China and the United States

In times of crash opportunities for the super rich arise. Crashing the US isn't a bad prospect for them.

During times of distress people look to the government for solutions rather than seeing that it was the government that is causing the problems. So if you place the country into distress, it means more power for the government. People are willing to give up their rights in cases like these as well because they think it is for the good of the recovery to do so.

It is like I have said before. If the doctor is creating the virus and trying to sell you the cure, he shouldn't be awarded the medal for solving the problem because he is the one who caused it. Who are we awarding the medal to? Bernacke, he is the doctor brewing up the virus and everyone is calling him the hero.

Hook, line, and bat over the head of the American people. It is a train wreck in progress but everyone has a smile on their face as we slowly slide into destruction. Make the people all fat and bloated on over spending that way when the dollar falls out, people can't complain since they will say, "Look at all the stuff you own, you are doing great!" Meanwhile the standard of living is bottoming out.

I agree with both of you that a collapse of the American economy, and society as it now stands, would be very much in the interest of the ruling elite. That's the case because, as you said, crises are opportunities for them to increase their control. Starving, bankrupt, confused people are much more willing to accept, or less likely to notice, new authoritarian policies. However, I'm still confused about China. Is the goal to bring them down with the U.S.? Has the goal been the make Chinese prosperity so dependent of American consumption that the one will follow the other into the ditch? If that's the case, then what comes next? There is no other world power which can replace the U.S. if not China. In other words, if China is next on the chopping block, will the subsequent order be a truly international one, rule of the U.N., world bank, and IMF? Or, if China is not to be brought down along with the U.S., why? May China be the next vehicle for the oligarchs ambitions? Perhaps to consolidate East Asia? As we know, regionalism (regional unions) are intended to be a prelimary step toward truly global government.

Many questions, much speculation, few answers. Thanks for your thoughts.

A quick note to those who look at this thread very skeptically: a quesiton I'm often asked when I begin to explain this conspiratorial (i.e. directed instead of incidental or chaotic) view of history and unfolding world events, is 'why would the ruling elite, if they are bankers and corporate giants, engineer economic crises that cost them money, make them lose business, etc.?' My response is that 1) while these periodic crises hurt business in general, they do not hurt (as much, or at all) the 'big boys,' who get federal assistance, and 2) the goal for these people is not money. Money is a means to an end. Think about it. What use does a man worth 50 billion have for more money? He could never spend what he has already, no matter how lavish his taste. Such a person could buy 13 $500,000 sportcars every day of every year just on the interest if he played it safe and put his money in a CD account! at a certain point, wealth becomes not a goal, but a instrument to be used to play the great game, which is for power. Build nations, destroy nations, elect politicians, remove politicians, shape habits, start wars, direct growth, etc. Why do you think the ultra-rich devote most of their time to founding and sitting on the boards of political NGO's and foundations? For fun? They want to change things, and shape them 'nearer to the heart's desire.' That, incidentally, is the motto of the Fabian Society, which has always consisted of some of the most influential people in government, academia, media, and business, and which openly supports the formation of a world collectivist state under a 'scientific dictatorship' (H.G. Wells words, a member), which would be governed ademocratically through private committees of experts.

BrightNoon great question.

The US would like that china adopt some of it's social programs but I don't think they will after seeing what trouble it is causing for the US economy. It would be like seeing a beggar on the side of the street with torn up clothes and smelling trying to convince you to give up your house and job so you can have the same sort of freedom he has. Well that means you are giving up your standard of living to become homeless.

What will happen? The Chinese will increase their standard of living because they will just sell the goods they are producing to their own citizens instead of exporting it all to the US. So if the US dollar drops out, the Chinese are NOT depending on the US for their economic success. They will just market their goods to their own which increases their own standard of living. So despite all the comments that you hear about China needing the US, it simply isn't true.

I like the fat kid metaphor:

Imagine an island with six people. One of them is a fat lazy American who just sits around all day (doesn't produce any goods) and he relies on the other five Asians to produce all of the goods (made in china, made in Korea, made in India, made in Malaysia , ect).

