Prelude to Finale
The truth of the matter is that U.S. policies and their consequences are so intertwined with China's that no wall of economic or political logic can be built that would separate what China has been doing for years with respect to international trade and what has ultimately come about here in the United States as a result. I will explain this in technical detail (and the technical aspect is surprisingly simple to demonstrate) in the upcoming, fourth and final part of my series, "The Economics of Wreckage," Part Three of which was a fairly rigorous survey of neo-Keynesian economic policy and the consequences of the Bush Administration's overuse and misuse of it. However, as a leader for the final installment of my frontal assault on both neo-Keynesianism and the Bush Administration's economic policies, I herewith offer a series of brush strokes concerning why China and its actions are inseparable from what has happened in this country.
Exchange Rate Manipulation
The poorly understood, if nothing less than spectacular, center piece of Chinese trade policy with the United States has for years been the yuan-dollar exchange rate. If China had not been "pegging" the yuan against the dollar (and doing so at an exchange rate so removed from purchasing power parity reality that even I cannot help but grin at the decade-plus highway robbery) a few minor things would have been different. In my February 2006 graphical post, "A Walk-Down Primer on the U.S. Trade Deficit with China," I set forth the chain of policies and consequences on both sides of the Pacific that were inexorably taking us to a very grim period, one now just about at hand.
We would not have lost millions and millions of American jobs. While our nativists have been ranting about those brown people from Mexico overrunning our borders with actual, real human capital to feed our demand for cheap labor, the Chinese were sitting back, running a currency gambit that sucked the very life out of our economy by making our stuff expensive in China and their stuff ridiculously underpriced here in the United States. This was discussed in Parts One, Two, Three, and Four of my video series, "Exchange Rates." Yet, somehow, not one serious word has ever been mentioned about erecting punitive fences to stop the madness of China buying dollars and paying for them with yuan to keep the dollar artificially strong against the yuan. And to make this pegging trick happen requires constant, consistent, conscious policy actions by the Chinese central bank, all while both the Clinton and Bush Administrations were too stupid to deal with the war-by-trade the Chinese were waging against our industrial base. Instead, it has been easier all along, on the one hand, to swallow the bilge the communist rulers in Beijing have pumped out about "market reforms" and, on the other hand, to point fingers at the scourge of Paco and Manuel sneaking into this country, what with that strong U.S. dollar they could earn, to work at jobs most precious Americans wouldn't even consider doing. We'll believe murderous communist thugs and let them suck our economy blood-dry; but, by God!, we shall be safe from Hispanic brown-skins taking our highly sought-after, minimum-wage jobs. (To be fair, it is always more exciting to organize a mob than to hold a class in macroeconomics.)
Second, Asset Values
The real estate price run-up that began in the 1990s would not have happened nearly to the extent that it did. As explained in my May 2005 article, "Exchange Rate Regimes," when greenbacks flow out of this country through international trade, they eventually land in the central banks of our trading partners. That flow of short-term dollars in exchange for short-term goods and services is called the "current account." When we import more than we export, there is a net outflow of greenbacks, and we are said to be running "trade deficits," and, as a consequence, those central banks overseas build up "foreign reserves" of greenbacks; but the only place U.S. dollars can be spent is in the U.S., which means those dollars have to return as long-term investment here by foreigners. This backflow, which matches in size the current account, is called the "capital account." Hence, if we have a negative current account, we'll have a positive capital account of the same magnitude; and this is how the debt-fueled economy of the United States was getting its power juice: foreign central banksChina's, the Arab countries', Japan's, and those of other countries all over the worldwere pouring the greenbacks they had earned into everything American, including consumer loans; mortgage-backed securities; corporate debt, from bonds to commercial paper; municipal bonds; land; and stock in IPOs, secondary offerings, shelf registrations, and secondary market equity. As set forth in my article, "Seven Principles of Macroeconomics," it was a propulsion system driven by foreigners who were selling us cheap, short-term consumer goods in exchange for us, in the long-run, selling them claims on our future expected cash flows. As long as just the private sector and mere municipalities of the U.S. economy were holding out their hands for this money, the system functioned well, and the debt allowed the United States as a macroeconomy to realize what are called "gains to leverage" without incurring substantial increases in risk that can ultimately attend too much of that leverage.
Nevertheless, it was all that money in foreign reserves focusing down on the American economy that allowed us to use so much debt to live beyond our means, compliments of foreign lending sources paying us in the here and now for our land, for our shopping malls, for our buildings, for our wars, for our research and development, for our meds, for our groceries, for our nice cars, for our municipal bonds to build sports stadiums and pretty greenspaces, for our theme parks, and for every other manner of desire we have to be profligate in our pleasures and patterns of lifestyles. In exchange, all we ever had to do was surrender our future cash flows, and those of our children, and those of our children's children.
Third, Industry Consolidations
Among the many excesses we were allowed as a debt-sopping nation, our corporations were able to use money they could not possibly have generated through the old-fashioned means of merely selling their wares. The debt available to corporate America through combinations of our own Federal Reserve printing money and foreign lending afforded the more entrepreneurial of corporations the ability and funds to go on buying sprees of other corporations, and the most pernicious of these excesses resulted in consolidations into oligopolies of what otherwise could have been relatively competitive industries. The most obvious example of this is in telecommunications, but that is by no means the only place it has happened: well beyond the radar of most Americans has been consolidation in all manner of other sectors, from agriculture and banking to information technology and distribution.
