Thursday, January 10, 2008


Michael made a good point to me in email. If some guy on a blog can figure out M3, the Chinese government should have no problem figuring out what it is. This sounds right to me. So I take back my comment that this was to hide our money supply growth from our foreign bankers. But if the Fed still tracks all the components of M3, what was the point of no longer publishing it? For them, it's a formula in an Excel spreadsheet for which they already have all the inputs. I have to believe then the answer is that they don't want the public to be aware of the money supply growth. I can't think of any other reason to no longer publish it.

At any rate, how does all this money supply growth affect China which is our largest creditor? My friend Steve used to say that China doesn't care about the balance sheet. When he told me this, I didn't know enough about how the world economy worked to know what it meant. Now I know more and I think he is correct.

China has higher priorities than how much we owe them and what the value of that debt really is. China views the last several years as an investment in its economy. By providing low cost labor and financing our extravagance, we has outsourced most of our industry to China. We helped them build factories and infrastructure. We trained their workers, fixed their banking system, and assisted them with the transition from a centralized economy to one based on capitalism and entrepreneurship. The problem for us is that China will not keep financing our consumption indefinitely. Their economy is maturing and in the future they won't need us anymore to stimulate demand and provide them with technical knowhow. We already are becoming a smaller and smaller part of their economy as their domestic demand has grown and other countries import more and more of their goods.

So if the value of America's debt were to drop by half or even become worthless, I don't think China would lose too much sleep over it. They would write it off as a $500 billion or $1 trillion investment in their economy. Heck, we spent about that much on the war in Iraq. Just think about that for a moment. For $1 trillion, we bought the deaths of thousands of American soldiers, tens of thousands of causalities, hundreds of thousands of Iraqi deaths, and a destabilization of a critical region. We planted the seeds for more radical Islamic terrorism, committed ourselves to an unending war, and dramatically lowered the standing of the United States in the eyes of the world. For about the same amount, China made an enormous investment in its economy to help bring a billion people out of poverty. And, that's assuming the debt becomes worthless. China now has a sovereign wealth fund that is buying assets left and right.

Now this upsets many Democrats in Congress. They want to label China a currency manipulator. Well, if they are a currency manipulator, what's the mechanism by which they manipulate their currency? Up until a few years ago, they pegged the value of Renminbi to the value of the dollar. Was this manipulation? Dozens of countries peg their currencies to the dollar. It just effectively means they are using the dollar as their currency (with the option to decouple in the future). Up until recently, Saudi Arabia, Kuwait, and the UAE did the same thing. I never heard any talk about labeling them manipulators. Recently, China moved to using a floating peg where the currency is allowed to float within a window. This may have been due to enormous pressure from the USA to switch to a floating currency. Or it may have been because China knows that in the long term the inflation America is exporting to China is too much for their economy to handle. At any rate, this is no more manipulation than the fixed peg.

So is China to blame for allowing the US to outsource all of its industry and industrial jobs? On one hand, it's natural that this should happen. Chinese workers are willing to work for less than American workers. But this couldn't happen to such a large extent in a truly free market. What really allows this to happen is that America borrows so much money from foreigners to finance our military empire, welfare state, and consumerism.

Is this a big problem? I think it is. This situation is similar to the situation in Africa. America and Europe give Africa billions of dollars in foreign aid. Because of American and European subsidies and tariffs on agricultural products such as cotton and corn, African farmers can't compete in the world market. All the foreign aid given to Africa is used to buy food from America and Europe. So the money we give to Africa is more or less an additional corporate handout to our agriculture companies. Meanwhile, African countries become completely dependent on this foreign aid. They can't build up their own production. They need our money to buy food. American tax payers effectively buy food from American companies to feed Africans. There's an old adage about giving a man a fish versus teaching him to fish.

This is a common unintended side effect of any welfare program. The people who "benefit" from it become dependent on it and the real benefactors are the companies that sell them goods. Want to keep poor people in a state of perpetual poverty? Easy. Give them money for doing nothing. They will never develop any useful skills so they can become productive members of the economy. This is the state we've kept the Africans in. We also have done this from time to time and in different levels to people in our own country.

How does this relate to the Chinese? China "helps" us the way we "help" Africa. China provides America with foreign aid by loaning us money to buy their goods. And now we have become dependent on it. I blame America and Europe for the situation with Africa, but I don't blame the Chinese for their situation. With Africa, we are the ones creating the subsidies, tariffs, and foreign aid that cause the problem. African farmers would have no problem competing if the playing field were level. With respect to China, their workers are willing to work for less than our people are willing to. It would be immoral to blame millions of Chinese workers living in poverty that they can't have low paying jobs that provide them with just enough to feed their families so that thousands of Americans can buy LCD televisions, drive SUVs, and eat themselves into obesity. And then we make the problem much worse with all the borrowing.

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