Thursday, January 15, 2009

The Oriental Abyss


Asian markets are as hard hit, and in some cases harder, than the US market. Over the last 40 years, the Asian economies have been reliant upon the US consumer. From toys to automobiles, and everything in between, one would find it impossible to walk through a modern American house and not find that a majority of items were made in Asia.

They have also been reliant on US jobs, or at least the elimination of them, to fuel their production booms. Because there are a finite amount of those jobs to trade, increasing debt, and creating asset bubbles was the only way for US GDP to rise. Unfortunately, to have GDP rise, the debt taken must be equal to or greater than the rise in GDP. Almost always, mathematically, the debt will be greater, because profit must be there for the companies. No business is in business to break even.
Alas, at some point the debt load becomes so enormous, no more can be taken. Hence the reason economists call such economic manipulations "bubbles." Bubbles burst when inflated too much, and this bubble is way over inflated.

China, Japan and Korea are all greatly dependent on the US consumer buying the products made there, which used to be made here. Think about it, for those of you old enough; 40 years ago how often did you see "Made in China" on the bottom of what you just bought? Is the answer "0"?

One of the gravest consequences of this economic policy for the US is the fact that as we gave China business through the trading of jobs for imports, we financed it all with the sale of Treasuries to China as their profits grew. China is now the single largest holder of US Treasuries in the world.

China controls the value of US Treasury notes, and with it, the value of the US dollar.

"US mistakes are the root cause of the global financial crisis, a senior Chinese central bank official said overnight, rejecting criticism of China's high savings rate and booming trade surplus.
"Errors made in US economic policy-making, financial supervision and markets are the ultimate causes of the crisis," said Zhang Jianhua, research head at the People's Bank of China, in an opinion piece carried by the People's Daily.
Some observers in the West are blaming China and other nations' high savings rate and trade surplus for fuelling excess consumption and asset bubbles in the United States, he said.
"Such views are ridiculous and irresponsible in the extreme," Mr Zhang wrote in the harshly worded piece in the Communist Party's mouthpiece
China spends a large part of its forex reserves buying US debt, keeping interest rates down and creating the conditions for more spending by American consumers, economists have argued.
But Mr Zhang said China's forex reserves as well as investment in US Treasury bonds started to grow fast only from 2003 while household savings and the long-term interest rate in the United States have been falling since the 1980s.
It was the loose monetary policy, lax supervision and huge fiscal deficit in the United States that caused the financial turmoil, he argued.
The big US trade deficit is a result of its own economic structure, according to the article.
"Theories that try to shift the responsibility for the crisis to countries with high savings are severely lacking in self-criticism" says Zhang."

From dinner parties to casual conversation, one of the most ill-conceived ideas I run into is that if we pump enough money into China, it will become democratic. The fault in this logic lies within the premise, as if the history of China matches the history of the US. The Chinese are fundamentally of a different mindset than the West, especially the US. Attempting to overlap traits unique to the US, and applying them to the Chinese is problematic, at best.

Never in the history of China has regime change come without the wholesale massacre of the opposition. Even today, look at how Tibet has has been handled. US influence has not benefited the Tibetans. That culture is being wiped out. The rate at which the Chinese government has attempted to assimilate Tibet has only increased over the last 40 years. The Dalai Lama dares not set foot in Tibet, for if he did, well.......

The fast rise in China's economy was built on the US increasing its debt load at a faster pace.

Since our economic system cannot absorb any more debt, the consumer must now start purchasing goods with cash. How many of you have gotten letters from your credit card companies reducing your limits? I know people with credit scores of 800 (and many very near there) that have received them. Housing values have tumbled, no more home equity lines of credit. Unemployment is rising at record pace, fewer paid workers = less goods can be bought.

China's economy is in trouble. As is the US. A big problem for the US is that China's piggybank, which it soon will be forced to got to, is in dollars. It will have to spend those dollars, ie sell Treasury notes, to keep its own economy afloat. As noted in the article above, they realize the US is, at the moment, unable to help. Now, you must ask yourself this question - If China is in the position of deciding to save their economy, or keep the value of the dollar up, which way will they go? Remember, for the time being, the US is unable to increase the amount of goods they buy.

I believe, very soon, most Americans will regret that our leaders ever gave China one dollar.


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