Shift in U.S. - China Dialogue Is Louder than Words

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 (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

Comments

[KingGeithner:]

My tone of my posts are nothing but polite and yet you chose to question my "intellectual prowess". Choosing that route is always a sign that one cannot develop a civil, serious response. I am sure SeekingAlpha is impressed when one of their contributors intitiates this type of behavior with their readers.

Also amazing that you believe Geithner was a worse Fed Reserve of NY chair than Bejamin Strong.

Also, I never said anything about my beliefs in the current rallies in equities. I did not mention my thoughts of that, because short term ups-downs in equities have little bearing on reality. But really, please keep attacking us readers who are remained civil.


On Jul 30 02:31 PM Jeff Nielson wrote:

> KingGeithner, first of all, I respond to people in exactly the same
> tone as their comments. If they show up here with an antagonistic
> attitude, that is exactly what they will receive in their reply.
>
>
> People who criticize me in a civil manner receive civil replies.
>
>
> As for "guessing" what you (and others) were thinking:
>
> 1) It's hardly a leap in logic to conclude that people who think
> there is a REAL basis in the current rally are the exact same people
> who didn't think valuations were excessive at the peak of the U.S.
> housing bubble - got burned badly once, and are about to get burned
> badly again.
>
> 2) On a personal note, if you choose a username which glorifies the
> biggest clod to ever run the New York Fed and the U.S. Treasury Department,
> you can hardly expect to be credited with much in the way of intellectual
> prowess.

Jul 30 02:43 PM

[Supersuperman:]

very good article and write up. Look at this article if you guys are interested. Market cap of US shrunk to 25% of the world market while BRIC's cap is going to rise from 19% to 25% soon:

www.wealthalchemist.co.../

Jul 30 04:29 PM

[KingGeithner:]

I like how you are quick to make assumptions about every poster. First off, my name tag is not intended to glorify Timmy boy. If I had a nametag saying His Supreme Holiness Bush, does that mean I am mocking him or does it mean I worship him? Apparently you do not see sarcasm easily. Second, none of my posts on this thread even hint at my thinking regarding Geithner's job performance; you are too quick to assume lots of things. What I said is I found it interesting that to you Geithner is the worst Fed Res chair ever (while his record is still incomplete mind you) when history has given us some chairmen who have presided over the Great Depression, '70s-'80s massive inflation, etc.

I also like how you go off on tangents to now discuss Geithner. Apparently you get easily distracted. My point I have been making is, all of a sudden it is fashionable to say America will falter and China will reign supreme. That is not a thoroughly thought out belief in my opinion, and for the reasons I have stated, mainly that China is just as reliant on us and we are on them, I don't believe China will attain sustainable growth unless they develop a middle class and a basic welfare structure that will encourage domestic consumption.

On Jul 30 04:04 PM Jeff Nielson wrote:

> KingGeithner if you chose "King Benedict Arnold" as a username would
> you not expect some comment on the message you choose to send?<br/>
>
> Geithner was TOTALLY asleep at the wheel during the entire Wall Street
> Ponzi-scheme - unless you believe former senior banking regulator,
> William Black, who came right out and said that the members of the
> Fed, and the Treasury Department will WILLING ACCOMPLICES in this
> crime-spree.
>
> Geithner even had the audacity to claim that he was "not a regulator"
> during this wave of fraud. Now today, as Treasury Secretary he is
> endorsing (among other things) confirming the Federal Reserve's role
> as chief "REGULATOR" for "consumer protection" in the financial sector.
>
>
> Using the words "Federal Reserve" and "consumer protection" in the
> same sentence is a non sequitur of EPIC proportions.
>
> Is this a more suitable way to respond to "King Geithner" (alias
> Tim-the-tax-cheat)?

Jul 30 05:01 PM

[awake09:]

'And in this corner we have KingGeitner, tag-teaming with LockedOut. Both are facing off against Jeff Neilson, defender of communist states and Canada. May the real capitalist win.'

So here's how it stacks up: China has the export business and cash reserves, but is inherently immoral and totalitarian. The US has lost its export industry and reserves, but serves as a guiding light to the rest of the world in matters of personal freedom, moral superiority and capitalist prosperity.

But when the US loses its moral calling AND its financial bragging rights, how is it left as any kind of shining example of anything to anyone? Like the scripture says, "Salt that loses its saltiness is good for nothing, except to be thrown out and trampled by men." And so we are.

We are no morally better than communists under our current agnostic, semi-Marxist regime, AND broke. Conclusion: invest in China, at least they know how to sell stuff and save their money.

Jul 30 05:57 PM

[Locked Out:]

LOL!