The Bush Administration has run staggering budget deficits every year, save for 2001, when it was still facing the daunting task of overcoming the year-over-year budget surpluses it had inherited from the Clinton years. It was the constant, reliable, predictable presence of foreign central banks at the fire-sale Treasury auctions (where the government raises money to cover the shortfall between tax revenues and government expenditures) that kept the consequences of Republican profligacy from constricting capital markets enough to send shock waves through the economy; but as long as foreigners were at those auctions ready, willing, and able to lend hundreds of billions of dollars to the government, the private markets did not get hit in any obvious way with the consequences of capital scarcity, even though the constrictions on available global capital were starting to show more than a few years ago, although back then, the cracking infrastructure of global capital flows was not noticeable other than as odd features like the rapid ascendance of sub-prime mortgage instruments and curious but barely noticeable loosening of rules regarding lending practices and banking risk exposure allowances.
Now, those raging budget deficits have cut so severely into the global supply of capital funds that the "sub-prime mortgage crisis" has occurred, and this is overwhelmingly the result, when all is said and done, of the largest government on Earth going on a multi-year, borrow-and-spend spree that has finally collapsed the ability of those world-wide capital markets to feed both the private and public sector debt follies of this nation.
Finally, Visions of Empire
The overwrought, fevered plans of world control foisted by neo-conservatives into overriding foreign policy by the Bush Administration's warhawks would long ago have slammed head-long into the hard reality of a public being denied its credit-based consumerism had our very own Federal Reserve not been printing money like it was going out of style. As I showed in Part Three of "The Economics of Wreckage," the U.S. central bank, even after it claimed it had stopped doing so, was pouring staggering billions of dollars into the economy at a rate that would make the most proliferate counterfeiter blush. The only measures of self-control to which the Fed was able to hold true were that it stopped printing the highly liquid money ("M1," as it is designated) used by common people and it stopped reporting its stunningly irresponsible growth rate in the kind of money ("M3," as it is designated) that can be used by high-end banks.
But here's the secret. Recall above that the Chinese were pegging the yuan-dollar exchange rate by entering global currency markets to purchase dollars with yuan (through the easy route of the People's Bank of China simply taking the dollars their merchants were earning and giving the merchants far more yuan than they had actually earned in dollars). Of course, this will ultimately cause severe inflation in Chinaa spiral which is now just beginning and which readers following links above to my articles and videos will see that I unambiguously predicted would occuras all those yuan it has for years been pumping out come washing back to its shores; but a far more immediate opportunity came to the minds of the geniuses at the Fed and in the White House: if the Chinese are hammering the global currency markets, buying up dollars to make them strong and paying for those greenbacks with yuan to make the Chinese currency persistently weak, what is to keep the United States from ramping up its printing of dollars, knowing as it does that the Chinese central bank is going to sop them up as soon as they hit the global currency trading streets? This calculus by the White House and its rubber stampers at the Fed had all the elements of a symbiotic relationship made in Heaven: the Chinese wanted to keep the dollar strong against the yuan to keep Chinese imports in the United States cheap, and the government of the United States wanted a ready buyer for debt of any kind, so why not supplement those auctions of Treasury bills, notes, and bonds with some of that special, green paper we call "U.S. currency" (which is nothing other than Federal Reserve debt backed by the full faith and credit of the United States of America)? That is one of the reasons why, in the graph of the growth of the money supply aggregates, republished below, the growth rate of M3 has been skyrocketing.
Illiquid money aggregates are perfectly suitable for use in global currency trading, and our U.S. Treasury, in coordination with what is suppose to be an independent Federal Reserve Board, has been double-dipping into the global capital river. Instead of stopping the Chinese from playing their currency manipulation games, the Bush Administration has been using the Chinese pegging to keep its own game of unsustainably low taxes and out-of-control, misdirected spending from reaching the crisis stage.
And Now, Ladies and Gentlemen, the End Game
Unfortunately, the game clock is running out before President Bush can exit the White House and leave the blame to the next President, who will have to clean up the terrible mess with draconian policies we haven't seen since President Carter dealt with similar (although not nearly as severe) problems at the end of the 1970s. For those who don't keep up on historical trivia, Mr. Carter was a one-term President, principally because he did what had to be done, which hurt like Hell and deeply offended the sensibilities of Americans who like their dire consequences without the dire part.
The bottom line is clear, though: responsibility for the problems we are now facing can be laid right smack at the doorstep of the Bush Administration, where those problems will now trip up not just the neo-conservatives trying to slip out to resume their lives as unregistered foreign agents, but will also trip up the Chinese government, which has been working in concert with a White House that is not only too stupid to understand the destructive, long-term consequences of its foreign policies, but is even too incompetent to hold off the shockwave of those consequences long enough to get out of Washington before all Hell breaks loose.
The good news for Mr. Bush is that it is still illegal for a mob to chase down and hang the President. The bad news is that the global capital markets have no such qualms about doing that to the American people who were led by such a fool.
The Dark Wraith will return later with further instructions on how to be scared to death of what is to come.
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Wrote Dark Wraith:
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