Wednesday, September 24, 2008

US sold out to China & Japan?

This morning, in the Detroit Free Press, I read an opinion piece from Tom Watkins. In it he discusses how the United States has sold out the American Dream to China and Japan - literally. It's the first time that I've read Mr. Watkins, but I agreed with many of the points he makes.
The Chinese government holds in excess of $1 trillion in U.S. securities. The Chinese fear the global economic slowdown being led by this country will stifle the jobs boom that has moved hundreds of millions of people out of abject poverty and created the Chinese equivalent of the American dream.
America is hugely in hock to China and Japan, borrowing money from those countries to underwrite the escalating debt brought about by the Iraq war, cutting taxes while going on a spending spree, and being mired in the mortgage crisis. While the United States borrows and consumes, the Chinese are saving, building up their infrastructure and lending us money to continue our self-destructive behavior.
This figure - if accurate - is for the Chinese government alone. What might have started in the Clinton years as a means of coaxing China out of its security bubble with the Most Favored Nation trading status has - now - ended with that country holding roughly 1/13th monetary equivalent of the 2006 estimated GDP in US securities. I cannot find figures on how much Japan holds in US securities, but I'm going to guess that it's substantial. If it's roughly equivalent to China's, then my theoretical $2 trillion held in U.S. securities dwarfs the expected eventual $800 billion cost of the Iraq War, and the $700 billion bail-out of Wall Street. A little bit worrisome.

Tom goes on to describe the construction boom and economic 'miracle' that is happening in China, even in the far-flung regions that many Americans have never even heard of; the Topekas and Boises of China:
Earlier this year, I traveled 48 hours by rail from Beijing, the capital of China, to Lasha, Tibet. What did I see? Not just the $40 billion of Olympic infrastructure investment in Beijing, but bridges, roads, rail, hospitals and schools being built in the interior of the country (some with inferior construction, as we saw in the collapse of thousands of schools in the May earthquake in Sichuan that killed 70,000, including 10,000 schoolage children).
I spent days traveling along the old "silk route" in Xinjiang Uyghur Autonomous Region, where, in the middle of the desert, thousands of windmills and solar panels provide renewable energy to the people of Turpan and Urumchi. Yes, I know, you have never heard of these places, yet they are more advanced than we are when it comes to finding alternatives to fossil fuels.
China building windmills and solar plants? In their far-flung western regions so far from the bustling crowded cities of the East? What? China investing in its infrastructure? Pardon a small snort of derision for our current executive's decision of cut taxes, cut government services, halt government investment, and diminish regulation and oversight. What that has left us with is a country that is quickly running out of real capital to inject into the economy. The US is drowning in a mountain of debt that it has allowed to be created. Meanwhile, our debt-brokers - the Chinese - are using the interest payments from their loans to us (as well as their governmentally controlled economy and our direct investments in their country) to invest in their infrastructure. Infrastructure investment is the analogous to a savings account at a bank - it may not have a great return rate, but it creates a firm safety net for the future. (Of course, if the bank goes under... that's a different thing.)
As this financial crisis plays out, the questions remain. Will people on Main Street be viewed as worthy of a bailout or investment as Wall Street? Will Treasury Secretary Paulson, Federal Reserve Chairman Ben Bernanke, Congress or the presidential candidates ensure that working men and women get relief? Or will it be, to paraphrase an old country song, Wall Street gets the gold mine and the rest of us get the shaft.
I'm a cynic. I say that we get the shaft, and many will be ignorant of the implications of that to say, "Thank you, can I please have some more?"

Tom doesn't discuss something that I think is looming on the horizon - although he does make a grazing connection with it in his opening paragraph: "Many have predicted that the 21st Century will be the Century of China. It seems that the jokers in charge of Wall Street and our federal regulators assigned to watch over "The Street" are attempting to speed up this prediction." The United States dollar might drop from its position as being the prime world benchmark currency, in favor for something else. If this happens, then more countries will peg their currencies to something other than the dollar, the US won't be able to build up more debt (out of no where), and the US government will have to start really tightening its belt on spending (you know: balancing its budgets - spending = taxation). This is already starting to happen with the Euro - mostly in European countries, but that may be spreading out further. If the debt rate of the United States rises past its ability to pay it off, then our economy will likely fall into a greater shit-heap as countries divest themselves of (to their perception) the over-pompous world policeman's economy for the up-and-coming Unified Europe (which has proven itself in international relations to be much more equitable and open for negotiations). Open day on the sale of US securities - if it comes - will be yet another legacy of this executive (although people will likely hang that albatross on the neck of whatever President is presiding at that time).

Finally, although I hate to quote T.S. Eliot twice in a month (since it will make me seem all doom-and-gloom):

This is the way the world ends.
This is the way the world ends.
This is the way the world ends.
Not with a bang but collapsed economy.

1 comment:

Fran├žois said...

Very scary indeed. There was a piece about that in FP some time ago -the question indeed is apparently *when* will the Chinese decide to not get the stupid end of the deal anymore.