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Something is afoot

by Migeru Wed Jul 28th, 2010 at 07:08:24 AM EST

FT.com: China offers vote of confidence in euro

The comments come a week after China bought several hundred million dollars worth of Spanish bonds, signalling a return by Asian investors to the eurozone's peripheral markets after an absence of two months.

...

While there was a high level of concern in Beijing about the European economy when the euro first started to fall sharply in value, there have been signs in recent weeks that opinion was shifting. Even before Mr Wen's comments yesterday, several policymakers had made more upbeat statements about Europe, while influential economists have made the case for China providing some support for euro assets.

...

According to people familiar with Spain's recent bond issue, China's State Administration of Foreign Exchange, or Safe, which manages the foreign exchange reserves, was allocated up to €400m ($505m) of Spanish 10-year bonds in a debt deal last Tuesday.

Comment and analysis below the fold.

originally posted 19 July

front-paged by afew


China's much-publicised purchase of Spanish bonds means that Wen Jiabao's words about the Eurozone are not just paying lip service to Merkel in her state visit. I suspect this development has much to do with Europe's brilliant China policy as Jérôme cleverly put it 3 months ago:

Europe has quietly and successfully implemented a 20% re-evaluation of the yuan against the euro without a peep from either the markets or the Chinese. This will protect domestic activity against subsidised competition from Asian exports, it will protect workers' jobs and their wages from the ever-downward pressure from Chinese wages and working conditions, and it will protect our energy intensive industries from freely-polluting, carbon-unconstrained factories out there.
The devaluation of the Euro with respect to the Yuan (via the Yuan's dollar peg) has now reached something like 30%, so it has to start biting China's trade policy. This necessitates, at the very least, a shift in the peg from a 100%-minus-epsilon dollar basket to a noticeable weighting of the Euro, and this leads to China buying more Euro debt and less Dollar debt to add to its foreign reserves. This comes on the heels of China Ratings Agency Downgrading US Debt From Moody's, S&P's, and Fitch's AAA Rating (h/t Jesse's Café Américain)
Currency wars. Well at least a Phony War for now. See, nothing has happened. All is well. Move along. Nothing to see here. Status quo intact.

The US sovereign debt gets a stiff downgrade, cut down from number one in the world, to a distant thirteenth place by China's Dagong Credit Rating Agency.

Governments like China do not take actions like this randomly, and their quasi-state organizations do not march to the beat of their own drummer. It will be interesting to watch this develop, and calculate the strategy, to figure out the next steps.

Within the Eurozone, Spain's yields are enticingly high with respect to Germany's, and China is betting on the Eurozone bond market not fragmenting. This may arguably go against a recent observation by Krugman (sorry, can't google it...) that the rising spreads among Euro bonds mean that the Euro bond market is fragmenting and so the Euro can no longer compete with the US dollar as a reserve currency because the German bond market just doesn't have the depth of the US bond market. I think in this case Krugman was making the mistake of equating "international investors" with "US/Western™/private" investors, and forgetting the deep pockets of China and the effect it can have by itself on bond markets.

In fact, just by virtue of China buying peripheral Euro bonds it lowers the periphery's risk of default or (perish the thought) ejection from the Eurozone, so China's own intervention ensures that the Spanish bonds it's buying are underpriced. And, I suppose, encouraged by the unexpected Asian appetite for its bonds, Spain is diving head first, as reported by BusinessWeek: Spain Picks Nomura as Primary Dealer to Boost Asia Debt Sales

The Spanish Treasury added Tokyo- based Nomura Holdings Inc. to the list of primary dealers of the country's government bonds as it seeks to boost debt sales in Asia.

Nomura will be added to the current roster of 21 dealers starting next month, a spokesman for the finance ministry said, confirming a report in the Expansion newspaper.

Now, while Chinese support will relieve the Market (and Marketista) pressure on Spain's government, we all know having someone else buy your bonds so you can buy their products is not healthy or sustainable in the long term. A case in point is the famed savings-glut/debt-binge symbiosis between China and the US. In this regard, BruceMcF wrote the following in the comments to my diary on the Savings Glut Theory some 18 months ago:
If the US is engaged in the borrowing, clearly the role of the Chinese here is in accommodating, not in causing, the long term unsustainable GDP growth model. And that accommodating entails finding a mechanism for providing the external finance so that the US could continue to purchase Chinese exports, even though the US was on a growth path that is unsustainable in the long term.

Now, is this recessionary? Compared to what alternative? The Chinese have simply been in no position over the past two decades to dictate to the United States that i[t] must adopt a sustainable GDP growth path. The only choices that it has had have been to either accommodate the growth path, putting off the day of reckoning, or refusing to accommodate the growth path, bringing forward the day of reckoning.

Given their own position of riding a massive demographic transition from the insanely unsustainable  pro-population-explosion policies of Mao to the population-control policies of Deng, instituted in 1979, the Chinese really had no choice but to accommodate.

The only side with actual freedom of action in the bilateral relationship was the United States, and our political elite ch[o]se to pursue a financially unsustainable GDP growth path.

Clearly Spain is in no position to force the economic hand of China, so China is doing this of its own volition in this case, just like Germany was doing before, though the case of Germany buying peripheral Euro debt is slightly different as BruceMcF again explained in a comment to JakeS' diary on the Savings Glut Theory a month ago:
Evidently, China is in part responsible for the imbalance because of its discounted exchange rate policy, just as the US is in part responsible for the imbalance because of the same discounted exchange rate policy.

After all, China could not discount the ¥RMB/US$ exchange rate on its own without the US electing to tolerate the discount. All the US need do is to discount back, and the originally discounted exchange rate nation will be under proportionally more imported inflationary pressure than the originally overvalued exchange rate nation. Its a game of chicken race to the cliff with the Chinese car starting out closer to the cliff.

Greece and Germany are a different case because they have an exchange rate pegged at €1:€1. Under a fixed exchange rate system, the surplus country has more power to determine policy stance than the deficit country.

So, in this vein, Spain would be well advised to use the temporary respite in Market pressure conceded by China to press ahead with the promised but as yet unrealised transition to a "new economic model" not based on tourism and bricklaying.

Display:
Beware of Chinese bearing gifts...

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Mon Jul 19th, 2010 at 12:17:23 PM EST
but isn't this a prelude to buying up spanish assets with the debt, when repaying becomes difficult, farmland, ports?

thin edge?

"We can all be prosperous but we can't all be rich." Ian Welsh

by melo (melometa4(at)gmail.com) on Mon Jul 19th, 2010 at 12:35:35 PM EST
[ Parent ]
That's why Spain should use this temporary respite from Market irrationality, German pig-headedness and EU neoliberalism to make s serious push to shift to a "new economic model". We can do two things: allow China to fund our transition from fossil-fuel dependence to renewable energy independence, or use their money to buy iPods "designed in California and made in China".

The first path leads to a potentially sustainable economic future with balanced trade, and the second leads to financial ruin maybe with an asset bubble in between.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Migeru (migeru at eurotrib dot com) on Mon Jul 19th, 2010 at 12:39:56 PM EST
[ Parent ]
does Zapatero have enough political support on his government to pull off such a myth-busting move?

"We can all be prosperous but we can't all be rich." Ian Welsh
by melo (melometa4(at)gmail.com) on Mon Jul 19th, 2010 at 04:08:14 PM EST
[ Parent ]
He's been talking about it for over a year, but he lacks the fiscal wherewithal (thanks, Brussels austerity!) and the economic advisors (even if they talk about sustainability and the new economic model they are neoliberals so they expect the market to do it for them). He knows what sounds good but I'm not convinced he knows how to do it.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Mon Jul 19th, 2010 at 04:23:36 PM EST
[ Parent ]
But you were talking about political support and, no, his political capital has evaporated because of the debt crisis. He's also lost the support of the centre-right nationalists for other reasons.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Mon Jul 19th, 2010 at 04:25:52 PM EST
[ Parent ]
How is Germany going to feel about this?

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Mon Jul 19th, 2010 at 12:36:58 PM EST
[ Parent ]
First of all, Merkel is in Beijing as we speak being praised by Wen Jiabao and complaining about market access for German firms.

Second of all, German bondholders would be more than happy to sell their Spanish bond holdings to China.

In this connection, remember the nightmare of a balanced budget

A decision was taken recently in Berlin to introduce a balanced-budget law in the German constitution. It was a hugely important decision. It may not have received due attention outside Germany given the flood of other economic and financial news. From 2016, it will be illegal for the federal government to run a deficit of more than 0.35 per cent of gross domestic product. From 2020, the federal states will not be allowed to run any deficit at all. Unlike Europe's stability and growth pact, which was first circumvented, later softened and then ignored, this unilateral constitutional law will stick. I would expect that for the next 20 or 30 years, deficit reduction will be the first, second and third priority of German economic policy.
Münchau and other economists predict that the German bond market is going to evaporate in a few years' time
What is the rationale for such a decision? It cannot be economic, for there is no rule in economics to suggest that zero is the correct level of debt, which is what a balanced budget would effectively imply in the very long run. The optimal debt-to-GDP ratio might be lower for Germany than for some other countries, but it surely is not zero.
So maybe Germany will be happy that the Chinese will be lending money to the rest of the Eurozone to buy German products.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Mon Jul 19th, 2010 at 12:44:13 PM EST
[ Parent ]
In the US, 49 states with balanced budget amendments does not mean the abolition of state bonds. What it means is capital budgeting, with the budget required to be balanced on current spending and capital service.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Tue Jul 20th, 2010 at 01:59:59 AM EST
[ Parent ]
Which leads to all kinds of creative accounting.  There's also public debt for private purposes -- another fun one.

Asdf is probably familiar with this, as Colorado is one of the more amusing offenders (and if you listen closely, all the way from Ohio you can still hear my former colleague shouting, "How can you report no fucking debt?!?!").

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Tue Jul 20th, 2010 at 04:36:10 AM EST
[ Parent ]
Both the Euro's Stability and Growth (Suicide) Pact and Gordon Brown's onw fiscal "golden rule" have led to creative accounting over the past 10 years... PPP/PFI is the form of "public debt for private purposes" we like here in Europe...

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Tue Jul 20th, 2010 at 05:08:51 AM EST
[ Parent ]
At least for a given value of "we". And of "like".

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Jul 21st, 2010 at 01:57:07 PM EST
[ Parent ]
They'll be happy about it.

It means that the Chinese central bank rather than the German treasury will be bailing out the German banksters.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Jul 19th, 2010 at 12:44:27 PM EST
[ Parent ]
As you have noted China has accommodated the US by accumulating US treasury notes and other US paper. They could not allow this money into their domestic economy without triggering massive inflation and so the sat upon it. At least it protected China from a repeat of the '90s currency debacle or "Asian debt crisis".

Does this development with China buying Spanish bonds mean that China is, in effect, using more of the accumulated US paper to deal with a USD/EUR currency imbalance that threatened their own interests?

You cited some analysis from Jesse's Café Américain in support of your argument. Jesse has also been predicting a re-alignment of international currencies that will come to the fore with the revision of the definition of the Special Drawing Rights regime this fall, which Jesse had noted includes a gold component.

Do you see this entering into the developing GFC story and if so how?

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Jul 19th, 2010 at 05:20:08 PM EST
[ Parent ]
I think the Euro crisis has thwarted China's monetary strategy for this year. In my diary What China wants 4 months ago I surmised
China wants to stop accumulating reserves and possibly unwind the ones they already hold. They might do this by allowing the Yuan to appreciate against other currencies, notably the dollar, but they don't just want that - they want to import high-tech goods from the US which at the moment is restricted by US policy. So, my interpretation of these words is that China intends to use their dollar reserves to pressure the US government to allow what amounts to technology transfer from the US to China. In fact, the way the Washington Post headlines their coverage (China's leader blames U.S. for bilateral tensions, rejects call to adjust currency) indicates that China is not about to give in on US calls to revalue their currency without access to the imports of their choice. The situation right now goes in the opposite direction, with both countries erecting mutual trade barriers.
Unfortunately for China, the Euro has dropped more than anyone was expecting at the start of the year and so China may have decided to prop it up a little. But this is just speculation.

If China decides to start lending to Europe it might get us out of the recession but here they are puching against the EU's policy stance of deficit and debt reduction. I guess instead of owing money to each other Europeans can owe it to China and still remain austere...

The problem with this is that Europe might get too comfortable and fall into the same trap the US fell into over the last couple of decade of unsustainable debt-fuelled economic activity...

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Migeru (migeru at eurotrib dot com) on Mon Jul 19th, 2010 at 05:34:56 PM EST
[ Parent ]
I take that as a yes to my first question. :-)

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Jul 19th, 2010 at 06:17:38 PM EST
[ Parent ]
I'm not sure China is "using their accumulated USD paper to deal with an USD/EUR imbalance". There is no indication here that China is reducing their holdings of US dollars in order to hold Euros instead. For all I know (I admit I haven't researched this) China could also be increasing their USD reserves, just not as much as they would have otherwise.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Mon Jul 19th, 2010 at 06:24:30 PM EST
[ Parent ]
My thought was that China's exports to Europe were threatened by a weak Euro, compared to the dollar, while the Euro was down around $1.25. This might have been, in part, due to the need of European debtors to pay US$ denominated debts. This could have been most effectively remedied had China used some of its US Treasuries to buy Spanish treasuries, etc. This would give China something beneficial, (protecting its European export market) to do with US$ assets that it cannot or does not want to use in the USA. Do you know if they have done anything of the sort.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Jul 19th, 2010 at 07:19:11 PM EST
[ Parent ]
That makes sense, but I don't know how to figure out what is happening.

Who publishes statistics of foreign currency reserve holdings? The Bank of International Settlements? The IMF?

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Migeru (migeru at eurotrib dot com) on Mon Jul 19th, 2010 at 07:24:12 PM EST
[ Parent ]
Guess I was hoping you might have access to that sort of information. I have seen some info from BIS, but it is usually for the previous quarter and I have never seen purchases broken out by currency used to settle the transaction.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Jul 19th, 2010 at 09:01:22 PM EST
[ Parent ]
Currency Composition of Official Foreign Exchange Reserves (COFER)
COFER is an IMF database that keeps end-of-period quarterly data on the currency composition of official foreign exchange reserves.

...

COFER data are reported on a voluntary basis. At present, there are 140 reporters, consisting of member countries of the IMF, non-member countries/economies, and other foreign exchange reserves holding entities. The classification of countries in COFER (as advanced economies or emerging and developing economies) follows that currently used in IFS world tables.

...

COFER data for individual countries are strictly confidential. The data presented in the attached tables are aggregated data for each currency for three groupings of countries



By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Tue Jul 20th, 2010 at 06:10:47 AM EST
[ Parent ]
So maybe we will have an idea in three months or so.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Jul 20th, 2010 at 09:57:22 AM EST
[ Parent ]
If you assume that any bump in the composition of reserves for the aggregate entities (is China "developing" or "emerging"?) mostly comes from China's holdings.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Tue Jul 20th, 2010 at 11:07:26 AM EST
[ Parent ]
I recall discussion of a "dollar squeeze" in the forex markets a month or so ago. I also recall the Fed renewing currency swaps in the same time frame. It may be that the amount of the currency swap was calibrated to prevent a currency meltdown, but not to prevent the euro from going to $1.22 or so. But if that was part of a dollar squeeze, (by US banks?), the Chinese might have just administered a lesson. You cannot run a dollar squeeze if the world's largest holder of US$ reserves doesn't allow you.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Jul 20th, 2010 at 01:37:58 AM EST
[ Parent ]
Migeru:
But this is just speculation.

yours or china's?

"We can all be prosperous but we can't all be rich." Ian Welsh

by melo (melometa4(at)gmail.com) on Mon Jul 19th, 2010 at 06:38:03 PM EST
[ Parent ]
Mine :P

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Mon Jul 19th, 2010 at 06:51:44 PM EST
[ Parent ]
If China decides to start lending to Europe it might get us out of the recession

Only if a substantial minority of EU countries rejected austerity.

Von überall könnte das Volk, Urbrut alles Undemokratischen, Zelle des Terrors, über die gewählten Hüter von Wachstum und Wohlstand® kommen. - flatter

by generic on Mon Jul 19th, 2010 at 06:53:11 PM EST
[ Parent ]
Actually, no.

Suppose all debt that EU countries would otherwise buy from each other is instead bought by China. This frees up a substantial fraction of GDP to invest within the EU (or to spend buying iPods).

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Migeru (migeru at eurotrib dot com) on Mon Jul 19th, 2010 at 06:56:42 PM EST
[ Parent ]
But that assumes there's something happening to invest in, and that the debt payments are converted into credit and/or disposable income.
by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Jul 19th, 2010 at 07:02:50 PM EST
[ Parent ]
mmm, what it assumes is either
  1. ECB "prints" fiat to pay Chinese BONDHOLDERS;
  2. or EP taxes the living BEJEEBUS out of earned income to pay Chinese BONDHOLDERS

or not: Work the WTO room to extort trade "balance"

Diversity is the key to economic and political evolution.
by Cat on Mon Jul 19th, 2010 at 07:16:09 PM EST
[ Parent ]
I did say one possibility was to use all that Chinese money to buy iPods (designed in California, built in China). That would be bad.

We could also make a determined push to change our economic model. That requires the political will to direct the economy in a particular direction, and to invest.

But, in any case, we would be allowing China to do our deleveraging for us.

In other words, borrowing from china what we'd otherwise borrow form each other (even if that borrowing is just rolling over of past debt) is a net positive. But we can use this for our long-term benefit or just piss it away and have another crisis a few years down the line.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Migeru (migeru at eurotrib dot com) on Mon Jul 19th, 2010 at 07:21:46 PM EST
[ Parent ]
Suppose all debt that EU countries would otherwise buy from each other is instead bought by China. This frees up a substantial fraction of GDP to invest within the EU (or to spend buying iPods).

I'm not so sure. Let's go over the mechanics.

First, the Chinese central bank converts European legal tender into Chinese legal tender through open market operations. Then, having obtained credit for an amount of European legal tender, it can convert some European sovereign bonds into European legal tender. The net effect of this process is to convert European sovereign bonds into Chinese legal tender.

This process makes the cost of liquidity - that is, the risk-free interest rate - go down in both Europe (because the price of bonds goes up, which decreases the effective compensation paid to providers of liquidity for their service) and China (because there is more liquidity available). But on the other hand, it creates a fiscal contraction in Europe, by lowering the overall monetary mass (since the Chinese legal tender will swiftly find its way back to China).

The main consequence of decreasing the price of liquidity is that it allows a going concern to convert its highly illiquid equity into highly liquid legal tender, though the magic of fractional reserve banking. Now, if you have a business environment in which equities are great or growing, the reduction in the cost of liquidity will prompt a great conversion of illiquid equity into liquid legal tender, thus increasing the average circulation velocity of the money supply greatly. This increase in average circulation velocity can then greatly outweigh the reduction in monetary mass. If, on the other hand, you have a depressed business environment where equities are small or decreasing, very little such conversion can take place - and the reduction of total monetary mass will dominate over the increase in velocity.

