Most of the headlines in the recent economic summit between China and the U.S. centered on blunt expressions of concern from China about the “security” of the more than $1 trillion it has loaned the U.S. This is somewhat surprising since such “concerns” have been stated both officially and unofficially for many months. The only difference now is that more journalists are standing around, looking for something to write about.
To me (and some other commentators), what was more significant is what is not being said during this meeting. Quoting David Sanger of the New York Times, who wrote an insightful article on this topic, “The demands that the Chinese let their currency appreciate, clean up their banks or get rid of the subsidies for state-owned enterprises has been toned down.” In fact, such criticisms are entirely gone.
Sanger attributes this more subservient attitude to the typical relationship between mortgagor and mortgagee: “You do not talk to your largest creditor [lender] that way – especially when you have a record-sized loan application pending.”
However, I would suggest that even U.S. officials have realized the ludicrous hypocrisy of continuing to criticize China.
Let China's currency appreciate (versus the U.S. dollar)? The same U.S. dollar being frantically pumped up in markets by the Plunge Protection Team? Obviously, the quickest/easiest way for China to have the renminbi appreciate versus the dollar would be to take it down through dumping some of their excessive holdings.
China should “clean up its banks”? Given the $10 trillion in government loans, hand-outs and pledges to Wall Street, along with new, fraudulent accounting rules which allow them to hide trillions in losses, even hypocritical U.S. officials could not criticize China's handling of their own (well-capitalized) banks – without blushing in shame.
China should “get rid of the subsidies for state-owned enterprises”? The U.S. government now owns virtually all of AIG (formerly the world's largest insurance company), most of General Motors (formerly the world's largest auto-maker) and at least a third of Citigroup (NYSE:C) (formerly the world's largest bank). All three are on government life-support, and would instantly wither and die if cut off from the government teat.
The fact is that is was absurd for the U.S. to lecture China, from a supposed position of ideological superiority five years ago – it has just now become obvious to most of the world. The U.S. has always had the world's most heavily-subsidized economy, a far cry from the “bastion of capitalism” which it pretends to be.
Hundreds of billions of taxpayer-dollars flow into the U.S. military sector each year, with a large chunk of those billions flowing into the hands of U.S. businesses – getting fat on their “cost-plus” contracts with the U.S. government. Military suppliers are now virtually all that is left of the U.S.'s manufacturing sector.
Once past the heavily-subsidized manufacturing sector, and even more heavily-subsidized financial sector, we come to the heavily-subsidized agricultural sector. The U.S. pumps more than $100 billion of subsidies a year into their agriculture economy. Yet, despite this massive subsidization, U.S. farmers claimed they needed to import ten million workers to stay competitive.
The obvious question to ask is: if the U.S. agricultural industry requires $100 billion/year of subsidies and labour in order to compete globally, why can't the U.S. government find an industry where the U.S. can actually “compete” without massive subsidization?
Instead, the U.S. has completely abandoned all precepts of “capitalism” in the name of political expediency. It is the world's largest hypocrite, in addition to being the world's largest dead-beat.
China is rightfully concerned about the “security” of its loans to the U.S. With no major sector able to “stand on its own feet” without massive subsidization, even if the U.S. could miraculously pull out of its economic nose-dive (which it can't), the best-case scenario is to return to a status quo where much of the economy requires massive subsidization just to survive.
Given the $70 trillion or so in “unfunded liabilities”, there are simply not enough dollars to pay even half of those pending benefits and continue this massive subsidization and avoid an endless series of multi-trillion deficits (leading inevitably to bankruptcy).
It didn't work for the “communist” Soviet Union a quarter of a century ago, and it won't work for the “capitalist” United States today.
Disclosure: I hold no position in Citigroup, AIG, or General Motors