Will Blog for Food

The US Trade Policy: Beg the Chinese to Revalue Their Currency

The US has boxed itself into a corner. Because of its philosophical allegiance to "free trade," it is left with no choice for its trade policy other than begging the Chinese to ravalue their currency. Consequently, the US is going into debt with the Chinese year after year as its trade deficit continues unabated. So far for 2009 the trade deficit is $405 billion. The US trade deficit with China for non-oil goods was 26% in 2000. Now in 2009 it's 83%. What this means is that the US is slowly going deeper and deeper in debt to China, and there is virtually nothing the US can do about it unless it does an about face and abandons its commitment to "free trade." This is a commitment that China profits from but does not share.

What this means for the US is that, as the US sinks more and more into debt, China acquires greater and greater wealth and is in a position to buy up US assets and assets in other parts of the world. The US is choosing a policy which increasingly beggars itself to China with the long term result that the US will be a dependency of China.

30 years ago when Reagan became President the US was the world's largest exporter of manufactured goods. Now it is the world's largest importer. 30 years of "free trade" have managed to turn the US into essentially a third world nation in terms of its trade policy. Raw materials are exported and manufactured goods are imported. Jobs have been exported to countries where labor and hence living standards are cheaper. The US is reduced to begging China, which pegs its yuan to the dollar, to revalue its currency or let it float in world currency markets as if this in and of itself would redress the balance and cause US exports to flourish and imports to languish. But such would probably not be the case as long as China's labor is cheaper than US labor.

An additional complication is that major US corporations such as Hewlett Packard and Mattel have built large factories in China from whence they ship their products back into the US market. These companies would suffer from a revaluation of the yuan because it would make their products more expensive in the US market. Therefore, they would vociferously lobby against any repudiation of free trade after they have made such a substantial investment in China. So China's course seems well protected not only by its increasing economic clout in the world but by US transnational corporations themselves who are thoroughly invested in the model of using cheap Chinese labor instead of expensive American labor to manufacture their products.

Now the only way the US could rescue its ultimate fate of becoming a dependency of China, as I see it, is to reinstitute tariffs. A tariff can fine tune the cost of an imported product so that it becomes cheaper or at least of similar cost to produce it in the US rather than abroad. This should surely be done for industries vital to US interests whatever these are considered to be. Imports for which there are no US equivalents don't need to have tariffs associated with them. For example, bananas are probably more propitiously grown abroad and imported to the US. So their importation should be encouraged not discouraged by tariffs. But manufactured goods which can be manufactured here should have tariffs associated with them so they will not be imported from abroad. Tariffs would discourage jobs from being exported because they would make it cost effective to produce manufactured goods in the US rather than abroad and having them shipped to the US. Thus jobs would be created in the US rather than abroad. Maybe there are other ways to do it, but it's not obvious. Tariffs seem the most straightforward way to accomplish the goals of job creation in the US and the retention of vital industries in the US. But that would require a trade policy and an industrial policy and a repudiation of "free trade."

Ross Perot was right when he predicted that NAFTA and CAFTA would produce a "giant sucking sound" of jobs being exported abroad. He just didn't envision the concomitant giant sucking sound of capital being exported as well due to trade deficits. And as former US companies become transnationals, they pay fewer and fewer taxes in the US. Of course, this is one of the advantages from their point of view. So they support the US less and less in terms of jobs and less and less in terms of the tax base.

Since Reagan took over the Presidency, the US has gone from being the world's largest creditor nation to the world's largest debtor nation, and its trade policy has contributed largely to this debacle. When a great nation's only alternative is to beg its competitor to revalue its currency, it has certainly lost its status as a superpower. The US has sunk to the position of acquiescing in its own demise and capitulating to a country with far more smarts and perhaps a more efficient political-economic system when it comes to getting anything done. While the US fruitlessly borrows even more money to fight ridiculous wars thus adding to its budget deficit, China is quietly buying up the world's assets and thinking to itself ... hmmm, another year, another $400-$500 billion US dollars. What should we buy this year? China is in the cat bird's seat, and America is hoist on its own petard of "free trade."

The War in Afghanistan Should Be Fully Funded by a Tax Increase

Now that there is such concern about government programs adding to the deficit, it should be mandatory that the war in Afghanistan be fully funded by a war tax. There was never a peep from conservatives when Reagan quadrupled the national debt from $1 trillion, when he entered office, to $4 trillion when he left. There was never a peep from conservatives when Bush Jr added $5 trillion to the national debt by giving tax breaks to the rich, starting wars in Iraq and Afghanistan and a prescription drug benefit that was a giveaway to the pharmaceutical corporations. In fact the only President in the last 30 years to run budget surpluses was a Democrat, Bill Clinton. In addition to running up a $5 trillion deficit, Bush Jr ran the economy off a cliff and then handed it over to Barack Obama.

And all of a sudden conservatives are up in arms about the deficits and debts. Not only did Bush Jr add $5 trillion to the national debt, he borrowed most of that money from the Communist government of China. How come conservatives aren't up in arms about that? Because they are total hypocrites, that's why. They want lower taxes, but they want more war, and they want the government to borrow the money for that. However, they don't want the government to borrow any money for any program that might benefit the American people. They don't want the government to borrow money to spend on infrastructure that's been neglected for 30 years. They don't want the government to borrow money to spend on health care or start a jobs program such as the Civil Conservation Corps, a domestic Peace Corps that FDR used to great effect in combating the Great Depression. They only want the government to borrow money to spend on war.