So the beneficial effect for Europe is not that these Chinese debt purchases stimulate our economy. It is actually contractionary under the current business environment. The benefit is that they are importing our inflation, which gives us more room for expansionary fiscal policy. However, this underwriting of the option for expansionary fiscal policy comes at the cost of impairing our foreign trade balance. So the fiscal expansion must be of a sort that comes with a reasonable story about how it will mitigate and reverse the de-industrialisation that goes with a trade deficit.

Which means that we have three basic options:

  1. Do nothing, or engage in further austerity. In that case, the contractionary and deflationary effects of the Chinese operation will further deepen our recession.

  2. Engage in expansionary fiscal policy in order to underwrite consumption (this includes bailing out banksters). This will help to get us out of the recession (faster if we underwrite the consumption of the poor and the middle class than if we underwrite the bad bets of the banksters, due to the greater multiplier effect from the former than the latter). But in the medium term, it will simply substitute the harsh de-industrialisation of a serious business depression with the softer, but no less effective, de-industrialisation through structural trade deficits.

  3. Engage in expansionary fiscal policy in order to underwrite investments in industrial capacity that will (preferably more than) offset the destruction of industrial capacity caused by the trade imbalance.

Only if we pick the third option will this be of any durable benefit to us.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Jul 19th, 2010 at 08:48:28 PM EST
[ Parent ]
I'm mostly with you, but I'm still wondering what a reduction in monetary mass would mean in practice.

Von überall könnte das Volk, Urbrut alles Undemokratischen, Zelle des Terrors, über die gewählten Hüter von Wachstum und Wohlstand® kommen. - flatter
by generic on Tue Jul 20th, 2010 at 09:48:29 AM EST
[ Parent ]
It means that people have less money to buy stuff with.

If the people who sold those bonds would otherwise have liquidated them and bought stuff for them, then it reduces domestic demand, by taking the liquid cash out of the economy (because the cash in question is Chinese and can therefore only be spent in China).

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Jul 20th, 2010 at 10:09:04 AM EST
[ Parent ]
Shouldn't the cash be recycled Euros?

Von überall könnte das Volk, Urbrut alles Undemokratischen, Zelle des Terrors, über die gewählten Hüter von Wachstum und Wohlstand® kommen. - flatter
by generic on Tue Jul 20th, 2010 at 10:57:59 AM EST
[ Parent ]
They could be.

But the alternative to recycling those euros is not to keep them in mattresses in China - it is to allow the people who earned them to buy European stuff with them (or, which comes to the same thing, to sell them for Chinese currency that some European merchant got from selling stuff to China).

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Jul 20th, 2010 at 11:00:49 AM EST
[ Parent ]
What matters here is the trade balance of the EU with China. A persistent deficit results in either EU bonds or Euro cash sitting in the vaults of the Bank of China and effectively out of circulation, depressing the monetary mass.

Being against the zero lower bound on interest rates means it makes no difference whether Chinal holds Euros or bonds. However, the widening spreads among Eurozone bond issuers mean that it now makes sense for China to hold (say) Spanish bonds rather than Euro cash. This partly offsets the liquidity drain from any EU trade deficit with China, as China releases Euro cash into circulation and holds illiquid bonds.

But if the fiscal policy is tight and you have a trade deficit the overall effect is still one of monetary drain.

However, China's trade balance with the US dwarfs the trade balance with the EU, so most of the action should be there,

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Migeru (migeru at eurotrib dot com) on Tue Jul 20th, 2010 at 11:05:14 AM EST
[ Parent ]
China lends more to Europe, which lends more to the US - the difference being that EU investment in hard assets in the US is less controversial than China's, so instead of lending to the US to buy Treasuries, we could be lending to buy actual assets.

Wind power
by Jerome a Paris (etg@eurotrib.com) on Mon Jul 19th, 2010 at 08:57:33 PM EST
[ Parent ]
Any sense of how this Chinese entry into the European sovereign bond market will play into the negotiations for a re-balance of the composition of the IMF's SDRs? I would think it would improve China's position in the negotiations.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Jul 20th, 2010 at 12:45:19 PM EST
[ Parent ]
Distinguish between the stocks and the flows. If China wished to generate a collapse of the US$, they would sell US reserve assets to finance the purchase of Euro assets. Nothing in the diary suggests they are doing that.

If China wishes to re-weight their basket peg toward the Euro, the result would be more purchases of Euro assets and fewer purchases of US$ assets. The information in the diary suggests that.

If they wish to re-weight their basket peg toward the Euro, of course they would take the opportunity to buy risk-inflated returns even as their action reduces the objective risk. That improves their return, but more importantly reduces the risk of holding Euro assets in general. If a policy shift is large enough that it cannot be hidden, then be sure that there is a benefit to the actions that are visible.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue Jul 20th, 2010 at 02:07:04 AM EST
[ Parent ]
Timeo Sinensis et dollars ferentes...

"Ce qui vient au monde pour ne rien troubler ne mérite ni égards ni patience." René Char
by Melanchthon on Tue Jul 20th, 2010 at 08:51:08 AM EST
[ Parent ]
Is it a coincidence that the US rating agencies have now thrown a little country up against the wall downgraded Ireland's rating?
by Metatone (metatone [a|t] gmail (dot) com) on Mon Jul 19th, 2010 at 03:18:18 PM EST
I'd say it is, yes.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Mon Jul 19th, 2010 at 04:26:22 PM EST
[ Parent ]
I think that has a bit more to do with the little country sawing its limbs off with austerity measures than the US.

Just a thought.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Mon Jul 19th, 2010 at 06:21:58 PM EST
[ Parent ]
...the little country sawing its limbs off with austerity measures...

And without benefit of anesthetics!

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Jul 19th, 2010 at 07:22:15 PM EST
[ Parent ]
...adding: austerity measures which US economists and the US government have been warning would backfire on them, while the great and glorious leaders of Europe have pushed for more.

But, yeah, it's all US bullying....

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Mon Jul 19th, 2010 at 06:32:35 PM EST
[ Parent ]
There's a difference between being anti- US and anti-rating agencies.

Just a thought.

adding... the ratings agencies over the last month have made a bunch of pronouncements both pro and anti austerity. Anyone who would pretend they are consistent, competent or impartial - or worse, as you do, that their ratings are beyond question rational on the subject of austerity - surely has some thinking to do.

If one follows the pattern of the previous crisis, one might see a connection between the agencies and recent bets by large clients on Wall St against PIIGS bonds. The unexpected Chinese actions might be expected to prompt a response... or it could be a co-incidence. But the relationship between investors and ratings agencies are based in the US only by historical accident. I referred to US ratings agencies in contrast to the Chinese one or others that may be trying to get in on the ratings game.

by Metatone (metatone [a|t] gmail (dot) com) on Tue Jul 20th, 2010 at 04:50:13 PM EST
[ Parent ]
Metatone:
one might see a connection between the agencies and recent bets by large clients on Wall St against PIIGS bonds.

Goodness! Do you think these events might in some way be related?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Jul 20th, 2010 at 05:36:15 PM EST
[ Parent ]
There's a difference between being anti- US and anti-rating agencies.

Yes, that would certainly explain the comment being directed at the US rather than ratings agencies.

Anyone who would pretend they are consistent, competent or impartial - or worse, as you do, that their ratings are beyond question rational on the subject of austerity - surely has some thinking to do.

Perhaps you could note where I said they were beyond question instead of throwing up that bitchy little straw man.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Tue Jul 20th, 2010 at 07:09:13 PM EST
[ Parent ]
So I think what your basically saying, sans all of the commentary on Spain, is that China is trading USD for Euro, and that this appears to be a decisive, long-term policy shift. By putting a floor under the Euro (and also pushing it upwards modestly) and a ceiling over the Dollar (and letting it fall modestly), China is narrowing the range that they trade in, and definitively ending any concern about bond traders exiting the Euro, or the dollar jumping out of its liquidity trap so quickly that interest rates rise prematurely. This nixes the primary political drama in both the EU and the USA; the effect of which would be relative stability in the financial markets, as well as in international trade.

On the international trade front, it goes something like this:
Euro increase, EU imports from China increase, EU exports to China decrease

Euro increase, EU imports from USA increase slightly, EU exports to USA decrease slightly

USD decrease, USA imports from China decrease, USA exports to China increase

So China is moving-by very measured degrees-small amounts of purchasing power from the US to the EU, without changing any of the domestic policies involved in moving its own currency.

This works for the EU because it safeguards the political and economic infrastructure of the Euro-zone.

This works for the USA because it modestly revives its flailing exports, while safeguarding the USD.

And this is desirable to China because now they can equalize some demand between their two main customers, and more importantly ensure an environment of global socio-economic stability.

That doesn't mean the recession is over by any means, it just means that the Chinese have negated the possibility of another massive financial crises, and given the world's policy makers a framework to operate within as they decide how to repair their own regional economies.

Thoughts?

by glacierpeaks (glacierpeaks@comcast.net) on Mon Jul 19th, 2010 at 07:41:37 PM EST
Not trading US$ for Euro, but rather increasing the share of Euros in foreign exchange exchange purchases and reducing the share of US$ in foreign exchange purchases.

Before and after, the official reserve transactions are creating ¥RMB to buy FX reserves, but the mix of FX reserves bought has been shifted.

The volumes are still smaller than in the middle of the Noughties, since the trade surplus is smaller, so a notional equilibrium exchange rate is closer to the pegged rate, so less intervention is required to maintain the peg ... the discount is not as steep as it was in the middle of the noughties.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue Jul 20th, 2010 at 02:19:14 AM EST
[ Parent ]
This nixes the primary political drama in both the EU and the USA; the effect of which would be relative stability in the financial markets, as well as in international trade.

Furthermore, it strengthens the case for more stimulus as bond vigilantes will be countered by China. I hope they are listening in Washington, London and Berlin...

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Wed Jul 21st, 2010 at 02:39:17 PM EST
[ Parent ]
glacierpeaks:
EU exports to China decrease

One would think so, but I am not sure. I am under the impression that a lot of EU exports to China either is precision-machinery or luxury items, neither of which is very price sensitive. In fact luxury items can sell better if the price goes up, as it then becomes more, eh, luxurious.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Tue Jul 27th, 2010 at 07:15:12 PM EST
[ Parent ]
But Europe remains a significant producer of intermediate goods for domestic industry, and some of that will go to China if they begin targeting the € for mercantilist ForEx policy (unless Europe starts doing the whole "industrial policy" thing - but given the attitudes of the nitwits in charge Serious People, that's about as likely as finding a single molecule of active ingredient in a homeopathic nostrum).

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Jul 27th, 2010 at 07:39:20 PM EST
[ Parent ]
Just an impression from a non-economist: the world has become China-centric. It just goes to show how cheap labor, just as slavery did in the past, can become THE dominant commodity, what everyone wants to get in on.

by shergald on Mon Jul 19th, 2010 at 08:15:33 PM EST
When the world was China-centric before, in the "Axial  Economy" circa 1,000 AD, the driving force for the relative cheapness of Chinese labor for export production was the productivity of Chinese agriculture.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Tue Jul 20th, 2010 at 02:21:50 AM EST
[ Parent ]
China is the world's exporter of last resort.

At the end of WWII the US was the exporter of last resort, being the only industrialised nation unscathed by war at home and having 50% of world GDP by some estimates. This allowed the US to dictate terms at Bretton Woods which was not a good thing in the long term.

Bretton Woods system - Wikipedia, the free encyclopedia

In case of balance of payments imbalances, Keynes recommended that both debtors and creditors should change their policies. As outlined by Keynes, countries with payment surpluses should increase their imports from the deficit countries and thereby create a foreign trade equilibrium. Thus, Keynes was sensitive to the problem that placing too much of the burden on the deficit country would be deflationary.

But the United States, as a likely creditor nation, and eager to take on the role of the world's economic powerhouse, balked at Keynes' plan and did not pay serious attention to it. The U.S. contingent was too concerned about inflationary pressures in the postwar economy, and White saw an imbalance as a problem only of the deficit country.

We're rehadshing the same old debates...

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Tue Jul 20th, 2010 at 04:01:39 AM EST
[ Parent ]
The big - and increasingly important - difference between then and now is the role of energy.

The US was self-sufficient - indeed surplus - in energy, and was exporting energy both directly, and indirectly, as embedded energy in exports.

China is now - like the US - a major net importer of energy, and are both energy debtor nations. That's why I find the whole G7/G20 agenda pretty fatuous. How many barrels has the G7?

I think that any Bretton Woods 2 - now overdue - must necessarily involve a new energy settlement of which a major component woill be a non-toxic networked market architecture. Indeed, I consider that an 'Energy Standard' for world trade is now necessary, within an 'International Clearing Union' framework agreement. In such a networked and decentralised model - unlike Keynes' centralised Bancor proposal - there would be no central issuer.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue Jul 20th, 2010 at 06:34:00 AM EST
[ Parent ]
ChrisCook:

The US was self-sufficient - indeed surplus - in energy, and was exporting energy both directly, and indirectly, as embedded energy in exports.

China is now - like the US - a major net importer of energy, and are both energy debtor nations. That's why I find the whole G7/G20 agenda pretty fatuous. How many barrels has the G7?

In addition, China is a low-income food-deficit country.
The classification of a country as low-income food-deficit used for analytical purposes by FAO is traditionally determined by three criteria. First, a country should have a per capita income below the "historical" ceiling used by the World Bank to determine eligibility for IDA assistance and for 20-year IBRD terms, applied to countries included in World Bank's categories I and II. The historical ceiling of per capita gross national income (GNI) for 2006, based on the World Bank's Atlas method, is US$ 1,735, which is higher than the level established for 2005 (US$ 1,675). The second criterion is based on the net (i.e. gross imports less gross exports) food trade position of a country averaged over the preceding three years for which statistics are available, in this case from 2003 to 2005. Trade volumes for a broad basket of basic foodstuffs (cereals, roots and tubers, pulses, oilseeds and oils other than tree crop oils, meat and dairy products) are converted and aggregated by the calorie content of individual commodities. Thirdly, the self-exclusion criterion is applied when countries that meet the above two criteria specifically request FAO to be excluded from the LIFDC category.


By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Tue Jul 20th, 2010 at 06:37:18 AM EST
[ Parent ]
China is now - like the US - a major net importer of energy

Including the energy re-exported embedded in products?

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Jul 20th, 2010 at 06:46:55 AM EST
[ Parent ]
That's a good point.

Energy accounting between states would be interesting. In fact, the result of using an 'energy standard' for exchanges would actually BE energy accounting.

I was doodling further recently re Iceland and aluminium in this connection.

Iceland could make a production/revenue-sharing deal with (say) Jamaica or any other producer in respect of bauxite, so that Jamaica are entitled to an 'equity share' x% of Iceland's refined aluminium production. Essentially a macro tolling agreement.

The outcome is that Iceland export their energy in the form of refined aluminium.

Alcoa etc could be sacked and told to re-apply as an operating member for which they would also receive an equity share. The advantage for Alcoa is that their capital requirement as a service provider - rather than transaction intermediary - shrinks dramatically.

Finally, the end-users - eg China and Japan - would be invited to invest in units redeemable in payment for aluminium, and the proceeds of this loan denominated in aluminium/ (embedded energy) would be used to repay all existing debt, getting rid of compound interest.

I suspect they would find unitised Aluminium a much more attractive proposition than $ denominated T bills at 0.1%.

As for Iceland, it gets the debt monkey of their shoulder, and means they get a better overall 'win/win' outcome, while Jamaica benefit from the refining uplift.

Rentiers lose.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue Jul 20th, 2010 at 07:12:24 AM EST
[ Parent ]
bravo! bravo!

tango?

Diversity is the key to economic and political evolution.

by Cat on Tue Jul 20th, 2010 at 10:06:32 AM EST
[ Parent ]
Spain, Ireland, Greece Sell Debt as `Funding Pressure' Eases - Bloomberg (20 July 2010)

Spain, Ireland and Greece sold almost 10 billion euros ($13 billion) of debt, with demand rising for shorter-dated securities, on optimism the European Union's aid programs will contain the region's fiscal crisis.

Hungary raised less than planned at a sale of three-month bills, triggering a decline in the forint. Greece, which prompted an EU-led bailout package in May to avoid default, auctioned 13-week bills, with investors bidding for 3.85 times the amount on offer, compared with a bid-to-cover ratio of 3.64 times at a sale of 26-week securities a week ago. Spain and Ireland also sold debt.

...

Concern that Europe's high-deficit countries wouldn't be able to meet their financing needs pushed yield premiums to euro-era records and led the EU to design a 110 billion-euro bailout for Greece and a broader 750 billion-euro backstop for the region. The debt crisis prompted governments across Europe to impose additional austerity measures to convince investors they were serious about taming their deficits.



By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Tue Jul 20th, 2010 at 06:59:03 AM EST
We should add the strong wages increase trend going on in China. Combined with the appreciation of the yuan against the euro, it reduces dramatically the labour costs differential.

Two examples: Foxconn, Honda Increase Factory Wages in China | 2point6billion.com - Foreign Direct Investment in Asia

Foxconn, the Taiwanese-owned IT giant responsible for making Apple, Dell, Intel, Microsoft, and Motorola products among others, announced today that starting Oct. 1, it would increase wages for assembly-line workers in Shenzhen by nearly 70 percent, up to RMB2,000 (US$293) [~228 €] per month.
...
Japan-based Honda Motors settled a labor dispute on Friday that shut down a significant portion of the automobile manufacturer's production over the last two weeks by agreeing to a wage increase of 24 percent. That would put the starting monthly wage of a new employee at RMB1,910(US$281) [~218.5 €].
(conversion in Euros is mine)

That puts these factories' employees wages way above Bulgaria and Romania minimum wages, at more or less the same level as Lithuania and not very far below Latvia, Hungary, Estonia and Poland... (Observatoire des inégalités - In 9 European countries, the minimum wage is under 300 € per month ).

"Ce qui vient au monde pour ne rien troubler ne mérite ni égards ni patience." René Char

by Melanchthon on Tue Jul 20th, 2010 at 09:54:51 AM EST
But those wages are still about 1/4 of US, German or French wages, and that is only for a few very high end manufacturers in China.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Jul 20th, 2010 at 12:11:46 PM EST
[ Parent ]
and ones from countries that china enjoys showing who's boss, in markets where there are chinese competitors. if it spreads to chinese-owned factories, the implications will be far greater.
by wu ming on Tue Jul 20th, 2010 at 12:23:04 PM EST
[ Parent ]
wu ming:
if it spreads to chinese-owned factories, the implications will be far greater.

It might be te case:

Foxconn, Honda Increase Factory Wages in China | 2point6billion.com - Foreign Direct Investment in Asia

These wage raises come in addition to minimum wage increases being implemented by provincial level governments across China this year ranging from 5 percent in Hunan Province to 27 percent in Ningxia Province. Analysts with Morgan Stanley put the average minimum wage increase in China this year at 17 percent based on the 11 provinces that have enacted such measures. "It is widely expected that many other provinces will soon follow suit," they said.

This may be the beginning of the end for China's infamous army of cheap labor.



"Ce qui vient au monde pour ne rien troubler ne mérite ni égards ni patience." René Char
by Melanchthon on Tue Jul 20th, 2010 at 12:35:37 PM EST
[ Parent ]
Yes, I recall China has recently made investments in eastern European debt.