So the other five bring in the fish, make all the clothes, make all the dishes, make all of the cooking equipment. Even gather up all the fire wood for cooking, while the lazy American keeps saying, "You five need me because if I wasn't here, you would have no one to give fish to, or to make dishes for, or to cook for." But the five Asians know that if the fat American were to leave the island then they would consume the fish themselves, use the dishes themselves, collect the fire wood for themselves and there wouldn't be a fat lazy American to hog all the goods.

Why am I calling the American fat and lazy? It means that the US doesn't produce any goods, the US just imports everything and exports practically nothing. Meaning that it survives off the labor of other countries meanwhile doing nothing for it's own production. Americans no longer make their own goods.

I too think China will just be the next centuries super power, under the same control of the bankers as the US now is.
Those people are internationalists, they don't care about countries.

Krumple, how does it fit into the metaphor that when you consume a lot, you become fat and lazy?

Well actually, I probably should have described it a little more clearer. I call the American fat because they over consume. Americans buy things we really don't need and often if you buy more you get more for your money so we are marketed to over consume. So it is not necessarily our fault but instead a natural incentive that is hard to resist. If you need two batteries you cant find them, you have to buy the package that has five in them. But you cant just have five because it is an odd number so you have to buy two packages of five so you have ten which is evenly divided into two. Just look at the hot dog and hot dog bun dilemma and you will get what I mean.

When I say the American is lazy, I don't mean they are actually lazy. Instead it means that we are not doing any production at home to maintain proper GDP for our economic growth. Instead we are purchasing the labor from other countries, making them wealthy while the Americans are losing jobs they can't work because there is nothing for them to do. You can't work for a business that has moved out of the country to avoid all the restrictions and regulations the laws have placed on operating within the US. Therefore the American becomes lazy relying on the production of other counties for it to exist.

We barrow money from the Chinese to pay for our debts. All our goods are produced there making the Chinese wealthy. Just go to Walmart and turn over everything you see and I bet you won't find a single item that says, "Made in the USA".

Americans are not lazy, we want to work but the government has placed to high of restrictions and regulations onto how businesses operate that it is far cheaper to go elsewhere. If a company has to pay medical, and other benefits, on top of that maybe there is licensing, and certificates or insurances, so on and so forth. A company can not afford to maintain profit gains to make their stock attractive to investors. So they look for options to reduce costs and often the simplest way to do that is to leave the country and go where those types of restrictions are not in place. They can pay less to foreign workers because they don't expect high wages.

Americans expect high wages because everything is expensive. Buying a home, purchasing a car, paying insurance for your home and car. Medical costs ect. ect. Not to mention over consuming the need to have more than necessary.

Oh I could go on but I think you get the point.

Makes sense.

I actually meant that Americans are lazy. Same with Europeans and all humans living in material comfort.
Getting what you want without effort makes you lazy.
Maybe lazy is the wrong word as it implies a character trait... pampered would be better.
That's why I am such an advocate of the whole Thomas Friedman idea of "utopian capitalism".
In a idealistic free market, where governments don't offer any special benefits but only equality of opportunity, the rich will automatically become poor (because comfort makes them lazy) and the poor will automatically become rich (because they are ambitious).
It's like a natural equalizer.
The reason that won't ever happen of course is because the ones on to p get the government to offer them special benefits so they stay on top.

I have another related question to you people with understanding of economics.
Why do we borrow from China? And where do they get the Dollars from?
Why don't we just print the money and give it to those who receive the bailout, for example?

I am not up-to-date on what the U.S. is recommending, but I am quite sure the Chinese have their own ideas and don't really care what the U.S. is recommending. However, whatever the U.S. is recommending, it is probably linked to potential U.S. exports, e.g. pharmaceuticals, medical equipment, stock market ownership, etc. China is a huge potential consumer of U.S. goods, and I am sure U.S. exporters would love to tap into it. My son, who is visiting China, was asked by some girlfriends to bring over a $1000 worth of Coach bags. Go figure.

Rich

---------- Post added 09-09-2009 at 10:44 AM ----------



Briefly this is how it works. The U.S. consumers buys hundreds of billions of dollars in goods from China each year more than the Chinese buy from us. This means we run a deficit with China. China has trillions of U.S. dollars that they have to invest somewhere. So what do they do with it?