Congress ought to pass a bill that says every increase in the Federal budget needs to be paid for and that includes war spending. Right now the US spends more on its military industrial complex and war machine than the rest of the world combined. And for what? There's no functioning Al Quaeda in Afghanistan. Are we suppposed to invade every country where some group of ragtags goes and hangs up a banner saying "We're Al Quaeda and We're Here"? It's patently ridiculous. We're spending ourselves into oblivion while neglecting infrastructure and the needs of the American people. The train has already left the station on alternative renewable energy. And where is the US? Well, never having gotten aboard, that's where.

While Canada didn't have one bank failure during this economic catastrophe, the US is still shuttng down banks at an alarming rate on a daily basis. The US has more people unemployed than the entire population of Canada. While the US is bombing civilians in Afghanistan, China is going in and silently buying up assets and natural resources while never having to fire a shot. This is utterly stupid on the part of the US. We're creating enemies all over the world, while China is being a perfect example of a well-behaved capitalist country. Their leadership, while authoritarian, can at least operate effectively in the world in the interest of China and its citizens. Meanwhile, the US, in an exercise of colossal futility, spends months and months trying to pass a bowdlerized and watered down health care bill. It's a tribute to the ineffectiveness and futility of the American political system. Other countries, like Taiwan for example, just make an assessment of the best health care systems in the world and then just go ahead and pick one with slight alterations. The US lets lobbyists swarm Washington and beseige citizens with misleading ads resulting in an abortion of a health care bill that takes forever to pass and longer than forever to go into effect. What are these people thinking? At this rate, the rest of the developed and developing world will tuck the US empire into its grave after the shortest run in history.

The US is doing everything in its power to become a backwater of history: namely, wasting blood and treasure on useless, pointless wars, borrowing money like a drunken sailor at a payday loan store, letting lobbyists legislate in the interests of corporations, neglecting infrastructure, spreading the culture of individual greed, outsourcing its jobs, a Congress that takes forever to get anything done and then they're a dollar short and a day late. The list goes on and on.

China is eating our lunch. Europe is eating our lunch. India is eating our lunch. And it's all because these  countries are investing a minuscule amount in their militarys compared to the US, while the US goes around the world creating enemies. These other countries are using the tools of captalism and friendly cooperation to create friends instead. China is building infrastructure in Afghanistan thereby winning friends. We're there dropping bombs on wedding parties and occupying their country thereby creating enemies. It doesn't take a lot of smarts to figure out who will be the winner there.

And the US is entangling itself in the most ridiculous contradictions. The logic seems to be we want lower taxes, but we don't want to add a penny to the deficit, but we don't want to pay for war, and we want more war in order to make the world safe for what?

Volcker Says China’s Rise Highlights Relative U.S. Decline

By James Tyson and Michael McKee

 

Sept. 29 (Bloomberg) -- Former Federal Reserve chairman Paul Volcker said the rise of China and other emerging economies has underscored a decline in the comparative economic and intellectual leadership of the U.S.

“I don’t know how we accommodate ourselves to it,” Volcker, an economic adviser to President Barack Obama, said in an interview with PBS’s Charlie Rose taped yesterday in New York. “You cannot be dependent upon these countries for three to four trillion dollars of your debt and think that they’re going to be passive observers of whatever you do.”

The former Fed chairman also said unemployment at 9.7 percent will slow the pace of recovery from the U.S. recession as Americans default on mortgages and consumer loans. Moreover, commercial real estate loans are likely to cause further losses for banks.

“This recovery will be slower,” he said. “We can’t just pump up consumption and pump up housing again.”

Group of 20 leaders, meeting in Pittsburgh last week, announced plans for more durable economic growth, including reducing U.S. dependence on overseas capital and cutting the reliance of emerging nations such as China on exports.

World leaders decided that the G-20, which includes emerging economies such as China and Brazil, will replace the Group of Eight as the main forum for global economic coordination. The shift illustrates how the excesses that led to the financial crisis have compelled industrial nations to share governance of the world economy.

Less Dominant

The growth of emerging economies is “symbolic of the relative, less dominant position the United States has, not just in the economy but in leadership, intellectual and otherwise,” Volcker said.

The G-20 accounts for about 85 percent of global gross domestic product and was created after a spate of currency devaluations plagued emerging markets from Russia to Thailand in the 1990s. The G-8, which comprises the most advance industrial economies of Europe and North America plus Japan and Russia, accounts for about half of global GDP.

China has overtaken Germany to become the world’s third- largest economy and may soon become the biggest exporter. It passed Japan a year ago as the main foreign investor in U.S. government debt. China, Russia, Brazil and India together hold about 42 percent of international reserve assets, excluding gold.

Herding Cats

“I would like to think that given the history of the past, given the strength, actual and potential of the American economy, we can still provide a kind of indispensable element of leadership here,” Volcker, 82, said. “But it’s not going to be dictatorial, I’ll tell you that. It is very hard to herd these cats together.”

Volcker repeated that under a new regulatory structure the Fed should be given primary responsibility for supervising banks rather than a council of regulators led by the U.S. Treasury.

The Treasury has “no professional background and no traditions in the area of banking supervision,” Volcker said.

“In the distribution of authorities among regulatory institutions, it’s really the Federal Reserve that naturally should to be surveying the whole world, so to speak,” he said.

Volcker has criticized the Obama administration’s plan to give the Fed authority to supervise “systemically important” financial firms. Such a designation would imply government readiness to support the firms in a crisis, encouraging excessive risk-taking, he said in said in testimony to the House Financial Services Committee on Sept. 24.

