Friday, March 13, 2009

Sino-American relations continue an ugly dance

A few days ago I gave my version of Sino-American relations over the past six months. In a nutshell, my belief is that China intends to expand their sphere of military influence using financial warfare.

Six months ago, I assumed this relationship would take several years to evolve.

I was wrong.

Only a few days ago, when there was a scuttle between US and Chinese naval vessels, the relationship had progressed much more quickly than I had anticipated. And now this from the APs Joe McDonald:

China's premier didn't say it in so many words, but the implied warning to Washington was blunt: Don't devalue the dollar through reckless spending.

Premier Wen Jiabao's message is unlikely to be misunderstood at the White House. It is counting on Beijing to help pay for its stimulus package by buying U.S. bonds. China already is Washington's biggest foreign creditor, with an estimated $1 trillion in U.S. government debt. A weaker dollar would erode the value of those assets.

"Of course we are concerned about the safety of our assets. To be honest, I'm a little bit worried," Wen said at a news conference Friday after the closing of China's annual legislative session.

That's right. The Chinese just told us to watch our step. And although the AP doesn't mention the recent naval scuttle, make no mistake - these comments immediately began a conversation among The White House, President Obama's economic team AND the Pentagon.

And here's the reality that must be addressed... America is funding it's naval operations near China with Chinese loans. Is it that far a stretch that China simply tells the US to begin repaying its debts as those debts come due (as early as this year) ?

That's the implicit threat coming from Beijing. But what's the knock-on effect if China demands payment?

1) Perhaps the US keeps those printing presses running 24/7 and inflates the money supply? That'd be just great for the price of consumer goods!

2) Maybe the US refuses to repay the loans? I'm "sure" that wouldn't spook other investors to the point of them redeeming their treasuries.

3) Could the US ask other countries for loans? Sure, but it sure sounds like most of the world is broke because they all invested in America's MBS market. And if we went to another country, at what interest rate would other countries then fund us? Perhaps the rate increases to 5%? 10%? Maybe we could stretch for Mugabe-esque numbers?!

I don't see any of those not-so-unlikely scenarios working out well for mainstream America.

Therein lies the problem. China has us between a rock and a hard place.

The best thing America can do is to begin minding its own business. We don't need to be the world's policeman. We're broke and our years of deficit spending are coming home to roost.

We should let China and Japan deal with their own problems. We simply can't afford to do this.

Tim White

p.s. Wen also offered an unqualified defense Friday of his government's policies in Tibet, ignoring questions about a massive security buildup in the Himalayan region.


Anonymous said...

"Ironman" already posted on the probable results of Obamanomics

"I'm really not sanguine about letting the Chinese play banker. I've played banker before with indebted developers who had more debt obligations than free cash flow. Here's what happens to those poor souls.

a) They earn no profits. The bank lets them make just enough in management fees not to abandon the property.

b) The tenants are reeemed with as many rent hikes as we could get away with before tenants moved out.

c) We permitted as little to be spent on building maintainance as we could get away with.

The bottom line is both the owner and tenants get hosed so the property can gin up as much revenue for the bank as possible. And yes, if contract debt service still exceeds net revenue, the debt piles up.

I'm sure there are tenements in this predicament on Chicago's South Side. There's a very real possibility the whole country ends up that way, unless we are convinced Beijing will be the world's most benign banker. Otherwise, welcome huge tax hikes and poor public services so we can service foreign debt.

As for myself, I prefer not to depend on the kindness of strangers."

Anonymous said...

Thank the greedy CEO's at Walmart, Target, home Depot, Lowes, Macy's, Nike etc...... for forcing U.S manufacturing off shore to the cheapest producer without any care for the U.S worker, our economy or the health and well-being of foreign workers. They have made China a manufacturing powerhouse and the U.S a debtor nation. China with it's new found wealth can now flex its muscles and try to intimidate it's borrower.

So, you see that free trade has worked wonders to line the pockets of our CEO's, but it really hasn't helped this country.

The question one has to ask is, were our jobs kept safe, was our financial system kept safe, was our way of life kept safe?

tim white said...

Although I was still in college and didn't follow public policy a great deal, I recall being strongly opposed to NAFTA at the time it was signed. I can't say I have a great alternative. To some extent trade will happen and my preference is to minimize tariffs. But to me... the:

North American Free Trade Agreement

is unconstitutional.

But Clinton (like most other Chief Executives - R & D) ignored the Constitution.

To me, the Constitution is quite clear.

The Constitution gives the Senate the power to approve, by a two-thirds vote, treaties made by the executive branch.

Yet this so-called Agreement got approval from less than 2/3 of the Senate (61-38).

NAFTA is not an Agreement. It is a Treaty. Just because Clinton and the 103rd Congress were comfortable being untruthful with the American public (and the MSM were complicit), doesn't make it Constitutional.

And FWIW, three worthwhile Senators:

Feingold - WI - D
Wellstone - MI - D
Smith - NH - R

all voted against NAFTA.