The Oddly Symbiotic Relationship Between the US and China

Yesterday, against the better advice of Voltaire, your editor spent the afternoon tending another’s garden. The weeds had grown long on the lawn and the vines’ creeping tendrils spanned the entire stretch of the backyard wall. The yard, having been left to its natural state, was beginning to look like a jungle. We sweated against the sun, mate close at hand, the cool earth beneath our fingernails.

Why all the effort? For one thing, we write for a living; it’s good to get one’s lily-white hands dirty from time to time. For another, the garden is out back of the house we are temporarily occupying here in Argentina’s capital. Our rental agreement is particularly favorable, so it behooves us to look after the place, to help out those who are taking care of us. Besides, we work (in the office downstairs) with an Englishman and, as we all know, there is nothing quite so offensive to an English gentleman’s eyes as the sight of an unkempt garden…with the possible exception, that is, of a disorderly queue.

We’ll return to our backyard in a second. First, let’s take a look a little farther afield…

The markets were awash with non-activity yesterday. The Dow Jones Industrial Average ended the day a dozen points lower than where it began the session. Gold shed a few bucks. If you were sleeping off a hangover, you barely missed a thing. Not so today. Within an hour and a half of the open, the Dow was seen lurking around 80 points below its open. Gold, too, had fallen $21 before lunch. What’s going on?

“US Stocks Slip On China Worries,” says one headline…

“Stocks open lower despite jobs data,” reads another…

“Stocks, Commodities Decline on China Rate-Rise Concern,” asserts a third…

If the mainstream press gets anything right, it is by accident only. The rise of China…unemployment…declining productivity in the west; these are not driving factors, Fellow Reckoner. They are not causes. They are effects. Symptoms of a larger trend. As usual, newspaper editors have put the horse before the cart. They should spend more time in the garden, digging around in the dirt, and less time making cocksure assertions about what’s causing daily, hourly, minute-by-minute moves in the world markets.

Bill has more on what Harvard economist Lawrence Katz calls a “genuinely puzzling” employment situation in his notes below. So we’ll take up the China question…

The relationship between the world’s two competing superpowers is indeed a curious, if not curiously symbiotic one. One nation produces, the other consumes. One borrows, the other lends. One is a capitalist in communist uniform, the other talks of freedom and liberty even as the weeds of encroaching bureaucracy threaten to paint the Capitol red.

The Americans, for their part, press China hard on her human rights record and on the issue of currency manipulation. And they do so, amazingly, with a straight face.

To be sure, China’s human wrongs record is nothing short of disgraceful. It’s true, for instance, that while last year’s Nobel Peace Prize recipient welcomed China’s leader to the White House this week, the recipient of this year’s award, a noted Chinese dissident, sits in a dank cell back in the Middle Kingdom. The media in China is heavily censored, operating behind what is sometimes referred to as the Great Firewall of China.

All this is hardly surprising. The state, as a wholly unnatural entity, is anathema to freedom…whether it barks orders and exerts force in Chinese, English, Swahili or other.

Back in the “Land of the Free,” Americans are engaged in a persistent struggle against the meddlesome zeal of their own public servants. Harry Reid, Obama’s senate majority leader, and the man who referred to President Hu as a “dictator,” lately referred to the Congress over which he and fellow do-gooder, Nancy Pelosi, presided as one of the “most productive in history.”

Translation: more laws, more meddling, more interference…than ever.

On the economic front, Fed Head Ben Bernanke is furiously tinkering with any and every aspect of the monetary system he can get his grubby mitts on. While the administration points the finger at China for artificially suppressing the value of its yuan, Helicopter Ben works overtime to fix interest rates, devalue the greenback and rescue institutions in desperate need of failure.

Meanwhile, Treasury Secretary Tim Geithner sells off the financial security of future generations of Americans to the highest bidder – usually China – at scheduled auctions…in broad daylight…for all to see!

Currently, your child’s share of the national debt is around $45,000. Come 2015, provided current trends continue, it’ll be bumping up against $70,000. China will own an unnervingly large portion of that debt. If policy makers in the US are so concerned about China’s human rights record and its monetary meddling, how can they possibly justify shackling their children with debt handcuffs that are, so to speak, “Made in China”?

Generally speaking, the state tends toward war, either on the battlefield, the balance sheet, or, more often, a combination of the two. The endgame between the US and China will be no different.

“The situation is hopeless…but it’s not serious,” as our friend, Doug Casey, likes to say. Which brings us back to our own garden…

What can we, as individuals, do to protect ourselves from the inevitable, impending collision of these 21st century empires? For one, we can speculate on the distortions that arise in the market as a result of geopolitical jostling. Readers may recall, for example, the recent “disruption” in the rare earths sector, a sector China dominates with some 97% of world production.

Byron King, editor of the Energy & Scarcity Investor, has written extensively about the rare earth story – and the associated opportunities for investors – in these pages in the past, in his essay “China’s Leg Up in the Rare Earths Market”.

“China will ‘cooperate’ with the international community on future rare earth exports – ONLY to the extent that the overall process benefits China,” Byron observes in his latest presentation on the subject. “Otherwise, they’ll always have an excuse for what they’re doing or not doing.”

“Ten years ago,” Byron continues, “China exported 75% of its production of rare earth metals to the rest of the world. Today it exports less than 25%, even though the production in the last 10 years has more than doubled.”

“There IS a GREAT future for the rare earth industry in the West,” Byron concludes. “But you have to be careful about chasing momentum. You need to invest wisely, with a focus on companies that can actually deliver an end product after managing years of capital expenditure, and forming-up many systems of systems.”

We “little people” may not carry much weight when it comes to international political gamesmanship, but we can, as that wise Frenchman advises, tend to our own garden.

Joel Bowman
for The Daily Reckoning