"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."
- Ludwig von Mises

Monday, February 14, 2011

China Puts War on the Table, Question's US Dollar's Future

In the past twenty-some years, since the fall of the USSR, there has only been one country that has repeatedly sent its troops abroad for military reasons.  It has been the US.  In 1989, the US invaded Panama.  Then the US led a coalition against the Iraqi invasion of Kuwait in 1991.  And now recently, the US has invaded both Iraq and Afghanistan, and has continued to occupy both nations.

I am not judging here; this is what Superpowers do.  Having the largest economies, and thus, the most disperse global interests, Superpowers have a need to maintain those interests, and to play the "world's police" to ensure global trade.  Bottom line: a Superpower has the most skin in the game and needs to exercise its power to maintain both its national security, and the smooth functioning of the global economy.  People may disagree with the methods, but the goals, I think are obvious.

But the post WWII era has ended, and so too, the post USSR era.   But a new development has been taking place: we now have China rising as a Superpower in its own right.  And with that rise, China's interests in Asia, as well as the rest of the world, are also rising.  And so, China will increasingly find itself protecting these interests and as a result, will also find itself in conflict with the existing Superpower paradigm: the USA, and US Dollar dominance.

Recently the IMF said the SDR should replace the US Dollar's dominance.  This is desperate appeasement, in my view.  It is hollow.  The SDR is a global "virtual" currency representing the US Dollar, the Yen, the Pound Sterling, and the Euro.  Other nations are left out, but promises that they will be included are being made.

It seems to me that China is having none of this.  At the end of the day, geopolitics and protecting one's interests is what matters, and a global currency that represents the Western world plus Japan, in my view, can never successfully accommodate the Chinese yuan. China and the US have increasingly competing interests, and the SDR approach, I believe will be a failure.  Furthermore, the four main currencies of the SDR, representing the US, the UK, Japan, and the Euro, are increasingly "basketcases" that also represent highly indebted countries with enormous social welfare programs that are either unfunded, or will need currency depreciation to fund.  How can the SDR, a global currency, function when the underlying currencies are highly volatile?

As for China's view, to further prove my point, a Chinese Party Magazine recently stated:

"Peace in China Not Gained by Giving in, only Through War."  The article that mentions this story is from "The Asian Age."  I do not have access to the original article, and so, I will quote from the cited article I found.  Here it is, emphasis mine:

From The Asian Age:

Terming US attempts to woo India and other neighbours of China as "unbearable," an article in a Communist Party magazine has said that Beijing must send a "clear signal" to these countries that it is ready to go to war to safeguard its national interests. 
The article published in the Qiushi Journal, the official publication of the ruling Communist Party of China (CPC) said China must adhere to a basic strategic principle of not initiating war but being ready to counterattack. 
"We must send a clear signal to our neighbouring countries that we don't fear war, and we are prepared at any time to go to war to safeguard our national interests," the article said, suggesting an aggressive strategy to counter emerging US alliances in the region. 
"Throughout the history of the new China (since 1949), peace in China has never been gained by giving in, only through war. Safeguarding national interests is never achieved by mere negotiations, but by war," it said.
The article continues, quoting the original source:
"What is especially unbearable is how the US blatantly encourages China's neighbouring countries to go against China. We cannot completely blame the US, as flies do not stare at seamless eggs. 
"They are attempting to gain benefits by using US," it said. 
It suggested that China should use its economic clout and trade as a weapon to rein in neighbours. 
"China's neighbouring countries need China's international trade more than China needs them, with the vast majority of China's trade deficit caused by these countries," it said. 
"Therefore, they, but not China, will suffer greater damage by antagonising China. China should make good use of these economic advantages and strategic power. This is also the most effective means to avoid a war," it said.
And this is where it seems that the Chinese Red Army may one day be "visiting" other countries, US style:
China on its part, it said, can consider the idea of launching economic warfare through strategies to contain the US dollar and making effective use of forums like the IMF and initiating a space war by developing strong space weapons. 
It also suggested as a counter-strategy the idea of pursuing a strong policy against neighbours joining the US alliance, even attacking a nearby enemy and forming anti-US alliances in Latin America and Africa.
And then, there is economic warfare, with the US Dollar as the target:
So in view of this China should "pick up courage" and go for aggressive buying of other currencies, including the Indian Rupee hence taking the lead in affecting the market for US dollars. 
This approach, it said, is market-driven and it will not be able to easily blame China.
"Of course, the most important condition is still that China must have enough courage to challenge the US currency. China can act in one of two ways. One is to sell US dollar reserves, and the second is not to buy US dollars for a certain period of time," which will weaken the currency and cause deep economic crisis for Washington.
 