Each week, the U.S. Treasury offers U.S. Treasury Bills and Bonds that China buys from the Treasury. The dollars that they use to buy these Bills and Bonds are essentially loans to the U.S. to fund the U.S. deficit. China buys these Bills and Bonds to help keep our economy afloat (by funding our deficits) and to encourage more buying in the U.S. for Chinese goods. This little game of ring-a-round-the-rosy works as long as the U.S. taxpayer continues to pay off the interest and principle on the Bills and Bonds that are issued by the Treasury.

Sometimes things go awry, as they are now, and we cannot pay back our bills, because we are broke. In this case, the Treasury just starts printing more money, which devalues the dollar which the Chinese really worry about. So, that is why they are looking for new places to invest, or just buy up U.S. companies.



We are. The value of the dollar is plummeting which means anyone who is holding dollars can buy much less for it. For example, watch the price of oil go through the roof once the economy starts going again (if it does). It has already climbed from a low of about $40/barrel to about $70/barrel in the last few months. Anyone who has saved money (such as me), is losing value on their life savings as we speak. In other words, savers are bailing out all those who spent excessively over the last 15 years.

Rich

Well your questions are related but they also have different reasons. So I will try to tackle their individual reasons and then tie them together because of their relationship.

Well the US just places bonds up for bid, but it just so happens that the Chinese are the ones showing up to purchase the bonds because they have the money to do so.

Where do they get the dollars? From exchanging their currency into dollars.

Why not print money? Well first of all the US is printing money. Secondly when you print money you cause the value of the money to drop. When the value drops the purchasing power of the money is drastically reduced. So prices increase to compensate for the loss in value.

An example is, lets say there is a thousand dollars in circulation. You print another thousand so there is now a total of two thousand dollars in circulation. You effectively have reduced the value (scarcity) of the dollar by half, since there is now twice as many dollars available.

The US is printing money and using it for bailouts. But it causes two back lashing problems. One it causes inflation and secondly it causes a vacuum in the markets.

Like the cash for clunkers. When you give people money to purchase a new car all you end up doing is moving people ahead of their normal buying behavior. So the consumer purchasing gets pushed into one time frame and when the cash for clunkers ends there won't be any buyers because you pushed them all into buying now where as if you never did they would normally make purchases spread out through the months.

So these car dealers who think the cash for clunkers is great for their business will see a major slump after it ends. So inevitably now the car dealers are going to cry when they figure this out and we are going to see another if not five or six more cash for clunker deals but that only works for a short period of time before the third issue arises.

All the vehicles that are traded in for the cash for clunkers deal get destroyed. This means you rob the secondary markets of vehicles for purchase. So the poor who can not afford to buy a brand new car have no options to buy a used car because they are being destroyed.

Secondly what kind of cars do you think Americans are buying? They are mostly buying foreign cars which doesn't help the US car industry one bit. So people turn in their junk American cars for a Toyota or Honda. That does nothing to help the US economy.

I apologize for going into the cash for clunkers but since you mention bail outs I wanted to use a good example for why these types of systems will ultimately lead to further degredation of the economy.

China has already surpassed the US. But Americans are too stubborn and to ignorant to realize this fact. The Chinese purchase more cars than Americans do. It is just a short period of time before they give up on buying worthless American bonds.

The next step Bernanke will call for the US dollar to be abandoned and call for a UN currency. This is so they can further mask their devious behavior. They will still accuse china for causing the economic crisis in American but it is a lie. There is one person causing the crisis in American and that is Bernanke himself.

Thanks very much. I agree and I do have somewhat of an understanding of the concept of inflation.
What I meant was, if the US government wants to give a bunch of money to, say, Goldman Sachs. Then they print the money. But why does China have to get involved?
The government prints the same amount of money and the same amount will end up with Goldman Sachs, so what does involving China do?

Is it that we essentially use every printed Dollar twice? We get Chinese goods for Dollars and then we get the Dollars back for bonds and give them to Goldman Sachs.
But why are we dependent of China to borrow us more, if they don't we just print the money.

