Posted on 03/22/2008 9:41:31 PM PDT by manilaman
US waging economic war against China
Outside the Box By JOHN MANGUN
Why have the prices of commodities like oil and gold risen so dramatically in the last year? Why has the dollar fallen so much? Normal business cycle? Bad management from the world’s financial institutions? And why hasn’t the world’s largest and strongest economy, backed by the most powerful government, been able to change the course of the situation? Perhaps the larger picture is that the United States is waging an economic war against China.
The New York stock market rallied some 400 points Tuesday night, prompting an increase in prices across Asia. Even the Philippines participated a little. US stock prices reacted favorably to the news that the Federal Reserve lowered interest rates. Bloomberg: “The Fed has cut the benchmark lending rate by 2 percentage points this year, the most aggressive easing since the federal funds rate became an explicit target of policy in the late 1980s.”
But don’t get too excited because you must look not just at the “big” picture, but the “whole” picture.
Conventional and common wisdom talks about the recession facing the United States and the potential that an economic slowdown is confronting the globe. There is little indication that a “normal” economic slowdown is happening; normal meaning that production is dropping. It is not so much that production is going down but that the end-result of production, buying, is dropping. If you look around the world at virtually every country in every economic and wealth group, people are wealthier today on the average than at any other time in history. But if people are wealthier, why aren’t they purchasing? One word: inflation.
Prices are going through the roof around the world. Well, that is obviously the fault of high oil prices, right? For example, Kuwait reports that inflation is at a 15-year high. China is very worried and the United States is ignoring the issue in favor of trying to keep the financial system sound.
World inflation has been in a downtrend since 1990, but prices are expected to show heavy increases in 2008, potentially reversing a 15-year movement. Traditionally, high interest rates were a strong indication of inflation trends. In the last 20 years, inflation was best illustrated by a weak dollar and strong gold and commodity prices. And we now have the dollar at historic lows and gold at historic highs, with both of these trends showing little likelihood of changing.
Then we must ask, why is this happening? Why have the prices of commodities like oil and gold risen so dramatically in the last year? Why has the dollar fallen so much? Normal business cycle? Bad management from the world’s financial institutions? And why hasn’t the world’s largest and strongest economy, backed by the most powerful government, been able to change the course of the situation?
Perhaps the larger picture is that the United States is waging an economic war against China.
The United States could strengthen the value of the dollar. It has not. China is hurt because now Chinese products are very expensive in the United States, and this will reduce the US trade deficit with China. China must import huge amounts of oil and strategic metals which are very much more expensive now. China holds hundreds of millions of physical dollars, the value of which is now much less.
China has refused to revalue its currency to a realistic level to improve its trade position with the United States. China has used its huge dollar reserves as a sword against the United States by threatening to sell those dollars, and thereby causing the dollar to drop in value. In effect, the United States is using China’s strength against China.
In order for China to maintain the levels of its trade with the United States, it will be forced to lower the value of its currency. However, if it does that, it faces two major problems. Foreign direct investment (FDI) into China would become less expensive, and China is worried that more and cheaper FDI would spur China’s inflation. Further, a devalued currency would reduce the profit to China for its exported goods.
If China keeps it currency at its present levels, the United States will buy less. The United States wanted a stronger yuan to reduce trade, which China was unwilling to do. That objective is now achieved by a weaker dollar.
China’s dollar holdings are worth much less when buying goods like oil and metals that China depends on for its development and growth. Further, China has been talking and trying for some time to diversify its foreign-reserve holdings form dollars to other currencies and gold. Now, their dollars are worth much less when buying gold, yen and euros.
The current crisis hitting the financial institutions looks to me like a normal business-cycle shakeout not unlike the dot-com IPO fiasco of the 1990s, the savings-and-loan and foreign-country debt crisis of the 1980s and the personal credit crisis of the 1970s.
Back then, the US government bailed out Wall Street, Mexico and the banks, among others, without receiving much in return. This time, the “crisis” is being used to further the US economic position, long-term position, particularly with regard to China. From Sun Tzu: “All warfare is based on deception.” -- Business Mirror http://businessmirror.com.ph/0320-222008/opinion05.html
My thoughts, exactly.
The Bush administration can even secure our southern border, which would end illegal immigration and 90% of the drugs brought into our country.
Why would they even care about an economic war with China? Red China probably owns most of the pols in DC anyway.
Great post. Couldn’t have said it better.
The trouble for the next administration is abundantly clear. I will concede we are on Category 6 rapids and none of the candidates have experience as river guides.
We are headed into a very inflationary period. We know how to stop it thanks to Paul Volker. However, who will have the same visionary leadership as Ronald Reagan to encourage the Fed to slam on the breaks and take the recessionary hit and then come out stronger on the other side with lower taxes and more incentives?
We may be doomed!
.
I went looking for some acrylic paints this week. I was just doing a small job and wanted to get one of the starter sets. I found one made in China for seven bucks. Everything made in the US was $12 or more. It’s difficult to pay nearly twice as much for the same thing.
Those jobs aren’t coming back. And they certainly won’t be coming back in a weakened economy.
“The economic mess is only really a mess on Wall Street” sounds a lot like the 1930s mantra of “What happens on Wall Street doesn’t reach Main Street.” And we all know that wasn’t true then and probably isn’t true now.
If the dollar continues its downward slide, OPEC and other commodity producers will be tempted to price their goods in other currencies.
A weak dollar is a double edged sword. Manufacturing investment will increase, but no one wants to see the value of his external reserves shrink by 30%.
bookmark
LLS
Yeah right.
LLS
Very cool... using an ancient eastern fighting technique, i.e. jujitsu, against a eastern power.
Ok, so maybe we don't want Japan to rebound back and threaten out position either?
Not much chance of that happening, I’m afraid. Japan’s population is aging. Most of the high-tech manufacturing jobs have already moved out of the country. The biggest worry is who how the country is going to take care of all the aged citizens that are going to need extra care.
Japan had its moment in the limelight in the 70s and 80s. Now, its economy is just barely treading water.
Why is it when your neighbor buys a big house, a nice car and sends all his kids to college, every year for decades, he is doing well. Why is it when he is buying money every year for decades, at low rates and paying it off, he is not considered doing well. Certainly the people that sold him the money think of him as one of their best customers and wish they could do more business.
The level of economic discussion on FR is pathetic.
China’s economy is a racket and now they are in a squeeze. It’s going to be rough on the average Chinese, as fer sure the communist/fascists elite are not going to take a hit on their profits. Like Putin and the Moscow mafia, the Chicomms will demonize the US and exhort their people to greater effort and then the elite will send their kids to American schools with new BMWs and park their money in US banks.
Our trade relationship with China is actually part of that plan. By pegging their currency to the U.S. dollar, they've basically ensured that the U.S. purchasing power of anything produced in China will not decline despite the "inflationary dollar" policy that has been put in place.
Basically, China is now functioning as a slave colony of the United States. And they are apparently quite content to be such a thing.
I don’t have any particular love for the Euros, however, they are a very large trading partner and if their economies are contracting it will hit us eventually in the form of lower exports. In addition, a weak dollar makes our imports more expensive leading to higher inflation. Also, the country derives substantial benefits from the dollar being the reserve currency of the world. The country derives substantial revenues through cosignage. It all comes down to the fact that there is going to be a world wide financial meltdown at some time in the future and the dollar will be at the center of it.
chicom bump for later......
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.