Article on Contemporary Affairs no. 1
20 Kislev 5770, 7 December 2009
Contents:
The China Problem and the
USA. Three Opinions
The Opinions:
(1) John Hulley,
"they will be able to take over the world".
(a) Brit-Am
Introduction on John Hulley
(b) John Hulley: Comments
(2) "China Still Needs the USA. The Brit-Am Appreciation" by Yair Davidiy
(3) A More Academic Approach
The Great Wallop by Niall Ferguson and Moritz Schularick
Reactions
4. Thomas Gray: The USA is on the Wrong Path
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(1) John
Hulley,
"they will be able to take over the world".
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(a) Brit-Am Introduction to John
Hulley
John Hulley is doing research about China, Iran, and the USA.
John says that China has a strong, almost a controlling interest in the USA.
Bill Clinton was elected President with Chinese money and gave the Chinese vital
secrets of a missile system
that the Chinese needed.
China is interested in Iranian oil and therefore the USA (or anybody else) will
not attack Iran or otherwise prevent Iran going nuclear.
Hulley believes that China wishes to take over the USA and the whole world and
that the Chinese now have the USA by "the short hairs".
We hope in the future that John will be sending us extracts from his articles on
this subject.
Here are comments John Hulley sent us concerning the notes by Yair Davidiy
posted below and the article by
Niall Ferguson and Moritz Schularick extracts from which are also shown below:
================================================
================================================
(b) John
Hulley:
Comments
Dear Yair, Here are some comments.
Your ideas and those of the professors are interesting on
economic aspects of the relationship between China and the U.S. But my focus is
more on the military problem. If we go on moving our industry, including
high-tech, industry into China, they will be able to take over the world when
their economy becomes the largest -- which could be in a very few years.
I think that would be a disaster for the world not only for political
and religious reasons, but also because of the slowdown in progress. As a
result of killing or imprisoning individualists, the rate of scientific
discovery and technical invention in collectivist societies is almost nil.
During the Cold War the advanced nations cut off high-tech exports to the USSR,
which soon fell hopelessly behind in military technology. I am proposing that
a similar system be applied to China as soon as possible.
Just think. No more religion would mean no more lost tribes.
And no more Brit-Am!
Do we want that?
Regards from John
P.S. In the second paragraph of the professors' article, I assume the word
'quadruple' is a misprint for 'double'.
(2) "China Still Needs the USA.
The
Brit-Am Appreciation" by Yair Davidiy
The Chinese may think they are superior to the West and especially to
the USA.
They may be dreaming of conquering the world or at the least North America and
they may well be dangerous.
They also appear to be realists.
They are not, in our opinion, necessarily an immediate threat.
In fact Chinese needs if coped with correctly could become a blessing.
The Chinese need the USA more than the USA needs China.
In a sense the Chinese are subject to the USA and work on behalf of US citizens.
The problem is that the US Establishment has not worked out how to benefit from
the situation without harming the US workforce.
This could still be done.
The Economics
In very crude simplistic terms as to why China needs the US see the following
hypothetical example:
A factory produces computer units.
It needs to produce 1000 units and sell them at $10 each. These figures reflect
its present work force, production capabilities, and a compulsion to
invest in increasing its capabilities at a regular rate.
Needed:
1000 at $10 each = $10,000
Market Options:
If I sell 100 at $10 will sell only 800 and receive $8000.
If I sell at $15 will sell 400 and receive $6000 but will have 600 left.
I need another $4000.
$4000 divided by 600 gives me ca. $6.6.
I cannot however sell the surplus units at $6.6 each without bringing down the price of
those I am still selling (or wish to sell in the future) at $15.
It therefore pays me to give 400 special vouchers worth $5 each to a separate
market segment (e.g. University students) who will add $10
of their own money and buy the units at $15 and I will receive my $4000.
So far I have sold 400 for $15 each and another 400 in effect for $10 each.
That still leaves me with 200 extra units that I can distribute to schools etc for nothing.
This will familiarise the next generation with our products and also gain us favorable publicity.
In the analogy China needs to produce and maintain its constant growth.
China cannot sell much outside the USA and its affiliates since the EU and
others have all kinds of market barriers that keep them out.
China also cannot entirely open itself up to outside market forces since
psychologically it is not built for it.
China can only sell to the USA and if necessary will do whatever it takes to
enable the USA to pay for its products.
This includes giving the USA part of the money to buy up the surplus that
otherwise would not be sold or even helping the USA produce
other products to sell to its own people or to other countries so that with the
money it can buy from China.
In other circumstance this situation could be considered a gift from Heaven.