Independent Agency

The central bank should instead oversee bank regulation carried out by an independent agency, Volcker has said. The chairman of that agency could also be a vice chairman of the Fed, to increase accountability and ensure the Fed is fully informed.

Volcker is chairman of the Economic Recovery Advisory Board, a body created by Obama in February to recommend responses to the crisis.

Since January, Volcker has advocated that regulators prohibit financial companies whose collapse would pose a risk to the economy -- those considered “too big to fail” -- from engaging in certain types of trading and investing. The administration wants stricter oversight for such companies and tighter capital and liquidity requirements.

Volcker said the Fed and the White House “were right in providing massive support” to financial markets after the collapse of Lehman Brothers Holdings Inc. Sept. 15, 2008, and to bail out American International Group.

“Faced with those emergencies, they did what they had to do at the time,” he said.

Giving Succor

While more might have been done ahead of time to prevent Lehman’s demise, “I think if it had been rescued somehow and kept alive, I still think you would have had an attack on the other institutions,” he said. The government’s actions give “succor to the next institution that gets in trouble and to their creditors in particular,” Volcker said.

China Heaps Scorn on U.S. Tire Duties

Mon Sep 14, 2009 4:52am EDT 

By Chris Buckley

BEIJING (Reuters) - Chinese media and officials have heaped scorn on a U.S. decision to impose special duties on Chinese-made tires, extending Beijing's warnings that the move may fuel trade friction as global growth struggles to revive.

U.S. President Barack Obama announced the safeguard duties on tire imports from China on Friday, a decision the White House said was meant to stifle disruption from cheap Chinese imports.

Experts said the dispute appeared likely to intensify sparring between the world's biggest and third-biggest economies, but was unlikely to spark a full-scale trade war.

China responded swiftly and vehemently to the decision, saying it may complain to the World Trade Organization and then announcing its own anti-dumping investigations of motor vehicles and chicken products from the United States.

On Monday, Chinese state media issued fresh denunciations of Obama's decision, which will launch the additional duties of 35 percent on Chinese-made tires from September 26, a day after the G20 summit of big rich and developing nations ends in Pittsburgh.

"Obama has undoubtedly chosen a dangerous gambit," said the International Business Daily, a Chinese-language daily issued by China's Ministry of Commerce.

"The Chinese business world that has been wronged by this will not sit still on this, and even tougher contention between China and the United States may be looming."

Mei Xinyu, a trade expert with a think-tank under China's Ministry of Commerce, said Beijing wanted to warn Washington against making the two countries' huge trade flows more uncertain.

"The trade retaliation initiated by China was not intended to launch a full trade war in a fit of anger, but to contain protectionist tendencies in our trade partner, so that there is a stable and more predictable environment for developing international trade," Mei told the China News Service.

After the U.S. decision, share prices of Chinese tire makers plunged in early trade on Monday, led by major producer Double Coin.

Double Coin shares fell by their daily 10 percent limit to 19.01 yuan, while Guzhou Tire dropped 7.4 percent to 14.84 yuan.

CONTINUED TRADE FRICTION

Washington and Beijing have vowed to cooperate in seeking to revive global economic growth, but the tire dispute and Chinese counter-moves have exposed friction over trade, which could spill into the G20 summit that Chinese President Hu Jintao will attend, as well as Obama's scheduled visit to China in November.

The tire duty was the first time Washington has applied special "safeguard" provisions that Beijing agreed to before joining the World Trade Organization in 2001.

Over the weekend, the Chinese Ministry of Commerce said the U.S. tire duties could spark a "chain reaction of trade protectionist measures that could slow the current pace of revival in the world economy."

The Chinese Foreign Ministry, which usually keeps an arm's length from trade disputes, echoed that warning in a statement on Sunday.
"This is going to damage financial and trade cooperation between China and the United States," spokeswoman Jiang Yu said in a statement posted on the ministry website (www.fmprc.gov.cn).

Economists and experts said the dispute may add uncertainty to trade between the United States and China, but not threaten the economic underpinnings of their relations.

"While the impact of this trade-restricting measure by the US on the tire-making industry is serious, its macroeconomic impact is not enough to ... threaten the strategic relationship between the two countries," Qing Wang of Morgan Stanley Asia said in a research note.

"Any potential reaction on China's part would likely be an isolated move, the purpose of which is to register China's dissatisfaction with a view to pre-empting potential similar actions in other industries in the future."

The new duty of 35 percent will take effect on September 26 and adds to an existing 4 percent duty. The extra duty would fall to 30 percent in the second year and 25 percent in the third year.

The United Steelworkers union, which represents workers at many U.S. tire-making plants, filed a petition earlier this year seeking the protection. It said a tripling of tire imports from China to about 46 million in 2008 from about 15 million in 2004 had cost more than 5,000 U.S. jobs.

Mei, the Chinese trade expert, said the U.S. chicken and motor vehicle products targeted by Beijing's anti-dumping inquiries were roughly equal in value to China's tire exports to the U.S. -- about $2 billion a year.

The U.S. trade deficit with China totaled $103 billion in the first half of 2009, down 13 percent from last year but still a source of much ire in Washington. (Reporting by Chris Buckley, Ben Blanchard, Simon Rabinovitch and Kirby Chien; Editing by David Fox)

© Thomson Reuters 2009 All rights reserved

 

The Fallacy of Assuming China Will Continue to Loan US Money

The US has convinced itself that the current situation in which the US as consumer stokes the world economy while those nations which accumulate dollars in the process will continue to finance American government debt is fallacious. The argument is that the dollar is the world's reserve currency so that Chinese accumulation of dollars has nowhere to go but back into the US in terms of loans. Thus the cycle is complete. China accumulates dollars by selling us cheap products. China recycles those dollars by buying US Treasury bonds. Dollars come home to be spent yet again on Chinese products.

