I can not seem to wrap my brain about the logic of a historic transfer of wealth from the United Stated to China as the dollar implodes that I have read about in various “financial” types of publications or websites.
It seems to me that China is artificially propping up the United States by helping to finance our debt so that we may continue to buy cheaper Chinese goods. China, in essence, is letting us borrow money to buy what they are selling to maintain their economic growth with both strong domestic production and a strong export business. However, it is painfully obvious that the US Government will eventually default on this mammoth debt. It seems to me, as there is no international bankruptcy court that tells China they get to come and take the cars and houses full of flat screens in America, the Chinese are making bad loans with no assets as collateral. If this is a correct appraisal, how could the Chinese sitting on worthless dollars with the US in default be construed as a transfer of wealth to the Chinese? It seems this is a very bad proposition for China and would hardly make them a wealthier nation. I’m looking for someone without big government bias who actually knows how markets and monetary policy really works to make some sense of this for me.
America prides itself on paying its foreign debts at the expense of its own citizens. I wouldn’t be surprised if the Chinese accepted technology, control of roads, utilities, and prisons, among other things, to pay off these debts. It would not be in the interest of the financial elite who are attempting to build one world to alienate the Chinese. The Chinese are taking a big risk, sure, but the risk is no bigger than what the FED takes when making loans that banks, corporations, and consumers are sure to default on. The Chinese can ask political favors and buy UN Security Council votes, gain access to resources, etc. The Chinese are positioning themselves in much the same way the World Bank and IMF have positioned themselves internationally. I doubt the Chinese ever want to see the debt paid off. Afterall, that would mean a loss of leverage over the United States. Of course, China would be competing with the FED for ultimate control of US Foreign and/or Domestic policy.
You are correct, mschapman. Austrian economist Donald J. Boudreaux said:
Senior Writer Steve Hargreaves writes that “By buying so many Chinese goods, the country is literally sending its dollars abroad. The Chinese then use those dollars to buy U.S. government bonds. While that allows the United States to continue borrowing, it’s bad because taxpayers must pay interest on those loans” (“Five Chinese trade tricks,” Jan. 17).
Ummm…. Uncle Sam ran budget deficits long before the Chinese starting buying U.S. treasuries. And it’s a bizarre and unflattering view of Congress in which that body is somehow lured into fiscal imprudence simply because Americans import more from the Chinese than the Chinese import from Americans.
Finally, even if Uncle Sam borrowed every cent of his debt from Americans, it would still be true that “taxpayers must pay interest on those loans.” Chinese creditors are not unique in demanding interest payments on the funds that they lend.
The problem is not the Chinese Central Bank purchasing US Treasury bonds. As pretty much every person with a brain cell left could tell the problem is the US government running such massive deficits. No deficits, no need to issue bonds, no interests paid to the Chinese.
We should also think about who Uncle Sam owes money to: the first three creditor nations are China, Japan and, quite unbelievably, the United Kingdom. While China is a well known case requiring no further explanation, both Japan and the UK have massive national debts themselves. Japan has been running massive deficits for two decades, yet in 2010 it increased its US bonds purchases so much they are now only slightly behind China. Britain purchased even more, surpassing huge historical creditors like Russia and Saudia Arabia. Most of these purchases came before interest rates started to pick up in October-November 2010, an event most analysts foresaw. It may be argued this is part of a strategy aimed at propping up the ailing US dollar. The Chinese and the Japanese know very well there’s a default risk in the future and they also know very well foreign creditors like themselves are likely to get a door in the face but are willing to play the game. The interests bonds pay are not what they are interested in: their only concern is to prop up the US dollar by any mean necessary to encourage exports. Remember how mercantilist Asian Central Banks are. Remember the Asians have enough foreign currency reserves as to make this a relatively low risk game.
The US should also keep more than a weather eye on Europe. Debts in the EMU area are spiralling out of control: now even the ECB has started emitting bonds of its own. For all their cheap Welfare State/Social Justice/Moral Superiority talks the Europeans have proven themselves every bit as rotten as the hated “capitalist” Americans: the mad scramble to prevent a partial default by Greece was initiated to save the skin of the main French banks, all of which were chin-deep in ouzo-bonds, just like “QEI” in 2008 benefitted the largest US banks. Japan, India and China have all pledged to buy as many “eurobonds” as possible. The rationale is exactly the same as the one behind massive purchases of US debt: too artificially prop up the value of the euro and hence encourage exports. Japan has again proven to be particularly enthusiastic, pledging to buy a whooping 20% of the “eurobonds”: in 2010 the Japanese yen has appreciated a lot over the euro, making Japanese goods less palatable. Big keiretsu with Europe as their main market (like Hitachi) have taken the beating of their life. Something needs to be done.
You may be right in talking about a transfer of wealth: both the US and Europe look like decaying noble houses forced to borrow money from the new middle class to finance their extravagant lifestyle while revenues from their estates are declining due to mismanagement. Both the US and Europe are far too arrogant to believe they could ever go broke: after all they can just refuse to pay these upstarts their due, squeeze their serfs a little more, clip the coins. No reason to worry.
It isn’t particularly profitable for the Chinese to keep borrowing us money. The Chinese government does it because the US economy is addicted to insane amounts of fresh credit, without which the US economy would collapse. The US is still a quarter of the worlds economy, a downturn of the US would drag the entire world economy down with it. That would be a huge problem for the export-driven Chinese economy. The Chinese government can barely keep itself in power by keeping it’s people employed, they can’t deal with hundreds of millions of angry laid-off workers.
