China, the US, and Russia: MAD revisited

There has been a school of thought running among the elite that the days of the West, and of the United States in particular, are numbered; and that our place as the lone superpower will be changed, either to share power with, or to be supplanted by, the East, particularly China.

Examples of this mindset are given by über-investor Jim Rogers who has even gone to live in Singapore; Deutsch Bank, which says that China will overtake the United States as the world's largest economy within ten years (China's reported growth rate as of January 2010 was 10.7%); another major bank, HSBC, which has moved its CEO to Hong Kong; and former Secretary of State Madeleine who defended the Clinton administration's policy towards China, even in the face of evidence that the Chinese stole US nuclear weapons technology (both warheads and ICBM guidance systems) from the United States.

What is interesting is that the elites, in making these predictions, seem to be attempting to fulfill their own desires; Jim Rogers is an "investor" -- not in the sense of a person who buys a company hoping for profits, but in the sense of one who acquires wealth by skimming off money during transfers of money or wealth between other parties. Deutsch Bank and HSBC are hoping to similarly profit off of hoped-for demographic and monetary trends; and Madeleine Albright and her ilk hope for an end to the unipolar world (brought about by the fall of the Berlin Wall and the fall of the Soviet Union) which has the United States as its center, and its lone hyperpower.

Several things should be brought to mind before continuing, however. Recall that as recently as the late 1980s, China was indubitably a Third-World country, rightfully villified for its abominable human-rights abuses (not just Falun Gong, by the way; Tiananmen Square made Kent State look like a picnic). Following intense lobbying, China was admitted to the WTO and given most-favored-nation status; and the rush to outsource manufacturing to China began. It may be argued that the initial impulse was to use the strategy which (seemingly) had worked to overthrow Communist rule in Russia: that is, expose the workers to the largesse and consumer goods of the West, and their hunger for material goods will lead them in time to a hunger for political freedom as well.

However, this approach suffered from a number of flaws, not seen in Russia. First, the fact that there have been, and are many more cultural similarities between Russia and the West, than between China and the West. To name just one example, there is a strong historical and cultural memory of Christianity in Russia, despite the persecutions, so the underlying meme of the value of the individual as important is more intuitively accepted. Whereas in China, despite the xenophobic pride over an ancient civilization (writing, gunpowder, steel production all before Europe had them), the individual has been much more subsumed, whether to ancestral worship or under the heels of warlords. Second, it is clear that not only was the West taking notes on the fall of Communist Russia; the Chinese were, too. So they conveniently decided to blunt the erstwhile economic move towards Freedom. This was done not by maintaining an official rigid hostility towards markets (thereby encouraging an underground black economy, and undercutting the moral authority of the Party), but by co-opting it. Markets were opened, but the companies remained under the control of the state. And China marketed itself as a low-cost producer of goods, and as a future market for Western companies. The leaders of the multinational corporations, having no national loyalties, but a great deal of short-sighted pride and greed, fell all over themselves to cooperate, regardless of the possible hollowing-out of their own economies, or of the arming of a possible military rival. ("We will buy from the capitalists the rope we will hang them with" has become "The capitalists will pay to build the factory in our country which will manufacture the rope we will hang them with.")

But there are another couple of trends: the rush to eviscerate the West's manufacturing capabilities (at least for supposedly lower-margin products) was combined with a shift on the part of the Western corporations away from production altogether, in favor of the more lucrative (but more ephemeral) search for profits based not on actual production, but on financial dealings. That is, making money not off of the creation of new wealth (which is slow and more-or-less steady, with an occasional recesssion and pruning thrown in); but off of the velocity of money, skimming cash off of the top of mass movements of money, regardless of whether any new wealth is being created. And this attitude, and the resultant behaviour, the expectation of creating riches (for the few) without its being based upon the creation of actual wealth, has spread from the industrial class to the government: since the bankers and "industrialists" can make profits out of thin air, then surely the government can issue currency based upon the paper values of assets, too? This thinking indirectly led to both the subprime mortgage crisis and the exponential growth of government spending in the United States. And since the government is financing its out-of-control spending by borrowing from other countries (such as the Chinese), the Chinese have us over a barrel.

China, in its turn, has become dependent on the West, after having taken much of the manufacturing from the West, finds itself in a paradox, ironically similar to the position the Russian Communists were in. It is true that China did not immediately have to worry about its peasants overthrowing Communism after a taste of freedom, since even the sweatshop conditions offered by the generation of party-approved "robber barons" were a great improvement over subsistence farming or worse. However, two unexpected developments have developed as a result of the sudden influx of wealth into China. The first is the growth of a true exploitative class, fat off of the sweat of the workers. (In fact, China represents the realization of George Orwell's Animal Farm : but that would be an article in and of itself.) The second one is the corollary of the old adage that "you can't take away what someone never had." That is to say, once you have given somebody a thing that they've never had before, and you then make a move to take it away, they will be angrier than you can imagine. President George Bush once pointed out that China needed to create 25 million jobs a year just to keep up with the population growth. So China is dependent on us for continued demand for it products, since the political consequences to its ruling classes, should they suffer a true recession, are unthinkable. If a billion peasants decide to revolt, no police force, no army on earth, will be able to stop all of them.

