Wednesday, September 12, 2007

Why China Subsidizes Us


Along with the problems in the housing market, the latest employment statistics unnerved Wall Street on Friday. While the financial markets bounce around, the downward trend for housing and employment may continue and worsen for awhile.

Some will see an employment downturn as a result of shipping off jobs to China. Maybe; maybe not. But let's talk about trade with China and, perhaps, a Chinese hidden agenda.
Many claim that China is "subsidizing" the U.S. by selling goods to us that are far cheaper than we could produce domestically.
That may be from a purely economic perspective, but one must ask the basic question: why is China being so altruistic toward an ideological competitor?
Before we look at that, perhaps an historical perspective is helpful. This is a chart showing the major employment sectors in the U.S. over time:


The U.S. has moved from a producing [farming, manufacturing] to a consuming [services] employment economy.
One must recognize the impact of efficiency. While fewer people are employed in farming than ever before, technology has increased efficiency so dramatically that more food than ever is being produced by fewer people than ever. Likewise, manufacturing is dramatically more efficient than ever before. Simply put, fewer people are needed for manufacturing.
So the employment opportunities are focused on continued improvement of efficiency or raising the quality of life.

But that doesn't answer the question about why China is being so altruistic about "subsidizing" the U.S. with cheap goods.
First of all, China is struggling to get to the point the U.S. was in 1950-1960. An enormous portion of its 1.3 billion population is still in agriculture... "dirt poor" as it were. Increasing manufacturing is its next step to wealth. Even so, the absolute output of China's manufacturing is amazing considering where it was two decades ago.
Then is increasing the living standard of its people the reason that China is "subsidizing" the U.S.?
In order to believe that, one must believe that China has converted to a market economy from a centrally-controlled economy so that it can create opportunities for wealth for its population. Evidence indicates that may be the case... in some part. There are an increasing number of millionaires and billionaires in China.
Does that also mean that China's power elite have converted from a Marxist philosophy to a capitalist philosophy?
I'm not convinced that is the case. Capitalism and central government management of the economy are not necessarily compatible. But limited capitalism may be a tool to be employed by a power elite... especially when the labor used to power the limited capitalism is powerless to demand anything. Some might argue that China's policies might be closer to mercantilism. Regardless, rather than accumulating gold and silver, classic mercantilism, the Chinese are accumulating the world's currency... U.S. dollars. The nation is gaining wealth, but not necessarily the whole population.
What this means is that "China" is not subsidizing the U.S.. Rather it is the Chinese laborers who are subsidizing the U.S. in order to build U.S. dependency on Chinese manufacturing... in order to build wealth for the Chinese government.

But are not many Chinese citizens becoming very wealthy?
Yes, within the constrains of the government control. Party leaders also are becoming more economically powerful as the government itself raises vast amounts of U.S. currency reserves.
So, increasing wealth is the Chinese end game?
I think not. Wealth is a means to an end.
What might that end be?
Power and influence.
For example?
  • Money to buy influence among U.S. politicians
  • Money to buy influence among U.S. corporations
  • Money to obtain technology for military upgrading
  • Money to create modern military products using the technology obtained by influencing U.S. politicians and corporations
  • Money to expand its upgraded military
  • Money to provide weapons "aid" to potential allies willing to act as proxies against the U.S. and, possibly, Russia so that China becomes the dominate military influence in Asia and Africa.
I believe that the Chinese government's goal is to be the dominant nation in the world by the end of the 21st century... economically and militarily... so that it will have priority access to the rest of the world's resources.
China's government is not "communist" in that it is not a "people's government." It is a feudal government of powerful elite, wealthy families that maintain the facade of a "people's government." It's strategy is to dole out just enough of the increasing wealth to placate its population without ceding any power.
So why is China "subsidizing" the U.S.?
Perhaps they are taking some pages out of the book from this man.
Wealth is but a means to an end. The U.S. might want to ask, "The end of what?"

[click on picture to enlarge]

I know, I'm just another one of those conspiracy nuts.


