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Who Holds the Trump Cards in the China vs. US Poker Game?
In my last article,
I outlined the current financial/ economic relationship between China and the
US. In particular I focused on the manner in which China is diverting its money
and resources away from the US Dollar and US economy.
Indeed, in
my opinion, when push comes to shove it is China, NOT the US who holds the
trump cards on the major issues. Here is a list of the trump cards I perceive.
I’ve referenced this list previously in a report on the Fed’s Quantitative
Easing Program 2, but I believe it bears reiteration:
1) Rare
earths production (China controls 93% of global production).
2) US
Treasuries ownership (a decision by the #1 holder to dump would start a global
rush from the US Dollar)
3) Derivatives:
China could simply tell its banks and firms to renege on all derivatives deals,
not just the commodity ones (commodity derivatives only comprise 2% of global
derivatives, interest rate-based derivatives, in contrast, comprise 80% or so
of the $600 TRILLION derivative market.
4) Interest
rates hikes: a series of interest rate hikes could greatly damage the US via its
derivatives market (see #3 above) or the US Dollar, which currently pays next
to nothing.
In contrast,
the US’s primary strengths are its indebtedness (it could potentially renege on
its debts to China, though this would likely kick off a systemic implosion
too), its military (which is already stretched thin due to the wars in the
Middle East), and its reserve currency (which China is already moving to
confront).
In plain
terms, China has the upper hand here. So be prepared to see any of the above
cards played in the coming years depending on how things play out between the
two countries.
In closing,
I want to stress that none of my statements are meant to come across as
US-bashing nor do I think the US is somehow “finished” from an economic
standpoint. The history of this country has been one of continually
re-inventing itself via conflict and I fully believe that it will successfully
emerge from its current economic problems (though this process will take
years).
Moreover, I
do not wish to come across as a disciple of the “Chinese growth miracle”
doctrine, which has saturated the financial community. The Chinese economy
faces its own major issues particularly regarding inflation, over-capacity,
loose monetary policies and infrastructure needs beyond the coast cities.
Indeed, in
some regards it is clear China is currently in something of a bubble at least
from a real estate and financial speculation perspective. This bubble, when it
pops, will set the country’s growth prospects back dramatically. The Chinese economy will have its downs
as well as its ups just as the US did during its ascendancy to power in the 20th
century.
However, to
me it is clear that the overall big trends in this picture are that China is
taking aggressive steps to attain super-power status while the US is something
of an empire in decline. Thus, going forward the US will face greater and
greater challenges from China, which has proven to be more forward thinking in
terms of gaining economic clout in recent years. These challenges will likely
play out in terms of trade wars or even actual physical warfare, so be prepared
for shortages of goods, or potentially even violent conflict in the coming
years.
Best Regards,
Graham Summers
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Chinese CCP will drop the economic growth in favor of ideology and Party rule stability plus export of the last communist model, I have no doubts. they have proved that with terrorized coordinated population one can achieve something for some time. The same happened when Soviets put the Sputnik in space in 1957. Short term, they can pull it of. Fot Chinese, 30 years is short term. Once it starts to undermine Party rule, thay have to scale back (Soviet Union in 1964) , or let it go (Soviet Union in 1989) .
The current inflationary pressures and weakness of the West after the crisis which still will resurface just makes this shift back to unproductive ruled command economics coming faster and more radically. Most likely, during 2012 Party top change.
The only thing to remember is that Chinese is after technology, so they will either wait until foreigners build all important component factories /software centers in China, or buy into foreign companies abroad- so they will continue cheeting the West with greed and profits to encourage them to share more technology EVEN if CCP turns on nationalization and eradication of middle class.
This will be not the first, not the last time the communists will have fooled the West since West is SO predictable-democracy + greed+ crisis . Very easy to work out what the reaction will be IF there is no dramatic change in internal politics in the West which Chinese will try not to provoke.
But I think, in this last point, they will not be succesful, since nationalist and anti-bailout moods will change the political landscape radically in the USA (plus double dip, unemployment, radicalization) and Germany for sure, very soon.
Actually, that is the reverse. The US is more dependent on China than the reverse.
That is why the US has been invested so much in multiples ways to prevent China (and other parts of the world by the way) from ending the relationship easily.
It is usually the case for people who are strongly dependent on others: they put all their strengths in making it very hard to end the relationship.
Classical for extortion schemes: the extorter is strictly dependent on the extorted. And the extorter spends energy on making sure that the extorted can not walk away at one's first whism. The whole system to trap and reduce mobility come from the dependent.