But wait a minute. Demand for Chinese products is made by US consumers who have the money to make purchases. If Americans don't have the money (or the credit) any more, they won't be able to buy Chinese products, and the Chinese won't be accumulating that many dollars with which to buy US Treasuries. And in fact US consumers have stopped consuming because their credit has dried up and they are losing jobs which are the basis of purchasing power. 

Let's look at the other side of the equation as well. The Chinese are under no obligation to fund the US government debt by buying Treasury bonds. They are under no obligation to continue as the US' banker. In fact they could spend American dollars in a number of other ways thereby starving the US government of its need for deficit spending. For instance, they could buy up American real estate. They could also buy American businesses. They could also buy up resources in other parts of the world paying in dollars. The fact that the dollar is the world's reserve currency could come back to bite us in the ass if dollars are used NOT to invest in US government debt. Also the world could phase out the dollar as a reserve currency - something China and Russia have already been talking about because they are having doubts about the stability of the dollar in the long term. They are afraid of the inflationary effects of the huge amount of deficit spending the US is undertaking in order to buy itself out of the current recession. They are losing faith in the US dollar. How ironic if the Chinese and others start purchasing US equity instead of US debt. At that point the US will become a subsidiary of China and other foreign countries who follow suit. It won't be a fully owned subsidiary of China because other countries also own a significant amount of US debt.

The rationale that money flowing from US consumers to China and then back again in a complementary cycle benefitting both is nonsense because the cycle is broken. Money flows from US consumers to Chinese producers to be sure. Then in China a significant portion of that money flows into the coffers of the Chinese government through taxation. The Chinese government buys US debt, and the US government spends that money on its military-industrial complex and in fighting wars in order to maintain its position of world dominance thus funneling that money back to US consumers via military and defense contractor pay which completes the cycle. The US borrows about $1 billion a month from China. We spend about $30 billion a month on Chinese imports so there is a much greater outflow than inflow of dollars. Even if every dollar of US government spending found its way back into the consumer economy and was spent on Chinese products, the consumer economy would have to come up with funds from elsewhere to continue importing Chinese products at the same rate. As the US loses its manufacturing base to China, the civilian economy continues to wither. And as the economy withers, US consumers cannot continue to buy Chinese products, the Chinese government won't continue to accumulate dollars at the same rate and will no longer have as many dollars to invest in US debt nor the incentive for so doing.

But wait a minute. As the US loses its manufacturing base, it depends on foreign manufacturers more and more even for its military equipment. So instead of repatriated dollars flowing into the hands of US consumers, they flow right back out again to foreign manufacturers including China. The US overstretch of some 700 military bases in foreign countries means that money is paid out to foreigners to support those bases. So less and less money is recycled by the US government into the hands of US consumers. The unemployed of course consume less. Americans who change their spending habits and start saving more are consuming less. Americans who have lost equity in their homes and 401ks will consume less thereby driving down Chinese imports. China will respond to this by seeking to sell its exports elsewhere and also by developing its own internal markets. The result of this will be an increased unwillingness to buy additional US debt, and this will leave the US government in a pickle. It will have to increase taxes on its own population in order to finance the US government instead of relying on borrowing money from foreigners.

Lower taxes in the US is partly to blame for putting the US into its current cycle of debt and dependency on foreign borrowing. When foreigners are no longer willing to buy US debt, the US must either raise taxes or print money which it is already starting to do. Printing money inevitably leads to inflation, and the Chineser know this - hence their reluctance to buy more US debt. As US consumers buy fewer Chinese products, the Chinese will wean themselves away from their dependency on US markets. All of this bodes ill for the dollar as the world's reserve currency and for exploding US government debt. US interest rates will have to rise in order to attract new investors and to make up for inflation. This will make less money available for investment in new businesses, and US manufacturing and other businesses will continue to decline as the cost of doing business in the US rises. This will mean that US GDP will be even more dependent on US consumers at a time when job losses and declining home equity puts less money into the hands of US consumers.

A vicious cycle is developing in which US consumers lose the wherewithal to consume causing more job loss and producing less tax revenue. At the same time foreigners become less willing to bail the US out by buying up its debt. This leads to higher taxes which kills even more jobs. The US overextended military empire will of necessity have to come to an end, and social services will have to decline even as they are being cut off in California today. The US once the world's first world nation will turn into a third rate nation while China assumes its mantle as the world's economic and military superpower.

Ronald Reagan started this process of government underfunding from domestic sources and reliance on foreign borrowing. When Reagan entered office, the US national debt was around $1 trillion. Reagan quadrupled this debt to $4 trillion by the time he left office. Despite the fact that Clinton balanced the budget in his out years, George W Bush, inheriting a $5 trillion national debt, managed to double it to $10 trillion by the time he left office. Reagan and Bush started the cycle of increasing government debt by lowering taxes and increasing dependency on foreign borrowing resulting in the downward spiral the US is experiencing today. Imprudent government economic policy under Bush and Reagan primarily is responsible for the precarious situation the US finds itself in today. Add to this the disastrous policies of deregulation starting with the repeal of Glass-Steagall, which put a firewall between commercial and investment banking, and you have the unmitigated disaster of the US economy circa 2009. And the chickens have not even come home to roost yet regarding US debt as the dollar remains strong and the US continues to borrow money to jumpstart the economy. When the US is no longer in a position to borrow money at favorable rates, the reality of the shambles of the US economy will become apparent.

