China Invests in the US – What is the real story?
Earlier this year there was much concern about the US trade deficit and the amount of money China invests in the US deficit spending. I wrote about it, as did many others, but those of us, who see this as a problem, were written off as complainers and fear mongers. Our internal consumption has not changed nor has our national policy to make things abroad and reduce US production capabilities to make what we consume. In other words we continue to spend the equity built up by those who came before us. The Reganist’s call this globalization. A rising tide raises all boats. I say high tide in China means low tide in the US. It is the nature of things since the volume of the water does not change as the moons gravity pulls the tide to one side invariably it lowers the level of the water elsewhere.
A rising tide in other areas of the world may be good for business and we may get a bit of over pray particularly in the financial institutions. We are no longer amazed that corporations and financial institutions are the biggest contributors to politicians and dedicate huge amounts of money to lobbying. For them, a rising tide in China and a reduction in the US may actually be a short-term positive to the balance sheet. To the US citizen it is only a disaster. The short-sighted policies of our government and businesses is about to come home to roost. China, during the current visit, announced a $3 billion in Blackstone, a private equity firm. This action was touted by the administration as a great thing. The financial markets say, “look, China is capitalist, this is a good thing.”
The reality is more ominous. This is a way for the Chinese government to divest from US Treasuries (that means sell, sell, sell) without the backlash. I have always said China will do what is in its own best interest. It does not care about what is good for America. It will continue to divest from treasuries, skyrocketing interest rates and tanking the dollar. The United States then find itself with rampant inflation because we only produce 12% of our consumption internally. Money will dry up and we will look back at the 1970s stagflation with longing for better times.
I am not saying that China is bad or good. I am simply saying that China will act in its own best interest. We should do the same.
A rising tide in other areas of the world may be good for business and we may get a bit of over pray particularly in the financial institutions. We are no longer amazed that corporations and financial institutions are the biggest contributors to politicians and dedicate huge amounts of money to lobbying. For them, a rising tide in China and a reduction in the US may actually be a short-term positive to the balance sheet. To the US citizen it is only a disaster. The short-sighted policies of our government and businesses is about to come home to roost. China, during the current visit, announced a $3 billion in Blackstone, a private equity firm. This action was touted by the administration as a great thing. The financial markets say, “look, China is capitalist, this is a good thing.”
The reality is more ominous. This is a way for the Chinese government to divest from US Treasuries (that means sell, sell, sell) without the backlash. I have always said China will do what is in its own best interest. It does not care about what is good for America. It will continue to divest from treasuries, skyrocketing interest rates and tanking the dollar. The United States then find itself with rampant inflation because we only produce 12% of our consumption internally. Money will dry up and we will look back at the 1970s stagflation with longing for better times.
I am not saying that China is bad or good. I am simply saying that China will act in its own best interest. We should do the same.
Labels: China, Corporations, Free Trade, Great Nation
posted by Small Business USA at 12:20 PM
3 Comments:
It seems to me that whatever China does or doesn't do is going to have a huge impact on the rest of the world. The fact that China has 1/3 of the total world population is enough to indicate what influence such a mass of people exerts on the limited resources available, be it food, oil or clean air. Economically, China is a sleeping giant and those who see it as an infinite market to exploit fail to realize the consequences, for example all Chinese owning a motor vehicle.
Interesting. I'm pro-globalization, and I don't really pay that much attention to trade deficits between the U.S. and China. But you make a profound statement: Countries act in their own best interests. Indeed, that's one of the basic assumptions of all international relations. Now, do you think it's in the American interest to continue trade with China, or should we worry more about Chinese divestiture of U.S. holdings? I'd have to find you some links (no time now though), but I'd bet the U.S. standard of living would depreciate some if we really cut back on U.S.-China trade, or bilateral relations more broadly.
In response to Lexcen: I agree that China is a nation we should be concerned about, again on national interest (security) grounds. In recent years, policymakers and scholars have debated whether to adopt a policy of either "engagement" or "containment." The U.S. has obviously engaged China, and has privileged Chinese interests perhaps by allowing the Communist regime into the WTO. Myself, I don't worry too much about China now, as long as the relative gains in growth and technological national advantage do not shift to the Chinese side over time. If and when that happens, the Pax Americana will have a good and ready rival!
Burkean Reflections
Lexcen I also believe China will be important over time. You are evidencing my thoughts exactly. Free Market-Free Trade are all dependent on all costs associated with creating a product being included in the cost base of the product. Instead what we are seeing is that the general population of the world is paying for the costs associated with Chinese products. I see it as a place where US, European and Australian companies can make goods without the inconveniences of Environmental, Labor, and Corporate regulations.
Donald I am neither pro or contro globalization. I think trade between countries is a good thing. I also think that any product produced anywhere should have all costs associated to that product. For example, Oil should have all military costs to secure US interests in every drop, Chinese products should have the costs of child labor or polution included as a tax, US companies selling into bad areas should pay a tax to cover the costs of securing their investments, etc.
In the utopian world, where we are all one big family, all things would be equal and products could be produced in one area freely and consumed in another area. In the real world we do not all agree. Some countries have different environmental regulations, some countries offer free University education, some countries do not like other countries. The greater the differences the more important it is to produce a higher proportion of goods internally because as instability increases the unseen costs rise and could lead to shortages. China fully understands this as they are purchasing raw goods and securing contracts for future supply no matter what the supplier is doing today.
US policy is very different, our government is allowing corporations to benefit from a lower cost of goods by footing the bill for security. The result is that the US is spending acquired equity (as evidenced by the falling dollar). Regarding a reduction in the standard of living by limiting purchases from China, in fact we are already experiencing the reduction. Unfortunately the costs must be paid and whether we pay them in the purchase price or through taxes, inflation, and the falling dollar, they must be paid. We have only masked the reasons for the the lower living standard but the end result is the same. The future will only be worse from this viewpoint.
China fully understands this. It is not living on the sparkling superficiality of rampant consumption. They are saving more than they spend. Good economics. They are doing their best interest even though the US is trying to convince them to become a consumption economy and stop saving so much. The build equity and we spend it. This fact alone will determine the future. This should be the primary focus of our policy makers. We need to build equity.
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