The reality is that the BRIC and the rest of the world would fare better if they manage to exclude the US from trading with them. Of course, that is a move the US can not allow and therefore will keep coercing the rest of the world into trading with the US.
"The US is more dependent on China than the reverse."
Sorry, I have to disagree. We can move the manufacturing anywhere.
If your thesis were true, we would've been more dependent upon Latin America during the 1990's, than they on us. We see how well that turned out.
China needs the jobs. We can buy their cheap crap from anywhere.
Well, no. The US can not afford moving the jobs elsewhere but China. That is how the things are expressed today.
If indeed it was possible, the US would not have to use tactics like starvation, maintaining a global military network and looking for dismantling China in an effort to turn them more manageable, dociler. You dont spend resources on maintaining people you are not dependent on in a certain position. Just moving the jobs outside China would do the trick.
In its world tour of misery, the US has discovered that if the jobs were not moved to China, nasty stuff could happen.
China is no longer a low cost country. It is another cause for the US to look for their cheap labour. Yet The more China rises, the more their population thrive, the more they put pressure on resources that must be allocated through the US world order to sustain the US way of life. This is what the US absolutely want to avoid.
This is why the story of jobs coming back to the US is drivel.
China is messing the world of tour of misery as planned by the US. It is a fact but still it does not mean that the US want the jobs to come back.
Well, hey, do ignore the small fact that, yes, companies are indeed looking past China for the next low cost manufacting base. The thought that they are stuck with China is wishful thinking on the part of the Chinese.
Unfortunately, the data in the real world doesn't seem to match your conjecture.
At least, this should settle the issue about the Chinese stealing jobs from the US.
It is hard to have both and therefore the US monetary policy can no longer be rationalized through the chinese peg.
So?
The point was your claim "The US can not afford moving the jobs elsewhere but China." I'm glad that it appears to be settled that the claim was unfounded.
Regarding job stealing, I think you're confusing my comments with someone else.
Well, I usually remind people that China is no longer a low cost country and that primary level jobs are already out of China -outsourced by the Chinese themselves in SE Asia lower ring.
This said, the US can not afford moving the jobs elsewhere but China is valid. Or if you prefer, the US have big troubles not moving the jobs elsewhere but China.
They are cheaper solutions but China still gets the jobs expelled from the US.
I concede with no problem hyperbole. But that does change the large picture.
Yeah, he seems confused. It's hard to keep count on that many sources of confusion but let me try to address the 'stolen jobs' confusion:
China has indeed 'stolen' US jobs via their aggressive mercantilist policy - not by being irreplaceable as an oursourcing target.
If India did the same, if it offered cheap manufacturing while keeping unbalanced trade (having a current account surplus with the US) for a long time, while growing, having full employment and fighting inflation (like China does it oday) then yes, they'd also be doing what China does.
What is a more healthy/civilized trade relationship is for example trade between the US and Europe - it's almost balanced out - neither side is taking advantage of the other one via mercantilism - there's free trade and a free flow of goods and capital, and exchange rates are allowed to balance out more or less naturally.
China does the opposite: it's a centrally planned economy with heavy capital controls and heavy regulations in place to keep worker wages and worker civil rights artificially low.
How right-wing posters here can argue in defense of China's policy is beyond me - don't they sense the heavy dose of irony? They probably do not.
That is heavy revisionism. Actually, the Euro currency was spurred by the US attitude when it comes to monetary policy. The Europeans've wanted to get their version of the USD so they have no longer to cope with the US deliberately offloading their issues on them. They still remembered the 70s and John Connally's approach.
On the contrary. The beef against China is that their policies have allowed to raise the average Chinese wages, opening a door on potentially more consumption, putting a dent in US consumption.
A few years ago, studies revealed that many US companies paid Chinese less than the minimal wages.
And you should write your congressman so he could US civilized trade to Ghana or any other places in the world where the US is dumping its toxic waste. Could help to see actions rather than words.
Excellent idea. Export your (sorry, China's) product to Brazil, Russia and India.
There is certainly enough demand there...
Probably the most interesting comment. Point missed by a kilometer.
More later on that, actually the only point that deserves expansion.
On the contrary, the principal asset for BRIC intertrade is less external demand. The US offers an extensive line for external demand, one of dubious value though, paid in debt (both explicit and implicit as shown by the troubles for Chinese to cash on their reserves)
The US promise is to consume countries faster and faster with asymetrical gains: for example, Ghana has been elected by the US to manage part of the US waste. The cause behind is that the negroes have short life expectancy and therefore will endure at little costs the effects of managing toxic wastes.