Given the fact that China is the biggest buyer of US debt, its actions will have a demonstrable effect on the market. 
"If China stops buying, other countries will pay close attention and are very likely to follow. Once the printed excess dollars cannot be sold, the depreciation of the dollar will accelerate and the impact on Americans wealth will be enormous. 
"The US will not be able to withstand this pressure and will curtail the printing of US currency," it said.
 SOURCE

The world is becoming more and more fragile, as we are witnessing the end of the post cold war paradigm, and a new emerging paradigm seeks to replace it.  We have to contend with not only a financial and currency crisis, but a crisis of world leadership and resource control.  Such periods in history involve global upheaval and currency re-alignments.  I don't rule out this article serving another purpose, that is, to serve as a bargaining chip of sorts that may influence the Yuan's portion of the SDR.  But in a world of increasingly multipolarity and spheres of influence, I think they mean it.  And history shows us that world dominance and currency dominance is usually fought for, not peacefully transitioned.

7 comments:

OKL said...

Misthos,

while you may be right in this regard, i think there is another interesting dynamic at play here; why is it now that the CCP is playing this "nationalism" card?

it is no surprise to me; food and housing prices inflation is really pissing the chinese people off and the bureaucrats are trying to play up the actions of the US in the South China Sea to stoke nationalism- the old story of blaming others for one's own problems.

it's interesting to see how the general public is shooting the US for their fiscal/monetary policies, while completely forgetting that China had the choice not to accumulate USD. of course, this also means that consciously or not, folks also agree that the US is practicing some form of gunboat diplomacy.

while China can yelp all it wants, i doubt the rest of the world knows what China wants or is going to do- will they deploy troops to safeguard the interests of some faraway neighbor? what will they want in exchange? what can they offer?

but back to my beginning point; i think this is the CCP's method of trying to keep the populace under control. i still do not think their economy can continue to expand at near double digit rates for another 20yrs; the demographics, politics and history simply point otherwise.

and so you are right; irregardless of whether China challenges the US or not, I think there will be some shuffling of the deck... there'll be blood spilt, but hopefully not too much...

Misthos said...

OKL,

You bring up a good point that I didn't consider. Yes, the CCP is playing this card for national consumption, but I still believe that it is also directed at the US.

I see China slowly creating a "Monroe Doctrine" that applies to Asia. Just as the US considered North and South America its backyard - and still does, so too is China saying that it will run the show in South Asia.

Just recently, China unveiled a plan with Colombia to create a railway that challenges the Panama Canal. This is serious stuff. Lines are getting blurred between what the US considers its sphere of influence, and what China considers its sphere of influence. And each is targeting the other's "backyards."

China's surplus dollars can also be attributed to the Tiannamen Square uprising. There was an implicit agreement after the uprising was put down... that we'll not democratize now, but we'll elevate your living standards - and the population complied. And so began China's ascent in the global arena.

But like all good things, nothing lasts forever. Yes, China has industrialized and had created factories, transportation systems, etc... but they also have a tremendous amount of US denominated assets - both agency and gov't debts.

What will become of those assets? There's an obvious endgame. The question remains, will the imbalances correct over time, in a smooth transition? Or will they topple, wreaking geopolitical havoc?

No surprise that both Germany and China just recently stated that surplus countries don't need to do anything - it's deficit countries that need to get their act together.

http://www.google.com/hostednews/ap/article/ALeqM5iEloB0YQghuFnKM63vRV1bgdKBUA?docId=822e167c6dc34a71ada88c0698fb3109

I guess these two exporting behemoths don't understand that in a fiat money world, it doesn't always pay to win the global currency accumulation game. While others consume your economic output, you accumulate ever increasingly fragile, dodgy, debt.

Good for you, Germany and China. You finance the consumption of much of the world, and in the end, you'll be paid, if you're lucky, with worthless paper, or worst case, your buyers will default.

It's like a restaurant owner happily selling a lobster dinner to someone with no money in their wallet. They give him their credit card instead. And later, when the restaurant owner runs their credit card thru the machine, he gets a message: "inadequate funds." Guess what? That lobster dinner has already been digested - too late for recourse!

That's MMT for you.

OKL said...

Misthos,

though I wrote in the earlier comment that China has a choice not to accumulate USD, I sort of shot myself in the foot when I commented on one of your posts awhile back that emerging countries have no choice but to accumulate USD.

i guess i'm not really looking at the economic argument, but really the political arguments to see which ones are taking hold.

on the 'monroe doctrine', i think growing military demands comes with increasing global influence... while China certainly holds certain advantages, we must remember that such aggressive actions by a neighbor can cause the usually dysfunctional ASEAN to band together both militarily and politically.

i agree that under the current global monetary system, deficits and surpluses are really 2 sides of the same coin; there are no inherent advantages on either side, simply because those advantages only exist if there is a sound money like the gold standard...

Jim Slip said...

"Under the current global monetary system, deficits and surpluses are really 2 sides of the same coin; there are no inherent advantages on either side, simply because those advantages only exist if there is a sound money like the gold standard.."

Exactly.

Because under the current system governments need not save.

What matters is having functioning economies.

If Germany and China wish to export and "save" paper, so be it.

The current (persistent) unemployment rates in many western countries are simply catastrophic.

