September 22, 2003

US is deeply in hock to China

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By 2016 China will be more important to the world economy than the EU. Think about that.

This forecast comes from Lehman Brothers – one of the most respected investment banks in the world.

Also this week, figures were published showing that Ireland’s imports from China increased by 64 per cent last year. A glance at any pub, convenience store or supermarket in Dublin shows that the hardest workers are Chinese kids.

In the financial world, China is fast becoming one of the biggest lenders to America. In fact, Chinese money is keeping the US afloat. It is clear that Chinese workers will have as much influence on whether George Bush gets re-elected as Saddam Hussein.

China is emerging more rapidly than people expected. The 19th century belonged to Britain, the 20th to America and the 21st may belong to China. If it does,what will it look like? And will China’s ascent be smooth and trouble-free?

China is having a remarkable effect on the price of manufactured goods worldwide. This effect is similar to the impact America had on agricultural goods in the late 19th century.

The period from 1870 to 1890 saw a sustained fall in the price of agricultural commodities in Europe, as the huge wheat farms of the US prairies and midwest began to flood the market. European food had always been a reflection of the price of land, the productivity of the land and the cost of local labour.

When an entire continent came up for grabs in North America, the land was almost free.The huge tracts without any peasant holdings made intensive farming possible, raising the productivity of US land above European land.

The railways in the US meant that they could get produce out of Ohio, Illinois and New York State and onto the world market quickly.

This caused a sustained agricultural recession in Europe. People’s livelihoods collapsed, prompting two extremely important political developments.

The agricultural recession caused mass emigration from Ireland, Britain, Germany, Sweden and many parts of central Europe to the US, rendering the US even more productive. This reinforced the original deflation

ary impetus from the midwest, and accelerated the urbanisation of Europe, leading to mass, city-based, labour movements in the 1890s and early 1900s, culminating in the rise of socialism and communism in Europe.

Those farmers who remained on the land became more militant, resulting in the loss of power by the old rural upper orders, from East Prussian Junkers to the Boycotts of North Mayo.

Such an enormous transfer of wealth to the US set the scene for the Americanisation of the 20th century.

China is exerting the same influence through its increasing dominance in manufacturing, and it is arguable that the political ramifications globally, will be just as monumental. How can any wester n country compete with 50 cent an hour factory workers?

So what happens? Well, the recovery in the US offers quite an interesting blueprint. America is having what is called a `jobless recovery’. The economy is growing, but unemployment is rising. This means that the average US worker is working longer hours, or producing more, or both. The numbers suggest that both are happening, but the real issue is that US workers are borrowing (against their houses, for example) while the basic blue-collar manufacturing jobs are migrating to China.

The US recovery is driven by punters borrowing cash to splash out in Wal-Mart at the weekends; the US is living beyond its means. How come?

Let’s start with Bush’s two tax cuts, possibly among the largest in US history. These tax cuts put cash into

American pockets which is then spent on consumer goods made in China.

This causes the US trade deficit to rise rapidly. (It is now running at more than $1.3 billion per day.) So the Bush tax cuts are lining the pockets of Chinese industrialists.

However, Bush also needs money to finance the US government and its wars.Who will lend America money? China will.

The Chinese, along with the Japanese, are now the biggest lenders to America. So think about it: America cuts taxes, Americans spend money and dollars flow out of America to China. The Chinese now hold the American dollars.

What can they buy? Why not American government debt? Thus, America impoverishes itself twice.

Initially, dollars flow to China for computers, mobiles and the like, and later, more dollars flow out of the US to China in the shape of interest paid on American government debt. All the while, America gets deeper in hock to the Chinese.

China is beginning to look like the Cricklewood publican of the 1960s who cashes the drunken labourer’s cheques. Eventually, the labourer is completely indebted to the publican and lives almost in a world of bondage.
Normally the way economics deals with that situation is via an exchange rate movement.The Chinese currency – the RenMinBi (RMB) – should rise and the dollar should fall. But neither country wants this to happen.