I would expect that the significant increase in wages by Foxcon, etc. would exert some significant upward pressure on wages in the Pearl River manufacturing area, at least over the next year or two. That could be mitigated were China be unable to control internal migration from poorer areas, but I suspect that effect would be limited by the education and training required by high wage Pearl River facilities.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Jul 20th, 2010 at 12:40:27 PM EST
[ Parent ]
ARGeezer:
that is only for a few very high end manufacturers in China.

Yes, but that's the ones that are in competition with central European countries' manufacturing plants.

"Ce qui vient au monde pour ne rien troubler ne mérite ni égards ni patience." René Char

by Melanchthon on Tue Jul 20th, 2010 at 12:37:36 PM EST
[ Parent ]
True enough.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Jul 20th, 2010 at 01:01:36 PM EST
[ Parent ]
Two general points:

  1. China is now using more energy than the US.

  2. The fact that we're having a plausible discussion about China lending money to the US and/or EU suggests that unofficially, the Yuan is now the world's reserve currency and that China is the lender or last resort.

So there's an interesting situation where the current hegemon's economy is imploding and the new player may be in a position to bail them out - if they choose to. At a price.

Traditionally, doesn't this usually result in a war to rebalance power more formally?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Jul 20th, 2010 at 05:42:16 PM EST
Traditionally, the great powers have believed in the mirage of a short, victorious war.

Even the Americans don't believe that anymore, except when they're fighting impoverished third-world backwaters that don't have an honest chance of fighting back...

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Jul 20th, 2010 at 06:01:52 PM EST
[ Parent ]
  1. is true enough and indeed the more important point, in my view
  2. is not true for Europe, and is only true for the US because China chose to keep its currency undervalued to protect its export competitiveness (something which largely benefits transnational corporations which are doing most of the exporting)


Wind power
by Jerome a Paris (etg@eurotrib.com) on Tue Jul 20th, 2010 at 07:08:07 PM EST
[ Parent ]
Not really. A weakening empire is not the same as a fallen empire.  Your logic only makes sense if you live in a world where everyone plays by the rules.  It doesn't make sense when you ask the question, "Who makes the rules?"  In this world, the US still does and although China is increasingly able to contest that authority, it simply can't escape from the US-dominated world in which it must still trade if it wants to grow economically.

By historical contrast, the US (and Japan t a lesser extent) grew and was able to contest space with European colonial powers through protected, domestically-oriented industrialization, not through exports and trade as China is doing.  The US didn't need Europe to grow economically, so it could overtake Europe without endangering its own growth.  China can't do the same because it lacks the mineral and agricultural resources it needs domestically.  Lacking a global military which can secure resources by preventing others access to them, China must trade to get them.  So it must abide by largely American-made rules and norms if it wants to continue its wave of prosperity.

Think of it in this extreme this way to see who's still in charge and likely will be for the forseeable future:  What if hostilities were to break out between the the West and China?  This could easily occur over something like Taiwan, for instance, if China simply decided it wouldn't work within American-made rules regarding Taiwan anymore and decided to contest them military.

Could the US directly defeat China in an all-out conventional war?  Probably not, especially if you consider Chinese victories over US forces in Korea the last time they met.

But could China continue its economic prosperity while in a military contest with the US?  No. The US Navy is bigger than the rest of the world's navies combined, most of which are close US allies.  China would find itself unable function as a mercantile power because it would lose its markets for exports as well as lose the foreign mineral and food resources it now depends on for its newly wealthy urban population and industry. The US Navy would simply prevent Chinese access to its foreign assets while hostilities continued and no one could do anything about it. Furthermore, the US, EU, and the rest of the world would suffer only marginal, if any, economic loss as they find that there are lots of inexpensive substitutes, domestic as well as foreign, for Chinese labor.

That's the kind of power that a global Pentagon buys you in today's world.  It compels China to act within the rules whether it wants to or not, and my reading of China's support for the Euro is that they don't have a choice, which means they are as powerless as ever.
 

by santiago on Tue Jul 20th, 2010 at 07:33:32 PM EST
[ Parent ]
Furthermore, the US, EU, and the rest of the world would suffer only marginal, if any, economic loss as they find that there are lots of inexpensive substitutes, domestic as well as foreign, for Chinese labor.

Except not, because the US does not have any capital plant left that's worth shit, outside the armaments industry. And most of the countries that the American capital plant has been relocated to (other than China) are in Korea, which will be a Chinese client about ten seconds after the commencement of hostilities, and Indochina, which is a region where China can stir up a whole lot of trouble even under an all-out naval blockade.

Oh, the US can build capital plant. But that will take them at least ten years, which is an eternity when a fifth of the (net) internationally traded steel and well over a third of the total global steel production just got taken off the market, and you're a net importer of both steel and finished products containing it.

That is not to say that the US couldn't make China lose more than China could make the US lose. But the US would lose.

But then again, why should China stop playing by the Americans' rules? They're beating the Americans at their own game, after all...

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Jul 20th, 2010 at 08:51:18 PM EST
[ Parent ]
Except not, because the US does not have any capital plant left that's worth shit, outside the armaments industry. And most of the countries that the American capital plant has been relocated to (other than China) are in Korea, which will be a Chinese client about ten seconds after the commencement of hostilities, and Indochina, which is a region where China can stir up a whole lot of trouble even under an all-out naval blockade.

The US  doesn't need its own capital plant to survive a conflict with anyone because it has a military capable of securing all of the resources it needs from anyone else. While China's borders are just China's borders, as far as political control over resources goes, America is effectively borderless due to its unique, global military reach. Unless a country today opts out of American empire by opting out of trade, America's military really does make all other countries mere constituencies of an American polity.

While China and other countries may be only able to politically secure economic resources within its nation-state borders, the global network of bases, ships, and aircraft that the US has allow it to secure anything it needs from anywhere just by buying it and shipping it.  No one else has that capacity, and until they do, the world pretty much has to follow the leader.

Korea won't go with China, because China can't protect its trade-based economy like the US Navy can, and without US and EU markets, Korea faces famine and devastation.  Korea therefore, like China, also has no choice of allies.  Beating America at its own game really is the best strategy out of a very limited set of options available to would-be imperialist competitors to American power today.

by santiago on Tue Jul 20th, 2010 at 09:23:07 PM EST
[ Parent ]
Were the USA to undergo a financial collapse from which the current measures cannot save it, much of its military reach would be curtailed. Most fallen empires declined economically, at least on a relative basis, before they fell militarily.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Jul 20th, 2010 at 09:55:01 PM EST
[ Parent ]
This is true, but that's something that can take a thousand years to happen, as it has with multinational political systems or empires in the past, including the Chinese themselves. Financial collapse is not the same thing as economic collapse, though.  After all, it's just money we're talking about in a financial collapse, a mere contrivance for getting people to organize real resources among themselves. A financial system collapse is just a  collapse in one set of rules for doing things, and that can have real and severe consequences, but it can be repaired a lot easier than, say, an ecological disaster like we might face from unchecked global warming, for instance.
by santiago on Tue Jul 20th, 2010 at 10:36:28 PM EST
[ Parent ]
an ecological disaster like we might face from unchecked global warming, for instance.

Or a worst cast outcome from Macondo Prospect, such as a tsunami triggered by a giant methane burp followed by  subsidence, driving H2S, SO and methane before it at the speed of sound towards the coast, followed by a wall of water and accompanied by a series of explosions when ever an appropriate mix of methane and oxygen is achieved.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Jul 21st, 2010 at 12:04:02 AM EST
[ Parent ]
Financial collapse is not the same thing as economic collapse, though.

The thing is that the American economic collapse has already happened and should be treated in the past tense.

What's keeping the American empire going is its mental capture of the European elites and its control of the financial system. For a country whose only significant civilian economic activity is finance, financial collapse is a generalised economic collapse.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jul 21st, 2010 at 03:36:51 AM EST
[ Parent ]
that's something that can take a thousand years to happen,

Or that can happen in well less than a century, as with the U.K. and its Empire - 1914 to 1948 or 1956. The US empire may date from 1898 to 1971 or 2001 or ???? More generously, perhaps from 1803 to ????

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Jul 21st, 2010 at 09:49:28 PM EST
[ Parent ]
The US  doesn't need its own capital plant to survive a conflict with anyone because it has a military capable of securing all of the resources it needs from anyone else.

  1. Not to put too fine a point upon it, but the only wars the US has won since Hiroshima are Grenada, the first iteration of Iraq and Panama...

  2. There is a world of difference between denying a capital plant to someone else and actually capturing it in a usable condition. As far as I'm aware, the latter hasn't been done since the War.

  3. It takes five to ten years to train the specialists that staff the capital plant. Beating other people's specialists over the head and stealing theirs doesn't do you any good if you have no domestic cadres of skilled workers to employ it.

If your point is that the US controls the high seas, then that's true as far as it goes, but it only goes as far as the rail net does not. A year or two of concerted effort by Russia and China and China will be shipping Ukrainian grain across Siberia by land. Expensive? Yes. Impossible? No. Particularly not if they have nothing else productive to do with their steel, on account of a trade embargo.

Korea won't go with China, because China can't protect its trade-based economy like the US Navy can,

It's not about "going with China," it's about not being able to prevent China from going in there and taking it over. In a working or not so working condition...

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Jul 20th, 2010 at 10:20:31 PM EST
[ Parent ]
Remember, empires don't need to win wars, just to survive them, for military strategies to be successful.  And you don't need to defeat China to prevent China's access to resources. You just have to be able to dissuade the world's ship owners, even Chinese ones, from doing business with China, which an aircraft carrier battle group is really good at.

You're right about Russia and Korea, but it's still the same catch-22 situation.  If China invades Korea, but has no access to the resources it needs, then famine occurs in Korea as well as China, so Korea will always stick with America, and Chinese contesting power with America is off the table.  So if China were to get cozy enough with Russia to be able to secure resources without a need for ocean transport (just as the US was able to do (and Napoleon was not) without worrying about England in the 19th century) then, yes, you have a scenario for the end of the empire.  

Hence, US geopolitical strategy should be, and likely is, to keep that kind of relationship from ever occurring. That's where policy matters and mistakes can be made.  Empires aren't deterministic organisms. People have to actually be smart enough to keep them working.  My point is that really the only way American power can fall in our lifetimes is if American political leadership screws up.  Without American mistakes, China can't overtake her, so it's America's game to lose, not China's game to win.

There is no inevitability in China's rise here, and that was even the thesis of Giovanni Arrighi in his otherwise anti-American tome about China's rise. China still has to solve the currently insurmountable problem of how to retain access to global resources without the military capability to do so.  Without an American (or climatic, perhaps) calamity, China isn't likely to ever get the capacity to be independent of American power, even if it becomes a more powerful constituency for American political leadership to deal with. At the rate China is rising, however, it should be able to overtake Israel within the next decade or two, I think. /snark

by santiago on Tue Jul 20th, 2010 at 11:50:19 PM EST
[ Parent ]
The US financial elite, along with that of the UK, is following its own dynamic, which is not likely to allow it to take the niceties of geopolitics into account unless it allows them to continue to earn 15%+ returns. The fact that they dominate the governments in their respective countries greatly increases the chance of social catastrophe. Until or unless these elites are sufficiently housebroken to work within a framework with needs other than their own this will remain the case.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Jul 21st, 2010 at 01:42:46 AM EST
[ Parent ]
What if the world's financial elite decides to move itself to Singapore?

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Wed Jul 21st, 2010 at 02:36:28 AM EST
[ Parent ]
Then the rest of the world embargoes Singapore until they die.

And everybody else lives happily ever after.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jul 21st, 2010 at 04:21:41 AM EST
[ Parent ]
And you don't need to defeat China to prevent China's access to resources. You just have to be able to dissuade the world's ship owners, even Chinese ones, from doing business with China, which an aircraft carrier battle group is really good at.

Only if you are prepared to interdict all shipping in the Sea of Japan. That will hit Korea and Russia as well. Now, Korea you can live without, but unless Russia actively collaborates in your embargo - and they have no particular incentive to do so - China can run their commerce under Russian cargo manifests and in Russian bottoms (the Vladivostok Global Shipping Company and the East Siberian Industrial District Consolidated Import/Export Company would suddenly become the most productive enterprises in the world...). So you'd have to be prepared to interdict Russian-flagged vessels sailing out of Vladivostok. The Russians will not be happy about that.

You're talking about a generalised confrontation with all of Asia here.

You're right about Russia and Korea, but it's still the same catch-22 situation.  If China invades Korea, but has no access to the resources it needs, then famine occurs in Korea as well as China, so Korea will always stick with America, and Chinese contesting power with America is off the table.

No, it means that Korea will not be the ignition point of such a conflict. But once the conflict does escalate to the point of naval blockade

So if China were to get cozy enough with Russia to be able to secure resources without a need for ocean transport (just as the US was able to do (and Napoleon was not) without worrying about England in the 19th century) then, yes, you have a scenario for the end of the empire.

It's not a matter of being cozy - if the Americans join Israel and Somalia as state sponsors of piracy and target Russian-flagged vessels, they're going to get a lot more cozy than they are real fast. It's a matter of building the relevant infrastructure. It's a question of whether the infrastructure to transport enough crop far enough can be built fast enough for the Chinese political system to survive a blockade.

There is no inevitability in China's rise here,

I actually agree with you on that.

What is happening right now to strengthen China's hand is that American industry is being moved to China. Mechanically, what happens is that China sells industrial goods to the US at discounted prices (through a variety of means, including but not limited to maintaining currency discounts) and uses the proceeds to buy the raw materials that make up the American colonies' tribute, in order to power Chinese industry. The reason that China is trading with the US rather than buying raw materials directly from the producers is that by discounting against the Americans, they incentivise the movement of the American industrial base to China (at the cost of selling their products for less than the full value).

It is always in the US' power to stop this process by changing policy away from favouring finance and towards favouring industry.

If and when that happens (and I predict that it will happen when the US runs out of civilian industry to ship overseas, because they will be understandably reluctant to ship their armaments industry overseas), the game changes. Then China no longer has any incentive to sell stuff to the US at a discounted price, and every incentive to deal bilaterally with the American colonies.

China then faces opportunities and challenges. To take the opportunities first, they can nationalise the Chinese-based holdings of transnational companies with relative impunity, since the only reason that those transnats are currently being treated according to the American rules is the prospect of them moving more of their operations to China. In the face of determined industrial policy, that prospect radically diminishes. The Americans are going to piss and moan about that, just as the British bitched a lot when Putin renegotiated their transnats' fraudulent Yeltsin-era contracts. But like the British, they will suck it up, because the alternative - a generalised trade war with all of Asia - is more expensive.

China can also begin to demand the full price for their goods from the Americans - they won't need to be hyper-competitive anymore, because there is no serious prospect of getting more of the American industrial plant (and for the same reason, they can always erect trade barriers to avoid losing what they have).

The challenge - and where the Americans can make monkey business for China - will be diverting colonial tribute from the American colonies to China while no longer paying the Americans a cut. But they are not entirely powerless here. The Americans keep their colonies not by virtue of military superiority - they have the capacity to wreck a colony, but not really to conquer it in any useful condition. Mostly they keep their colonies in line by bribing the local strongmen and then saddling them with unpayable debts... both activities denominated in US$ (and the way the Americans have traditionally saddled their colonies with unrepayable debts has been by building infrastructure projects with revenues in local currency but financed by loans denominated in US$ - but there's no reason why the Chinese can't play that game too).

Take away the post-Bretton Woods monetary system, and you take away the American empire.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jul 21st, 2010 at 04:17:02 AM EST
[ Parent ]
Those are good points, but you don't need an embargo on all trade, or even to stop shipping in the Sea of Japan to cut off China from both its markets and its resources.  You just need to prevent the Chinese from being able to have secure access to Mideastern oil, American soybeans, African minerals, and foreign markets for exports. Depending on Russian contraband during a conflict with the world's largest navy isn't what secure means, so just the threat of it actually takes the war option off the table for Chinese authorities.  It's a piece of Chinese wisdom, after all, that says, "A winning general achieves victory first and then goes to war, while a defeated general goes to war first and then seeks victory." Without secure access to the resources its newly modern economy now needs, war isn't an option for China any more.  The US doesn't face the same constraint, however, even if war isn't a realistic option for America either.

But I agree with you completely on the need for the US, and the West in general, to break its relatively recent addiction to financing wealth instead of creating it through industry if remaining powerful in the world is important to them.  Long term, allowed to continue, poor industrial policy will doom an imperialist project.

by santiago on Wed Jul 21st, 2010 at 08:44:08 AM EST
[ Parent ]
santiago:
So if China were to get cozy enough with Russia to be able to secure resources without a need for ocean transport (just as the US was able to do (and Napoleon was not) without worrying about England in the 19th century) then, yes, you have a scenario for the end of the empire.  
So, what came of The Shanghai Cooperation Organization?

That was a diary by by richard carlucci on May 11th, 2006. There was also Hot Summer for Mr Bush by FarEasterner on May 22nd, 2006; and Afghanistan neglected - and now Russia and China want US out by Jerome a Paris on July 7th, 2005. But 2006 was a different era and after the Global Clusterfuck started we haven't heard a lot about the SCO. Is it still alive? Can it be revived? Does it matter?

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Migeru (migeru at eurotrib dot com) on Wed Jul 21st, 2010 at 06:04:05 AM EST
[ Parent ]
the only wars the US has won since Hiroshima are Grenada, the first iteration of Iraq and Panama...

You don't have to win a war (in the conventional sense of achieving your stated objectives) in order to wreck a country and deny its resources to everyone else.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Migeru (migeru at eurotrib dot com) on Wed Jul 21st, 2010 at 02:34:04 AM EST
[ Parent ]
another demagogical statement. I think the writer needs to go back to basics and return only armed with facts before coming out with such kind of assertions.
by FarEasterner on Wed Jul 21st, 2010 at 05:00:41 AM EST
[ Parent ]
???
by santiago on Wed Jul 21st, 2010 at 08:45:34 AM EST
[ Parent ]

The US  doesn't need its own capital plant to survive a conflict with anyone because it has a military capable of securing all of the resources it needs from anyone else. While China's borders are just China's borders, as far as political control over resources goes, America is effectively borderless due to its unique, global military reach. Unless a country today opts out of American empire by opting out of trade, America's military really does make all other countries mere constituencies of an American polity.

I fully agree with santiago's description of the asymetry of the relationship between China and the US. China has to play by the rules of the game, as set by the dominant power. The US can isolate any country form the rest of the world; no country can do that to the US.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Thu Jul 22nd, 2010 at 08:57:39 PM EST
[ Parent ]
It would be insane for China to challenge the US militarily, but neither is China helpless because of the USA's great military power. In many ways it could be said that China is the greatest free rider of all on US military power. Even in Afghanistan the US provides the security, however poorly, and China makes off with many of the richest mineral deposits.

China's government has the great advantage of being able to conduct policy without particular regard for popular sentiment, and can always play the Chinese nationalism and Han exceptionalism cards to good effect. And they have the advantage of powerful cultural traditions that, well played, bolster the government -- so long as the economy keeps working.

