Tuesday, November 11, 2008
Revisiting China's "Stimulus": The End of Globalization?
Upon further consideration, and further reading, I think I'm beginning to come to a different conclusion about the Chinese stimulus plan that I posted about before. As I said before, China has been printing money to buy US debt to ensure that it has a stable market for its goods here in the States. No controversy there. China has also been disgruntled with the arrangement, as it is abundantly clear that the US is inflating to take advantage of the situation, essentially getting the good at an even larger discount. The US is stealing, basically. China has started up "sovereign wealth funds" and made several high profile purchases of US securities, presumably to avoid the "inflation tax" it was incurring with the debt certificates (and as anybody with a brain knows, bonds paying 4% long term are a lousy investment as inflation will destroy their worth). These investments subsequently blew up in their faces, but that's not the point. The point is that China isn't putting up with America taking advantage of the "dollar empire" through inflation any longer. That's what this stimulus appears to be to me. China is attempting to replace its dishonest American customers with Chinese ones. It doesn't want to restore the "Old Order." It wants to replace it with a new one: an economically independent China that can't be ripped off by the US. Will this work? First off, the American relationship didn't work in the first place. I've already been over that. The export market was an economic tumor whose sole benefit was that it kept large numbers of people employed. China is attempting to feed the tumor with another group of consumers. Its still a tumor. Secondly, once again, this is an act of redistribution. The capital for the stimulus will be withdrawn from the bank accounts of the middle class and the wealthy through inflation. Saved capital will be redirected to immediate consumption by the masses. The squandering of capital is never good for an economy, whatever the immediate effects might be. It is also a violation of property rights and unethical, and will have the predictable consequence of malinvestment and ineffeciency which will haunt them down the road when it is finally revealed by the markets that those factories are the economic tumors that they are. China can get away with this kind of thing now, since they come from such an incredibly backwards situation not so long ago that pretty much any change is an improvement, and they are bound to grow either way for some time to come so long as they don't go back to the old ways. But they cannot keep doing these kinds of things forever. And make no mistake: this is a HUGE plan for a country like China. We're talking ~$600 dollars to each individual in that country. That's about 1 months salary for a very good paying job over there. It positively dwarfs our "stimulus" package. But notice this: it is approximately equal to one year's account surplus with the US. Coincidence? I don't think this is a good idea. It is a bad idea that replaces another bad idea. The reason that the Chinese exported to America in the first place was because it gave them access to a relatively sane, predictable, and steady market. I would question whether China's new domestic market will have such qualities. That being said, the longer China keeps this relationship with the US, the more the US will take advantage of it. It has to be given up eventually. Too bad they didn't just let the free market take care of that by NOT MANIPULATING THEIR CURRENCY and trading good for good instead of good for paper. You can't inflate a good. It would have been a much easier transition. So, basically, I think it will turn out badly. It will not avoid the Great Depression they are facing in my estimation. What does this mean for the US? A great nation is rejecting the dollar. That's the biggest thing. The US dollar is now the world's reserve currency. It has replaced gold. The US took advantage of the situation, inflated to fleece its trading partners, and now at least one will have no more of it. I suspect others will follow. We will no longer be able to inflate our way to prosperity on the backs of others. We will have to pay our own way, and we are not used to that. If our central bank and our politicians continue with their profligate behavior, the consequences for us will be much more immediate and harsh than they have been in the past, since other economies were absorbing our inflation for us through their political addiction to our markets. They were forced to buy our debt whether they wanted to or not. This crisis will bring an end to that. It won't be an easy transition, under any circumstances, much less the present one. On top of that, this is China we are talking about. Our trade relationship has largely stabilized our relationship, as we are dependent on one another. If it is severed, we can expect conflicts to escalate more easily now that there will be less to lose. The US cannot afford more conflict, especially from a nation like China. We are in big trouble. We'd better tread carefully.