For the US, a falling currency could only be rectified by higher domestic interest rates (to entice foreigners to hold US government paper) and this was ruled out by the Federal Reserve last Tuesday when it reaffirmed its low interest rates policy.

The Chinese reasoning behind not wanting a strong currency is both straightforward and fascinating. China needs to grow by 7 per cent each year simply to keep the labour force employed.Twelve million young workers join the labour force each year.

Migration from the centre of the country to the coastal productive strip is running at another 22 million per year. The Communist Party knows, after Tiananmen Square, that social unrest can boil over easily so they need a strong economy to stay in power. The Communist Party sees America as its way out of a political cul-de-sac. Ironically, after all the posturing, American capitalism is saving the Chinese Communist Party. What would Mao and Nixon have made of that?

It suits the Chinese, from a geopolitical strategic point of view, to be America’s biggest creditor. It will give the Chinese leverage in the years ahead, just as in the 16th century parsimonious Protestant Holland had profligate Catholic Spain by the short and curlies.

Ultimately, the Dutch bled the Spaniards dry with interest calls over the course of the late 16th century.

The Chinese are crucial to Bush’s re-election. Despite all the stuff about the resurgent Democrats and Wesley Clark, the only way the Democrats will win is if a Ross Perot type figure enters the race from the right and splits the Republican vote.

If blue-collar workers in the US continue to lose their jobs, Bush’s free-trade obsession, driven by his proximity to big business, could be his Achilles heel. If a populist and isolationist anti-free-trade, pro-American-jobs candidate combined this economic message with a political `Bring the boys home from Iraq’ campaign, Bush could be in serious trouble. And China, not Iraq, would be the bogeyman, believe me.

Let’s not be cosy about this over here, because everything that holds true for the US with respect to China, holds true for Europe and Ireland.

To quote a Chines e proverb, “Never wish to live in interesting times”.

David McWilliams presents the Breakfast Show on Newstalk 106

 

This forecast comes from Lehman Brothers – one of the most respected investment banks in the world.

Also this week, figures were published showing that Ireland’s imports from China increased by 64 per cent last year. A glance at any pub, convenience store or supermarket in Dublin shows that the hardest workers are Chinese kids.

In the financial world, China is fast becoming one of the


biggest lenders to America. In fact, Chinese money is keeping the US afloat. It is clear that Chinese workers will have as much influence on whether George Bush gets re-elected as Saddam Hussein.

China is emerging more rapidly than people expected. The 19th century belonged to Britain, the 20th to America and the 21st may belong to China. If it does,what will it look like? And will China’s ascent be smooth and trouble-free?

China is having a remarkable effect on the price of manufactured goods worldwide. This effect is similar to the impact America had on agricultural goods in the late 19th century.

The period from 1870 to 1890 saw a sustained fall in the price of agricultural commodities in Europe, as the huge wheat farms of the US prairies and midwest began to flood the market. European food had always been a reflection of the price of land, the productivity of the land and the cost of local labour.

When an entire continent came up for grabs in North America, the land was almost free.The huge tracts without any peasant holdings made intensive farming possible, raising the productivity of US land above European land.

The railways in the US meant that they could get produce out of Ohio, Illinois and New York State and onto the world market quickly.

This caused a sustained agricultural recession in Europe. People’s livelihoods collapsed, prompting two extremely important political developments.

The agricultural recession caused mass emigration from Ireland, Britain, Germany, Sweden and many parts of central Europe to the US, rendering the US even more productive. This reinforced the original deflation

ary impetus from the midwest, and accelerated the urbanisation of Europe, leading to mass, city-based, labour movements in the 1890s and early 1900s, culminating in the rise of socialism and communism in Europe.

Those farmers who remained on the land became more militant, resulting in the loss of power by the old rural upper orders, from East Prussian Junkers to the Boycotts of North Mayo.

Such an enormous transfer of wealth to the US set the scene for the Americanisation of the 20th century.