Something from the I Ching relevant to the US-China relation comes to mind:

The Taming Power of the Small

"The yielding obtains the decisive place, and those above and those below correspond with it: this is called THE TAMING POWER OF THE SMALL."*

Subtle and inscrutable these Chinese. The Book of Changes is thought to have taken shape in the centuries before Confucius and is basic to Chinese culture and habits of mind. China will play to its own advantages, which are considerable, when it can, while accommodating US advantages where it must.

For now probably advantage China. They have the currency reserves, a growing economy and the ability to conduct foreign policy strategically, even if they play by US rules. Meanwhile the USA is run by a cabal of pirates and is constrained to act and react according to the short term needs of that constituency. The Chinese undoubtedly think us to be barbaric fools, even if dangerous and powerful fools.

Time will tell just how valuable our military power is in this relationship. But we cannot readily use it to immediately get whatever we want. Most frustrating.

*From the Wilhelm/Baynes translation, Princeton, 1961

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Jul 23rd, 2010 at 12:43:00 AM EST
[ Parent ]
ARGeezer:
Subtle and inscrutable these Chinese. The Book of Changes is thought to have taken shape in the centuries before Confucius and is basic to Chinese culture and habits of mind. China will play to its own advantages, which are considerable, when it can, while accommodating US advantages where it must.
In addition, China plays GoWeiQi, the West™ plays chess.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Fri Jul 23rd, 2010 at 09:38:27 AM EST
[ Parent ]
the WestTM plays chess...

...when it isn't playing checkers.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Jul 23rd, 2010 at 01:44:32 PM EST
[ Parent ]
Or poker slot machines.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Sat Jul 24th, 2010 at 02:21:22 AM EST
[ Parent ]
The US  doesn't need its own capital plant to survive a conflict with anyone because it has a military capable of securing all of the resources it needs from anyone else.

With friends like Fox And Friends and the American Petroleum Institute ... who needs external enemies?

Seriously, if war is politics by other means, then the question if whether "America can survive a conflict with anyone" is a massive non sequiter when it seems increasingly plausible that American cannot survive business as usual, with the ongoing destruction of our industrial capacity and pillaging of our natural resources as thorough as any foreign occupier ever could aspire to accomplish.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sat Jul 24th, 2010 at 02:26:44 AM EST
[ Parent ]

Except not, because the US does not have any capital plant left that's worth shit, outside the armaments industry.

That's not quite true. US industry is employing less and less, and has abandoned some sectors, but its output has never been higher, when measured in the value of the goods produced. I'm not sure it would be so hard to rebuild, if a war-type effort were put into it.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Thu Jul 22nd, 2010 at 08:55:10 PM EST
[ Parent ]
And the existing US capital plant is currently operating at less than 70% capacity, IIRCC.  

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Jul 22nd, 2010 at 10:21:25 PM EST
[ Parent ]
By historical contrast, the US (and Japan t a lesser extent) grew and was able to contest space with European colonial powers through protected, domestically-oriented industrialization, not through exports and trade as China is doing.  The US didn't need Europe to grow economically, so it could overtake Europe without endangering its own growth.  China can't do the same because it lacks the mineral and agricultural resources it needs domestically.  Lacking a global military which can secure resources by preventing others access to them, China must trade to get them.  So it must abide by largely American-made rules and norms if it wants to continue its wave of prosperity.

The US grew in the 19th century because it had a continent to colonize, not because of international trade rules.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Migeru (migeru at eurotrib dot com) on Wed Jul 21st, 2010 at 02:29:31 AM EST
[ Parent ]
That's what I mean.  The US didn't need trade to grow, so it insulated its industry from trade while expanding into the "virgin" continent.  China's expansion today, however, is entirely a global, trade based phenomenon.  It needs trade to grow, making an historical comparison between US vs. Britain and China vs. US misleading. It's more like pre-WWI Japan vs. pre-WWII US.
by santiago on Wed Jul 21st, 2010 at 08:49:11 AM EST
[ Parent ]
The apt comparison here is Germany and Britain between the German unification in 1870 and WWI.

If it hadn't been for the first world war, we would be having this conversation in German.

Incidentally, there's another parallel: The countries that won the first world war did so by being neutral.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jul 21st, 2010 at 05:54:40 PM EST
[ Parent ]
There are many unsubstantiated laughable assertions in this post. I understand that most points are about hypothetical (and absolutely baseless) premise about Western-Chinese military antagonism yet the whole post should be quoted and author should be asked to provide proof.
by FarEasterner on Wed Jul 21st, 2010 at 04:57:41 AM EST
[ Parent ]
Proof of what?
by santiago on Wed Jul 21st, 2010 at 08:49:39 AM EST
[ Parent ]
of every your statements here which are unsubstantiated. Take your most recent statement:  

... because China cannot improve itself through any option other than submission to the current world regime of rules on trade, commerce, and finance if it wants to continue to grow.  

please provide proof..

It can't opt out of trade with the US and EU,  

please proof

which means it cannot contest power with the US militarily.

please proof

and every your statement deserve the same questioning.

by FarEasterner on Wed Jul 21st, 2010 at 09:58:13 AM EST
[ Parent ]
Here's the proof that China cannot opt out of trade, done in a stylized, geometric proof format:

Given: China's economic growth in the last decade has occurred mostly due to its national strategy of export promotion, aka mercantilism. (Is this false?  If so, support your refutation.)

Given: China doesn't produce enough oil, soybeans, and other key minerals it needs domestically to satiate the demands of its greatly expanded economy.

Given: China currently does not have a non-oceanic transportation system or the political trust in place to be capable of supplying resources from land routes with neighboring sources such as India and Russia, which are presently relatively minor importers of Chinese production in the first place.

Given: China lacks the military capability of preventing the US from denying access to critical foreign export markets and resources if such a situation occurred.

  1. Assume that China opts out of trade today.
  2. Ask the following questions:

Without exports to the US and EU today, where will China obtain the wealth needed to support greatly expanded middle class lifestyles and pay the bills for its huge export-based industry?

Where will China obtain the mineral and agricultural resources it needs to maintain middle class lifestyles of its urban population as well as provide for industry, state, and military infrastructure?

Argument: If China cannot obtain sufficient income to support its current level of development and growth without international trade, then it cannot opt out of trade. (Is this not true?)

Argument:  If China cannot presently obtain the mineral and agricultural resources it needs to maintain and grow its current level of industrial development, then it cannot opt out of trade.

Proof: If China cannot obtain the resources it currently needs from foreign sources if  US were to choose to deny Chinese access to foreign markets and foreign sources of mineral and agricultural supplies, then China has no real alternative available other than to comply with the present world economic regimes.

China is stuck to trade, at least for the time being.  It has no other option.  This might change if it can become energy independent or if it develops a global military capable of contesting space with America, but that's not the situation today or, I argue, for the foreseeable future.

by santiago on Wed Jul 21st, 2010 at 11:47:37 AM EST
[ Parent ]
Mirror arguments apply to the US.

The difference is that China can afford to throw the US against the wall, providing it stays on good terms with the EU and also supports development in other nations which it can grow as export markets.

The US can't afford to throw China against the wall because it wants, and sometimes needs, the stuff that China makes, which now underpins a huge segment of the US corporate economy.

A trade war with China would be catastrophic for the US, because the shops would soon run out of everything - from food to clothes to toys to consumer electronics. Among others.

You're also ignoring the point that China is already supporting the US financially. If China allowed its currency to float, China would suddenly discover a significant source of wealth.

The relationship is on a knife edge. So far it's been expedient for the Chinese to continue with it, but it's immensely naive to assume that this has to continue because of some kind of implied non-specific US awesomeness that China lacks.

And China has far more options, and is in a much stronger economic and geopolitical position than the US is.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Jul 21st, 2010 at 12:02:11 PM EST
[ Parent ]
There is one important difference:

China is a low-income food-deficit country. The US is neither.

In other words, the US could literally starve China to death in the event of war.

This (the food deficit, not the war scenario) has to be one of the main reasons China is greatly expanding its hold on African agricultural production. I wonder how much of what officially counts as Chinese food imports is already "off-shore food production" on land leased by China.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Migeru (migeru at eurotrib dot com) on Wed Jul 21st, 2010 at 12:28:14 PM EST
[ Parent ]
If China revalued the yuan, the low-income element could easily disappear.

As for food imports:

LJ Anderson: Rise in food imports heightens contamination risk - San Jose Mercury News

As computer jobs have gone offshore, so has the production and processing of food. In addition, the U.S. now imports more food than it exports -- with fresh produce, and fresh and frozen fish and shellfish among the leading imports. Mexico is the No. 1 exporter of fruit to the U.S., and China is in second place.

This unprecedented growth in globalization of food sources is accompanied by concerns about health risks to consumers. Regulations governing food production in many developing countries are often negligible. For example, two-thirds of the world's production of farmed fish is grown in ponds fertilized by animal manure or human sewage.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Jul 21st, 2010 at 12:45:51 PM EST
[ Parent ]
Your source is simply mistaken there. The US does not import more than it exports. The reverse is true, and by a wide margin.  (That story seems to come from a news report in 2004 when, for just a couple months that year, there was actually an agricultural trade deficit. But on an annual basis the surplus was still quite large that year.) Furthermore, the amount of food imported or exported is but a small fraction of total domestic production, so US agriculture, which is mostly a function of controlling the world's single largest and most productive tract of agricultural land -- the 100 million hectares that make up the American Midwest and Great Plains, is neither dependent upon imports nor exports for food.  
by santiago on Wed Jul 21st, 2010 at 12:58:44 PM EST
[ Parent ]
However, there is a trend of offshoring even our agricultural industry. Here in the Salinas Valley, the self-proclaimed "Salad Bowl of the World" that made the base of Steinbeck's work, food packing and processing has been offshored to China and South America, with the last 4-5 years seeing the bulk of this taking place.

There are a lot of vacant warehouses just south of Salinas, and many growers have shifted to growing grapes for wine production to replace lost lettuce and vegetable crops.

To be sure, the overall picture is still one of enormous agricultural productivity, but shifts are under way.

And the world will live as one

by Montereyan (robert at calitics dot com) on Wed Jul 28th, 2010 at 03:27:35 PM EST
[ Parent ]
food packing and processing has been offshored to China and South America

Does this mean American growers would grow lettuce which would then be shipped to China and South America for packing and processing before being shipped back to the US for consumption?

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Migeru (migeru at eurotrib dot com) on Wed Jul 28th, 2010 at 03:39:01 PM EST
[ Parent ]
See Cantonnery Row by John Steinbeck.
by afew (afew(a in a circle)eurotrib_dot_com) on Wed Jul 28th, 2010 at 04:37:29 PM EST
[ Parent ]
Does this mean American growers would grow lettuce which would then be shipped to China and South America for packing and processing?

If land in the Salinas Valley is being shifted to wine grapes I would suspect that the growing is being off-shored and coming to the US grown, processed and packaged by cheap labor. Gotta get those last few drops of lifeblood out of the bottom 99% of the US population. Poisoning those that are left is a no charge extra.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Jul 28th, 2010 at 05:40:49 PM EST
[ Parent ]
No, the mirror arguments don't apply to the US because the US is the only one with a navy capable of securing access to all of the foreign resources it ever needs.  That's my whole argument here against the China is the New Master (tm) narrative in all of this.  

A trade war with China will just replace Chinese goods on US store shelves with goods made in any number of other countries that the US can continue to access. Walmart can replace their suppliers in days, if not minutes, as can any other retailer.  China is a low-cost producer, not a specialty producer.  It is utterly replaceable.

China is financing the US, but even when China reduced it's bond investments when the crisis ensued, other buyers of US private and government debt stepped right in and kept rates low. China is a good option for the US. The US is a critical actor for China.  That's the power disparity at play.  In portfolio theory terms, the US's risks are very diversified, while China's remain concentrated.

What, exactly, are the strong economic and geopolitical positions of China relative to the US that you are talking about.  You seem to be mistaking mere, short-term momentum for actuality here.  Fortunately for the Chinese, they seem to have a more realistic outlook on their own place in the world themselves.

by santiago on Wed Jul 21st, 2010 at 12:42:19 PM EST
[ Parent ]
santiago:
the US is the only one with a navy capable of securing access to all of the foreign resources it ever needs.

And that's working really well in Iraq, Iran and Afghanistan, isn't it? Or how about in South America?

You seem to believe that all the US has to do is turn up with a carrier strike force and help itself to whatever it wants.

Firstly, the US has always preferred to install puppets and do less shooting. Installing puppets actually works quite well, but it's not quite as easy as it used to be, as the US is discovering in Iran and Eastern Europe.

Secondly the idea that all you need is a navy is obvious strategic nonsense. Most resources are landlocked or at least somewhat remote, and if the US wanted them it would have to capture ports and secure extraction and supply lines.

Considering that the US can't even take out the Somali pirates, this seems like a less than entirely plausible scenario.

Successful US naval actions in the last couple of decades are rarer than unicorn testicles. Iraq was a lot of shouting and shelling to no great effect, Afghanistan is a fiasco, USS Cole was another disaster, Somalia continues to be a source of fail, and the rest is - where?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Jul 21st, 2010 at 12:54:49 PM EST
[ Parent ]
And that's working really well in Iraq, Iran and Afghanistan, isn't it? Or how about in South America?

Actually, yes, it is.  At least as far as securing access to resources goes.  Iraq and Afghanistan just prove, for the umpteenth time, that military force is a poor way to provide for economic development and nation-building, not that military power is useless for killing enemies, toppling opposing governments, or denying other nations access to critical resources while securing them for yourself.

by santiago on Wed Jul 21st, 2010 at 01:01:51 PM EST
[ Parent ]
Naval warfare on the high seas is pretty much as far from counterinsurgency, where the US has struggled, as you can come. I have no doubt over the superiority of the US Navy, even if no one really knows how a modern naval struggle would develop (ie how vulnerable are capital ships in general and carriers in particular to subs and missiles?).

Still, this doesn't really matter that much as the role of capital ships is power projection and keeping the sea lanes of communication open. If you want to deny them to others you use subs. Which the US Navy is shock full of.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Wed Jul 21st, 2010 at 04:20:42 PM EST
[ Parent ]
No, that's nonsense. By any sane measure - which excludes that used by Blackwater and other war corporations, of course - it would have been infinitely cheaper to buy Iraqi oil from Saddam than it has been to fight a pointless and destructive war, which has created an oil source that's extremely vulnerable to random attacks.

And exactly which resources has the US secured in Afghanistan? (Apart from heroin.)

The point is that Iraq and Afghanistan are primarily corporate welfare wars, not resource wars.

In terms of value for money and practical success, it's insane to pretend that they've bee anything other than disasters.

What they have done - and what they were likely designed to do - is put tax money into the pockets of a select few lobbyists and corporations.

Which is fine as far as it goes, but it's not a good precedent for a real resource war.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Jul 22nd, 2010 at 08:56:37 AM EST
[ Parent ]
You're not seeing it. I agree with you that Iraq was a mistake and that continuing in Afghanistan as we are now is a mistake. What I'm arguing is that those two incidences have nothing to do with the the usefulness of military force for killing enemies, toppling foreign governments or determining who is allowed to buy oil and who isn't.  China can only buy oil from the Middle East, or any other ocean-dependent source, because it is not engaging in armed hostilities with the US.  The US has no such constraint.  It can engage in armed hostilities with just about anyone and still buy everything it needs from foreign sources because it has a navy capable of protecting those lines of communication.
by santiago on Thu Jul 22nd, 2010 at 10:39:23 AM EST
[ Parent ]
China can only buy oil from the Middle East, or any other ocean-dependent source, because it is not engaging in armed hostilities with the US.  The US has no such constraint.

Apart from the fact that if you piss off the people who sell you the stuff you need to buy, they may stop doing that.

And unrestricted commerce warfare is a really good way to piss people off. Especially if it's against their biggest customer.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Jul 22nd, 2010 at 10:43:04 AM EST
[ Parent ]
Except that they have to sell oil to someone or they can't pay their bills either. It's sad, but like storefronts in Chinatowns, because people need to work in order to eat, they end up doing business with the gun-toting gang in the neighborhood whether they like it or not.
by santiago on Thu Jul 22nd, 2010 at 10:50:52 AM EST
[ Parent ]
I would not be so sure. An oil embargo wouldn't have to last that long before the American ability to engage in global piracy would be seriously impaired.

But actually, I wasn't thinking so much about the oil producers as about the merchant marine. The US directly controls a fairly small share of the global merchant marine. And there's a difference between being able to blow up a ship and being able to take it over in a useful condition. Tick off enough of the rest of the world's maritime nations through unrestricted commerce warfare and you will find yourself unable to find civilian shipping for your own needs.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Jul 22nd, 2010 at 11:36:24 AM EST
[ Parent ]
I see you point about the oil embargo, but that's where having both a navy, and US dollars to pay for oil.

I guess I'm thinking that the merchant marine is basically like any other business.  Ship owners, when they are not a government, have real fortunes and savings invested in them and stand to lose a lot if someone wrecks a boat, and crew members have even more to lose.  (Ship insurance doesn't cover acts of war, generally, so the owners have a lot of skin exposed in such situations.)  Maybe I'm wrong, but I doubt many ship owners, flagging their vessels out of Liberia and Panama as the vast majority of ships are, are going to risk putting their investments in harms' way if the world's big boys came to blows, which means that the only way they could continue to pay their loans and bills is to sail them with non-Chinese cargo. To me it looks like the very market forces that allow China to benefit now, would act completely the opposite if the risk level of doing business with Chinese cargo increased. Risk gives advantages to those with the greater power, or biggest guns, all the more so when you can't afford to idle your capital (or labor) as most ship owners are.

by santiago on Thu Jul 22nd, 2010 at 10:00:56 PM EST
[ Parent ]
China can only buy oil from the Middle East

False. What about working pipeline from Kazakhstan and under construction from Russian Far East?

because it is not engaging in armed hostilities with the US

Neocon crap.

We used to hear such stuff from John Bolton. Are you his deputy on ET?

by FarEasterner on Thu Jul 22nd, 2010 at 10:54:45 AM EST
[ Parent ]
I'll be happy to respond to your comments when you stop the false, Ad Hominem attacks.
by santiago on Thu Jul 22nd, 2010 at 11:27:51 AM EST
[ Parent ]
truth hurts?

No attempt to back your neocon statements?

I am happy to receive "2" marks from neocons every day.

by FarEasterner on Thu Jul 22nd, 2010 at 11:37:32 AM EST
[ Parent ]
FarEasterner, please. If santiago's comments appear neocon-like to you, that is no reason to call him a neocon or ask him if he's John Bolton's deputy.

It's possible to discuss this without name-calling, isn't it?

by afew (afew(a in a circle)eurotrib_dot_com) on Thu Jul 22nd, 2010 at 12:13:59 PM EST
[ Parent ]
this is internet. there is no ban on using word "neocon". if he cares to back his claims he keep repeating in every other post i would be only happy to unravel and show where and how his views are neocon with extensive quotations from speeches of honourable John Bolton and comrades.
by FarEasterner on Thu Jul 22nd, 2010 at 12:27:39 PM EST
[ Parent ]
There's no ban on saying "neocon", but calling the other person a neocon and comparing them to John Bolton would, on many Internet discussion sites as on ET, be called "flaming".

