Posted on 12/09/2003 9:59:29 PM PST by Remember_Salamis
How to Hamstring a Hyperpower
There may not exist any military checks to American power, but the markets are doing their part to rein in our foreign policy. by Irwin M. Stelzer The Weekly Standard 10/02/2003
THE AMERICAN ECONOMY seems bedeviled by twin towers. The terrorist destruction of the World Trade Center has left a residue of homeland security costs that will be a drag on the economy for years to come. Then there are those financial twin towers--the trade and budget deficits--that have caused a periodic outbreak of nervousness among policymakers for decades.
Now we have a new pair of threats, the towering pile of U.S. government IOUs held by China, and the increasing number of barrels of imported oil that America needs to keep its factories operating, its trucks rolling, and its citizens moving from meeting to meeting. Last week the vulnerability of America's economic recovery to these threats became obvious.
In an effort to appease industries that have been hurt by competition from imports, the Bush administration concluded that it had to do something about China, which is running a trade surplus with America of well over $100 billion per year. With new polls showing that president Bush is now running neck-and-neck with several of his potential opponents and the unemployment rate failing to respond instantly to an economic growth rate that is now probably approaching 6 percent, the president's men want to be seen to be tough on countries that are "stealing our jobs."
That leads them straight to China, whose undervalued currency makes Chinese goods cheap in America and made-in-the-USA products expensive over there. Never mind that the trade deficit issue is more complicated than the simple trade figures suggest. Take Wal-Mart. The giant retailer imports about $12 billion in goods from China every year, enabling it to sell trainers, T-shirts, and a host of other goods to American consumers at prices they just love.
So is the trade deficit costing Americans jobs? Perhaps not. Stephanie Pomboy of consultants MacroMavens reports that "Since China first pegged the Yuan to the dollar in 1994, Wal-Mart has nearly tripled its workforce from 528,000 to 1.4 million today. And that's before counting the jobs associated with its plans to add 210 supercenters and 40 Sam's clubs [Wal-Mart's bulk discounter] stores this year."
The hundreds of thousands hired by Wal-Mart probably don't realize that their jobs depend on their employer's continued access to Chinese goods. But the 300,000-500,000 U.S. workers who lost their jobs over the past three years as a result of the "relocation of U.S. production to overseas affiliates" are certain that low-cost Chinese labor and the undervalued currency are the source of their woes. And they don't care that job losses due to such relocations come to only 0.1 percent of employment per year.
For Treasury Secretary John Snow, politics trumps economics. So he used the occasion of last week's meeting of the G-7 industrialized countries in Dubai to persuade his colleagues to endorse a call for a new exchange rate regime. The new program would require China to allow its currency to float higher, making its products more expensive in world markets.
BEWARE of what you wish for. Sitting in the vaults of China's central bank are hundreds of billions of dollars of Uncle Sam's IOUs. China uses the mounting pile of dollars from its favorable trade balance to buy U.S. Treasury bonds and notes. Chinese demand for these securities keeps their price up and, conversely, interest rates in the United States low. If China were to begin selling its holdings, or even announce that it has no interest in adding to them, the price of treasuries would fall, interest rates would rise, and the U.S. economy would slow.
Which is why China's towering holdings of America's IOUs are a potential constraint on this country's freedom of action in, among other places, North Korea. Worse still, last week America was forced to take note of another hostage to fortune that it has refused to deal with--its reliance on imported oil. In 1972, when an oil embargo first brought home to Americans just how dependent they were on imported oil, imports supplied less than 30 percent of our needs. Today, imports account for almost 60 percent of U.S. oil consumption.
After assuring the world that it would continue pumping enough oil to ease prices from the $30 range, OPEC surprised world markets by announcing, effective in November, a production cutback of 900,000 barrels per day. This cutback comes at a time when most experts are expecting worldwide demand for oil to increase, with China--which has replaced Japan as the world's second largest consumer of oil--leading the parade.
The immediate effect of OPEC's thumb-in-the-eye to America will be to slow the worldwide recovery. But that is less important than the reminder of still another constraint on America's room for foreign-policy maneuver. The need for oil imports from Saudi Arabia undoubtedly has more than a little to do with President Bush's reluctance to press the Saudis to stop financing and exporting terror. And it may well explain his refusal to publish the recent report detailing Saudi complicity in terror. The war on terror apparently stops at the Saudi border.
So we have Beijing in a position to effect U.S. interest rates and Riyadh in a position to determine just how much of Bush's tax cut will be offset by higher oil prices. It seems that markets might trump military power in setting limits on the world's only superpower.
Irwin M. Stelzer is director of economic policy studies at the Hudson Institute, a columnist for the Sunday Times (London), a contributing editor to The Weekly Standard, and a contributing writer to The Daily Standard.
© Copyright 2003, News Corporation, Weekly Standard, All Rights Reserved.
If it wishes, China can sell it's t-bills and cause US interest rates to skyrocket, to especially high interest rates if the "herd mentality" of the world's financial markets follow suit (panick selling). What we'll have is a low baseline interest rate and an extremely high natural interest rate, where the US will be unable to cut interest rates to stimulate the economy, while defecits get extremely expensive due to high interest rates (defecits don't matter right now because interst rates are soo damn low. when they're high, we have to pay through the nose to borrow).
As a result of all this, the US must either (a) raise taxes and further constrict the capital markets or (b) cut spending -- military spending. See how it all works? China is strategiclly buying bonds in order to hurt our economy long-term if need be, as well as our capability to fund defense expenditures. And I guarantee you that the White House is well aware of this; It's been pointed out in the Weekly Standard Numerous times).
This leverage played out in today's meeting with wen jibao: we'll work with you on the Yuan (remnimbi) and NK if you'll publicly oppose moves towards Taiwanese Independence!
Repudiate foreign debt owed to China. All they have is paper, and they sure as hell don't have anyway of collecting on it. So to put it crudely 'f*** 'em.'
The Chinese Communists are the bloodiest killers left on the planet and we might as well deal with them now, or it will be damned harder to deal with them later.
We don't need their goods. The Indonesians, the Taiwanese, and the Indians will be perfectly happy to manufacture for us. In the long run, we'll be better off.
Tell the Maoists to ram it.
L
Same way George Soros broke the currencies in Asia, causing a ripple effect.
Who would lose more if China pulled a stunt like that?
If we cut off all financial ties with China and refused to honor the paper they hold because of their manipulation practices, China's economy would crash in a way that would make 1929 look like a picnic
In the long run?? ... China does .. IMO, a stunt like this could screw them royally
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We are not a superpower. The only thing we have is atom bombs and airplanes which are useless for anything but deluding ourselves or putting on a hollow show while we collapse internally.
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There is no way we can pay this off. With compound interes and the trade deficit, within five to ten years China will own the United States monetary system and will be able yo buils and support itself on the interest alone, leaving us a slave state to China. We're stuck in the equivalent of a loan shark juice operation of our own making.
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How?
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Corrected for typos:
There is no way we can pay this off. With compound interes and the trade deficit, within five to ten years China will own the United States monetary system and will be able to build and support itself on the interest alone, leaving us a slave state to China. We're stuck in the equivalent of a loan shark juice operation of our own making.
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Why?
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