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[SBD]

China Holds Key to U.S. Economy

By John F. Sheehan
Americans should not underestimate the enormous leverage they have on the global economy in general and on China in particular. But they should not underestimate America’s vulnerability to a crash from this relationship, either. America has become so dependent on Chinese and global lending to finance its imports from China that the resulting distortions to the international financial markets are becoming unmanageable. Whatever you hear about the health of the American economy, America is living in a fool’s paradise, because it is all on borrowed money. Indeed, the whole real estate asset bubble (which has also financed consumer demand) has been financed by Chinese and other Asian purchases of Ginnie Mae, Fannie Mae, and Freddie Mac paper, which keeps the American real estate market liquid and is bigger than the market for U.S. Treasury securities. China and other Asians own more than half of all this paper, meaning they control the liquidity of the American real estate and consumer credit market as much as the Federal Reserve Bank. By financing our purchases of Chinese manufactured goods, the Chinese have been turning America into an economic colony of China. This is bankrupting our national finances, destroying our currency and hollowing out our industry. Indeed we are engaged in a self-destructive co-dependency with China that is unsustainable and has turned globalization into a Chinese-American affair. Most of third-world development foreign direct investment has been diverted to China, and most all of China’s manufactured exports go to America.

All of these exports are financed by loans made to Americans from Chinese and other Asian central banks. This co-dependency will collapse because the global economy has become over-dependent on the credit and trading relationship between two countries — and the nature of that relationship is not friendly, but predatory, threatening to destroy America’s economic position. The statistical weight of this relationship on global trade and capital flows is awesome. Since 1995, 60% of the world’s cumulative output demand has come from America, which is twice America’s share of global GDP (demand).

American spending has been up 3.5% per year since 1995, which is twice the increase of the rest of G-7 countries combined. And about 75% of China’s economy is dedicated to foreign trade; 64% of the entire Pacific Rim’s is (up from 55% in the early 1990s), and pretty
much all of East Asia’s “intra-Asian trade” is dedicated to supplying manufacturers that export to the U.S. market. That means Asia’s development is certainly not selfsustaining and without American imports, intra-Asian trade will certainly collapse. This is especially true for China, which only has a current-account surplus with the United States while it is probably in deficit with the rest of the world. As China must import both capital goods and raw materials for what it manufactures for America, its dependence on other countries for its so-called inevitable rise is total. Moreover, Asia’s overcapacity is so massive, so overdependent on American demand and so geared to American prices that Asia could not absorb its own production even if it wanted to. The inevitability of the rise of Asia and China, therefore, is a myth. It is a phenomenon dependent on American indulgence. By withholding trade and investment, it can be stopped …

… Like other Asian countries before it, China’s capitalintensive manufacturing export strategy is hitting a line of diminishing returns. China’s advantage is that unlike most other Asian countries, it has an unlimited supply of cheap labor. Like other Asian countries, however, it is still overdependent on America as its market

…… The only thing that keeps Chinese banks from collapsing from bad loans is the amazing Chinese penchant for thrift — citizens often save over 50% of their incomes. This deposit growth averages about 30% every six months, allowing domestic credit to grow at a similar rate. The Chinese people’s perception of their banks’ solvency is highly dependent on the implied and inferred guarantee of deposits by the People’s Bank of China (PboC), which has accumulated $500 billion in foreign currency reserves

…… Every time the solvency of Chinese banks looks shaky, the PBoC injects hard currency into its big four state banks and entices American investors into buying minority stakes in them and in other smaller Chinese institutions.

Either way, China’s banking system is dependent on foreign hard currency — the American dollar in particular —because America is China’s biggest customer. Without these “forex” reserves, China’s banking structure collapses into the nightmares of bank runs, disappearing capital and a choice between hyper-inflation and hyper-deflation

…… For the last fifteen years, at least 85 cents of every new dollar saved by every person on Earth, from Antarctica to Canada to China to India, has gone into U.S. dollar denominated instruments.

This is what has been financing America’s great consumer credit machine, our asset bubbles and our federal deficits. And each year, as we devalue our currency (and consequently the value of foreign investments in U.S. paper), we default on these debts by the exact percentage of the dollar’s decline

…… Until now, Asian central banks have been willing to go along with this, because their purchases of American government securities kept American consumer demand for Asian (and particularly Chinese) products strong —meaning Asian investments in American paper had nothing at all to do with “America being a great investment.” Rather, America has been a great customer — on credit

…… Asians rationalized that they could take the loss if it helped them accumulate a critical mass of industrial power that might become self-sustaining. This has not yet happened, but it indicates that their loans to America had a predatory motive — not one of confidence in the American economy. It was an act of plundering and using debt to keep it going, that’s all

…… Chinese central bankers understand that the world economy will crash if this process of lending America money to buy Chinese products is interrupted, because 60% of the world’s ‘growth’ is financed by Chinese exports to America and Chinese loans to finance these exports. But it also means that this stability is predicated on a gradual transfer of America’s real wealth to China. This means that the end point of this 'stable' transfusion is economic death for the United States. Is this ‘stability’ worth it?

— John F. Sheehan is a bank economist who lives and works in Boston, Massachusetts. He specializes in international issues, especially international economic strategy.

SBD

note: Please provide a link to source. Thanks.

[GenrXr]

He misses the mark on 2 very major points.

First, the worlds economy is based on the American economy. If the US is hurt then the rest of the world will be hurt as a result.

Second, capitalistic markets only work when they are governed by moral ethics and China will fail miserably here. America recently went through a recession because we had a President in office who's political party declared all that mattered was performance and not character. When this happens great companies go broke as witnessed by Arthur Andersons bankruptcy.

China will soon meet the same fate. Their immoral nature will destroy their commerce. Same thing happened to Japan in the 80's.

Damn wish people would follow history.
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"An activist is the person who cleans up the water, not the one claiming its dirty."
"All that is necessary for evil to triumph is for good men to stand by and do nothing." Edmund Burke (1729-1797), Founder of Conservative Philosophy

[SBD]

[PhantomSgt]

We are fueling China's military buildup with US $ and setting the stage for a balance of power shift in Asia. The one half of one percent of the Chinese population that are communist Party members will do anything they can to expand their communist base around the globe and maintain their iron grip on power in China.

As we write messages on this forum China is expanding into our own backyard in Central and South America.


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Retired AF E-8

Independent that leans right of center.

[Bob51]