Not for the first time, I quote from Bill Mitchell:

"The government doesn’t have to issue debt if it is happy to keep interest rates flat-lining at about zero. The government can always pay its interest bill if it is in its own currency. What happens if the private sector will not buy the bonds? Not a lot. The spending would still be made and have a positive effect (assuming there is excess capacity in the economy) and the bank reserves would sit there not earning market rates. Consumers might then choose to spend the excess bank reserves and then the automatic stabilisers would reduce the deficit. Not a lot wrong with any of that. Deficits stimulate growth and the central bank sets the short-term interest rate."

Misthos said...

Hi Jim,

I agree with many of Bill Mitchell's observations.

But MMT, the way Bill Mitchell would like to see it, is more of a political issue than an economic issue.

Wealthy elites will accept unemployment at high levels if it means that they maintain their wealth.

An easily expanded monetary system will always be used to the benefit of the few, to the detriment of the many.

The lessons we have learned over the past three years have proved this. How has the global financial crisis been handled? Why?

The only way a full employment MMT paradigm can ever succeed is if the existing Davos/Power Elites Banking crowd gets taken down a few notches.

Good luck with that. Ever speak to the average person about economics? Not only are they clueless, but they often have views that are against their own self interests! You can thank the elites for that. The common man has been dumbed down, or at least, kept in the dark.

MMT full employment theories are utopian views that have already been implemented. The FIRE economy is a full employment, or rather, full bonus, government program. And it works really well for the select few.

If you haven't seen this recent interview of Professor Sachs, I suggest you do:

http://www.youtube.com/watch?v=bCPz2SzROFQ

Jim Slip said...

I watched the interview and I agree with what Professor Sachs says.

Misthos, let's focus on the Eurozone.

What do you think the outcome of the "austerity measures" is going to be?

Since we both currently live in Greece, I think we can agree that the lack of aggregate demand is obvious by now. Here in Athens you see "for rent" signs everywhere (where shops used to be), and unemployment is already 14%.

I am the first to state that the Greek state needs to reorganize the public sector so that it's disciplined, so that it does useful jobs, and so that it doesn't antagonize the private sector.

But who honestly believes that no matter how poorer Greece becomes, that it can compete against Germany for exports?

Anyway, the point is, what is the Eurozone trying to achieve?

If it wanted to achieve balanced trade, there are better ways of doing it than condemning people to long-term unemployment.

If Germany wanted to maintain it's competitive advantage, then the easier way to do this is by making sure it's customers have money to spend via (what else under fiat?) deficit spending on the European level.

I'm at a loss. Germany might be doing good for the time being, but I believe it's only a matter of time before the results of austerity affect her as well (via lack of demand).

Misthos said...

Jim,

Greece has been put in an impossible situation. It can't increase the money supply or devalue. At best, it can export its way out of this mess.

But Greece does not have the same economy as Germany. It's exports are not as high margin, it relies on a lower currency to increase exports and tourism. Yet the EU is doing its best to keep the Euro high.

It is far easier to devalue today than to embark on an industrialization and technology program that could take years or decades to show results. Don't get me wrong, Greece should become more competitive and business friendly - but that won't happen overnight - yet the debt payments are ongoing RIGHT NOW.

Many say that the Euro changed Greece for the better. I think that's an incomplete picture. It wasn't the Euro per se, but the credit market that came with it.

This paper has some really good charts on Greece's credit growth since the mid 1990s.

http://www.kepe.gr/pdf/D.P/dp_84A.pdf

Add public sector (credit) growth - and you get a better picture on why Greece's living standards rose so fast. Much of it, just like in the US, was credit driven. And surplus countries like Germany and China also benefitted from this credit expansion.

So the drachma wasn't so bad after all. It allowed Greece to devalue when it had to, to raise interest rates to spur foreign investment, and to be more competitive in tourism. The Euro is doing none of that - just the opposite. Add Austerity measures, and it's a recipe for disaster.

Germany will eventually feel the brunt of this too. They are trying to increase their Asian exports, but still, most German exports are in the EU. Germany still has a trade deficit with China.

Even Greece, with it's unique agriculture and climate, still imports many foods due to the strong Euro! It's crazy. A farmer is better off just getting subsidies from the government than trying to compete with non euro agricultural producers. And farming, keep in mind, is a low margin business, unlike say, much of what Germany produces.

European policymakers need to understand the role of credit, what austerity really means, and how a currency affects an economy. Being haunted by Weimar Germany is foolishness right now.

The Maastricht criteria should be changed.

We live in a fiat world - an MMT world. Why shoot yourself in the foot? Play the game that everyone else is playing until it collapses. It doesn't pay to be some monetary "hero" by imposing arbitrary debt limits in a fiat world. European policymakers are foolish, and German Central Bankers don't get it. They need to understand that not everyone can or should be like Germany.

Don't get me wrong, overall, I agree with German Central Bankers that a nation should have some discipline. But it's a different world right now, we're in a fiat money crisis. It's a race to the bottom, and playing the responsible game now gets you nowhere.

But in my view, the endgame is still unavoidable. Hence the title of this blog: "Fiat Collapse."

Misthos