China purchases bonds because it gives them an opportunity to make money. It's a high risk investment for them with high yield. The US likes it because they can monetize the bond debt. If they issue a bond worth one million and print another one million they effectively have One million in spending power and also reduced their debt by half. Since the purchasing power of the one million has not dropped due to having twice as much money in circulation. It's basically a hidden tax. In essence the money in which they pay back to the Chinese is really just half of what they borrowed even though it is still one million dollars, the purchasing power is only that of five hundred thousand.



Same as above.



Yeah it is one way to get the dollars back.



Well we are nearing the end of the Chinese buying our bonds, but our great hero Bernanke has started buying back the US bonds with printed money. People think this is a wonderful idea but it doesn't make any sense.

We are issuing debt to ourselves by printing money to pay back debt we owe to ourselves. So essentially it is a way to mask printing large amounts of money and keeping bond rates low. If people started seeing the bond rates sky rocket it would be a huge WARNING but people seem to be asleep or something because they should be going through the roof but they have cleverly devised this plan to make sure those bond rates stay low.

To put it all another way, it would be like this. You barrow a hundred dollars from yourself, yes I know this sounds silly but this is how silly they are doing it. Then when you get the hundred dollars from yourself, you destroy half of it. (Why is half destroyed? Because printing the money reduces the spending power of the money. As stated previously) So now you only have fifty dollars. But you still owe yourself a hundred dollars. So you barrow another fifty from yourself so you can repay the loan. But this leaves you net zero but a debt of fifty dollars, so you have to barrow more so you can spend some. It becomes an infinite loop cycle of zero gain but MASSIVE inflation results. The value of the dollar is dropping rapidly because of this practice.

I am now certain they want the dollar to drop so they can monetize the debt. It is why Obama doesn't care about the One Trillion dollar deficit he will ultimately produce every year he is in office. Because once we have printed large sums of dollars paying back the debt will be simple.

If you owe a hundred billion dollars and you print a hundred billion dollars then you can simply pay your debt. But you effectively now have reduced the value of the dollar dramatically by doing that. Prices of goods and services will sky rocket. The government will pass the blame onto foreign currencies to take the eyes off of their behavior. They will call for a new currency to replace the dollar. It will be exceptionally bad for lower class Americans because their status or wealth will not be able to handle massive price increases.

When gasoline shoots to ten dollars a gallon. They will try to place price controls onto stations but this will create lines but they will lie and say there is a gas shortage and that is why the price has gone up. People will go along with it and not question it. Until the prices continue to rise and people get fed up with the lines. Imagine waiting in line the day before you need to go to work, spending hours waiting to buy gas. Then when you do, it will cost you five or six times what you are currently use to paying.

Oh I should stop my rant before I start sounding crazy.

Hi,

I'll try to provide an example (a bit simplified of course).

Suppose you are playing a game of monopoly and you have $500. China has $5000, and Goldman is broke. Now, the banker Bernanke comes along and gives Goldman $5000. What has happened? All of a sudden, Goldman can buy properties much easier than you can. Your $500 is worth a lot less, since it can buy much less. Goldman is going to start buying everything.

How about China? Well China is pissed. They were able to buy all the properties they want but now cannot because their $5000 is no devalued since Goldman can bid on the same properties and buy an equal amount.

So what does China do? China says, what the heck. If banker Bernanke is going to print money for Goldman whenever Goldman goes broke, these $5000 that I have is worthless. I better start buying up property and get rid of these dollars. So they start buying up property (real estate, utilities, transportation) on the board, leaving you with your measly $500 out to dry.

Goldman is OK. China is pissed and buying up property and you have to pay the whatever rent they demand because you are now a tenant and no longer an owner, and because the price of property has gone up, your overall standard of living has gone down. You can no longer afford to buy tangible property.

Hope this helps,

ich

The government doesn't just print money. They allow the Fed to print money, then they sell treasuries bonds to the Fed in exchange for that newly printed money. In other words, we pay interest to the Fed in return for them loaning the money which we passed a law in 1913 allowing them to print. Huh?

Exactly.