China and Russia to Get Their Wish for New Reserve Currency

New rules are being written for the International Monetary Fund (IMF). For some time now China and Russia have expressed a desire for a new reserve currency for the world other than the dollar. The dollar has effectively been the world's reserve currency since World War II. This has allowed the US to go tremendously into debt while borrowing huge amounts of money from China, Saudi Arabia and other nations. Because of the global economic crisis which many nations blame on the US, China has complained recently about this reality. They own approximately one trillion dollars of US Treasury bonds and are worried that they won't get their money back.

In an article in the Washington Post today the IMF has essentially set up a world reserve currency:

Yesterday, the IMFC backed plans to dramatically increase the fund's financial war chest to cope with the crisis. At the London summit, world leaders including President Obama called for the IMF, which has the capacity for about $250 billion in lending, to beef up its resources to $1 trillion. That money would be raised in two ways. First, through $500 billion in pledges from major governments. But the IMF also has the ability to effectively print its own money, and has plans to issue about $250 billion in its currency, which has a value based on the dollar, the euro, the yen and the pound. The IMFC said the fund had effectively secured about half the $500 billion from governments, though some critics were less certain of that. Japan, the United States and the European Union, for instance, have all committed to give $100 billion. But to date, only Japan's commitment has actually come in. Obama sent Congress a letter last week urging support for the U.S. pledge. The fund, the IMFC said, may also "consider market borrowing" to increase its resources. That appeared to refer to plans at the IMF to issue bonds similar to, say, U.S. Treasury bills. That would provide new ways for developing giants such as China to invest in the fund; the IMF and China are close to agreeing on a deal in excess of $40 billion.

So the IMF has the ability to print its own money! This is just what China and Russia have asked for. The dollar will no longer be able to dominate the world's currency markets. The US will no longer be able to borrow billions each day and run up its astronomical national debt even further. Furthermore, the IMF will issue bonds which the Chinese can then invest in instead of US Treasury bonds. They will constitute then a "savings account" or a repository of value for excess Chinese profits.

Consider this article from the Wall Street Journal:

BEIJING -- China called for the creation of a new currency to eventually replace the dollar as the world's standard, proposing a sweeping overhaul of global finance that reflects developing nations' growing unhappiness with the U.S. role in the world economy. The unusual proposal, made by central bank governor Zhou Xiaochuan in an essay released Monday in Beijing, is part of China's increasingly assertive approach to shaping the global response to the financial crisis. Mr. Zhou's proposal comes amid preparations for a summit of the world's industrial and developing nations, the Group of 20, in London next week. At past such meetings, developed nations have criticized China's economic and currency policies. This time, China is on the offensive, backed by other emerging economies such as Russia in making clear they want a global economic order less dominated by the U.S. and other wealthy nations. However, the technical and political hurdles to implementing China's recommendation are enormous, so even if backed by other nations, the proposal is unlikely to change the dollar's role in the short term. Central banks around the world hold more U.S. dollars and dollar securities than they do assets denominated in any other individual foreign currency. Such reserves can be used to stabilize the value of the central banks' domestic currencies. Monday's proposal follows a similar one Russia made this month during preparations for the G20 meeting. Like China, Russia recommended that the International Monetary Fund might issue the currency, and emphasized the need to update "the obsolescent unipolar world economic order."  Chinese officials are frustrated at their financial dependence on the U.S., with Premier Wen Jiabao this month publicly expressing "worries" over China's significant holdings of U.S. government bonds. The size of those holdings means the value of the national rainy-day fund is mainly driven by factors China has little control over, such as fluctuations in the value of the dollar and changes in U.S. economic policies.

The proposal is unlikely to change the dollar's role in the short term? The WSJ article was written on March 24, 2009, and the Washington Post article, on April 26, 2009. How's little over a month for "a short time"?

The implications for the debt based economy of the US are ominous. With a budget deficit of one trillion dollars, the US must borrow $2.74 billion per day just to keep its economy afloat. The Chinese are not likely to be putting all their excess profits into dollars in the future so what's the US going to do? If it can't borrow money, it will have only one option: to print it. And then the likely result of that is hyperinflation. In short the whole US capitalistic system is likely to come tumbling down. At that point the US will have to invent a whole new economic system not based on the dollar. Probably a new currency will be put into effect with the dollar ending up in the dustbin of history. This is not a pleasant prospect for most Americans who will have their standard of living drastically lowered. The old way of running trade deficits with China and Saudi Arabia among others with dollars piling up in those countries which are then used to buy US debt will be over. US dominance over the world economy will end.

The philosophy of the IMF is also changing. For the last 30 years or more, the IMF has been dominated by the US and its policy of unfettered capitalism. Countries needing help from the IMF have had to agree to draconian policies including privatization of public institutions, "free" trade, lowered taxes and deregulation. When imposed on poorer countries in return for a bail-out, these policies effectively cut the safety net out from under the poor and resulted in widespread suffering. Milton Friedman, Alan Greenspan and the Chicago School of Economics caused IMF policies to undermine the welfare of the poor. Now that's changing as the US loses credibility on the world stage and other countries such as China gain. No longer will austere measures be imposed on countries in need of a bail-out from the World Bank. This will make it easier for socialist countries to maintain their safety nets and not pull the rug out from under the poor.