We depend on China for financing for an unsustainable spending binge and debt which can never be repaid. This is partially the result of erstwhile fifth columnists and fellow travelers within our government who have been trying to make us spend ourselves into oblivion(*), and dependent on growing China's economy to the point that they can lend to us, and in the futile hope that economic liberalization would lead to political liberalization.

China depends on us for a market for their cheap, cadmium- and mercury-laden, counterfeit goods. Even when China is given the blueprints for the state-of-the art manufacturing in the US (managers at Procter & Gamble were told to do this), or when they steal the intellectual property (widely rumored to have happened with various Chery automobiles), the underlying China ethos of "I got your money, sucka" means corners will be cut and sub-par products often produced. This is done to keep the peasants working.

The United States CANNOT create more debt out of thin air, without a growing, vibrant economy of its own, one which produces real wealth, rather than siphoning off wealth from real producers elsewhere.

China CANNOT sell to a debt-ridden United States: and it cannot create a true middle class without the Communists losing their grip on power.

The temporary solution by the politicians on both sides is to temporize, or to kick the can down the road.

The consumers in the United States are retrenching, which, in the absence of a Marxist in the White House and Socialist and Communist Moles throughout the House and Senate, would allow a *real* recession, clearing of the deadwood, and re-allocation of wealth into truly productive sectors. The politicians have so far been given cover by the banking interests who are using their political clout to demand that the government socialize their losses based on an unsusstainable, fantasy-driven business model. (The Chinese might have called 2007 and 2008 the Year of the Black Swan).

China cannot revalue its currency (which the laws of economics would ordinarily dictate) without losing its status as low-cost-producer to other East Asia countries, and losing millions of additional jobs. And it is threatened on the other side with the devaluation of the United States dollar, which would amount to a de facto revaluation of the yuan. So it is diversifying out of dollars and into commodities on the one hand; and on the other, using its foreign currency reserves which remain, to create huge Potemkin Village projects (creating what you might call WPA or "Wang Project Administration" jobs) in order to stave off unrest. This has resulted in imbalances in worldwide commodity prices, and an artificially high growth rate for China's economy. It is growing on paper -- as noted earlier, the nominal growth rate in January 2010 is 10.7% -- but much of the output is devoted to (like the Peking Olympics, or the phantom city of Ordo) projects which only consume output, rather than allocation of resources towards creating more wealth or the means of production.

In fact, China has inadvertendly followdd the United States into its own real-estate bubble: housing prices for a 1000 square foot apartment in Peking are 80x the average earnings. Which makes the US subprime mortgage racket look like prudence.

So -- in contrast to the US vs. the Soviet Union, which was governed by MAD, or, "Mutually Assured Destruction", the relationship of the United States to China is governed by a new form of MAD: "Monetary Assured Destruction."

(*) Incidentally, this raises fascinating parallels with Reagan's Cold War strategy against the Russians, forcing them to spend more than their economy could bear on military hardware, in an attempt to keep up with our military superiority. The Marxists and leftists have been trying to undermine OUR country by forcing us to spend more than our economy can bear on dimwitted social programs in an attempt to keep up with their (self-declared) moral superiority. (As a counter example, ask how many people defect FROM the U.S. to Socialist- or Communist- led countries.) See the phrase "Cloward-Piven strategy" for more on this.

---The United States CANNOT create more debt out of thin air, without a growing, vibrant economy of its own, one which produces real wealth, rather than siphoning off wealth from real producers elsewhere.--

--I am reminded of a quote I saw attributed to Henry Ford--"Wealth is either grown, mined or manufactured"--seems apropos today--

Some great writing. Thank you.

There were so many things I wanted to emphasize here but I'll settle for just two.

China CANNOT sell to a debt-ridden United States: and it cannot create a true middle class without the Communists losing their grip on power.

The cheap goods will disappear here and revolution will appear there as millions more Chinese citizens become unemployed.

Incidentally, [these are] fascinating parallels with Reagan's Cold War strategy against the Russians, forcing them to spend more than their economy could bear on military hardware, in an attempt to keep up with our military superiority. That's a great point!

There are dire circumstances for the majority of the 1.2 billion citizens but there is the budding domestic expectation of some with an inkling of how a truly free market works . . it's likely too late for the commie masters.

The Chinese citizens may present two options to the Chinese Communist Party: revolution or get slapped silly by the Invisible Hand.

RE: your tagline.