As for China; we (the Fed rather) could print all the money, monetize all the debt we issue, but that would trash the dollar immediately. The time for that will come no doubt, but for now, they need foreign lendors to buy at least some of the bonds to keep appearance up. Keep in mind that this whole operation is eventually going to turn on a dime. Right now, the Chinese, British, and Japanese* are lending huge amounts of money to the U.S., and the Fed is only openly monetizing a small amount of treasuries. However, when that real buying stops, it won't just stop, it will turn into panic selling as the Fed will respond by monetizing everything, crushing the dollar and the investments of the former lenders. It will be zero to sixty trillion in five seconds. Bam!

*If anyone is wondering how Britain, with virtually no industry, and more debt relative GDP than us, can be lending us money, your not alone. Likewise with Japan, much higher debt, deep recession, deficits as far as the eye can see. So, how do countires with no budget surplus lend money to another country? Yes, we've been focusing on the wrong lendor. China was the story, but China is pulling back now. Britain and Japan are taking up the slack. How? Here's whats been happening.

Foreign holdings of US treasuries have been increasing at a higher rate in the last 18 months than ever before, amounting to a new ~$1 trillion during that period. Central banks, as indirect bidders (at treasury auctions), have been buying the greatest share of them at auctions. However, the TIC (Treasury International Capital flows) reports that capital inflows have plunged from their 2007 highs and have in fact become negative; private foreign entities have sold $364 billion, while central banks have bought $50 billion since the start of 2009 (through May): a net flight of $314 billion from the US.


If capital inflows have been negative, where has the money come from for central banks to buy a record amount of treasuries? Here's where it gets stranger.

In one auction series, from 7/27-7/31 of this year, the US treasury auctioned slightly more than $243 billion in bonds. Indirect bidders, assumed to be central banks, bought 39% of the total: ~$95 billion. According to the TIC, central banks bought only $50 in US paper of any sort from the start of the year through May.

Is it then rational to assume that central banks bought nearly twice as much in one week in July as they did in five months previously? No, central banks have been using the interest they earn from their custody accounts with the FED (where they keep the investments they've accumulated over the years, and which aren't reported on the TIC, because the funds do not cross national borders) to buy more treasuries than the TIC reported inflows would be sufficient to do. The custody account balances are continuing to increase rapidly, but the composition is changing; more treasuries, fewer agency bonds (Fannie and Freddie e.g.). In other words, central banks are selling their agency bonds and then taking those profits, along with interest, earned on their accounts in general, to buy treasuries. Hence the increase in treasury holdings ($500 billion) is greater than the decrease in agency bond holdings ($178 billion) since about October 2008 by $322 billion; then subtract the $50 billion actually wired into the country from abroad by central banks to buy US paper this year through May, as noted by the TIC, (apparently used to buy treasuries, which apparently were then parked in the custody accounts), and that leaves $272 billion in interest paid on those accounts, or funds wired into the country between October and the start of 2009.


The purpose of this complex arrangement is to give the appearance of strong demand for treasuries (from private entities, esp. Americans themselves) without having to acknowledge that central banks are the buyers AND to covertly inflate the money supply, as the Fed itself is the buyer of these agency bonds (with new money).


Which foreign central banks are buying these treasuries through their custody accounts? Primarily Britain, then Japan, then a distant third, China. Which of these is printing money to buy treasuries? It would make no sense for a nation to either print or borrow money to buy American treasuries if that nation had a surplus to spend. China appears to be continuing its purchases of US debt, but not on as great a scale as before, even as more debt needs to be sold. If Britain and Japan are buying treasuries, they must be buying them with printed/borrowed money, as they have no surpluses. How can they afford to do this? The Fed is buying their debt in return (presumably through some indirect method like the one described above).

I call this scenario, WE ALL FALL DOWN. It works beautifully...until the debt of any one of the participant countries becomes unservicable, at which point all of the debts become unservicable, and all the currencies then either hyperinflate or the debt is repudiated.

This is not my theory by the way, I'm an amateur economist. See Chris Martenson's website, where you might also catch (I know Nero has already) the 'Crash Course.' Though M. connects the dots, all the data is directly from published Fed sources.

EDIT: correction, I said above that 'when that real buying stops, it won't just stop, it will turn into panic selling as the Fed will respond by monetizing everything, crushing the dollar and the investments of the former lenders. It will be zero to sixty trillion in five seconds. Bam!'