China is exerting the same influence through its increasing dominance in manufacturing, and it is arguable that the political ramifications globally, will be just as monumental. How can any wester n country compete with 50 cent an hour factory workers?

So what happens? Well, the recovery in the US offers quite an interesting blueprint. America is having what is called a `jobless recovery’. The economy is growing, but unemployment is rising. This means that the average US worker is working longer hours, or producing more, or both. The numbers suggest that both are happening, but the real issue is that US workers are borrowing (against their houses, for example) while the basic blue-collar manufacturing jobs are migrating to China.

The US recovery is driven by punters borrowing cash to splash out in Wal-Mart at the weekends; the US is living beyond its means. How come?

Let’s start with Bush’s two tax cuts, possibly among the largest in US history. These tax cuts put cash into

American pockets which is then spent on consumer goods made in China.

This causes the US trade deficit to rise rapidly. (It is now running at more than $1.3 billion per day.) So the Bush tax cuts are lining the pockets of Chinese industrialists.

However, Bush also needs money to finance the US government and its wars.Who will lend America money? China will.

The Chinese, along with the Japanese, are now the biggest lenders to America. So think about it: America cuts taxes, Americans spend money and dollars flow out of America to China. The Chinese now hold the American dollars.

What can they buy? Why not American government debt? Thus, America impoverishes itself twice.

Initially, dollars flow to China for computers, mobiles and the like, and later, more dollars flow out of the US to China in the shape of interest paid on American government debt. All the while, America gets deeper in hock to the Chinese.

China is beginning to look like the Cricklewood publican of the 1960s who cashes the drunken labourer’s cheques. Eventually, the labourer is completely indebted to the publican and lives almost in a world of bondage.
Normally the way economics deals with that situation is via an exchange rate movement.The Chinese currency – the RenMinBi (RMB) – should rise and the dollar should fall. But neither country wants this to happen.

For the US, a falling currency could only be rectified by higher domestic interest rates (to entice foreigners to hold US government paper) and this was ruled out by the Federal Reserve last Tuesday when it reaffirmed its low interest rates policy.

The Chinese reasoning behind not wanting a strong currency is both straightforward and fascinating. China needs to grow by 7 per cent each year simply to keep the labour force employed.Twelve million young workers join the labour force each year.

Migration from the centre of the country to the coastal productive strip is running at another 22 million per year. The Communist Party knows, after Tiananmen Square, that social unrest can boil over easily so they need a strong economy to stay in power. The Communist Party sees America as its way out of a political cul-de-sac. Ironically, after all the posturing, American capitalism is saving the Chinese Communist Party. What would Mao and Nixon have made of that?

It suits the Chinese, from a geopolitical strategic point of view, to be America’s biggest creditor. It will give the Chinese leverage in the years ahead, just as in the 16th century parsimonious Protestant Holland had profligate Catholic Spain by the short and curlies.

Ultimately, the Dutch bled the Spaniards dry with interest calls over the course of the late 16th century.

The Chinese are crucial to Bush’s re-election. Despite all the stuff about the resurgent Democrats and Wesley Clark, the only way the Democrats will win is if a Ross Perot type figure enters the race from the right and splits the Republican vote.

If blue-collar workers in the US continue to lose their jobs, Bush’s free-trade obsession, driven by his proximity to big business, could be his Achilles heel. If a populist and isolationist anti-free-trade, pro-American-jobs candidate combined this economic message with a political `Bring the boys home from Iraq’ campaign, Bush could be in serious trouble. And China, not Iraq, would be the bogeyman, believe me.

Let’s not be cosy about this over here, because everything that holds true for the US with respect to China, holds true for Europe and Ireland.

To quote a Chines e proverb, “Never wish to live in interesting times”.  


  1. Paul Baynes

    Presumably China is also concerned that a change in
    exchange rates would mean that US produce would have lower
    prices in the international marketplace, having a negative
    impact on China’s current ability to trade due to low
    labour costs. Buying US currency therefore keeps China
    competitive.

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