While China gains ascendency on the world stage, the US is saddled with a military empire including 737 military bases manned with 2.5 million personnel in about 130 countries around the world. The US military budget takes up over half of US government expenditures and is currently over one trillion dollars annually if interest on the national debt and veteran expenditures are taken into account. So if the US could not borrow $1 trillion annually, it would have to drastically cut its military budget which is probably not such a bad thing. The demise of the US world empire would relieve the US of being the world's policeman. Other countries would have to take up the slack and there would probably be far less meddling in other countrys' affairs. Currently, such countries as France and Germany are getting by with letting the US take care of their share of protection at US expense, of course. If they want protection in the future, they will have to shoulder their share of the financial burden.

The US will not be able to have a debt based economy fueled by consumer consumption and cheap imports. This is probably a good thing as well as the US will have to redevelop its own manufacturing base and rely on its own products rather than importing so much from abroad. The change in the current world order will allow the US to start building its house on a rock again instead of the sand castle its been building for the last 50 years.

China Flexes Its Economic Muscle

The current economic crisis is mainly a western crisis. China is doing quite well, thank you. The US model of unfettered capitalism, privatization of public institutions, deregulation and free trade has been exposed as virtually a fraud, and China is capitalizing (pardon the pun) on the fact that the US mainly has egg on its face. While the US and other western countries are in recession, China's economy is humming along quite nicely, albeit not as at great a rate as previously, but still outperforming the west.

China is giving financial aid to many western countries such as Jamaica that had previously been aligned with the US which is helpless to come to their aid at the present time. So China has stepped into the breach. China has called for a new world reserve currency to replace the dollar which is under increased scrutiny due to the fact that the Federal Reserve's printing presses are running day and night. The dollar's value is being diluted and China openly expresses reservations of the value of its trillion dollars in dollar denominated reserves. China is practically banker to the US as every day the US must borrow billions of dollars to finance its deficits.

The following is from the Washington Post:

Overseas aid and loans are just one way China is asserting itself in its new role as a world financial leader. While polishing China's own image, Premier Wen Jiabao and other top leaders have blamed the West for the global economic crisis. Chinese officials increasingly are challenging the primacy of the dollar, warning other countries about the danger of keeping reserves in just one or two currencies, such as dollars and euros. And as the global economic crisis has eroded faith in U.S.-style capitalism, there's growing talk that a new "Beijing Consensus" will replace the long-dominant Washington Consensus on how developing countries should manage their economies. Coined by British economist John Williamson 20 years ago, the term "Washington Consensus" refers to a standard set of policies -- including privatization of state enterprises, free trade, deregulation and restraint in public spending -- that the International Monetary Fund, the World Bank and the U.S. Treasury Department have long urged on debt-ridden nations, particularly in Latin America. A fierce debate has broken out among academics and financial policymakers about how to define the Beijing Consensus, or even whether such a thing exists; many say that it is a loose package of political points rather than an economic model, and that there is no formal effort by the Chinese government to promote it. But some experts are already calling it a challenge to the existing order.

Developing countries are losing confidence in the US economic model and US preachings about how developing countries should develop. Instead of seeing themselves as mini USs, developing countries are gravitating towards becoming mini Chinas. The Beijing consensus is replacing the US consensus. The IMF and World Bank, long dominated by the US and its philosophical approach to reality, are starting to change. China is forging allinaces all over the globe. While the US labors on under the delusions of its military might being the predominant factor in world relations, China is exerting its influence on the world stage almost wholly in terms of its seemingly superior economic model, and other countries are hastening to abandon US influence while setting their courses on paths that emulate the Chinese.

Cheng Enfu, an economics researcher at the Chinese Academy of Social Sciences, a government-affiliated think tank, said he defines the Beijing Consensus as promotion of economies in which public ownership remains dominant; gradual reform is preferred to "shock therapy"; the country is open to foreign trade but remains largely self-reliant; and large-scale market reform takes place first, followed later by political and cultural change. The global economic crisis, Cheng said, "displays the advantages of the Chinese model" and has already expanded China's influence. "Some mainstream economists are saying that India should learn from China; Latin American countries are trying to learn from China. When foreign countries send delegations to China, they show interest in the Chinese way of developing," Cheng said. Barry Sautman, a political scientist at Hong Kong University of Science and Technology, said in a research paper that Western academics often deride the Chinese model as "economic growth without the constraints of democratic institutions." But, he argued, the emerging Beijing Consensus "takes seriously some aspirations of developing states often ignored or opposed by the West," such as "a more equitable international distribution of wealth and power." As Beijing grows more assertive in international finance, it is working inside as well as outside existing organizations. In January, it joined the Inter-American Development Bank -- which is active in Latin America and the Caribbean -- as a donor country. It is in talks with the IMF to increase its contribution to the fund in exchange for more of a say in IMF policies. And in Asia, it is leading the push by the Association of Southeast Asian Nations for a regional fund that will compete with the Asian Development Bank. This week, China's allies Kazakhstan and Pakistan -- both of which recently got new loans from China -- threw their support behind calls from China's central bank governor, Zhou Xiaochuan, to create a new world or Asian reserve currency to replace the dollar. Venezuelan President Hugo Chávez, who also signed a credit line with China recently, has backed the proposal. In the past five months, China has signed $95 billion in currency swap agreements with six countries that now hold part of their reserves in yuan. The government has also begun to allow companies in southern China to settle contracts with foreign neighbors in yuan instead of dollars or euros.

While the US via the World Bank has advocated in the past the Shock Doctrine of abrupt privatization causing economic distress for millions of people is South America and elsewhere while at the same time giving advantages to international corporations which proceeded to exploit poor peasants in those countries, China prefers a more gentle approach including the preservation of public institutions, self-sufficiency and social safety nets for the poor. The US model is in disarray. Chicago School of Economics' Milton Friedman has been discredited. Laissez faire capitalism is down the tubes. The Chinese model is winning out over the US model without a shot having been fired. Sun Tzu was right. The best war is one in which weapons need not be resorted to. And China is beating the US at its own game - capitalism - only its Chinese capitalism and not the US variety. How interesting!