Not true! The real buying has, nearly, stopped. I would correct my statement to 'when the shell-game breaks down...'

Probably the shell game continues, but the real losers are savers who keep their money in cash or bonds who will gradually see their savings devalued. More money will probably be made elsewhere, (e.g. commodities, gold, stock market, currency trading, stock market), but which asset class will produce above average returns is a complete guess. It is where ever the money ends up going.

Rich

Don't get me wrong rich, I have nothing but contempt for this shell game. It certainly does rob savers, and anyone paying taxes now or in the future. We will have new bubbles, like the Dow right now, but there is an end to the bubble sequence in sight: government debt. It's a bubble and will eventually burst, at which point all the other credit-fed bubbles will burst. The idea that stocks and other paper assets will keep up in a high or hyperinflationairy environment isn't supported by history. In Weimar, the stock market surged into the trillions, but the mark was devalued even more: i.e. holders of paper of any kind lost real value, even though they experienced absurdly huge nominal gains.

There are two factors that will shape the investment environment as the system collapses; asset price deflation due to a shortage of credit and very high price inflation of essential and basic goods, like food, energy, clothing, etc. During Weimar, the proportion of household income spent on rent, e.g., fell to a fraction of a percent, while the proportion spent on food surged into the stratosphere. This is the error made by the people who preach general price deflation due to debt destruction and loss of credit or liquidity. Its well and good to define money supply as money+credit, and we are experiencing a loss of credit. However, that only causes price deflation in assets that have to be bought with credit! Houses, stocks, new cars, other paper instruments, NOT food, fuel, clothing, etc. All the money which was being used to as collateral to borrow and buy such items, will be used to buy the neccessitities, and cause massive inflation in them.

Another seemingly little understood phenomena is the fact that when inflation rises highe nough, lending slows or halts; in Weimar, practically all business activity, except that associated with the basic, unavoidable transactions needed to saty alive (food, fuel, etc.), stopped completely, as merchants and lenders refused to exchange their goods for a currency that lost value daily. The idea that inflation cna only occur in a booming economy, the 'overheating' idea, is false; it can occur then, it did in the last decade or so, but it can also occur in the midst of a severe depression. The same conclusion can be drawn from the great depression, which deflationists like to say occured because of unbeatable deflationairy forces. Nonsense! The abolition of the gold standard and subsequent actions by the monetary authorities caused the deflation of the early years not only to stop, but to turn into high inflation practically overnight. How could this inflation occur even in an increasingly contracting, depression environment? It happened because inflation is always and everywhere a monetary phenomena, which can operate completely independently of any real economic conditions. In other words, this notion that we can print to infininity with no risk of inflationso long as our economy continues to contract, and that we only have to worry abnout inflation after growth resumes, is simply false. In fact, inflation may be more likely to occur if growth does not resume, as the government will keep printing to try to obtain growth, while the quantitiy of goods and services that can be purchased with that money shrinks.

I strongly feel that we're heading toward a hyperinflationairy depression, or at least a bout of stagflation far worse than the 70's. I'd reccomend to anyone that they get out of all paper assets which depend on the flow of cheap credit, which is basically all paper assets. Likewise, if you plan on saving for your retirement in diamonds, fine art, classic cars, or anything of that sort, don't. In Weimar, many a priceliess piece of art, or family heirloom was sold for a loaf of bread. The only assets that should keep up with inflation, let alone beat it, are gold and silver and the essential commodities, like wheat or corn. And fo course stocks associated with those goods. However, I don't think I'd be trying to get rich quick by betting on the riskier gold or silver stocks, or agri-companies. What I hope to do is preserve my wealth by holding silver (I'm too poor to own much gold), and then pay off fixed interest rate debt, and buy dirt cheap credit-based assets, once inflation has given me huge nominal gains.

That's what the big boys do.

My guess is that the U.S. will be in a very slow growth mode for a decade or more, and many people will have to adjust their lives to smaller dwellings, less travel, less eating, and less consumption in general - which is really not a bad thing at all as long as there is a way to survive.

Rich