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Wednesday, January 11, 2006

A Tale Of Two Nations

I had a dream last night. It was about two nations. One nation had the largest trade deficit in its history; the other tripled its trade surplus in just one year, 2005. One was losing manufacturing capacity and calling it good; the other was rapidly increasing its industrial capacity and was described by an international economist as "the factory of the world." One was fighting a discretionary war overseas that was ballooning its annual deficit; the other was at peace and running a balanced budget. The first nation constantly borrowed money from the second nation, but the second nation was starting to become more tight-fisted. One had economic growth of 3.5%, effectively zero when inflation and a flat worker standard-of-living were factored in; the other had economic growth of about 9%. One was experiencing a bond yield inversion, which is almost always a predictor of an economic downturn; the other was not. One's economy was based largely on a constantly-growing housing sector; the other owned a large percentage of the first nation's mortgages. One was on a trend of trimming civil liberties; the other, while not as free as the first, was in the process of liberalizing.

In my dream, I was asked which nation I thought was stronger; which was more likely to dominate the world economy, and thus the world's politics in all the ways that economics affect politics. And I answered: The second nation. The second nation is stronger, and has a bright future, and the first nation does not.

What makes this otherwise-boring a dream a nightmare is this: when I woke up, I was still in it. And I was living in the first nation, and the second nation was China.

SUPPLEMENT, JAN. 18, 2006: In a comment to one of my earlier posts on the Fed, M3, and the Money Supply, my reader ql in ny made a prescient comment. She said: "[T]he one thing that will prevent a complete breakdown is that the Chinese need Americans to buy their goods. So I don't fear an immediate depression, or even one in the next ten to twenty years. It will happen gradually. Once the Chinese can buy their own stuff, that is when the shit will hit the fan."

Which made me wonder: what if the Chinese start buying their own stuff, creating a self-sufficient economy? What signs will there be when China shifts from relying on exports to creating its own consumer class, freeing itself to assert real power and influence in the world?

And then I saw this from China's Xinhua news agency:

"HSBC economist Qu Hongbin said... China faced an urgent task to tilt growth toward consumption and away from investment. *** Qu told a news conference in Beijing that the government should take the lead by redirecting its own spending from physical infrastructure to areas like education and healthcare. This could help boost China's consumption-to-GDP ratio by 3-4 percentage points and give consumers a reason to spend more and save less. *** Weaning the economy off exports and related investments would reduce China's vulnerability to... trade tensions"

Hmmm again. I'm just a country lawyer/mediator, not an economist, but I dream of living in a country that considers a 9.1 growth rate to be a "cooling" economy, has the cash to spend on physical infrastructure, education, and healthcare, and is trying to get its own people to stop saving so much and start spending more.

And I am more than a little fearful when an economically powerful nation, that currently subsidizes our own debtor economy, starts to withdraw that support and (exactly as ql said) is intentionally cultivating its own consumer society -- i.e., taking the step that will enable it to stop propping up our economy and instead assume its own dominant world role.

The U.S. is "the lone superpower"? Don't make me laugh. The sheriff with the fast six-gun has nowhere near as much power as the banker that keeps buying everyone's mortgage. Rich bankers like China buy and sell sheriffs like the U.S. I'm sorry to say this, but we can either start taking lessons from China, or start taking orders from them. We have time to regain REAL power, but we're not taking any of the necessary steps right now. This is just one more way in which our current government is childishly playing make-believe instead of really keeping America safe and preserving our way of life.


Blogger wet pants said...

The moving "away from dollar" denominated securities should indeed scare the shit out of Merikans, especially in the stock market, and yet you have the Dow posting over 11,000.

Though I am not an expert in economics, I do find this development frightening. And I can see a "perfect storm" scenario, where China moves away from dollars and the housing market (which has supported consumer spending) slows.

But then, Dear Leader would call me irresponsible and a partisan critic of his policy.

Just wouldn't want to be holding the bag when those debts come due.

1/11/2006 3:00 PM  
Anonymous Anonymous said...

Just wouldn't want to be holding the bag when those debts come due.

Are you an American taxpayer?

You're holding the bag.


1/11/2006 3:27 PM  
Blogger wet pants said...

Are you an American taxpayer?

You're holding the bag.

True. (shrugs ruefully). Makes S&L or some of the other big failures look like a cake walk.

1/11/2006 3:48 PM  
Blogger Jeremy said...

Wow...excellent post. One nonpartisan, completely moronic co-worker of mine asked back in 2000, "come on, you're too bad can Bush really be?"

My answer now is, "so bad, I wish I was in fucking China."


1/11/2006 7:50 PM  
Anonymous Anonymous said...

Thanks, Jeremy! Always feel free to send links around -- I'm trying to build readership, not to "blogwhore" but to get a real discussion going here.

Thanks again.

1/11/2006 8:59 PM  

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