Monday, October 25, 2010

Destructive Deficit Spending

The global financial crisis is going to end. The only question is when, not how. The how is certain. With ugly stratospheric budget deficits. Investors will need to be persuaded to hold Himalayan high mountains of debt for decades. The history of financial crisis show that public debt typically doubles, even adjusting for inflation, in the three years following a crisis. America and many rich and poor nations are well on their way to meeting these projections.

Throwing money at the problem and propping up greedy banks that created the speculation is, as Jim Walker of Asianomics says, like trying to put out a fire by pouring gasoline on it. The result will be an even bigger, more searing fire.

The multi-trillion U.S. deficit financing is crowding many emerging economies and their companies out of the international capital markets that only creates more resentment towards America.

The reality is that in order to build America and restore it to its former glory the current financing models have to be torn up and replaced with fiscal prudence. A depression will undoubtedly follow with mass unemployment and wealth destruction. But it can be short and sweet as opposed to the prolonged agony America and the world have gone through the last three years ─ and also lay the foundation for a new era of healthy sustained growth.

A drive to devalue the dollar could spin out of control by eroding confidence in the currency, leading global investors to cash out of assets denominated in the dollar before their losses worsen. The potential for a mass dumping of the dollar, especially by the Chinese, is a very realistic scenario.

No nation has ever devalued its way to prosperity. The Japanese tried and failed in the late 1990s. A weaker dollar, or the mirror image of a stronger Chinese yuan would be no exception to that time-honored premise.

Sunday, October 17, 2010

Karate Chop Japan

The first Karate Kid movie involved Japanese actors and took place in Japan. Karate Kid II took place in China with Chinese actors and Jackie Chan. Isn’t it time Washington dumped a politically broken and economically broke Japan as its major ally in Asia and replaced it with a prosperous China like Hollywood did? I am at a loss as to why America is still allied with Japan, the country that attacked and brutalized Americans during World War II, and continues to do so with its economic policies today, while it shuns China, America’s World War II ally that fought side-by-side America to defeat Japan, that wants to partner with America.

Japan’s continuing economic and geopolitical decline over the last three decades ─ at the expense of China’s ascent ─ was highlighted when China surpassed Japan in the summer of 2010 to become the world’s second-largest economy after the U.S. Some economists predict that China will overtake the U.S. by 2030. China’s growth rate for 2009 was more than 11 percent compared to America’s anemic 2.4 percent.

To make matters worse, China’s expanding economic shadow is buying up small and mid-size Japanese companies and real estate, taking advantage of depressed asset prices ─ the same it is doing in the U.S. China is also now Japan’s biggest trading partner and a bulk purchaser of Japanese government bonds. The bond purchases are helping drive up the value of the yen making Japan’s exports less competitive with China’s.

China’s dominant shadow over Japan was further highlighted in September 2010, after a Chinese fishing trawler collided with a Japanese coast guard vessel off the islands known as Diaoyu to the Chinese and Senkaku to the Japanese. The uninhabited islands northeast of Taiwan are claimed by both countries and are administered by Japan.

Japan arrested the captain of the fishing trawler for illegal fishing but released him after anti-Japanese protestors rallied outside the Japanese Embassy in Beijing and across China and Hong Kong. China also cancelled high level political and cultural exchanges, instructed travel agencies to cancel tours to Japan and withheld the shipment of rare earths used in electronics that posed a significant threat to the Japanese economy. China controls more than 90 percent of the world’s rare earth minerals.

The fact that the captains arrest coincided with the September 18 anniversary of an incident that led to Japan setting up a puppet government in Manchuria in the early 1930s, a date that stirs bitter memories in China of the brutal Japanese occupation of China, stirred China’s nationalistic outburst and effective economic reaction to the arrest.

Japan blinked and China smiled. Japan lost face while China gained big face. Which face makes more sense for America to have in its 21st-century geopolitical picture?

Friday, October 08, 2010

China Bashing Again

I never cease to be amazed how prevalent China bashing becomes during an election season in the U.S. The midterm 2010 election is no exception. China is again blamed for the low value of its currency, high unemployment in the U.S. caused by outsourcing to China and the bilateral trade deficit. The result was that last week the House of Representatives voted overwhelmingly to impose tariffs on virtually all Chinese imports to the U.S. The threat of putting sizeable tariffs on a country’s entire exports to the U.S. is not only highly unusual, but of dubious legality under international trade law ─ as is the case on China’s currency manipulation which the World Trade Organization does not define as illegal.

A currency fix alone won’t solve America’s problems. A revaluation of the yuan addresses only one of the many pressures shaping the imbalances in the Sino-U.S. relationship, a subject I discuss at length in Feasting Dragon, Starving Eagle.

The Chinese feel that America is trying to curb China’s growth, and thus its power and refuse to assist America in its efforts to isolate Iran and North Korea.

China, as America’s largest creditor, has become more confident in its dealings with the U.S. and on the world stage. Why should China make economic concessions to a country many blame for plunging the world into financial crisis? Why should China make its exports and imports more expensive? Why should China bail America out of its financial abyss at the cost of its exports being more expensive and Chinese factories being shut down and millions of workers becoming unemployed? Would America if the roles were reversed? I for one don’t think so. America should be thankful China is helping finance America’s unjustified deficit spending spree and stop blaming China for the mistakes of Washington career politicians. The alternative is America defaults on its financial obligations, or worse, bankruptcy.

A trade war with China, the world’s leading tea drinking country, does not help U.S. exports or employment in America as members of the Tea Party movement advocate. China can buy from elsewhere hurting U.S. export industries while American consumers pay higher prices for essential consumer items and also have higher tariffs imposed on U.S. products, which China defiantly imposed on U.S. poultry before the House vote. On the day of the vote, China warned of dire consequences and further economic disruptions and let the value of the yuan fall.

Back Writing My Blog

I have finished writing Feasting Dragon, Starving Eagle which has been a joy! It will be available on Apple's i-Bookstore next week and on Amazon at the end of the month. All my other books will also be available in the e-book format on Amazon and i-Bookstore at the end of the month. I now look forward to getting back to my weekly blog.
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