And note this sentence above: "This week, China's allies Kazakhstan and Pakistan -- both of which recently got new loans from China -- threw their support behind calls from China's central bank governor, Zhou Xiaochuan, to create a new world or Asian reserve currency to replace the dollar." And I thought Pakistan was our ally!? Don't we support it with gazillions of dollars. And we're fighting there to prevent it getting taken over by the Taliban?! And yet Pakistan supports a new Asian currency to replace the dollar. Some ally!

But wait, there's more. While China beats us at our own game, socialism is well and good in Europe. Here's Senator Bernie Sanders take on that:

And what we learned impressed us. Finland is a country which provides high-quality health care to all of its people with virtually no out-of-pocket expense; where parents and their young children receive free excellent childcare and/or parental leave benefits which dwarf what our nation provides; where college and graduate education is free to students and where children in the public school system often record the highest results in international tests. In Finland, where 80 percent of workers belong to unions, all employees enjoy at least 30 days paid vacation and the gap between the rich and poor is far more equitable than in the United States. One reason there was so much interest in the Finnish model was that even before Wall Street greed drove the world economy into a deep recession, more and more Americans were wondering why the very rich were becoming richer while our economy failed our working families. They wanted to know why the middle class was shrinking, poverty was increasing and the United States was the only major country without a national health care program.

So European socialism is a success. Chinese capitalism is a success. While Europeans get free college educations, American corporations exploit US students with usurous student loans driving them into debt even before they graduate!  The only failure seems to be US capitalism - the capitalism espoused by Milton Friedman, Ayn Rand, Ronald Reagan and others.

Despite all the rhetoric about "family values," workers in the United States now work the longest hours of any people in a major country. Our health care system is disintegrating. At last count, 47 million Americans had no health insurance while we spend twice as much per capita on health care as any other nation.

We have the highest rate of childhood poverty in the industrialized world. Our childcare system is totally inadequate. Too many of our kids drop out of school, and college is increasingly unaffordable. One of the results of how we neglect many of our children is that we end up with more people in jails and prisons than any other country on earth. There is a correlation between the highest rate of childhood poverty and the highest rate of incarceration.

While our friends enjoy socialism, it is decried by right wing pundits and wingnuts in the US. While our "enemies" practice capitalism and have become our default banker, we continue down the road of serfdom and indebtedness. What's wrong with this picture? Calling Sun Tzu!

China on a Roll with Money to Spare

The following article is from the Washington Post:

China Gains Key Assets In Spate of Purchases

Oil, Minerals Are Among Acquisitions Worldwide

By Ariana Eunjung Cha

Washington Post Foreign Service
Tuesday, March 17, 2009; Page A01

SHANGHAI -- Chinese companies have been on a shopping spree in the past month, snapping up tens of billions of dollars' worth of key assets in Iran, Brazil, Russia, Venezuela, Australia and France in a global fire sale set off by the financial crisis.

The deals have allowed China to lock up supplies of oil, minerals, metals and other strategic natural resources it needs to continue to fuel its growth. The sheer scope of the agreements marks a shift in global finance, roiling energy markets and feeding worries about the future availability and prices of those commodities in other countries that compete for them, including the United States.

Just a few months ago, many countries were greeting such overtures from China with suspicion. Today, as corporations and banks in other parts of the world find themselves reluctant or unable to give out money to distressed companies, cash-rich China has become a major force driving new lending and investment.

On Feb. 12, China's state-owned metals giant Chinalco signed a $19.5 billion deal with Australia's Rio Tinto that will eventually double its stake in the world's second-largest mining company.

In three other cases, China has used loans as a way of securing energy supplies. On Feb. 17 and 18, China National Petroleum signed separate agreements with Russia and Venezuela under which China would provide $25 billion and $4 billion in loans, respectively, in exchange for long-term commitments to supply oil. And on Feb. 19, the China Development Bank struck a similar deal with Petrobras, the Brazilian oil company, agreeing to a loan of $10 billion in exchange for oil.

On Saturday, Iran announced that it had signed a $3.2 billion agreement with a Chinese consortium to develop an area beneath the Persian Gulf seabed that is believed to hold about 8 percent of the world's reserves of natural gas.

Even as global financial flows have slowed sharply overall, China has dramatically stepped up its outbound investment. In 2008, its overseas mergers and acquisitions were worth $52.1 billion -- a record, according to the research firm Dealogic. In January and February of this year, Chinese companies invested $16.3 billion abroad, meaning that if the pace holds, the total for 2009 could be nearly double last year's.

Worldwide, the value of mergers and acquisitions transactions so far this year has dropped 35 percent to $384 billion. By comparison, the United States had $186.2 billion in outbound mergers and acquisitions in 2008 and Japan had $74.3 billion.

China's state-run media outlets are calling the acquisition spree an opportunity that comes once in a hundred years, and analysts are drawing parallels to 1980s Japan.

"That China started investing or acquiring some overseas mineral resources companies with relatively low prices during the global economic crisis is quite a normal practice. Japan did the same thing in its prime development period, too," said Xu Xiangchun, consulting director for Mysteel.com, a market research and analysis firm.

It's not just Chinese corporations that are taking advantage of the economic crisis to help others while helping themselves.