It could be compared to the British possession of India which enabled British
manufacturers to sell cotton goods etc to the Indians and thus bankroll the
British Empire for the benefit of humanity.
Unfortunately the US has a number of inbuilt restrictions that inhibits a
beneficial and proper exploitation of the situation.
If these could be overcome instead of Chinese goods taking away American jobs
they could be creating them.
When Chinese money enabled many ordinary Americans to buy houses it was a
blessing.
While it lasted it was good for the US economy and good for US citizens who
needed housing.
Apparently it was too much of a good thing. Overconfidence led to
disappointment, rejection, and depression.
Not enough money went into improving US economic capability.
This is one of the causes of the present economic crisis.
In our opinion the fault does not lay in the phenomenon itself but rather in its
application. A higher proportion of the funds should perhaps have gone
to increasing US productive capacity in fields in which America still has an
edge.
The article below by Niall Ferguson and Moritz Schularick says more or less what
we have said but uses more facts, more sophistication, more figures,
and less coherency.
The authors of the article however advocate solving the problem by changing the
game.
We would suggest to keep the game going only have one side (the USA) more
assertive once the ball reaches its side of the patch.
###############################################
(3) A More Academic Approach
The Great Wallop by Niall Ferguson and Moritz
Schularick
Source received from the Origin of Nations e-mail list
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The Great Wallop
Niall Ferguson and Moritz Schularick, nytimes.com, November 16, 2009:
Extracts Only:
A FEW years ago we came up with the term "Chimerica" to describe the combination
of the Chinese and American economies, which together had become the key driver
of the global economy. With a combined 13 percent of the world's land surface
and around a quarter of its population, Chimerica nevertheless accounted for a
third of global economic output and two-fifths of worldwide growth from 1998 to
2007.
In its heyday, Chimerica consisted largely of the combination of Chinese
development, led by exports, and American overconsumption. Thanks to the
Chimerican symbiosis, China was able to quadruple [double' J. Hulley] its gross
domestic product from 2000 to 2008, raise exports by a factor of five, import
Western technology and create tens of millions of manufacturing jobs for the
rural poor.
For America, Chimerica meant being able to consume more and save less even while
maintaining low interest rates and a stable rate of investment. Overconsumption
meant that from 2000 to 2008 the United States consistently outspent its
national income. Goods imported from China accounted for about a third of that
overconsumption.
China's economic ascent was a result of a strategy of export-led growth that
followed the examples of West Germany and Japan after World War II. However,
there was a key difference: China made a sustained effort to control the value
of its currency, the renminbi, which resulted in a huge accumulation of reserve
dollars.
As Chinese exports soared, the authorities in Beijing consistently bought
dollars to avoid appreciation of their currency, pegging it at around 8.28
renminbi to the dollar from the mid-1980s to the mid-'90s. They then allowed a
modest 17 percent appreciation in the three years after July 2005, only to
restore the dollar peg at 6.83 when the global financial crisis intensified last
year.
Intervening in the currency market served two goals for China: by keeping the
renminbi from rising against the dollar, it promoted the competitiveness of
Chinese exports; second, it allowed China to build up foreign currency reserves
(primarily in dollars) as a cushion against the risks associated with growing
financial integration, painfully illustrated by the experience of other
countries in the Asian crisis of the late 1990s. The result was that by 2000
China had currency reserves of $165 billion; they now stand at $2.3 trillion, of
which at least 70 percent are dollar-denominated.
This intervention caused a growing distortion in the global cost of capital,
significantly reducing long-term interest rates and helping to inflate the real
estate bubble in the United States, with ultimately disastrous consequences. In
essence, Chimerica constituted a credit line from the People's Republic to the
United States that allowed Americans to save nothing and bet the house on ...
well, the house.
Nothing like this happened in the 1950s and 1960s. At the height of postwar
growth in the 1960s, West Germany and Japan increased their dollar reserves
roughly in line with the American gross domestic product, keeping the ratio
stable at about 1 percent before letting it move slightly higher in the early
1970s. By contrast, China's reserves soared from the equivalent of 1 percent of
America's gross domestic product in 2000 to 5 percent in 2005 and 10 percent in
2008. By the end of this year, that figure is expected to rise to 12 percent.
The Chimerican era is drawing to a close. Given the bursting of the debt and
housing bubbles, Americans will have to kick their addiction to cheap money and
easy credit. The Chinese authorities understand that heavily indebted American
consumers cannot be relied on to return as buyers of Chinese goods on the scale
of the period up to 2007. And they dislike their exposure to the American
currency in the form of dollar-denominated reserve assets of close to $2
trillion. The Chinese authorities are "long" the dollar like no foreign power in
history, and that makes them very nervous.