If you want to show what you think is of neocon inspiration in santiago's comments, that is a different matter.

by afew (afew(a in a circle)eurotrib_dot_com) on Thu Jul 22nd, 2010 at 12:43:01 PM EST
[ Parent ]
really? even if John Bolton himself will appear on ET you would not call him neocon because it will be flaming?
by FarEasterner on Thu Jul 22nd, 2010 at 12:45:47 PM EST
[ Parent ]
What good does namecalling do? Address the arguments if Bolton had any...

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Thu Jul 22nd, 2010 at 12:47:13 PM EST
[ Parent ]
not political correct enough to call spade a spade
by FarEasterner on Thu Jul 22nd, 2010 at 12:50:36 PM EST
[ Parent ]
The problem is that the shouting match between you and santiago is not very enlightening as to the underlying issue. For instance, for all your criticism of other's imputations of Chinese motivations, you haven't provided your own view of what moves China while suggesting that you have an insight or lack of bias that others lack.

So you calling santiago a neocon doesn't tell me anything about what you think is the correct view of China's motivations, nor what evidence one can get about it from outside.

You can call a spade a spade but the question of what China wants is more interesting than the question of whether santiago is a neocon.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Migeru (migeru at eurotrib dot com) on Thu Jul 22nd, 2010 at 01:58:56 PM EST
[ Parent ]
ThatBritGuy:
Successful US naval actions in the last couple of decades are rarer than unicorn testicles.
Cue in the Exile classic U Sank My Carrier! - By Gary Brecher - The War Nerd
The truth is that van Ripen did something so important that I still can't believe the mainstream press hasn't made anything of it. With nothing more than a few "small boats and aircraft," van Ripen managed to sink most of the US fleet in the Persian Gulf.

What this means is as simple and plain as a skull: every US Navy battle group, every one of those big fancy aircraft carriers we love, won't last one single day in combat against a serious enemy.

The Navy brass tried to bluff it out, but they were pretty lame about it. They just declared the sunken ships "refloated" so the game could go on as planned. This is the kind of word-game that makes the military look so damn dumb. Too bad Bonaparte never thought of that after Trafalgar: "My vleete, she is now reflotte!" Too bad Phillip didn't demand a refloat after the Armada went down: "Oye, vatos, dees English sink todos mi ships, chinga sus madres, so escuche: el fleet es ahora refloated, OK?"



By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Wed Jul 21st, 2010 at 01:02:17 PM EST
[ Parent ]

And that's working really well in Iraq, Iran and Afghanistan, isn't it?

Iraq is a failure precisely because they moved away from their usual modus operandi. They did not need to invade Iraq to get its oil (in fact, the opposite is true). But it doesn't disprove either the point that they can isolate any country they want whereas nobody can isolate the US from the resources of the rest of the world.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Thu Jul 22nd, 2010 at 09:01:21 PM EST
[ Parent ]
However the landward side of the harbor is problematic for much of the resources that the US needs if the strategy is to squeeze the resources out of the country as opposed to pursuing mutually beneficial trade ... especially in Africa and South America.

As in the turn of the last Century, places like Afghanistan and Burma are near the pivots of the great game. And China is already better positioned to cope with a massive disruption of Arabian oil exports than the US is, and pulling further ahead.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Thu Jul 22nd, 2010 at 06:13:46 PM EST
[ Parent ]
Didn't you notice how many times you used words China "can", "can't", "must" etc. In other words you tell us what China really wants to do. You says "China can't opt out of trade" when this premise is patently false because no Chinese would want "to opt out of trade" in the first place. All other your assertions about China's policy built on the same false antagonistic assumptions. I (and no doubt others on ET) are still awaiting your proofs that China really wants to do this or that which you attributed to her.
by FarEasterner on Wed Jul 21st, 2010 at 12:30:32 PM EST
[ Parent ]
China doesn't want to opt out of trade. Why should it? It wants to trade. But trade creates dependency, and unlike the EU or the US, whose highly diversified economies benefit from, but are not dependent upon, trade, China has actually become dependent upon trade, particularly trade with the US and the EU.  Dependency is the opposite of independence, and independence is what provides power in counter-party relationships. Think it through.
by santiago on Wed Jul 21st, 2010 at 12:46:42 PM EST
[ Parent ]
What these neocon musings are doing here?

In this world, the US still does and although China is increasingly able to contest that authority, it simply can't escape from the US-dominated world in which it must still trade if it wants to grow economically.

Where is the proof that China "must trade"? UK for example trades very little with China and Asia so we have to read often in local newspapers desperate pleas from UK ministers that their country "means business". Why can't we say that UK "must trade with Asia to survive?".

By historical contrast, the US (and Japan t a lesser extent) grew and was able to contest space with European colonial powers through protected, domestically-oriented industrialization, not through exports and trade as China is doing.

Really? How about landgrab from France, UK and genocide of native Indians as factors of American growth in 19th century?

China can't do the same because it lacks the mineral and agricultural resources it needs domestically.

Surely? China BTW has rare minerals which the West is in desperate need. Also China has money and able to buy all necessary raw materials from neighbours even with exclusion of Australia and New Zealand which really will be screwed if Beijing frowns.

Lacking a global military which can secure resources by preventing others access to them, China must trade to get them.

This is false statement. China does not need "global military" to secure resources.

So it must abide by largely American-made rules and norms if it wants to continue its wave of prosperity.

This neocon cry [patently false] you repeated several times on this thread, one time is enough, we have eyes to read.

After speculation on military conflict between the West and China you says:

But could China continue its economic prosperity while in a military contest with the US?  No.

Rhetorical statement because the same applies to US if Washington's loonies decide to have military contest with China. No way US can continue its anaemic economic recovery in case of full-blown nuclear war with China.

The US Navy is bigger than the rest of the world's navies combined, most of which are close US allies.

Maybe Thailand? Read Thai press more. And no need to quote the rest of your post - total crap.
 
by FarEasterner on Wed Jul 21st, 2010 at 02:52:05 PM EST
[ Parent ]
The fact that we're having a plausible discussion about China lending money to the US and/or EU suggests...

...that China has accumulated huge foreign currency reserves that it has had trouble utilizing with benefit to itself and that these reserves are bigger than any other nation's reserves, perhaps several nations combined. In order to utilize its reserves other than as reserves it will have to assume non-trivial counter-party risks in a volatile risk environment. And the Chinese economy is not without its own problems. The rest of the world could live without China. The converse does not hold.

Could the rest of the world live without the USA. Wait and see.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Jul 20th, 2010 at 08:26:24 PM EST
[ Parent ]
The rest of the world could live without China.

Only if we are prepared to radically downsize our economic activity. China produces well over a third of the world's steel - and exports quite a lot of it, either directly or embedded in finished and intermediate products. China also builds well over a third of the world's new shipping tonnage and a substantial fraction of world production of crude textiles. Counting energy embedded in finished goods, China is also a major coal exporter.

Removing this production overnight would not be trivial dislocations. The textile industry could probably migrate relatively easily, but steel and shipbuilding are heavy industries that do not simply spring up overnight, and coal is constrained both by the location of the resources and the willingness (or not) of the locals to die during the extraction process.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Jul 20th, 2010 at 09:06:52 PM EST
[ Parent ]
True, there would be dislocations. And, for a while, consumption would drop in Europe and the USA. But the balance of trade would improve, at least in the short term. Longer term it would depend on policies. Were the policy to be only to find another low cost producer in which to play the same game, not too much would change. But, at a minimum, there would have to be a burst of capital investment to replace lost production in China, and that would be a major stimulus.

Of course how such a thing could happen is hard to see. If as a result of war the USA is highly unlikely to come out unscathed. The environmental impact of a nuclear war would likely be catastrophic. If as a result of economic and political collapse in China, the productive capacity is almost certain to remain. China could move to a model with greater domestic growth but that would be a drain on world resources of all sorts and produce an increase in pollution.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Jul 20th, 2010 at 09:47:15 PM EST
[ Parent ]
It doesn't ever have to get to war for the power of military superiority to be felt. It's very unlikely to ever get to war, much less a nuclear war, because it would be suicidal for China to even try, so we have pax-Americana equilibrium.  Here's the strategic problem for China and the US:  Both China and the US depend today on foreign-based natural resources to maintain current levels of prosperity, China a bit more than the US due to US domestic agricultural capacity. But only the US has a navy and global basing structure capable of securing access to those foreign resources through international trade regimes such as property rights norms, tariff agreements, etc.  China can't secure the foreign resources it needs, so, like everyone else in the world, it depends on American goodwill to provide access to them through the trade, global governance institutions, and liberal democracy discourse that America has organized over the last 60 years or so.  The world is much less interdependent than we have been led to believe by business journalism.  It's much more of one way street that benefits America and her allies/partners.
by santiago on Tue Jul 20th, 2010 at 10:29:22 PM EST
[ Parent ]
The world is much less interdependent than we have been led to believe by business journalism.  It's much more of one way street that benefits America and her allies/partners.

It does tend to be a one way street, but it only benefits "America" if you consider the only interests of "America" to be the financial elites. I find it rather hard to see how the generation of volunteer US soldiers who have been traumatized in Iraq and Iran have really benefited, compared to having had the opportunities that their parents had to earn a living from a decent paying US job.

That job has been sent to China, not because it had to be, but because that was the most profitable decision for the elite. This elite has become destructive and parasitical. The economy that is run in their interest is sucking the wealth out of the bottom 99.3% of the US population for the benefit of the top 0.7%, give or take a few tenths of a percent. This model of military backed domination has been extended not just to the rest of the world, but to the domestic population as well. Perhaps you are o.k. with that but I am not.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Jul 21st, 2010 at 01:18:30 AM EST
[ Parent ]
US soldiers who have been traumatized in Iraq and IranAfghanistan

You got a couple of years ahead of yourself there...

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Migeru (migeru at eurotrib dot com) on Wed Jul 21st, 2010 at 02:39:38 AM EST
[ Parent ]
It's very unlikely to ever get to war, much less a nuclear war, because it would be suicidal for China to even try

This is rhetorical statement. The same applies to US to go to war with China or Russia. US would be obliterated in any nuclear holocaust.

so we have pax-Americana equilibrium

This moment is passed you did not know? It was called "American Century" by neo-cons.

But only the US has a navy and global basing structure capable of securing access to those foreign resources through international trade regimes such as property rights norms, tariff agreements, etc.

False statement because of the word "only the US". The power of US for example in South East Asia was in mix of economic and military ties which are on the wane by all accounts, even Thailand and Indonesia are drifting away from US. After decades of lobbying US was admitted into East Asian Forum only humiliatingly together with Russia which obviously had had less interests in this region.

Then the West indeed has currently dominated international organizations but everything is changing. Take for example Moody's with atrocious rate of 80-90% of failures which were rated AAA obviously will be replaced and why not by Dagong?

China can't secure the foreign resources it needs, so, like everyone else in the world, it depends on American goodwill to provide access to them through the trade, global governance institutions, and liberal democracy discourse that America has organized over the last 60 years or so.

Again unsubstantiated statement. China has money why it can't secure the foreign resources? What happen with Australia (and other resource-based economies like Canada) if China launch sanctions against them? China does not depend on American goodwill to get access to them.

The world is much less interdependent than we have been led to believe by business journalism.

Empty rhetorics without proof.

It's much more of one way street that benefits America and her allies/partners.

Again false assumption.

by FarEasterner on Wed Jul 21st, 2010 at 01:34:44 PM EST
[ Parent ]
Were the policy to be only to find another low cost producer in which to play the same game, not too much would change.

You're missing something very important here. China is not only a great producer, but a huge source of global aggregated demand as well.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Wed Jul 21st, 2010 at 04:25:49 PM EST
[ Parent ]
I think it would be more trivial that it might seem at first.  A lot of Chinese steel production, if not most, goes to Chinese industry, not European or American.  Same with shipbuilding.  Without Chinese trade, the non-Chinese world doesn't really need Chinese steel or Chinese ships. But the independency doesn't work the other way.  Without the raw materials and food it gets from the Middle East, North America, South America, and Africa, Chinese industry won't work and neither will its army hold up long.  (Same problem Japan faced.)  But without Chinese stuff made from mostly imported raw materials, other places can pretty easily import the raw materials and set up shop. It's not Chinese technology that gives them such an advantage after all, it's the cheapness of the stuff they make. Given a just slightly higher price, Haitians can do that too, as can many others.

This provides for an effective equilibrium (that word, again). It's suicide for China to confront the US militarily, so it won't do it or even invest in military resources to do it.  Instead it must content itself to try to outshine others in American-European world it has been reborn into.  I really don't think we'll see another empire or such thing take America's place as long as capitalism remains the dominant way things are done in the world.

by santiago on Tue Jul 20th, 2010 at 10:14:35 PM EST
[ Parent ]
I think it would be more trivial that it might seem at first.  A lot of Chinese steel production, if not most, goes to Chinese industry, not European or American.  Same with shipbuilding.  Without Chinese trade, the non-Chinese world doesn't really need Chinese steel or Chinese ships.

Except that if they want to buy the stuff from other people, they need ships. And if they want to make the stuff themselves, they need steel.

But the independency doesn't work the other way.  Without the raw materials and food it gets from the Middle East, North America, South America, and Africa, Chinese industry won't work and neither will its army hold up long.  (Same problem Japan faced.)  But without Chinese stuff made from mostly imported raw materials, other places can pretty easily import the raw materials and set up shop.

Except that even with the direct support of the then-premier industrial power on the planet, it took China thirty years to transfer that industrial capacity. You are talking about taking it off-line and rebuilding it from the ground up. That is not a trivial exercise. You're talking at least ten years ramp-up time here.

This provides for an effective equilibrium (that word, again). It's suicide for China to confront the US militarily, so it won't do it or even invest in military resources to do it.  Instead it must content itself to try to outshine others in American-European world it has been reborn into.  I really don't think we'll see another empire or such thing take America's place as long as capitalism remains the dominant way things are done in the world.

Except that the US won't keep being an export market for China. At some point, it will either stop de-industrialising or become a raw materials supplier instead.

The current situation is not an equilibrium - there is a secular flow of industrial capacity from the US (and to a lesser extent from Europe) to China. You don't have secular flows in equilibrium. And you don't have a plausible story right now about how equilibrium is going to be achieved, because you don't have a plausible story about how the American body politic is going to stop cutting its hands off in order to feed China before they run out of hands.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Jul 20th, 2010 at 10:30:21 PM EST
[ Parent ]
Put simplistically, if the Chinese went to war without a navy like America has, the Chinese wouldn't get to keep their ships -- they would have to surrender them to America who would allow the world to use them for trade and supplying resources to America until China ate its hum humble pie and rejoined the American world again. Since the dawn of capitalism, the importance of having the biggest navy, or capacity to be independent of trade, cannot be overestimated.  Everything else falls into place after control of the seas is established.

It took China 30 years to develop its industrial capacity because it didn't have technology or, more importantly, the social institutions for capitalist industrial organization. Once they developed the social institutions of capitalism, it took only weeks or months for them to build new factories. It woouldn't take even 30 weeks for anyone who has necessary capitalist political institutions and social norms in place to replicate Chinese intermediate good manufacturing in the rest of the world.  Same thing already happened in WWII when the industrial powers retooled their entire economies in matters of months to produce things multiple times the scale that had been produced before the war.  The real limiting factor isn't the knowledge or industrial base; it's the resources -- the oil, and minerals and food supply, and that's what big navies provide.  In the end, the guy with the biggest guns and fastest boats controls the resources, not the the guy with factories to transform resources from one thing to another. You can replicate the factory, not the resources.

Regarding equilibrium, we're not talking long duree here.  We're talking about the political constraints faced by people who have responsibility for feeding billions today.  It's a political equilibrium because no actor can improve their lot by doing something other than what is provided for in the rules of trade, commerce, and global governance set up by, and mostly for the benefit of, the US and its close allies.  

Over the long term, yes, economic advantages can change, and the winds appear to be blowing in China's direction. But in order for China to actually overtake America, it would have to find a way of securing access to the kinds of resources that America can, either militarily, or by reorganizing the institutions by which people organize their economic lives, i.e, overthrowing capitalism. Right now, China is securing access to the resources it needs by merely depending on American goodwill and Western social contrivances for property rights and the like.  China has a long way to go yet before it can do better than just depend on others for both institutions and security, but I agree that it appears to be headed that way someday.

by santiago on Tue Jul 20th, 2010 at 11:20:12 PM EST
[ Parent ]
I tend to agree that new manufacturing could be ramped up quickly, but I cannot see how the current system can possibly have any stable equilibrium. Instead, it seems to me most likely that we are rapidly heading for a massive financial disequilibrium that will require the sort of response that will not be possible while retaining the nature and structure of the present elite and their system.

The current system consists of a pack of sociopaths in suits with the habits of pirates seeking every opportunity to loot and pillage. They and the way they operate take no account of the need for anything but their own immediate returns, which are now only obtainable through organized fraud enabled by their capture and domination of the political process. This is unstable and will crash just as surely as the economy of ancient Rome collapsed when overrun by Goths and Vandals. The pirate elite has no interest in the boring tasks required to run a sustainable society. That is why we don't have one.

Many superior forms of organization are possible, but so are vastly inferior forms of organization. I can only hope that some of those with position and power have the vision to want to secure a livable world and a decent society for their children and grandchildren.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Jul 21st, 2010 at 01:36:11 AM EST
[ Parent ]
I'm not talking about a system or stable equilibrium in the general sense here.  I'm just saying that the strategic options available to leaders of states like China provide an equilibrium, in the game theory sense of the word, because China cannot improve itself through any option other than submission to the current world regime of rules on trade, commerce, and finance if it wants to continue to grow.  It can't opt out of trade with the US and EU, which means it cannot contest power with the US militarily.  
by santiago on Wed Jul 21st, 2010 at 08:53:47 AM EST
[ Parent ]
From this statement
It can't opt out of trade with the US and EU

does not necessary follows that
which means it cannot contest power with the US militarily

in other words proof, please.

China cannot improve itself through any option other than submission to the current world regime of rules on trade, commerce, and finance

From this statement we learn that China wish to improve itself without submission to Western narrated "rules".

Proof, please.

by FarEasterner on Wed Jul 21st, 2010 at 01:44:18 PM EST
[ Parent ]
This sis of course only under the condition that the Chinese won't strongly expand their navy. Which they are actually doing. At a faster pace than their economy is growing, IIRC.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Jul 21st, 2010 at 04:31:05 PM EST
[ Parent ]
Wikipedia:
The future fleet of conventional Chinese submarines is a deadly quiet force that could perform defensive and offensive operations. The future fleet will compose of the Kilo, Song and Yuan types, as the Romeos and Mings are phased out of service. China is reported to have the option of purchasing the more advanced Russian Amur class SSK. With the success of indigenous programmes, however, future purchases of foreign submarines look relatively unlikely.


By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Wed Jul 21st, 2010 at 05:06:07 PM EST
[ Parent ]
Yes, that China wants to be able to blockade Taiwan aint no surprise. What we should keep our eyes and ears open for is any news about Chinese capital ships, to secure SLOC's.