The bottom line of US trade direction. The negroes enable the US citizens in their way of life while the US has no incentive in the negroes'raising their standard of life. The more they live longer, the greater the costs of getting them to manage the US waste.
So the more Ghana trade with the US, the faster they dig their graves.
Now BRIC could offer to all these countries a more satisfying deal as in all cases, the BRIC capacity to consume other countries is less than the US capacity.
Extensive demand is not always that benefitial and for Ghana, it would be better for them to deal with countries with less demand.
It is the same for BRIC intertrading as dealing with the US is destructive to them. None of the BRIC countries has for the moment the capacity to be as destructive as the US therefore they would not be able to inflict similar damage to each other.
Adding to that, trading on more equal footing, which means greater room for internal consumption of produced goods etc...
The trouble is that if they go in this direction, this will shortcut the US from international trade. A situation the US can not afford.
Btw., if you are looking at this from a libertarian angle then you should consider the plain fact that the corrupt, weak government in Ghana was caused and perpetuated by super-powerful private companies/monopolies dominating trade in Africa and bribing/assassinating the remaining pieces of civilized society out of existence.
That might give you an idea why there's a substantial majority of people over here who oppose giving companies even less regulation than the little bit of regulation they are facing today a'ka Ron Paul and to give them even less reason to not be the unscrupulous sociopath monsters they've been for the past several hundred years. (Inherited by generations of rich brats who never experienced real life or real honest to God work.)
As far as I'm concerned give me a stupid bureaucratic government any day of the week - with them I at least can count on them only looking as far as their paychecks and benefits go (not the billions of profits a CEO can rip off) and I have the chance to vote them out of power every two to four years, if they mess up.
Strong governments can at least give citizens a framework of civilization, in form of defense against various common threats, such as:
Libertarians offer none of that form of civilization and offer mega-companies instead, a'ka Ghana. Color me thoroughly unimpressed :-)
So there is an angle to this? What does this mean? If it looks from another angle, this will change?
Because, somehow, no matter what angle I am looking at it, I cant see different perspectives to it.
How is this relative?
Kid me not, the mighty Ghana through a strong government, will be able to oppose the US military and not get overpowered. Pretty sure these guys would like to learn the recipe.
Back to reality, the fact is that the US has a waste economy and that the existence of the waste will not disappear through libertarian, communist, capitalist or any drivel like this. Not a matter of angle.
So where should this waste be flushed away? Certainly not in the US as it is toxic. So where?
No, and economic history has shown it again and again that all the trump cards are held by consumers of optional/competitive goods, not producers of such goods.
Consumers of goods set the prices and they control demand. They also pick the producer they buy from.
If China makes itself more expensive then the US will buy from other countries (India, Brasil, etc.) or will produce it itself, if the marginal cost of outsourcing reaches zero.
Japan has learned this in the 80s and 90s.
Now, the picture is arguably more nuanced for monopolistic or popular value-added goods (which is a form of a monopoly as well, arguably a more constructive form of monopoly: the monopoly of quality) - but China produces a very low proportion of such goods currently. Currently China is mostly engaged in a race to the bottom, not in a race to the top.
Eventually China will diversify and will become like Germany or Japan, but right now that's not so and if China stopped exporting goods overnight the world as a whole would not feel much of it - and most developed nations would be markedly better off.
So for the next one or two decades expect China to learn and adapt, and expect it to be defensive and diversified in its policy moves, not aggressive.
After that, it might all change.
QUOTE
No, and economic history has shown it again and again that all the trump cards are held by consumers of optional/competitive goods, not producers of such goods.
Consumers of goods set the prices and they control demand. They also pick the producer they buy from.
If China makes itself more expensive then the US will buy from other countries (India, Brasil, etc.) or will produce it itself, if the marginal cost of outsourcing reaches zero.
QUOTE
The consumer holds the trump card as long as he pays the producer cash for his products and services. If the consumer makes purchases with a line of credit provided by the producer, then his creditworthiness becomes an important factor in the relationship. From the producer's point of view, a consumer maxing out the line of credit or demanding an increase of credit limit sends a clear warning signal. It means the consumer probably will not be able to pay in the future. When it becomes obvious that the consumer will default, the producer will write the loss off and end the relationship. He'd be better off not making anything for the dead-beat consumer, or using the products himself, or even burn the products (at least he doesn't need to spend more energy chasing the consumer to collect more debt). So the notion that the buyer always calls the shot doesn't hold in all cases.