Yet there is a strong temptation for both halves of Chimerica to keep this
lopsided partnership going. Despite much talk of the need to reduce global
imbalances, the biggest imbalance of all persists. This year, America's trade
deficit with China will be around $200 billion, the same as last year. And China
has again intervened in the currency markets, buying $300 billion to keep its
currency and hence its exports cheap.
The reality, however, is that an end to Chimerica is in the American interest
for at least three reasons. First, adjusting the exchange rates between the
currencies would help reorient the American economy ' primarily by making
American exports more competitive in China, the world's fastest-growing economy.
Second, an end to Chimerica would lessen the potentially dangerous reliance of
American economic policy on measures to stimulate domestic purchasing. American
fiscal policy is clearly on an unsustainable path, and the Federal Reserve's
negligible interest rates and the printing of dollars are artificially inflating
equity prices.
Finally, renminbi revaluation would reduce the risk of potentially serious
international friction over trade. The problem is that as the dollar weakens
against other world currencies ' notably the euro and the Japanese yen ' so does
the renminbi, magnifying China's already large advantage in global export
markets. The burden of post-crisis adjustment falls disproportionately outside
Chimerica. Unless China's currency is revalued, we can expect an uncoordinated
wave of defensive moves by countries on the wrong side of Chimerica's double
depreciation.
Historically, as production costs and income levels in countries have risen,
their currencies have adjusted against the dollar accordingly. From 1960 to
1978, for example, the deutsche mark appreciated cumulatively by almost 60
percent against the dollar, while the Japanese yen appreciated by almost 50
percent. The lesson is that exporters can live with substantial exchange rate
revaluations so long as they are achieving major gains in productivity, as China
still is.
To be sure, China's central bank has suggested that it might be willing to
switch from the dollar peg to some form of exchange-rate management, taking
account of "international capital flows and movements in major currencies." But,
like the recent Chinese comments about replacing the dollar as the premier
international reserve currency, this may be no more than rhetoric.
For as long as the People's Republic has existed, the United States has been the
principal upholder of a world economic order based on the free movement of goods
and, more recently, capital. It has also picked up the tab for policing the
oil-rich but unstable Middle East. No country has benefited more from these
arrangements than China, and it should now pay for them through a stronger
Chinese currency. Chimerica was always a chimera ' an economic monster.
Revaluing the renminbi will give this monster the peaceful death it deserves.
Niall Ferguson, a history professor at Harvard, is the author of "The Ascent of
Money." Moritz Schularick is a professor of economic history at the Free
University in Berlin.
Reactions
Thomas Gray: The USA is
on the Wrong Path
Re The China Problem and the USA. Three Opinions
Dear Yair,
Regarding China, Mr. Hulley is right that we should not be giving technology to
a repressive country. But we are. You are right that China needs the U.S. and
the U.S. should take advantage of the situation for the benefit of both. But
the U.S. is not doing that.
When you speak of what should be done, my sorrow just deepens. I worked for 12
years in U.S. industry as a mechanical engineer. I observed the horrible
paradigm shift based on evolutionary theory that made foolishness the order of
our work. The focus became earning money for the stock holders instead of
building technology for the benefit of man. Yet, even those decisions served to
reduce income because they were made on the basis of short-sighted
calculations. I protested with letters to the leadership of the company and
basically got my suggestions shoved back down my throat. I was going to quote
Proverbs to the vice-president, "There is a way that seems right unto a man, but
the ends thereof are the ways of death," but I decided I had better not because
they might interpret it as a threat from me. I was not the only one who was
grieved and protesting. A retiree came back for a visit and became disturbed
and said, "I have to get out of here. This place smells of death." I gave
several years of effort to look for a way to stop the foolishness, then I gave
the company 9 months notice before quitting and leaving the U.S. Since then,
everything I have heard from the U.S. indicates that the path of foolishness is
deepening, and it is nation-wide, not just in my former company. How can they
go back to wisdom, when they are so entrenched in foolishness? Thus, when you
rightly speak of what should be done, my sad experience comes back into my mind,
because I know they are not going to do it. Wickedness is increasing. But it
is not the end yet. It is time to look for what we should do next. But no one
is listening. They are either waiting for the U.S. to rise up as a mighty man
from his slumber to fight the Philistines, not knowing that his strength is
draining away, or they are hunkering down for the coming of the end-time events.
For Related issues see:
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by Satellite in the Hills of Ephraim
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