Like the ones the Koreans and Japanese are building.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Wed Jul 21st, 2010 at 05:11:07 PM EST
[ Parent ]
Why?

Take a capital ship that you don't like.

Then take a moderately modern spy satellite.

Then take four dozen submarines.

Launch five hundred cruise missiles over the horizon.

Watch as ten million man hours, five thousand sailors and pilots and a hundred thousand tons of high-grade steel sinks helplessly to the bottom of the Pacific Ocean.

Dive, scatter and lose the counter-sub task force dispatched to hunt you down.

Repeat as necessary. They can get twenty of your subs for each capital ship you take out and you still come out ahead in terms of steel, man-hours and trained sailors.

Watch your capital be reduced to radioactive glass about forty-five minutes after the first capital ship gets an impromptu U-boat makeover.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jul 21st, 2010 at 06:13:06 PM EST
[ Parent ]
First, it boils down to how effective subs are vs ASW vessels, and how effective the anti-missile systems are. No one knows this, because there hasn't been any serious naval warfare since WW2, with the exception of the Falklands war, which for several reasons actually told us less than one might imagine.

Second, even if the subs win, you still don't control the SLOC's. You just deny them to the enemy.

If you don't believe me, send in your merchantmen and watch as land-based (and carrier-based) fighters, long-range bombers, missile armed fast attack crafts and enemy submarines close on them. Not pretty. You need your own ASW and AA (and ASh) bubble around your convoys of merchantmen. You only get that from capital ships, or a plentiful base network.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Wed Jul 21st, 2010 at 07:17:48 PM EST
[ Parent ]
I might add that with "capital ship", I'm not just referring to carriers, but to guided missile destroyers/cruisers and the like as well.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Jul 21st, 2010 at 07:23:44 PM EST
[ Parent ]
Interesting article to your attention on American-Russian-Chinese triangle:

The Moscow Times: Tangled Triangle of Russia, China and the U.S.

recently .. former high-ranking Pentagon official.. made a special trip to Moscow to warn us about an increasingly powerful China. The "Chinese dragon," he said, has large ambitions and will try to dominate the world. He hinted at the need for Washington and Moscow to close ranks and start preparing for a joint defense against Chinese political and economic expansion.

... Reveling in its victory in the Cold War and its clear military, political and economic superiority, the United States set its sights on global hegemony. This antagonized and alienated both Moscow and Beijing and created an opportunity for them to join forces once again to oppose U.S. hegemony.

The Sept. 11, 2001, terrorist attacks marked the beginning of the end of U.S. global domination. The U.S. fall from the stars was accelerated by its unsuccessful, taxing military campaigns in Afghanistan and Iraq and the deep economic crisis.

By 2009, it became obvious that the "Pax Americana" global empire was a pipe dream, and the United States -- now under the leadership of a more pragmatic and realistic President Barack Obama -- began looking for new alliances. One of the Obama administration's ideas was sharing the burden of responsibility for global security with China...

In February 2009, U.S. Secretary of State Hillary Clinton proposed creating a U.S.-Chinese superpower alliance... But the Chinese leadership flatly rejected Clinton's proposal. ...China has always insisted that it has no ambitions to become a hegemony and is opposed to any global domination by any superpower.
...This is why many U.S. policymakers view China as the country's largest threat.

How can the United States counter this threat? ... once again, Washington has courted Moscow to help the United States counterbalance China's growing global influence. But the United States doesn't realize that Russia has no interest in alienating China.

Eighteenth-century French philosopher Charles de Montesquieu said, "Small counties perish from external enemies, and large countries perish from internal ones." Russia has more than enough internal problems that it needs to solve without having to worry about conflicts with China. This is why ... the Russian-Chinese-U.S. triangle will remain as three separate centers for a long time to come.

by FarEasterner on Wed Jul 21st, 2010 at 05:55:38 PM EST
[ Parent ]
The US does its best to alienate the EU from Russia and Russia from China in order to preserve its hegemony. I don't think the EU, Russia or China are concerned with hegemony but, in Chomsky's dychotomy, survival. So the US can scaremonger and drive wedges all they want but I don't think it will work.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Thu Jul 22nd, 2010 at 04:18:53 AM EST
[ Parent ]
Everything else falls into place after control of the seas is established.

Looking at Somali piracy, isn't it possible to mess up the world system badly enough that there are no safe shipping lanes anywhere?

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Migeru (migeru at eurotrib dot com) on Wed Jul 21st, 2010 at 02:44:21 AM EST
[ Parent ]
No. The Somali pirates are a paper tiger. If the powers that be really wanted to clear out the Gulf of Aden it could be done in a week.

But there is no feeling that it's needed, as so very few ships fall prey to the pirates. The real cost of this piracy is reflected in the insurance premiums shipping companies must pay when they pass through these waters. The increase of the premiums is smaller than the cost of maintaining the current naval forces down there. Heard that one before? Yeah... Privatise the profits, socialise the costs.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Wed Jul 21st, 2010 at 04:34:38 PM EST
[ Parent ]
Put simplistically, if the Chinese went to war without a navy like America has, the Chinese wouldn't get to keep their ships -- they would have to surrender them to America

Or re-flag them with a neutral-in-their-favour country prior to the commencement of hostilities. The only historical examples of successfully blockading serious industrial powers (France during the Napoleanic Wars, Germany during the world wars) involve countries that did not have any land borders with neutral-in-their-favour countries possessing blue-water ports.

It took China 30 years to develop its industrial capacity because it didn't have technology or, more importantly, the social institutions for capitalist industrial organization.

And after thirty years of systematically dismantling their industrial plant, it is doubtful that the Americans have that capacity either at this point.

Same thing already happened in WWII when the industrial powers retooled their entire economies in matters of months to produce things multiple times the scale that had been produced before the war.

This requires there to be an industrial plant to re-tool. Re-tooling and re-building from the ground up is not the same story. And even re-tooling isn't as easy as it was in the '30s and '40s because the machinery has gotten a lot more specialised since then. You can't take a jet engine factory and convert it to a rail engine factory the way you could take an automobile factory in the '40s and convert it into an aircraft factory - you might as well scrap the whole thing and start over instead.

You would be better advised to compare the task at hand to the re-building after the War, when most of the pre-existing industrial plant had ceased to exist. That took a couple of years, not a couple of months, and they had help from the premier industrial power of the time, whereas you are talking about doing it in opposition to the premier industrial power of our time.

The real limiting factor isn't the knowledge or industrial base; it's the resources -- the oil, and minerals and food supply, and that's what big navies provide.  In the end, the guy with the biggest guns and fastest boats controls the resources,

Only against countries that he can effectively blockade. Once Chinese shipping is out of the Sea of Japan, it's impossible to interdict without cutting off the Russian East as well, unless Russia is neutral in your favour. Which, at the moment, they are not. And if you send your carrier task forces into the Sea of Japan to carry out piracy against Chinese shipping, land-based cruise missiles can make them not come home again for a fraction of the cost of building a blue-water navy.

It's a political equilibrium because no actor can improve their lot by doing something other than what is provided for in the rules of trade, commerce, and global governance set up by, and mostly for the benefit of, the US and its close allies.

That is a necessary but not sufficient condition for describing it as an equilibrium situation - it could also be (and in this case is, due to the secular trends involved) - a positive feedback loop. The atmospheric concentration of water vapour is a stable equilibrium (on the macro scale). A ball balancing on top of another ball is an unstable equilibrium. A Ponzi scam is a positive feedback loop.

(Stable and meta-stable) equilibria change gradually - unconstrained positive feedback loops crash. (Unstable equilibria rarely live long enough to be observed in noisy environments.)

But in order for China to actually overtake America, it would have to find a way of securing access to the kinds of resources that America can,

You're still assuming that the Americans can simply start interdicting Chinese commerce at will. Physically, they can, but doing so would piss off every other industrial power on the planet. So economically speaking, they can't.

Germany thought they could get away with unrestricted commerce warfare against the Entente during the first world war. That is probably the single strategic decision that goes the longest way towards explaining their defeat, because that's what brought the Americans in on the side of the Entente.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jul 21st, 2010 at 04:56:36 AM EST
[ Parent ]
Without Chinese trade, the non-Chinese world doesn't really need Chinese steel or Chinese ships.

Except that if they want to buy the stuff from other people, they need ships. And if they want to make the stuff themselves, they need steel.

But you did say China produces only (ahem) 1/3 of the world's steel. So there are steel industries elsewhere that can be scaled up.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Wed Jul 21st, 2010 at 02:42:07 AM EST
[ Parent ]
But what's the ramp-up time for that?

A year? Two years? Ten years?

Any of those answers will mean that simply embargoing China is off the table. You'd have to do something a lot more gradual. And if you do something a lot more gradual, then China has time to respond, and you start entering a regime where predictions become hard to do...

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jul 21st, 2010 at 04:20:05 AM EST
[ Parent ]
When I said war, I wasn't in any way implying that war would rational, planned, or effective.

When it's not oppressing peasants in its own back yard, The US starts wars to increase its perceived mojo and to feel good about its own awesome, not for practical reasons. It also runs the world's biggest war machine as a convenient excuse for corporate welfare, not as a form of military effectiveness, the latter being incredibly limited in practical terms.

Both China and the US have nukes, and if hostilities start over - say - resource access in Afghanistan, it won't be long before they're used.

China is already in a position to crush the US financially. The Chinese leadership have chosen not to, so far, but if the US economy implodes - which is looking almost certain - the Chinese will decide that it's self defence to secure energy and other resources around the world, and the US will twitch and spasm like a moron giant, especially if the US has one of its idiot presidents in charge.

The point is that politically and militarily, the US is no longer viable. It's running on empty and hasn't realised this yet.

The best that can happen is sovereign default and economic reorganisation. But with an idiot president at the helm, conflict to save face is more likely.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Jul 21st, 2010 at 05:07:04 AM EST
[ Parent ]
When it's not oppressing peasants in its own back yard, The US starts wars to increase its perceived mojo and to feel good about its own awesome, not for practical reasons.

But it is also very careful to only start war against countries that don't have a sporting chance of fighting back.

The whole starting war against countries that actually have a military (or any economy worth speaking of) is a European thing, historically speaking at least.

Both China and the US have nukes, and if hostilities start over - say - resource access in Afghanistan, it won't be long before they're used.

Which is the real reason that China will back down over a confrontation - you don't play chicken with a psychopath. But this should not be mistaken as the psychopath having the strategic advantage in any other avenue of engagement than a game of nuclear chicken.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jul 21st, 2010 at 05:16:56 AM EST
[ Parent ]
ThatBritGuy:
But with an idiot president at the helm
If you're talking about Obama, wait until you see Palin.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Wed Jul 21st, 2010 at 05:20:54 AM EST
[ Parent ]
And what is the impact on losing 1/3 of the steel production capacity? I don't think it would be catastrophic. After all, we're talking about a global naval blockade...

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Wed Jul 21st, 2010 at 05:39:39 AM EST
[ Parent ]
Considering that China consumes a hell of a lot of steel itself... At least it would be catastrophic for the global iron ore industry. ;)

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Jul 21st, 2010 at 04:38:54 PM EST
[ Parent ]
How much of that steel ends up in products China exports? That is the relevant question, just as it is for energy.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jul 21st, 2010 at 06:21:09 PM EST
[ Parent ]
Instead it must content itself to try to outshine others in American-European world it has been reborn into.

Such statement we used to hear from likes of John Bolton and other neocons.

by FarEasterner on Wed Jul 21st, 2010 at 01:39:26 PM EST
[ Parent ]
The rest of the world could live without China.

Global demand rests on China. Take that away, and we'll have a real depression.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Wed Jul 21st, 2010 at 04:23:17 PM EST
[ Parent ]

Global demand rests on China.

No it doesn't. It's narrowly true for some specific categories of raw materials, but no for global aggregate demand.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Thu Jul 22nd, 2010 at 08:53:31 PM EST
[ Parent ]
And machinery, capital goods, cars etc, etc. Add in India, and Brazil for good measure.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Thu Jul 22nd, 2010 at 09:09:52 PM EST
[ Parent ]
Were it a fact or perceived to be a fact that China was out of business as a global trade player that would be stimulative to world manufacturing as a whole, as a good amount of manufacturing capacity would have to be created in other countries. I believe China exports well more of its production than it consumes. Given the raw material stockpiling that China appears to have undertaken a drop in commodity prices, ex energy, would not seem unlikely unless China continues to boom. I don't know how these two factors would balance out, but they should offset one another.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Jul 22nd, 2010 at 10:18:28 PM EST
[ Parent ]
The reserves have already benefited China ... they were accumulated as a side effect of discounting exchange rates, and the neo-mercantalist policy benefits in terms of exported unemployment has already been reaped.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Thu Jul 22nd, 2010 at 06:16:21 PM EST
[ Parent ]
ThatBritGuy:
The fact that we're having a plausible discussion about China lending money to the US and/or EU suggests that unofficially, the Yuan is now the world's reserve currency and that China is the lender or last resort.
The world's exporter of last resort ultimately holds the levers of the global monetary system. I guess I'm going to become a mercantilist if the current economic state of affairs persists for long enough.

And then a physiocrat, I suppose...

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Migeru (migeru at eurotrib dot com) on Wed Jul 21st, 2010 at 05:41:50 AM EST
[ Parent ]
And then a physiocrat, I suppose...

interesting... diary?

"We can all be prosperous but we can't all be rich." Ian Welsh

by melo (melometa4(at)gmail.com) on Mon Jul 26th, 2010 at 11:26:02 AM EST
[ Parent ]
I was just joking about ideologically "progressing" backwards to the 18th century...

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Mon Jul 26th, 2010 at 11:37:37 AM EST
[ Parent ]
not all old ideas are crazy... in my brief foray into understanding the phenomenon, there's a resonance with Chris Cook's economic philosophy, in the trust in land being the ultimate (non-fungible, and energy the fungible?) value criterion.

 

"We can all be prosperous but we can't all be rich." Ian Welsh

by melo (melometa4(at)gmail.com) on Mon Jul 26th, 2010 at 12:12:34 PM EST
[ Parent ]
One of the things the physiocrats are remembered for is Quesnay's tableaux économiques which foreshadows Leontieff's input/output model and the modern "flow-of-funds" framework for macroeconomics analysis (see a mention of such models here).

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Mon Jul 26th, 2010 at 12:19:19 PM EST
[ Parent ]
ThatBritGuy:
So there's an interesting situation where the current hegemon's economy is imploding and the new player may be in a position to bail them out - if they choose to. At a price.

Traditionally, doesn't this usually result in a war to rebalance power more formally?

I remember discussions of hegemonic war a couple of years ago. The first was Has WWIII already started?, a diary by rdf on April 27th, 2008. There, BruceMcF commented
The hegemon is then the term used for the leading power among the great powers, based on the prevailing power resources of the day. Under any version of power transition theory, a period of balance of power is a tumultuous period likely to have a lot of conflict, and then hegemonic wars occur after a period of balance of power when a potential new hegemon has emerged, and one or more dissatisfied challengers make a move to carve out a stronger position for themselves in the emerging international system.

One of the concerns of some students of the cycles of hegemonic wars in political geography are how to establish a system were we can avoid having hegemonic wars.

In terms of ability to project power beyond their own region, it would seem that the great powers of the day are the US, China and the EU, with India being the only obvious candidate medium power with the prospect for emerging as a great power.

There was another discussion of Hegemonic War between China and the US in this subthread of my Socratic Economics IX: National Accounts (May 31st, 2008).

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Wed Jul 21st, 2010 at 05:52:22 AM EST
[ Parent ]
though interesting observation the diary does not present the whole picture concentrating on much-maligned yuan exchange rate and purchase of Eurobonds. Reasons behind Chinese economic policy are entirely domestic and these are not illuminated in any way.

I agree with the conclusion that Zapatero's regime needs to use its time wisely yet it's not clear how quickly Spain can change its economic landscape. It's not easy task even for medium size country like Spain and up to now there were no indicators that anything changed on Spain's path to bancruptcy.

by FarEasterner on Wed Jul 21st, 2010 at 05:10:47 AM EST
FarEasterner:
Reasons behind Chinese economic policy are entirely domestic and these are not illuminated in any way.
I don't pretend to have any special insight into China's domestic policy motivations, except possibly in this other comment which is not about insight but (explicitly) speculation on my part
I think the Euro crisis has thwarted China's monetary strategy for this year. In my diary What China wants 4 months ago I surmised
China wants to stop accumulating reserves and possibly unwind the ones they already hold. They might do this by allowing the Yuan to appreciate against other currencies, notably the dollar, but they don't just want that - they want to import high-tech goods from the US which at the moment is restricted by US policy. So, my interpretation of these words is that China intends to use their dollar reserves to pressure the US government to allow what amounts to technology transfer from the US to China. In fact, the way the Washington Post headlines their coverage (China's leader blames U.S. for bilateral tensions, rejects call to adjust currency) indicates that China is not about to give in on US calls to revalue their currency without access to the imports of their choice. The situation right now goes in the opposite direction, with both countries erecting mutual trade barriers.
Unfortunately for China, the Euro has dropped more than anyone was expecting at the start of the year and so China may have decided to prop it up a little. But this is just speculation.

If China decides to start lending to Europe it might get us out of the recession but here they are pu[s]hing against the EU's policy stance of deficit and debt reduction. I guess instead of owing money to each other Europeans can owe it to China and still remain austere...

The problem with this is that Europe might get too comfortable and fall into the same trap the US fell into over the last couple of decade of unsustainable debt-fuelled economic activity...

I also don't pretend to tell China what it should be doing.

I can only go on publicly available information via press reports, but I do try to look at what it means for "us" (Spain, the EU, the West™), and to voice an opinion on what my polity should be doing.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Migeru (migeru at eurotrib dot com) on Wed Jul 21st, 2010 at 05:31:09 AM EST
[ Parent ]
well, your diary generated the whole China-specific discussions by "ET-China experts" which came up with statements-speculations which can only cause the attack of uncontrollable laughter from anyone who knows China (and how it works) even a little. This can be said also by not so friendly observers of China.  

so what was aim of recent Chinese purchase of Euro debt? Was it Eastern courtesy before Merkel's visit, maybe for Market consumption? Yes, yes and no.

Courtesy is one thing Chinese are very sophisticated at, His Majesty Market has ears so it can listen but hardly take it into consideration. The amount of European debt is so big no China can swallow. However markets in the West became very attentive to Chinese domestic economic policy and so far purchase of Eurobonds was not included.

by FarEasterner on Wed Jul 21st, 2010 at 05:48:27 AM EST
[ Parent ]
It appears saying "China" invites talk of hegemonic transition war. Pavlov lives!

Anyway, it occurs to me that, if the EU didn't have an embargo on China, China could be buying Spanish guns instead of Spanish bonds. From six months ago:

EU Business: Spanish EU presidency mulls lifting China arms embargo (26 January 2010)
Spain is "weighing the pros and cons" of the embargo, which Europe introduced after the 1989 Tiananmen Square crackdown on Chinese pro-democracy protesters, Moratinos told a press conference.