It appears to me that the Chinese has offered the US a line of credit worth 1 trillion dollars or so. The credit limit has been reached and they are not increasing their Treasuries holding in any more (therefore the BenBernank prints some funny notes and buys them from the TimmyBoy). Nowadays, every time the Chinese receive some dollars bills from the US, they blow them right away on real stuff like gold (500% increase in import), silver (from net exporter to net importer), crude (securing sources everywhere) and so on, maybe even bags of weed. They don't mind accepting the federal reserve note at all, as long as they can use the dollars to buy real stuffs from the rest of the world. They will stop, however, when the rest of the world refuses to accept the dollar. It's quite foolish for the Chinese to challenge or confront the US on this issue. They are not that powerful yet. Plus, the Chinese do benefit from this relationship because they have received trillions of dollars from the US and with that money bought 70% of world's annual iron, concrete and copper production, and a lot more. They made some wise investment with the materials like high speed railroads and some dumb ones like ghost cities. The day will come when China stops playing the game. That will not be the result of the Chinese having had enough. It comes when the entire world has had enough. By then the US won't be able to do anything because it's not US versus China, but the US versus the rest of the world.
I suspect that the US and China have entered into some sort of secret pact. China makes stuffs for the US, in return the US prints some funny papers and gives them to China, and China uses the papers to buy the stuffs they need from the rest of the world (the Chinese has a huge trade deficit with the rest of the world). The end result is that the US and China each gets the stuffs each wants, and the rest of the world exchanges their hard commodities for Benny notes. This makes strange bedfellows out of a capitalist and a commie. The scheme can't run indefinitely. The US tries to drag China deeper into the deal to prolong the current system. China tries to pump the system up too, but is preparing for the eventuality at the same time. They are not willing to sink with the US. Their bet is that when the balloon pops, the world will refuse to accept dollars because it's backed up by nothing. However, the world might still accept Chinese money because it'll be backed by about one third of world manufacturing capacity.
Erm, no.
What happened was that China has shipped about 1 trillion dollars worth of products to the US, weighing several hundreds of millions of tons, while the US in exchange shipped a few hundred tons of green paper, with dead presidents printed on them. (Or electronic incarnations of that green paper.)
That's not a particularly bad deal, as far as the US is considered.
It would only be a problem if China was printing this green paper (ask the Irish about the mess they got themselves into by guaranteeing 1300% of GDP worth of private debt denominated in a currency printed elsewhere ...) but last I checked this capability of ornamenting paper in that particular green style is still firmly in control of various branches of the US Government.
China can blackmail the US with US Treasuries the same way a right-wing robber can threaten unsuspecting victims with threats of "give me your money, else I'm going to blow my brains out right here!".
It's not considered a real threat economically, unless you are impressed easily - or if you feel particularly charitable that night.
"Eventually China will diversify and will become like Germany or Japan, but right now that's not so and if China stopped exporting goods overnight the world as a whole would not feel much of it - and most developed nations would be markedly better off."
Oh my, you do have a lot to learn don't you? Do you really believe your statement? The US doesn't really manufacture that much anymore. It all went to China. Most of Europe doesn't manufacture any more. It all went to China. So who is going to be better off?
I'd hate to rain on your favorite right-wing conspiracy theory but China/US bilateral trade is at 366 billion dollars total, or 2.4% of US GDP. Of that exports from China are 296b (1.9% of GDP), exports to China are 69b (0.4% of GDP):
http://www.uschina.org/statistics/tradetable.html
That's a significant trade partner, but still chump change compared to the size and diversification of the US economy as a whole.
You are deluding yourself if you think China is so important that the US could not live without China. It would hurt China a lot more if the US stopped trading with China. For China there are a number of willing, only slightly more expensive substitutes which are ready to jump in if the opportunity arises.
The thing is that outsourcing and globalization cuts both ways: just like it was easy to outsource into China, it's easy to outsource out of China again.
A trade war with China would be a humiliatingly one-sided affair very detrimental to China - and China knows that.
Yeah i dont understand why he thinks higher yuan rates will.hurt us and the derivative structure unless the author is talking about forcing.us rates higher and even that wouldnt.hurt us as much as the chinese bevause the fed controls short term rates and the steepener.trade would just recapitalize the banks faster