Published:
02/19/2011 06:36pm
What Does The Visit By The Chinese Premier Really Mean?
What Does The Visit From The Chinese Premier Mean? Not much is the short answer. Like most diplomatic endeavors, the show is more impressive than the substance. But the impact of China is unquestionable, and our economy is at risk.
It was announced today in the news that the largest Chinese Bank is buying its way into the U.S. market. So now, in addition to selling us a majority of our manufactured goods, they now will be providing us the financing for us to buy their goods. Like most American’s, something in my gut says this isn’t good, but it seems to be the only way to keep our American economy moving forward. What does this really mean for you and me? Well for starters, let’s look at the two major issues; the need for Chinese capital, and the trade situation.
Regarding the first issue, China is our largest creditor owning around 20% of our federal debt. Additionally, they continue to be a major provider of credit to the U.S. government which runs such massive deficits. The situation reminds me of the old saying “if you borrow $1000 from the bank, they are in control, if you borrow $1 billion, you are in control”. So the issue is problematic for both sides. In order to pay off this debt, which is as real for governments as it is for you and me by the way, the Federal Government either earns more revenues, cuts expenditures, or takes the third option unique only to government, and that is to devalue the currency so the debt is paid back with less valuable dollars. This is a real concern of the Chinese government today as the policies of the Federal Reserve are doing just that. But, we need their capital, and in order to protect their investment, they have to keep loaning us money. If we either stop paying, or inflate too much, the Chinese get hurt. If they stop lending, then we get hurt. So, the discussion between our governments is centered around the need for the U.S. to get its spending under control which is the only way both sides win.
On the trade side, the major concern is that the Chinese are keeping their currency at unreasonably low valuations which makes our exports to China more expensive, and their exports to the U.S. less expensive. This is a problem that the Chinese government has indicated a willingness to address this which could, if they actually do it, help American exports and thus reduce our trade deficit.
Now, related to the credit situation and the trade deficit, it’s important for American’s to realize that the Chinese are not political friends of the U.S.! This is a communist country who believes that the individual rights of people are subordinate to the needs of the state. And they have recently made some very disconcerting statements about military objectives. And as most people know, they did just announce the development of a stealth technology based on U.S. technology. The relevance of this is comes into play as we consider global trade and the need to have the military power to support your own trade. As China becomes and economic and military global power, they will have more ability to strike beneficial deals with other nations, which they are doing today. Natural resources will then flow to China more readily than to the United States. This is a strategic threat!