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SEARCH BLOG: FEDERAL RESERVE for full versions... or use the Blog Archive pulldown menu.

February 3, 2006
Go back to 1999-2000 and see what the Fed did. They are following the same pattern for 2005-06. If it ain't broke, the Fed will fix it... and good!
August 29, 2006 The Federal Reserve always acts on old information... and is the only cause of U.S. recessions.
December 5, 2006 Last spring I wrote about what I saw to be a sharp downturn in the economy in the "rustbelt" states, particularly Michigan.
March 28, 2007
The Federal Reserve sees no need to cut interest rates in the light of adverse recent economic data, Ben Bernanke said on Wednesday.
The Fed chairman said ”to date, the incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing in core inflation”.

July 21, 2007 My guess is that if there is an interest rate change, a cut is more likely than an increase. The key variables to be watching at this point are real estate prices and the inventory of unsold homes.
August 11, 2007 I suspect that within 6 months the Federal Reserve will be forced to lower interest rates before housing becomes a black hole.
September 11, 2007 It only means that the overall process has flaws guaranteeing it will be slow in responding to changes in the economy... and tend to over-react as a result.
September 18, 2007 I think a 4% rate is really what is needed to turn the economy back on the right course. The rate may not get there, but more cuts will be needed with employment rates down and foreclosure rates up.
October 25, 2007 How long will it be before I will be able to write: "The Federal Reserve lowered its lending rate to 4% in response to the collapse of the U.S. housing market and massive numbers of foreclosures that threaten the banking and mortgage sectors."
"Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses," he said.

"Uncertainties about the economic outlook are unusually high right now," he said. "These uncertainties require flexible and pragmatic policymaking -- nimble is the adjective I used a few weeks ago."

December 11, 2007 Somehow the Fed misses the obvious.
[Image from:]
December 13, 2007 [from The Christian Science Monitor]
"The odds of a recession are now above 50 percent," says Mark Zandi, chief economist at Moody's "We are right on the edge of a recession in part because of the Fed's reluctance to reduce interest rates more aggressively." [see my comments of September 11]
January 7, 2008 The real problem now is that consumers can't rescue the economy and manufacturing, which is already weakening, will continue to weaken. We've gutted the forces that could avoid a downturn. The question is not whether there will be a recession, but can it be dampened sufficiently so that it is very short.
January 11, 2008 This is death by a thousand cuts.
January 13, 2008 [N.Y. Times]
“The question is not whether we will have a recession, but how deep and prolonged it will be,” said David Rosenberg, the chief North American economist at Merrill Lynch. “Even if the Fed’s moves are going to work, it will not show up until the later part of 2008 or 2009.
January 17, 2008 A few days ago, Anna Schwartz, nonagenarian economist, implicated the Federal Reserve as the cause of the present lending crisis [from the Telegraph - UK]:
The high priestess of US monetarism - a revered figure at the Fed - says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. "The new group at the Fed is not equal to the problem that faces it," she says, daring to utter a thought that fellow critics mostly utter sotto voce.
January 22, 2008 The cut has become infected and a limb is in danger. Ben Bernanke is panicking and the Fed has its emergency triage team cutting rates... this time by 3/4%. ...

What should the Federal Reserve do now? Step back... and don't be so anxious to raise rates at the first sign of economic improvement.
Individuals and businesses need stability in their financial cost structures so that they can plan effectively and keep their ships afloat. Wildly fluctuating rates... regardless of what the absolute levels are... create problems. Either too much spending or too much fear. It's just not that difficult to comprehend. Why has it been so difficult for the Fed?

About Me

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Michigan, United States
Air Force (SAC) captain 1968-72. Retired after 35 years of business and logistical planning, including running a small business. Two sons with advanced degrees; one with a business and pre-law degree. Beautiful wife who has put up with me for 4 decades. Education: B.A. (Sociology major; minors in philosopy, English literature, and German) M.S. Operations Management (like a mixture of an MBA with logistical planning)