense – the cost of housing – soars.
How could it be that they get richer at the same time?
We have come to a curious conclusion. That once the zeitgeist…the ruling spirit…of these united states inclined towards empire, all its institutions, its constitution, its news media, its philosophies and folklore, its theories and popular hysterias, and even its statistics had to bend. After 1989, the United States was clearly the master of the world. If it was master of the world it must be superior to it. Everything about it must be superior; its intellectuals and public chatterers just had to explain why.
Why is the U.S. economy so superior? Because it is a paragon of "technological dynamism, openness to trade, and flexibility," volunteered David H. Levey and Stuart S. Brown, writing in Foreign Affairs magazine. "Would-be Cassandras have been predicting the imminent downfall of the American imperium ever since its inception," the pair begins. But don’t worry, "U.S. power is firmly grounded on economic superiority and financial stability that will not end soon."
How they know what will be reported in tomorrow’s newspapers they do not bother to explain. Nor do they explain how being open to trade helps a country that has given itself a competitive disadvantage, or why, if the U.S. economy is so dynamic and flexible, it cannot afford to raise wages…or pay for what it consumes on a current basis.
But when the "facts" seem to contradict the imperial theory, the "facts" are bent. Here, misters Levey and Brown go to work with crowbars:
"Capital gains on equities, 401(k) plans, and home values are excluded from measurements of personal saving; when they are added, total U.S. domestic saving is around 20 percent of GDP – about the same rate as in other developed economies. The national account also excludes ‘intangible’ investment: spending on knowledge-creating activities such as on-the-job training, new-product development and testing, design and blueprint experimentation, and managerial time spent on workplace organization."
Intangible investment? Why didn’t we think of that sooner! The trouble with the concept is that it produces intangible products, intangible profits, and intangible wages. Maybe the employees will get to enjoy an intangible sandwich someday.
The only way Americans continue living in the style to which they’ve become accustomed is by mortgaging the inflated value of their own tangible homes…and running public sector deficits – both are forms of stealing from the future. Only an old man with nothing more to prove would say so, but the U.S. economy in 2005 has become what Warren Buffett calls "Squanderville." Americans, he says, are becoming "sharecroppers," in an "ownership" society.
But whence cometh these 7.5 million millionaires?
They blow in on the same gust of deceit that bends the rest of America. Even though primary residences were not included in the calculations directly, the whoosh of debt lifts up all assets. Owners’ equity sustains borrowing…and other assets, including second homes and property investments – rise too. And it reduces the need to sell other assets – since equity can be taken out and spent almost as easily as you can order a pizza. This boosts up asset prices generally and puts millions of people with rather ordinary finances into the millionaire category.
It is all a conceit and a fraud. But at least people are enjoying it.
More news, from our team at The Rude Awakening:
Eric Fry, reporting from Manhattan…
"A couple years ago, lowly valued oil-drilling stocks couldn’t seem to find any investors. Today, investors can’t seem to find any lowly valued drilling stocks…except maybe in Canada…"
Bill Bonner, with more views:
*** "Despite what the drug ads on prime-time TV say, true ‘breakthroughs’ in the drug industry are relatively scarce. Sure, every once in a while, a new medication or class of drug is introduced that makes a huge impact on the industry or on patients’ lives. Pfizer’s VIAGRA comes to mind in this regard," Jonathan Kolber informs us. We had been wondering how it was that pharmaceutical companies are the world’s most profitable businesses – but without many bona fide breakthroughs.
"However, the dirty little secret of the pharmaceutical industry is that a lot of ‘new’ drugs are simply modified (and not necessarily improved) versions of existing medications," Jonathan continues, "It’s a sort of a "planned obsolescence" trick of marketing.
"Most drugs lose the protection of their patent after around seven years on the market. This means that other companies can then make generic (cheaper) versions of the same drug. So to stay hyper-profitable in the face of much cheaper generic products, drug makers simply wait until a product goes ‘off patent,’ and then unveil – amid millions of dollars worth of media hype – a new, slightly different version of the same medication.
"While I abhor such behavior, the young, Nordic company I’ve been looking into isn’t one of the participants. It’s an innocent beneficiary."
*** In Orange County, CA, the property bubble floats higher and higher. The latest numbers show that barely one in ten buyers can afford the median home. How does a real estate market function when so few people can actually buy? "Creative financing," says our old friend Rick Ackerman. Finance companies no longer verify income – which invites buyers to lie. And they welcome "neg am" – negative amortization – mortgages, which put the borrower deeper into debt every month. The lenders are colluding with the borrowers, in other words, each winking at each other’s scam. The lenders pretend to be doing the borrowers a favor. The borrowers pretend that they are people the lenders would want to do a favor for.
*** The "liberation" of women and minorities meant giving them the right to vote, which meant not "liberation" at all – but merely including them in the process of bossing other people around. A person is truly liberated when he is free from the whole affair. People are most free when they have no political power of their own…and when they are left alone by the people who do.
Americans living outside of America are among the world’s freest people. Except for the requirement to pay tribute to the homeland, we are remarkably exempt from many of the day-to-day indignities of citizenship. That is especially true of your editor who travels between several countries regularly. He is practically a stateless person.
But yesterday, he had a run-in with the forces of national improvement here in Britain. He was forced to go get a National Insurance number. He had no desire for such a number. He had no plans to ever use the number. He cared neither for the public health benefits…nor for the retirement benefits…nor for any other benefit with which British politicians had bribed the masses. So it was plainly a waste of everyone’s time for him to get such a number. But he is not one to defy the law – when he thinks he won’t get away with it.
And so he sat before an agent of the Blair government in some godforsaken slum and answered questions as truthfully as he could without dispensing more information than was likely to be necessary. Yes, he lived in London. No, he did not live in London all the time. Yes, he traveled frequently. Yes, he was employed in London. Yes, he had an apartment. No, he was not HIV positive, as far as he knew. No, he had never held up a bank. No, he had never pointed a firearm at Her Majesty’s Officials.
The official asking the question looked like a skunk with a mustache. She was from Pakistan or India, we couldn’t tell which. She spoke English and was very pleasant. After a while, we began to realize that many of the questions were not really part of the interview process, but merely designed to pass the time of day.
We also noticed that the woman was exceptionally helpful. If we suggested one answer, she would suggest another – one that would cause less trouble for the processors and the applicant.
Waiting around, we began to notice a curious collusion between applicants and interviewers. They were like mortgage lenders; these agents were no longer working to protect the government’s money – but actively trying to find creative ways to get rid of it.
"Oh, no…if you say that, you won’t be eligible for benefits…"
"Okay…I will put down that you …"
"You don’t have your passport with you? Well, we’ll work around it…."
All very civilized…and mad!
*** "If the Dutch follows the lead of the French and shoot down the EU constitution, the biggest winner could be China," Dan Denning explains.
"More than ever, investors want to own a currency backed by strong economic growth. Right now, the default winner is the dollar. But there is no economy in the world growing as fast as China.
"Since I was there last year, the China story has only become more compelling. Not without risks, to be sure. But if you have the right strategy, China is still a profit opportunity."