On Jul 30 05:57 PM awake09 wrote:

> 'And in this corner we have KingGeitner, tag-teaming with LockedOut.
> Both are facing off against Jeff Neilson, defender of communist states
> and Canada. May the real capitalist win.'
>
> So here's how it stacks up: China has the export business and cash
> reserves, but is inherently immoral and totalitarian. The US has
> lost its export industry and reserves, but serves as a guiding light
> to the rest of the world in matters of personal freedom, moral superiority
> and capitalist prosperity.
>
> But when the US loses its moral calling AND its financial bragging
> rights, how is it left as any kind of shining example of anything
> to anyone? Like the scripture says, "Salt that loses its saltiness
> is good for nothing, except to be thrown out and trampled by men."
> And so we are.
>
> We are no morally better than communists under our current agnostic,
> semi-Marxist regime, AND broke. Conclusion: invest in China, at least
> they know how to sell stuff and save their money.

Jul 30 06:26 PM

[Locked Out:]

LOL!


On Jul 30 05:57 PM awake09 wrote:

> 'And in this corner we have KingGeitner, tag-teaming with LockedOut.
> Both are facing off against Jeff Neilson, defender of communist states
> and Canada. May the real capitalist win.'
>
> So here's how it stacks up: China has the export business and cash
> reserves, but is inherently immoral and totalitarian. The US has
> lost its export industry and reserves, but serves as a guiding light
> to the rest of the world in matters of personal freedom, moral superiority
> and capitalist prosperity.
>
> But when the US loses its moral calling AND its financial bragging
> rights, how is it left as any kind of shining example of anything
> to anyone? Like the scripture says, "Salt that loses its saltiness
> is good for nothing, except to be thrown out and trampled by men."
> And so we are.
>
> We are no morally better than communists under our current agnostic,
> semi-Marxist regime, AND broke. Conclusion: invest in China, at least
> they know how to sell stuff and save their money.

Jul 30 06:26 PM

[Tony Daltorio:]

Locked Out, you should change your name to Locked Up because it sounds like you've never left your home much less travelled anywhere outside the US.

I've been in the investment business for more than 2 decades and Jeff is right in that the biggest bubbles in financial markets history has occurred in the US and continue to do so (Treasuries).

And you quoted from the Wall Street Journal? You may as well quote from Pravda or Tass. The WSJ is nothing more than a propaganda rag.

And you've swallowed the Wall Street Kool Aid about Chinese consumption. The Chinese middle class is now 330 million, larger than the entiire US, and still growing very rapidly. Don't look at the big coastal cities in China which have slowed down. Look at the internal provinces in China where they can't keep items on the store shelves.

Jul 30 06:54 PM

[mna:]

Wow, excellent commentary. Hit it right on the spot. Very few people have the capacity necessary to fully comprehend why and how the shift in power is happening. Fact is, Chinese real economic output is much higher than what the foreign exchange rates indicate. Conversely, the US real economic output is much lower than what the Forex rates indicate. The only thing holding up our wealth is the perception and the status of the greenback as a reserve currency. In other words, the only thing holding us up is the Trust the rest of the world has on our currency. And we all know how fast trust an be breached, and how difficult it is to rebuild that trust once it's been broken.


On Jul 30 02:06 PM Dave Wrixon wrote:
> US wealth is largely
> due to an unjustifiable and unsustainable value of the dollar. To
> a large extent conversely Chinese poverty is to a substantial degree
> exaggerate by under valuation of the Yuan. All this will change and
> much faster than you think. No, let rephrase that, much faster than
> most people think.

Jul 30 07:02 PM

[Ricard:]

Locked Out and Jeff Nielson,

Your debate is fascinating. I must say I agree with both of your points, and don't understand why you disagree.

I agree with Locked Out:

1) There is a widening gap between the rich and poor that dwarfs America's. (I find it ironic that the world's largest communist country is probably more capitalistic than the world's most famous capitalistic country.)

2) Labor conditions in China are atrocious

3) Most of the population has yet to even enter the labor pool

...yet, also agree with Jeff Nielson:

4) The progress that mainly China and India have achieved in the past two decades has been widely recognized as the largest lift out of poverty that humanity has ever seen DESPITE the fact that there is much more work to be done

5) China, due to the utter lack of a social safety net, are very cautious savers

6) The government, lacking any real access to materials that seem to come with alignment with the West's political position, is just as cautious and saves a plenty


I hope I haven't missed anything. I think both of you make excellent points. Not exactly sure why you two are disagreeing.

As far as China blowing bubbles, you cannot discount the effects of foreign direct investment. China has policies that mitigate the effects, but low-volume environments do not need much stimulation to blow a bubble. This is coming from one of the culprits - my emerging market positions are all Chinese.

Jul 30 08:03 PM

[Jade Queen:]

Actually, I think the U.S. has become something of a third world manufacturer in some respects.

SolarWorld is German. It makes cells in Oregon and puts panels together in California. It is taking some of its Oregon cells to schools to help kids learn to put together panels, thinking ahead about work force and generating lots of excitement here.