By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Wed Jul 21st, 2010 at 06:20:37 AM EST
... though I guess that would prop up the Pound Sterling rather than the Euro ...



I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Thu Jul 22nd, 2010 at 06:19:32 PM EST
[ Parent ]
... perspective on this.

Does anyone know of blogs equivalent to Eurotrib covering China?

by Pope Epopt on Thu Jul 22nd, 2010 at 07:41:50 PM EST
Fascinating discussion. And yes, it would indeed be interesting to get a Chinese perspective on the whole issue.
Santiago, your pattern of reasoning and the package of premises that you operate from surely does have a Boulton-esque aroma. At least. Far Easterner may push the limits of civility, but he's right about that.

The Neocon-PNAC story lines are convincing partly because they contain much truth, but more importantly because they are deeply, seductively reductionist. They fit a world view that has come to be widely accepted in the West- that a machine-like view of strategy is all that's needed and that public opinion and popular action are under tight control, and therefore are inconsequential to the policy debate. They will be molded as necessary once the "Real People" make their call.
I think this is often an incorrect assumption, though just exactly what conditions are sufficient for people to break out of this conceptual cage is not an acceptable area of study. Sounds too much like searching for the "preconditions" to the elite. However, I think a reading of real history- history not written to justify or flatter the "winners" at the great game- suggests there are a veritable ocean of factors that relate to the social ecology of conflict that render the Neocon analysis pretty useless. Here's an example.  

Back in my grad student days, a professor of mine who taught a course on war and conflict named Hansen, who was a recent refugee from the military policy-making apparatus, ran through a powerfully similar analysis of the strategic and economic factors that related to the then-existing relationship between the US and China, as percieved by the hawks of the day- Boulton's mentors and peers. In the end, his view came down to a games-theory tidbit that calculated the mega-deaths involved in two strategies:

The bomb now strategy,
a la Boulton, and

The Wait and See strategy

In summation, he maintained that for the sake of humanity and the good of a democratic world, it was our obligation to immediately effect a nuclear strike against China to eliminate it's capacity to initiate a nuclear war, with known casualties, and a probability of success of 100%. This, in order to prevent a far greater conflict with casualties at least ten times as great.

In my class, I was alone in calling his analysis for what it was- a games-theory fantasy enclosed in a bubble, made of selected bits of real and fancied history, natural science and statistical window dressing. It cost me dearly to say that, since he was the departmental darling, and was instrumental in relentless attacks on anything I did from that point on. The behavioral similarities to Boulton are striking. Perhaps it comes with the disease.
My example is itself reductionist- the discussion here has been far more nuanced, the support better honed than his was- but both utterly delete any input from the lower orders, any consideration of any wider human good, any influence exerted by popular hope or agony, or even the existence of a moral or ethical component in strategic analysis. There is only one endpoint- to win or lose. "Winning" is not defined in any way other than as power to determine the outcome of events--even if that outcome is species extinction.

I'm not suggesting a retreat to wishful thinking. I'm suggesting that this IS a retreat- to mechanistic reductionism.

THAT is a truly Neocon perspective.
 

Capitalism searches out the darkest corners of human potential, and mainlines them.

by geezer in Paris (risico at wanadoo(flypoop)fr) on Fri Jul 23rd, 2010 at 07:46:02 AM EST
One of the great values of having ET regulars who take and strongly defend unpopular views here is that it forces us to refine our own views and shows us the limits of our own arguments. It seems that there are a number of us who can personally testify that we were not afforded the same courtesy in academia. We should always defend civility and welcome viewpoints contrary to our own. If, collectively, we cannot defend popular positions then perhaps we should reconsider them. GiP's comment above is illuminating with regard to the ET CW regarding the Neocon worldview, as were Jerome's and others.

It is better to intelligently oppose ugly realities of power when we can and accommodate them when we must than to deny them. The trick is knowing which we can do when. The Neocons would have us believe that their worldview is all encompassing and There Is No Alternative in realpolitik no less than the proponents of Neo-Classical Economics would have us believe the same with regard to economic governance. I believe both are both wrong and bad policy. The trick is to ever have the opportunity to demonstrate better alternatives.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Jul 23rd, 2010 at 12:06:23 PM EST
[ Parent ]
It has been a fascinating read...

Every single comment... and I mostly agree with you here. The neocon view is too simplistic.

It really seems that the power structure is going to become more dependent on local geograpahy.. with continental powers and not world powers. I certainly do not see the US as an empire, it can control the sea, but it hardly matters what they say any longer regarding South America, or Asia.

Besides, the US is not monolithic, there are casts, and structures, and groups and ideologies, and  frames and views.

I think the future is more about who wins the narrative than anything else... It seem that we are going to win the battle for universal equality but we are going to lose the masters of universe economic narrative...The development of South America, Asia ,and South Africa is going to come at the expense of the middle class in Europe and the US, so that the master of the universe in the US and Europe can happily buy all the stuff they want with their rents, from now on to the eternity without having to be too worried about inflation.

The real interest of this debate is what happens when the master of the universe become much more hindu, chinese and brazilian...Will they share the same narrative, different?

Oh, well, this and global warming (energy transformation) are the real interesting things we still can have some effect.

By the way.. how in hell we lost the narrative battle in Europe to print money and increase inflation when we have 30% of our factories shut down by lack of demand, and more than 10% unemployment?

Did we ever try?

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Fri Jul 23rd, 2010 at 01:05:13 PM EST
[ Parent ]
There seems to be some confusion here about what "neoconservative" means. People seem to think that anything which implies maximizing power or using coercion means is neoconservative, when nothing could be further from the truth.

Looking back over my comments, I can see that they are all well within the overall intellectual assumptions about what motivates states and political action called Realism, not neoconservatism at all. Realism is a very broad school of thought in political science and IR theory encompassing everyone from the left-wing Stephen Walt (and to an extent Juan Cole, as well as radical Saul Alinsky) to the right-wing Henry Kissinger.  The central thesis of realism in international relations is that the actions of states are necessarily limited by the need for states to maximize power and security, especially when talking about big, empire-like states. This assumption is justified under the simple reasoning that if large states don't seek to maximize power and security in international affairs, they will be soon overtaken, absorbed, or otherwise made irrelevant as independent polities by other large states that do. Political independence, i.e., sovereignty requires states to seek power and security first and foremost.

Neoconservatism, on the other hand, comes from the exact opposite school of thought in international relations theory -- Liberalism.  Neocons do not believe that states must maximize power or lose independence.  Rather, neocons believe that liberal democracies ought to, not necessarily have to, prioritize power struggles with non-liberal states because it is the right thing to do on social justice grounds.  Madeline Albright, in her writings if not by admission, actually belongs to the more liberal wing of this school of thought, as does Condi Rice and a large body body of rightist, pro-Israeli colonization supporters.

With outstanding timing, Stephen Walt has a guest post on this very topic on his blog last week.

by santiago on Sat Jul 24th, 2010 at 04:54:34 PM EST
[ Parent ]
The central thesis of realism in international relations is that the actions of states are necessarily limited by the need for states to maximize power and security

Security and power, however, are not entirely coterminous. And increasingly, as both shooting and trade wars become ever more losing propositions for all the belligerents (whether they nominally win or lose), they become conflicting objectives.

The will and ability to enforce your policy preference on somebody else comes with the inherent risk of resistance. And in a world in which resistance, even if you suppress it successfully, is ruinously expensive, exercising power is not conducive to your security. Conversely, in a world in which both trade and shooting wars are expensive propositions, it is perfectly possible to ensure your security without being able to project power - all you have to do is make it sufficiently expensive to infringe on your security while not making your offencive capabilities sufficiently threatening to warrant a first strike or provoke an arms race.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jul 25th, 2010 at 09:13:20 AM EST
[ Parent ]
I agree completely.
by santiago on Sun Jul 25th, 2010 at 10:50:51 AM EST
[ Parent ]
JakeS:
Security and power, however, are not entirely coterminous.

Seems to me that the Chinese have understood that economic power now trumps military power.

My thesis is that the Chinese may well have exercised an economic veto over further US adventurism in Iran in the first half of 2007 in a 'Suez Moment'. They are now quite happy for US 19 year olds to die defending free trade.

The evolution of warfare in an increasingly networked society is an interesting one.  

I made a couple of presentations in Lausanne in 2005 - in relation to the energy markets - at a very high level conference on 'Economic Terrorism'.  My case was and is that the trend to ever greater market consolidation and centralisation is creating ever more vulnerable 'single points of failure'.  

As I said then, the only difference between an economic terrorist - determined on a market coup to bring down the market - and a hedge fund, is motive.

The UK military are well aware of the vulnerabilities of a networked society, and the then head of the UK Defence Academy flew up here to spend a day with me on the subject not that long ago.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Jul 25th, 2010 at 12:56:31 PM EST
[ Parent ]
the only difference between an economic terrorist - determined on a market coup to bring down the market - and a hedge fund, is motive the colour of their skin and the language they speak.

There, fixed it for you.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jul 25th, 2010 at 01:06:39 PM EST
[ Parent ]
But it's important to keep in mind that economic power can only trump military power if economic activity is secure. Exposing your economic well-being to trade means that you must either have the military/political means of protecting that trade or maintain friendly enough relations with those that can.  

Hypothesis: International trade/investment/communications/migration -- in other words, the elements of globalization -- only occur in significant levels when protected by a sufficiently powerful, transnational political authority, aka an empire-like power.

Falsifiable evidence: What historical examples are there of massive levels of sustained cross-border trade, migration, investment, and communications occurring where there is not an empire-like state both and protecting those relationships?

The implication that China's current, trade-based economic power, like rising Japan of the previous generation, is entirely dependent upon maintaining good enough relations with the United States, without whose protection it cannot maintain the oceanic lines of communication it still needs.

by santiago on Sun Jul 25th, 2010 at 01:19:18 PM EST
[ Parent ]
However, "good enough relations" and "good relations" is not the same.

"Good enough relations" means simply that it is more expensive for the US to start a trade war with China than not start a trade war with China (and that it is more expensive for the US to stop securing international trade as a whole than to keep doing it).

That still leaves plenty of room for ultimata to be issued in both directions.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jul 25th, 2010 at 01:34:55 PM EST
[ Parent ]
Dominance is not the same as complete control, and the dominant party in a relationship is not immune from influence from those he or she dominates.  But there is a world of difference between being dependent upon another's rule-making framework and having what is true sovereignty over your affairs and the affairs of others -- the ability to just walk away from it all if you have to.  

Although it would be at least marginally costly in the short term, the US really can walk away from China and still get by without a serious deterioration in standard of living, national security, etc.  Indeed, a very large part of the US labor movement pushes to do that every day.  (You seem to think China that what China produces is a lot harder to replicate anywhere else than I do, but I just can't name a single thing that anyone really needs from China. (Steal is easy to make and it is already done in lots of other places that could use the extra business, for instance.) However, in the decade or so since China has engaged in an export-oriented growth strategy, it can no longer walk away from trade to survive. (Almost 40% of GDP is now from trade, up from close to zero just over a decade ago, which means that almost all Chinese growth is due to trade, while only a small part of US or EU GDP growth is due to trade, and that part is the cheap stuff anyway.)

I argue that instead of being a real world power, China has become, at least for the time being, a textbook case of the 1970's era dependency theory.  It needs trade to keep social forces from overwhelming the state, but it has only marginal capacity to affect the rules and norms of how trade happens.

by santiago on Sun Jul 25th, 2010 at 07:14:53 PM EST
[ Parent ]
Oh, sure, China is replaceable. If you have somewhere between five and ten years to ramp up production elsewhere, depending on which sector you're looking at.

But if you're talking a 5-10 year time scale, China has the option to walk away as well - it can simply begin dealing bilaterally with the American colonies instead of going through the post-Bretton Woods dollar system. China will still need food imports from the US, but the US will need raw materials inputs from their colonies as well - and unless they can pay better than the Chinese for those raw materials, they will have to buy them via imports of Chinese finished goods. And it would be curious indeed if the US were better at making everything than China is...

The US can take away China's access to raw materials, yes. But only by disrupting global trade institutions rather severely. And without the dollar-based trade and financial hegemony, the US can't secure those raw materials for their own use - as Iraq is so amply and painfully demonstrating. Is the US prepared to bet that Latin America would still be prepared to sell its raw materials under a Bretton Woods II regime? Yes, they have to pay their bills... but quite a substantial fraction of those bills are dollar-denominated loans, which are going to get essentially wiped out if current international trade institutions collapse.

It is possible that the Americans would be prepared to roll those dice, but not unless they were pushed to do so by something rather more substantial than simply having to pay full price for Chinese imports...

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jul 25th, 2010 at 07:34:49 PM EST
[ Parent ]
I just can't identify anything that China makes and that the US, or EU for that matter, needs that would take more than 10-15 weeks to obtain from elsewhere.  It's not steel, and if it really is that important, it wouldn't be the US or EU that goes without it if it couldn't be quickly reproduced elsewhere. It would be the poorer parts of the world which get priced out of things when they get scarce.  (The US has dollars as well as a Navy, and those dollars have proven to be even more valuable in times of crisis, not less.) Not good economics, or good social justice, but it does mean that the US has options that China doesn't.  

Put another way, the US has a poker hand which all the players at the table know that China cannot possibly match in this round, drastically reducing one's options for playing, bluffing, or folding.  And those options amount to a certain level of sovereignty enjoyed by the US and not by China.  If China wants to regain its pre-trade sovereignty, it will have to ween itself from trade-based growth first.  (Which is actually China's long term strategy, but it's far from there yet.)  In the meantime, China is just another part of Washington's global constituency, getting in line with Israel, Europe, Latin America, Louisiana/BP, the Tea Party movement, and the rest.  (Notice that Russia is not on the list.  Russia, Iran, and North Korea are, in fact, as sovereign as the US is, and I think they are the only ones left, since even Cuba now gets a third of its food imports from the US, and Venezuela, bless her heart, still can't find anyone else who will process enough of its low-grade crude oil other than the US.

Mind you, I am not saying that this is in any way a good state of affairs, but I am just really skeptical of the narrative going around here which presumes the US has already gone bust and China has already taken over the world. It just hasn't happened, and given the huge distance China still has to make up before it does, I don't think we can even say it is likely, much less inevitable, even in the distant future.

by santiago on Sun Jul 25th, 2010 at 10:20:47 PM EST
[ Parent ]
I just can't identify anything that China makes and that the US, or EU for that matter, needs that would take more than 10-15 weeks to obtain from elsewhere.

I'd love to see that. You're talking about a project on the same scale as the rebuilding of West Germany after the War. In a country whose dominant political factions are universally inimical to the very idea of a coherent industrial policy.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Jul 26th, 2010 at 08:40:09 AM EST
[ Parent ]
I think you're really overestimating both the value and the amount of work that actually goes into all the infamously cheap junk, now including electronic components, that still make up the bulk of China's exports. The technology and know-how didn't move to China, just the cheapest parts of the production processes. The kind of thing that takes a national industrial policy in a place like China happens much more quickly than you seem to be allowing for in the Western-based, multinational corporate HQs that moved the production to China in the first place.
by santiago on Wed Jul 28th, 2010 at 05:14:48 PM EST
[ Parent ]
It's not the cheap junk I worry about. It's the intermediate goods.

Your timescale of 10-15 weeks is almost certainly true for any individual shipyard or steel plant, but we don't have the kind of cement production or bricklaying capacity or steel production to run all those replacement projects in parallel (and renovate their supporting infrastructure, which hasn't been properly maintained for between one and four decades), nevermind the political institutions to organise such an effort.

Let's be wildly optimistic and say that we have or can create sufficient slack in our industrial plant to re-build ten percent of the Chinese industrial capacity dedicated to exports in parallel. Let's further say that all replacement industrial capacity is immediately dedicated to this project, and that China's domestic industrial plant is roughly equal to the effort that would be mobilised for the reconstruction effort.

Under these wildly optimistic assumptions, it would still take seven to eight iterations, or between 1½ and 2½ years at 10 and 15 weeks per iteration, respectively, to replace the full productive power of China. During which time we would essentially be operating a wartime economy.

And this assumes that you put engineers in charge of the process, so it works as smoothly as can be reasonably expected from a human endeavour. With the crop of lawyers, economists and bookies currently holding the commanding heights of our industrial plant, you'd have to multiply by an idiot factor and add a run-around-like-headless-chickens-for-a-while term.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jul 28th, 2010 at 06:19:11 PM EST
[ Parent ]
Under these wildly optimistic assumptions, it would still take seven to eight iterations, or between 1½ and 2½ years at 10 and 15 weeks per iteration, respectively, to replace the full productive power of China. During which time we would essentially be operating a wartime economy.

On that timescale, it would be a great way to get out of the depression. After all, we're starting out from a recession so there is slack that could come online faster.

However, we've become more adept at liquidating plant so some of the redundant plan may already have been dismantled.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Migeru (migeru at eurotrib dot com) on Thu Jul 29th, 2010 at 04:09:07 PM EST
[ Parent ]
A service in our new service economies is dismantling, crating and shipping plant to South Asia where it will be reassembled for industrial use. I can't supply references, but I have come across such a service company carrying out a contract not far from here. The factory, in the textile sector, was closed, the employees laid off, and the plant shipped off. Not to China, but to Laos (or it could have been Viet Nam, Thailand...). The service company has done this job for several clients in the area, where the textile industry has all but shut down.

Another, though cruder and more risky, closing-down trick was arson. Burn the factory down (with consequent damage to machinery) and collect on the insurance (if you can). This one has gone out of favour as the insurance companies started looking seriously at what was going on.

by afew (afew(a in a circle)eurotrib_dot_com) on Thu Jul 29th, 2010 at 04:23:15 PM EST
[ Parent ]
But under our current dysfunctional financial system, cutting off China would make the going concerns who are supposed to rebuild the capacity at home under your scheme even more insolvent than they already are, since they would lose their Chinese assets without being able to default on their liabilities with domestic financial institutions in a non-disruptive manner.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Jul 29th, 2010 at 04:31:46 PM EST
[ Parent ]
santiago:
I just can't identify anything that China makes and that the US, or EU for that matter, needs that would take more than 10-15 weeks to obtain from elsewhere

You can't be serious.

Even for relatively simple manufacturing, 10 to 15 weeks is a bare minimum to find extra manufacturing capacity, transfer production, set-up the supply chain, qualify the new factory...

Double or triple that for more sophisticated manufacturing needing big iron equipment: automobile assembly lines, shipyards, IC's packaging,...

And this is assuming that spare manufacturing capacity is already available elsewhere in the world: buildings, equipments, qualified workforce...

Depending on the industry, China based manufacturing is a significant chunk of WW manufacturing (one third? two thirds? more?). Should you move your manufacturing out of China, who is going to pick up the slack on short notice? SE Asia is already saturated and doesn't have anything near the Chinese capacity.

As for the US and Europe, as pointed out by Andy Grove, not only is manufacturing a dwindling activity, but even the knowledge itself is going out the window.

It's more complicated that it sounds like on CNBC stock tickers. Modern manufacturing is a science: you can't create any significant capacity in a greenfield deployment in less than a couple of years.