Your analysis is right; the US economy has huge misallocations of resources and cannot continue on its current path for very long. However, the Chinese economy is equally misallocated. They’ve built huge industries around producing goods for foreigners who can’t pay them back. Changing their production processes, so that they are less focused on exporting manufacturing, would involve closing factories, unemployment, and economic uncertainty. Just as US leaders have buried their heads in the sand regarding the US economy; Chinese leaders have done the same and continue to perpetuate their unsustainable economic policies.
So, would it be fair to say that there will be no such thing as any transfer of wealth to any part of the world? Is this essentially a ponzi scheme among central banks in the developed economies of the world to keep propping up one another in order to keep the elites in control, but that inevitably all of these economies will suffer the same fate of collapse? Although in this scenario there will certainly enough pain to go around, it seems to me that the ones who really stand to lose the most are the “too big to fail” corporations, banks, ruling elite, and intellectuals who will correctly serve as the targets of public outrage.
I think you are spot on [except for thinking that strong domestic production is somehow improved by giving stuff away to Americans].
How could everyone be so stupid, then? First of all, we are living 27 years after 1984, so that the media is totally Pravda. In other words, someone has to take the blame for the lowering of our standard of living that is about to happen. Who better than wealthy faraway yellow skinned China? It doesn’t have to make sense, just has to be repeated often enough.
The Chinese would benefit indirectly from the collapse of the dollar, because then the drain on their economy of giving us free stuff would cease. The way a boy friend benefits indirectly when he finds out his high maintenance gf is cheating on him.
They stand to lose the most, but they don’t care about more money, they are already in control of the money supply. It’s about power. It’s fine to lose most of your wealth as long as everybody else loses more. Then you are further on top relatively. A downturn is an opportunity for the ruling elite to consolidate it’s power. People go broke and have to sell their assets, meaning those who have money can get control of assets below value.
The anger of the public is usually deflected in a way that actually helps above mentioned interests. For example, the 2008 recession was spun as the consequence of too gentile financial regulation. Too big to fail corporations and banks really hate more regulation, right? Nope, they wanted that regulation, they are the ones writing it. It allows them to fix the markets in their favor.
Anything they buy would be cheaper, but demand for their exports would go down too. Decreasing demand is always a double-edged sword. The economy isn’t like an auction, there isn’t a fixed amount of products to be distributed. Consumption requires production, and the US produces more than it consumes. If that wasn’t the case, why would the rest of the world trade with us? Think of it this way, would Greece or Brazil benefit if the US was destroyed by a giant meteorite? Sure, they could buy cheaper exports that are now consumed by the US. But they couldn’t export their products to the US any more and they would miss out on anything the US currently produces. Whats more, the entire world economy would shrink, other countries would buy fewer of their exports. Not to mention that a second great depression isn’t going to benefit any country in the short run.
I’m not sure though, how you arrive at the conclusion that we produce more than we consume when we have such a huge ongoing trade deficit.
Nobody would benefit if the US was destroyed by a giant meteorite. But that’s not the same as the dollar going to zero. Look at Germany. Their money went to zero in the twenties, and now they are doing quite well. In fact they are propping up most of Europe. True, other countries could not export to the US anymore, for we would be broke, but there are 1.2 billion hungry Chinese, no longer faced with the burden of giving us their stuff for free, that will eagerly trade with Greece and everyone else.
Sure, the whole world might take a hit, short run. But for us it will be much longer than for them [as it was during the great depression, for those countries that didn’t do the follies that we did].
I am not sure which countries currently live and die by their exports to the US.
We are exporting Dollars in return for products. That’s what we call a trade deficit. Normally inflating a currency would devalue it, but the US was in a special situation after world war two, the Dollar becoming the worlds reserve currency. That means other countries had a demand for the Dollar, so we could just happily keep printing more to buy stuff for it. An ongoing trade deficit is actually the most awesome situation you could be in as a country, you are literally getting a free lunch. But it’s an artificial situation, other countries aren’t getting any value in return. Once they start using their own currencies all those Dollars in circulation go to zero. The problem is that there’s so many Dollars in circulation, it’s not just one countries currency, it’s a world currency.
I think you might be underestimating the effect that a Dollar collapse would have on the world economy. The US is a much greater share of the world economy than Germany was in the twenties, and the US economy is much more interwoven with the rest of the world. Germany defaulting in the twenties didn’t have that much of an effect on other economies, but if the US defaults the entire framework might break down. It’s not just that the volume of exports will decline, it’s the shock that’s going to do the damage.
Also Germany kinda had some rough decades there between the twenties and the fifties. They are doing well now, but that’s 80 years later. And the effects of the depression were hidden by the war.
The Chinese government has different incentives than “the Chinese”, which is just an abstraction. The Chinese governments main concern is staying in power, for that they need to keep their people employed. They have a few million peasants moving to the cities each month, and the only thing that keeps those people from causing civil unrest is jobs. Even the recent recession cost China a few hundred million factory jobs. The Chinese leadership rather buys worthless US bonds to prop up the Dollar than to face a depression and angry dissidents knocking at their door. It’s bad for Chinese factory workers, but they aren’t making the decisions.
Also Mexico would be on the brink of collapse without exports to the US. But it’s not so much just dependency on exports to the US. It’s that the entire world economy will contract. Say Germany can’t sell cars to the US, then they will buy less corn from Brazil, which will buy fewer TV’s from Japan, etc. Everything gets pulled down.