We also have some mini-cultures who can get high-output agriculture with low fossil inputs (the Amish and others). Demand for this will likely increase as aquifers decrease and are fouled.

No doubt some nefarious intern-corrupters are scheming about those pesky Amish. Nonetheless, it could be tough to get entire Amish communities in private prisons for saving their own seeds, without having somebody talk about it on the internet.

So far, the scandalously named food-safety bill has had a few difficulties.

The thing about changes happening in the U.S. is that you are not going to see them in the WSJ and some other oligarchial media.

It has been said, maybe here, that changes in the agricultural field don't show up for 8 years in the universities.

The same thing may well be true of China. If solar people can Google Earth my house, I'm sure they can do the same in China and make some conclusions about what is going on.

At least the Chinese have the sense to grow clover in road medians, thereby setting nitrogen rather than depleting it.

The left hand of city governments often don't know what the right hands are doing.

It seems likely that is true in both the U.S. and China. The habit of trading, in technology like that on the water cube, is unlikely to be something either side wants to stop.

What often helps the U.S. is that when the government utterly messes up, local currencies spring up, and some people roll their eyes, roll up their sleeves, and start doing things that need to be done, in spite of government and its cronies.

Eventually some of the most egregiously corrupt get busted, with perp walks and all.

Jul 30 08:31 PM

[a. palmer jr.:]

Apparently nobody has thought of this....everyone's going on about how America bought items from China with worthless dollars and China bought America's worthless bonds, making it sound like China is some kind of victim. Let's look at it from another side: China is practically destroying our economy by sending us virtually worthless items for our dollars. We now buy from them because they are the only ones manufacturing certain things, although we don't like the item necessarily, it's our only choice. China uses slave labor to undercut other countries efforts and ours that have a regular working force. China ignores safety, health, and environmental rules because it's cheaper although dangerous for the customer. China has, for years, manipulated their currency to gain an advantage over the US and others, so they would get the jobs that others would have. As far as I'm concerned, our reps that initially went to China to start business with them did us a great disservice, we have enough of a trade imbalance with the middle east, let alone having another one with the far east. In the future, Americans are going to have to be smarter in our dealings with other countries and think of our own people rather than treating other countries as some kind of a charity.

Jul 31 08:08 AM

[a. palmer jr.:]

By the way, all the bubbles are bursting in the United States because all the bubbles are based on credit, not actual wealth.

Jul 31 08:58 AM

[KingGeithner:]

Bubbles are not limited to the U.S. Need I remind you of the Asian financial crisis, Japan's lost decade, Dubai'i, Eastern Europe, etc.

I believe a bubble is now forming in China. The Chinese need to maintain their golden 8% GDP growth rate; growth below this number according to party officials could lead to civil discontent. Without global demand for their exports, GDP in the second half of '09 fell below their 8% goal (and again, economists always question the reliability of the reported figures in China). So how did the government choose to attain growth greater than 8% for 2009? By dramatically increasing the money supply and freely issuing more and more domestic loans (money supply has increased 28% on a yearly basis). You can't just develop a middle class overnight, what the Chinese are attempting to do. It is just a simple fact that history has shown....when banks let the floodgates open and lower their lending standards, a bubble forms that will eventually have to pop. With tepid economic growth in the U.S. and the rest of the world, China will struggle achieving 8% annual growth unless they keep flooding their markets with money (and we know how this always works out for other countries). Amazing....people criticize the U.S. for this, yet few realize China is now doing the samething. Hence, my ongoing point on here that China is not as sturdy as people think.


On Jul 30 06:45 PM Tony Daltorio wrote:

> Locked Out, maybe you should change your name to Locked Up because
> I doubt whether you have ever left your house, much less travelled
> anywhere in the world.
>
> Jeff is right in that the biggest bubbles in financial markets history
> have all occurred in the US over the past several years due to many
> factors - greed, lack of regulation,etc.

Jul 31 10:34 AM

[hksche2000:]

Our Military and its "good-old-boy" Industrial Complex literally live on borrowed money. If China and other lenders want to reign in our imperialist military activities around the globe, they can do so at any moment. They'll just turn off the financial spigots and we will have to pay our good soldiers (and expensive bad contractors) with IOU's. It's a joke! Or is it?
The real power in todays global world is with those who own the money and hold the economic powers. That used to be ourselves, but no more. Because of our failed Educational System, we are even losing our famous brain powers fast and depend on importing that, too, from India, China and wherever young kids (and their parents!) recognize that a good education is an absolute "sine qua non" to make it in this highly competitive new global world.
Wake up USA kids/parents, 2.5 billion Chinese, Indians etc are in line to eat your lunch and make you cook it for them. And most of us can't even do that any more.
What ever happened to this great Nation of ours since we raised the flag over Iwo Jima?! It wants to make you cry.