No matter how you put it, moving (hypothetically) manufacturing out of China just cannot happen overnight without huge disruption, the kind of which will become painfully apparent to consumers all over the "developed" world.

by Bernard on Mon Jul 26th, 2010 at 03:51:46 PM EST
[ Parent ]
US and EU based manufacturing mega-multinationals, such as GE and 3M, source products in minutes, not even weeks, because they have a global network of suppliers and potential suppliers for each of the hundreds of thousands of products they manufacture. None of those companies, nor most of their smaller but also globally integrated competitors, has been so foolish as to become dependent upon the political risk in one part of the world, be that China, or even the EU or US.  Unless someone has specific data showing otherwise, I'm just not buying the arguments that 1) China really produces anything anyone really needs, or 2) if it does, that it can't be obtained easily and relatively painlessly elsewhere.

Andy Grove is talking long term, and he's right as far as that goes, but that's not what we're talking about here regarding geopolitical dependency today.

by santiago on Wed Jul 28th, 2010 at 05:23:16 PM EST
[ Parent ]
What was the rate at which steel production and shipbuilding expanded at the steepest period of ascent between 1930 and 1945, for any political unit above five million inhabitants that you might care to pick?

For reference, replacing all of China's steel production gives a doubling time of 25½ weeks, or just a hair over quadrupling every year. Now, some of the Chinese steel goes to cover domestic demand, but most of it is exported either as is or embedded in intermediate or finished manufactures. So let's be excessively generous and say that half of it stays in China. That gives us a doubling time of 46½ weeks, or just about a full European work year.

So what you're claiming is that, if we put our minds to it and iron ore and coal were not constraints, we could somewhere between double and quadruple non-Chinese steel production in the space of a single year. (Or, in a linear rather than exponential model, double or treble it.)

You can repeat those calculations for shipbuilding, semiconductors, polymers and so on, with varying results, depending on sector and assumptions.

Now, does the world really need to replace all of China's exports? In the absolute sense of "can we maintain industrial civilisation in the absence of these goods," we could certainly do without a lot of it. But in the sense of "can we maintain something sufficiently resembling our current social contract to prevent torches and pitchforks," we need rather a lot of it. And it is the latter criterion that is relevant to the Masters of the Universe, since they risk ending up on the business end of a pitchfork...

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jul 28th, 2010 at 06:47:46 PM EST
[ Parent ]
As big of an exporter that China is today, in all of the industries you've mentioned here -- steel, semiconductors, shipbuilding, polymers, etc., basically inputs to other manufacturing -- lots of other countries allied or directly dependent upon the US -- also have large and well developed manufacturing sectors as good or better than China's.  Unless you're looking at some data that says otherwise, I'll bet nothing close to doubling of such capacity would be necessary to replace China, just marginally increasing currently unused capacity that has been very recently idled due to very recent Chinese competition. China provides a lot of stuff, but not really very much when looked at proportionally, and it certainly won't be Europe or America that goes without if short term constraints due to trade interruption with China occurred.  It would be some of the billion plus slum dwellers who currently can get everything from inexpensive Chinese gas power generators and pumps to Sony TVs who go without things.  (And though it's sad to say, going without things now and then is just part of life for slum dwelling poor -- just ask the Gazans.)

But you've brought up a really good research question:  How dependent, specifically, really is the world on Chinese resources and manufacturing?  I'm thinking not at all, but some good data might show otherwise.  I might look into this...

by santiago on Thu Jul 29th, 2010 at 01:09:34 PM EST
[ Parent ]
Unless you're looking at some data that says otherwise, I'll bet nothing close to doubling of such capacity would be necessary to replace China,

China makes a third of all steel in the world - replacing that capacity means adding half our current capacity, minus what China produces for domestic consumption that remains in China and is not exported as part of other goods.

just marginally increasing currently unused capacity that has been very recently idled

Do you have data suggesting that the displaced production has resulted in mothballed facilities, rather than scrapped facilities?

and it certainly won't be Europe or America that goes without if short term constraints due to trade interruption with China occurred.

Going by nominal GDP, the EU, US and Japan had just a hair over two thirds of the world's consumption ex China. Now, unless you want to postulate that we would be able to completely monopolise all consumption (including Russian and OPEC consumption...), a one-third cutback across the board creates shortages even for white people who speak English.

It would be some of the billion plus slum dwellers who currently can get everything from inexpensive Chinese gas power generators and pumps to Sony TVs who go without things.

This would render most of our colonies inoperational. There goes the raw materials for rebuilding...

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Jul 29th, 2010 at 03:17:27 PM EST
[ Parent ]
Here's where I'm coming from, just looking at steel for the moment:

China produced, as far as my limited data (said under his breath, wikipedia ) can say, almost 40% of the world's 1.3 billion tons of steel in 2008 (down, actually from 2007).  Of that amount, the same source says that China exported, on net, only 33 million tons of steel (though in 2006), or only about 3% or so of total world steel production (maybe 5% allowing for generous growth between 2006 and now).  Now Chinese exports of finished products might also account for more of that, but since Chinese exports, as big as they are, also amount to only single digits of total production of finished products worldwide, that tells me that we can probably do without China in the world entirely with little notice from anyone, and probably to the short-term benefit of blue collar workers in most areas as an added policy outcome side effect of a trade interruption with China.  Let me know where my math is off here.

by santiago on Thu Jul 29th, 2010 at 04:56:31 PM EST
[ Parent ]
Now Chinese exports of finished products might also account for more of that, but since Chinese exports, as big as they are, also amount to only single digits of total production of finished products worldwide, that tells me that we can probably do without China in the world entirely with little notice from anyone

a) Total production by mass, or total production by market price?

b) You're forgetting capital goods and intermediate goods, which amounted to over twice the value of the consumer goods exports in 2005 (according to the IMF), on an upwards trend.

c) "Finished goods" are not fungible - polymers, petrochemicals and semiconductors have a strictly limited value as substitutes for steel in the production of vehicles, pipes, hardware, windmills and industrial machinery. And vice versa.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Jul 29th, 2010 at 05:19:04 PM EST
[ Parent ]
Maybe, but we'd have to see some data on those arguments too before we can say much more about them.  Put them in the format I did:

Chinese production / World Production

and

Chinese Net Exports / World production.

I just think it is going to be hard to come up with figures that show that Chinese net exports of just about anything amount to much more than normal idled production capacity of 10-20% that are standard in most manufacturing sectors and are probably even bigger today and for the near future due to the recession.  But that's that falsifiable data that would change my mind on it.

by santiago on Thu Jul 29th, 2010 at 05:42:51 PM EST
[ Parent ]
santiago:
I just think it is going to be hard to come up with figures that show that Chinese net exports of just about anything amount to much more than normal idled production capacity of 10-20% that are standard in most manufacturing sectors and are probably even bigger today and for the near future due to the recession.

I doubt there are many manufacturing sectors outside of China with overall idle capacity anywhere near the 10-20% mark, just waiting for eventual orders. Maybe in relatively simple assembly like textile or shoes: less expensive equipment and lower skilled workers.

For anything that requires heavy and expensive machinery (steel, automobile, electronics assembly...) idle plants just do not exist: they are dismantled and their employees laid off.

Should you want to rebuild that, you'd need Capex (a lot of it in some cases) and workforce training. All of this takes more time and money than seen from Wall Street brokerages...

In some sectors, and electronics assembly is arguably one of those, Chinese net export is definitely above any idle capacity you could come up with elsewhere: just about everybody in that field has moved manufacturing to mainland China, starting with the Taiwanese.

by Bernard on Fri Jul 30th, 2010 at 10:48:10 AM EST
[ Parent ]
Some data might be enlightening here:

In the US, where we would expect asset markets to be the most liquid for idled capacity, the capacity utilization rate is currently only 74%, and 71% in manufacturing.  The average from 1972-2009 was 80.1%, so actually I was too generous.  Capacity under-utilization worldwide is likely to be at least 20-40%, more than enough slack to pick up the hole in manufacturing that China might leave behind if it closed itself off to trade was was isolated from the world by conflict with the US.  (Interesting, isn't it?  Chronically unemployed capital is actually a much bigger figure than unemployed labor.)

by santiago on Fri Jul 30th, 2010 at 11:07:46 AM EST
[ Parent ]
Chronically unemployed capital is actually a much bigger figure than unemployed labor.

The very wealthy know better than most just how big a mess things are in, even if they will not acknowledge their own role in creating that mess. As inflation is low to non-existent and many are expecting deflation they might be more than happy to sit on their assets.

Labor, on the other hand, is almost exclusively unemployed involuntarily. Did the very wealthy not have a strangle-hold on government policy this would be a very good argument, in times like these, for either taxing their idle wealth. This is one of the situations about which Keynes wrote where actions entirely rational for an individual when taken simultaneously by almost all those in the position to act, collectively prove disastrous.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Jul 30th, 2010 at 04:40:44 PM EST
[ Parent ]
A very well put description of the term, "zero-bound."
by santiago on Fri Jul 30th, 2010 at 05:11:37 PM EST
[ Parent ]
A lot of China's steel production has gone into the roads, rails and high rises China has built. Another portion is going into their new automotive industry, mostly for domestic consumption. There has been rather informed speculation that China has a real estate bubble that is likely to deflate soon. Land values have been rising exponentially and how often has such a situation been brought in for a soft landing?

Another good question is what would be the effect on the USA and Europe of the popping of the real estate bubble in China?

New evidence on a Chinese housing bubble

Our look at the available data strongly suggests that prices are quite risky at current levels, and that it would take little more than a modest decline in expected appreciation to engender sharp drops in prices. The first foundation of this conclusion is that home prices in China are at their all time highs, and have been appreciating at especially high rates recently. This is documented in Figure 1 which plots real and nominal price indexes developed at the Tsinghua University for newly constructed homes in 35 major cities.

Real prices more than doubled over the past decade, with appreciation rates escalating at the beginning of 2007 and then again in early 2009. The most recent data show a record 41% (annualized) growth rate for the first quarter of 2010.

Figure 1. Constant quality price index for newly-built private housing in 35 major Chinese cities, 2000-2010


Source: Wu, Gyourko and Deng (2010). The underlying data source is the Institute of Real Estate Studies, Tsinghua University. See the discussion in Wu, Gyourko and Deng (2010) for more on how these indexes are created.

But it was not high price levels alone that convinced Case and Shiller (2003) and Shiller (2005) that US house prices had become unsustainable - it was the all-time high price-to-rent and price-to-income ratios.

....

Figure 2. Price-to-rent ratio in eight major Chinese cities, 2007-2010

....


Figure 3. Price-to-income ratios in eight major Chinese markets, 1999-2010

From Wu, Gyourko and Deng (2010). See that article for more on the creation of these ratios.

....


Figure 5. Real constant quality residential land price index for Beijing, 2003-2010.

From Wu, Gyourko and Deng (2010).


I know that, were I a Chinese official, I would be very concerned about this situation. Then there is China's `Empty City' of Ordos and an empty giant shopping mall, Dongguan South China Mall with >7 million square feet available and less than 1% leased. I would certainly not want to have been involved in financing these projects, though many wealthy Chinese have homes bought and paid for in Ordos, but held as investments and not lived in.

I have trouble seeing exactly what all of this means for China, but doubt that it is good. It is even harder for me to imagine what the effects of this situation will be on China's relation with the USA and Europe. But it has got to be part of what is afoot.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Jul 29th, 2010 at 10:56:40 PM EST
[ Parent ]
santiago:
Steal is easy to make
Just ask Wall Street...

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Mon Jul 26th, 2010 at 04:56:36 AM EST
[ Parent ]
Hmmmm....that was then and this is now.

I think that in the emerging modern networked "Economy 3.0" as I like to call it, firstly the financial economy has become a multiple of the 'real world' economy, and secondly markets are able to take alternate routes to bypass the former controlling nodes.

So even though a power may exercise physical hegemony and a veto power over physical trade movements, the financial markets have evolved in a way that even the mightiest physical hegemony no longer confers a veto over movements of money and capital.

We are now in a bipolar world with China now having a de facto economic veto power, and IMHO they have probably exercised it in their 'red line' area - which is just the same as that of the US - ie Energy Security.

 

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Jul 25th, 2010 at 02:03:17 PM EST
[ Parent ]
I would argue the opposite.  Economy 3.0 is even more dependent upon an empire-like power than investment and commerce in less network-dependent economies of the past. And it has nothing to do with physical manifestations of power or resources.  It has to do with who is capable of making and enforcing rules because Economy 3.0, as you have described, is even more dependent rules and norms than less networked economies are.  Networks make trust and counter-party risk a much bigger factor in human relationships, which gives even more power than ever to those who can can credibly threaten to destroy nodes of trust as well as to those who can defend them.  
by santiago on Sun Jul 25th, 2010 at 06:43:37 PM EST
[ Parent ]
The key term here is "credible." The threat of destroying critical nodes in the system isn't credible if those who make the threat depend on the system for their own comfort and convenience.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jul 25th, 2010 at 07:19:56 PM EST
[ Parent ]
That's true, but for all the growth potential in P2P ways of doing things, I see two groups who are never particularly dependent on an approach to relationships based on dispersed networks: political/military authorities and outlaws/outcasts, such as terrorists or insurgents.  Both of those groups stand to gain power, not lose it, if networks collapse, even if some of their capabilities for doing things are compromised because of the loss of networks and P2P benefits.  In crises, the people with guns and centralized authority gain power, not the people who manage individual, trust-based relationships, and this means that there is an inherent instability in a network-based economy sans the hard power of a strong state apparatus.  The guys with guns, protectors as well as enemies, have strong incentives to never let economy 3.0 to ever become too widespread. And who can stop them?
by santiago on Sun Jul 25th, 2010 at 11:41:15 PM EST
[ Parent ]
You are assuming that the people with guns cannot be bought.

The catch is that you don't need to keep buying them forever. You only need to keep buying them until the networked system has existed for so long that the previous system has atrophied sufficiently to make the ability to obtain a larger slice of the cake at the cost of diminishing the cake a losing proposition.

Why would people engage in an activity that so obviously undermines their power in the long term? Because people don't think long-term, particularly psychopaths.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Jul 26th, 2010 at 08:49:55 AM EST
[ Parent ]
I'm neither assuming they can't be bought, or that they will always use force instead of mutually beneficial exchange. Instead I'm suggesting that people engage in coercion strategically, and that such opportunities make concentrations of power necessary to protect a system such as an economy or any network of relationships.
by santiago on Wed Jul 28th, 2010 at 01:51:30 AM EST
[ Parent ]
santiago:
 Economy 3.0 is even more dependent upon an empire-like power than investment and commerce in less network-dependent economies of the past. And it has nothing to do with physical manifestations of power or resources.  It has to do with who is capable of making and enforcing rules because Economy 3.0, as you have described, is even more dependent rules and norms than less networked economies are.  

I completely disagree.

Economy 3.0 is what makes empires impossible: the Internet interprets hegemons as damage and routes around them.

A would be hegemon may be able to dominate any one or any half dozen nations, but cannot dominate more than a few of the nodes all of the time.

Interactive partnership-based protocols are key to Economy 3.0: these agreements - eg international trade agreements cofigured around transaction repositories - will act like a form of legal XML linking disparate jurisdictions and legal entities together, rather than disparate hardware and software.

Law is Code.

We are seeing the end of one way, statutory or judge-made protocols - 'contrats de mandat' as the French have it - and a transition to 'contrats de societe'. These are the same sort of two way protocols you find in Japan, and elsewhere in the East, and also the consensual approach of Islamic jurisprudence, which many think underpinned the Napoleonic code.

A hegemon would simply find themselves excluded from participation at worst, or participating on inferior terms, at best.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Jul 25th, 2010 at 08:01:16 PM EST
[ Parent ]
You can't exclude the wannabe hegemon - if you try, he starts blowing shit up, and you can't afford that.

The point of a hegemony-resistant architecture is to make sure that wannabe hegemons can't exclude other actors without imperilling the core function of the system. Mutually assured destruction works, most of the time.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jul 25th, 2010 at 08:21:22 PM EST
[ Parent ]
You are separating the concept of power from law, and thus from your concept of code. This means you are essentially making the same mistake that neoclassical economics does -- assuming that people prefer to engage in mutually beneficial relationships instead of coercive relationships if both options are available. Not even worrying about hegemons, just strong states, or strong military/political authorities are necessary for the widespread adoptions of micro-level, trust based relationships. Why? Because the guy with the gun, or the car bomb, or the army, or the virus, or whatever, has a lot more power to gain by destroying people's trust in one another, i.e., corrupting the code, than he does by leaving it be.  To me, Economy 3.0 seems to be inherently unstable which means it can't happen without the supportive authority of a strong state/military sponsor, just like trade, investment, migration, or any other aspect of globalization need such a sponsor.
by santiago on Sun Jul 25th, 2010 at 11:51:32 PM EST
[ Parent ]
If people always choose coercive relationships - which is nonsense anyway, although it seems to be a given among people who believe they're important enough to decide policy for everyone else - then a stable hegemony is impossible by definition.

Historically, there's never been any such thing. At best, relative stability is maintained by cripplingly expensive wars until the economy implodes and the wars are no longer affordable.

Ethically and practically, mutually beneficial relationships are vastly more productive and stable for everyone except the psychotic predator class who would rather cover themselves with scraps and baubles than allow a peace dividend to grow the world economy.

It's self-styled 'realists' who are the biggest brake on progress and innovation.

Not everyone wants to remain a stupid rat chasing other stupid rats for scraps around a barrel. Some of us have more interesting plans.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Jul 26th, 2010 at 03:50:34 AM EST
[ Parent ]
No one here is arguing that hegemony is stable.
by santiago on Tue Jul 27th, 2010 at 10:41:10 PM EST
[ Parent ]
I am very glad that you reject identification as a neocon. But realists and neocons can sound very much alike in much of their discourse.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Jul 26th, 2010 at 12:57:05 AM EST
[ Parent ]
Only if you're not paying close enough attention, I would argue.   Here's another piece on the same topic by Walt.

In short, because realists understand that military power is a crude instrument and that governing alien societies is a costly business, they have argued against such foolishness.   Instead, the main advocates of military involvement have been a coalition of neoconservatives and liberal internationationalists, driven by a variety of agendas and infused with a remarkable degree of hubris. The results -- first in Iraq and now in Afghanistan -- have not been pretty.
by santiago on Wed Jul 28th, 2010 at 05:28:59 PM EST
[ Parent ]
In other news...

tPortal.HR via Google Translate: Chinese to invest in Zagreb airport (07/26/2010)

We found out that the Press Office of the president Ivo Josipovic states that the Head of State received a high level delegation of the Central Committee of the Communist Party of the People's Republic of China.

"During the meeting they discussed the overall improvement and dynamization of relations between Croatia and China to mutual satisfaction, and special attention was paid to the possibilities of Chinese investment in large infrastructure projects in Croatia, such as port of Rijeka and Ploce, Zagreb airport and the plain rail Rijeka-Zagreb- Budapest", the statement said coming from [Croatia's Presidential palace] Pantovcak.

I guess Croatia might be about to switch from going totally indebted to France and Germany, to being totally indebted to China.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Mon Jul 26th, 2010 at 09:23:18 AM EST


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