The Chinese government also has come to the rescue of ailing countries, such as Jamaica and Pakistan, that it wants as allies, extending generous loans. Even Chinese consumers are taking their money abroad. In a shopping trip last month organized by an online real estate brokerage, a group of 50 individual investors from China traveled to New York, Los Angeles and San Francisco to purchase homes at prices that have crashed since the subprime crisis.

continued here

While US Economy Languishes, China's Economy Surges

From the New York Times:

By KEITH BRADSHER

Published: March 16, 2009

GUANGZHOU, China — The global economic downturn, and efforts to reverse it, will probably make China an even stronger economic competitor than it was before the crisis.

China, the world’s third-largest economy behind the United States and Japan, had already become more assertive; now it is exploiting its unusual position as a country with piles of cash and a strong banking system, at a time when many countries have neither, to acquire natural resources and make new friends.

Last week, China’s prime minister, Wen Jiabao, even reminded Washington that as one of the United States’ biggest creditors, China expects Washington to safeguard its investment.

China’s leaders are turning economic crisis to competitive advantage, said economic analysts.

The country is using its nearly $600 billion economic stimulus package to make its companies better able to compete in markets at home and abroad, to retrain migrant workers on an immense scale and to rapidly expand subsidies for research and development. Construction has already begun on new highways and rail lines that are likely to permanently reduce transportation costs.

And while American leaders struggle to revive lending — in the latest effort with a $15 billion program to help small businesses — Chinese banks lent more in the last three months than in the preceding 12 months.

“The recent tweaks to the stimulus package indicate a sharper focus on the long-term competitiveness of Chinese industry,” said Eswar S. Prasad, a former China division chief at the International Monetary Fund. “Higher expenditures on education and research and development, along with amounts already committed to infrastructure investment, will boost the economy’s productivity.”

The international economic slowdown is also doing some things that Chinese authorities had tried and failed to do for four years: slow inflation, reverse what had been an ever-growing dependence on exports and pop a real estate bubble before it could grow even bigger.

The recession in most of the large economies in the world is inflicting real pain here — causing a record plunge in Chinese exports, putting 20 million migrant workers out of their jobs and raising the potential for increased and sustained social unrest. But as President Hu Jintao told the National People’s Congress last week, “Challenge and opportunity always come together — under certain conditions, one could be transformed into the other.”

To that end, Chinese companies are shopping for foreign businesses to acquire. The commerce ministry is leading a delegation of corporate executives to Europe this week for the ministry’s first mergers and acquisitions trip; the executives are looking at companies in the automotive, textiles, food, energy, machinery, electronics and environmental protection sectors.

The government initiatives coincide with some immediate benefits of the slowdown for China. For instance, air freight and ocean shipping costs have plunged by as much as two-thirds since last summer as demand has fallen.

Blue-collar wages, which had doubled in four years in some coastal cities, have fallen for many workers this winter, reviving China’s advantage in labor costs.

Unemployment has pushed down the piece rates that factories pay for each garment sewn or toy assembled. Overtime has practically disappeared.

Lao Shu-jen, a migrant worker from Jiangxi province who works at a blue jeans factory here, said that he earned $350 a month late last year but would be lucky to earn $220 a month this spring.

“There are a lot of blue jeans” piling up in the back of the factory with no sign of buyers, he said.

College graduates and highly qualified middle managers, in acutely short supply a year ago, are now widely available because of layoffs. They are likely to stay that way as universities expand — although white-collar unemployment could pose a threat of social unrest: limited job opportunities for students contributed to the Tiananmen Square protests 20 years ago.

Today some jobs are still available. Four days after a shoe factory closed here for lack of orders, laying off several hundred workers, there were four ads on the factory’s front gate from other shoe factories seeking to hire skilled workers.

Unskilled laborers face the greatest difficulty finding jobs. But with subsidies from Beijing, provincial governments have embarked on large-scale vocational training programs of the sort that the United States has discussed but not actually tried.

Guangdong province alone, here in southeastern China, is quadrupling its vocational training program this year to teach four million workers engaged in three-month or six-month programs.

The main comparable program in the United States, under the Workforce Investment Act, has been training fewer than 250,000 a year, although President Obama’s stimulus program provides funding that could more than double the number of American workers in training programs.

The Guangdong training programs are half in the classroom and half in the factory, usually the business that plans to employ the trainees. By increasing productivity, training programs can hold down corporate labor costs per unit of production for years to come.

China’s huge training programs may also help preserve social stability by keeping the unemployed off the streets, although Chinese officials deny that is their intention.

Multinationals are cutting back less in China than elsewhere — and some are even expanding.

Intel is shutting down semiconductor production lines sooner than previously planned at older, smaller operations in Malaysia and the Philippines as it opens a large, new factory in Chengdu in western China.

IMI Plc., the big British manufacturer that manufactures items as diverse as power plant valves and brewery equipment, has just announced an accelerated shift of operations to China, India and the Czech Republic, after cutting its global work force by 10 percent since December.

And Hon Hai, the 600,000-employee Taiwanese company that is one of the world’s largest contract manufacturers of products like the Apple iPhone and Nintendo Wii game console, has just increased employment by nearly 5 percent in China even as it cuts overall employment by 3 to 5 percent.

Yet China’s economy still has weaknesses. Little is being done to shift the economy away from a heavy reliance on capital spending and toward greater consumption. The social safety net of pensions, health care and education barely exists, so Chinese families save heavily.

And strict government policies on labor and the environment, imposed a year ago when China felt more confident of its economic strength, are prompting low-tech industries like toy manufacturing to move to other, less stringent countries.

Top labor officials insisted during the National People’s Congress that they would resist suggestions from some Chinese executives that the new standards be relaxed.