On Jul 29 03:46 PM Pax Americana wrote:

> The USA is not, and will not, be "swept aside" as easily as you presume,
> the US military still is the Arbiteur of Global power reach, and
> maintains a tenuous peace in extremely fractious corners of our planet.
> Without Americas overiding Military power in these regions, Ancient
> and deep enmities would again raise their head. Secondly America
> is the "Bread Basket" of the planet, and food is, and will become
> increasingly important. We also issue more scientific patents than
> anyother Nation, "right off America at your peril!

Jul 31 12:38 PM

[Locked Out:]

How To Destabalize Countries Legally .Economic Hitman Part 1
www.youtube.com/watch?...

Jul 31 02:18 PM

[Locked Out:]

Corporate and foreign lobbyists, operating invisibly to media and public scrutiny, are the true "epicenter" of our government, where former public officials and generals get rich peddling their influence to the highest bidders. These groups' activities shape our nation's policies and determine in whose pockets wealth accumulates. The interests of our people and the security of our nation are irrelevant. It's all about power and money.

Jul 31 06:43 PM

[Jeff Nielson:]

Lots more to reply to, lets see if I can get to some of it.

Ricard, when you compare (for example) current labour conditons in China with conditions with U.S. (or Canada), I think you confuse the issue. As fast as China's economy is growing, this is still a society in the process of fully industrializing.

Growth rates, pollution, and working conditions are very similar to our own dirty, primitive economies when we were in the early stages of industrialization. All of those factors will improve over time (remember OUR 7-day-a-week, 12-hour-a-day work week?).

As for wealth disparities. I'll say it again, 1% of the U.S. population has 35% of all wealth, while 80% of the population hold only 15% of the wealth. At worst, China might be equally as bad. The difference being that the average Chinese citizen is having a steadily increasing standard of living, while the average American (and Canadian) is experiencing a declining standard of living.

"King Geithner" if you are trying to mock Tim-the-tax-cheat, you do a remarkably good job of concealing it.

I'm not trying to "change the subject" and I did not just begin to write that China was the new economic power of the 21st century.

Awake09, you illustrate my point about U.S. hypocrisy when you call CHINA "immoral".

A.palmer, obviously the IOU's of a bankrupt economy are worth much less than the goods given up in exchange. That doesn't mean that I consider China a "victim". I think they set out with the deliberate purpose of acquiring a mortgage over the U.S.

Given their trade surplus and economic growth, they can afford to sustain huge trading losses, since what they want is an economic veto over U.S. policies.

I agree with Hcksche2000 that the empire(s) of the 21st century will be essentially purely economic empires. With weapons which can cross oceans and obliterate cities, military empires are certainly much too expensive, and more likely simply obsolete.

Jul 31 11:27 PM

[coreopsis:]

Great catalyzing article for discussion, despite lots of baseless arguments most of which you are puncturing successfully.

There is another element in the US situation [not directly related to China] but which raises equally serious issues internal to the US which I will mention in passing and which is most interesting.

The WSJ reported last week that the CA state tax authorities reported the following collection statistics [year 2007]: taxpayers in the top 1% of income supplied collections for just under 50% of state personal income tax receipts. A rather chilling thought, I'm afraid.

On Jul 31 11:27 PM Jeff Nielson wrote:

> Lots more to reply to, lets see if I can get to some of it.
>
> Ricard, when you compare (for example) current labour conditons in
> China with conditions with U.S. (or Canada), I think you confuse
> the issue. As fast as China's economy is growing, this is still a
> society in the process of fully industrializing.
>
> Growth rates, pollution, and working conditions are very similar
> to our own dirty, primitive economies when we were in the early stages
> of industrialization. All of those factors will improve over time
> (remember OUR 7-day-a-week, 12-hour-a-day work week?).
>
> As for wealth disparities. I'll say it again, 1% of the U.S. population
> has 35% of all wealth, while 80% of the population hold only 15%
> of the wealth. At worst, China might be equally as bad. The difference
> being that the average Chinese citizen is having a steadily increasing
> standard of living, while the average American (and Canadian) is
> experiencing a declining standard of living.
>
> "King Geithner" if you are trying to mock Tim-the-tax-cheat, you
> do a remarkably good job of concealing it.
>
> I'm not trying to "change the subject" and I did not just begin to
> write that China was the new economic power of the 21st century.
>
>
> Awake09, you illustrate my point about U.S. hypocrisy when you call
> CHINA "immoral".
>
> A.palmer, obviously the IOU's of a bankrupt economy are worth much
> less than the goods given up in exchange. That doesn't mean that
> I consider China a "victim". I think they set out with the deliberate
> purpose of acquiring a mortgage over the U.S.
>
> Given their trade surplus and economic growth, they can afford to
> sustain huge trading losses, since what they want is an economic
> veto over U.S. policies.
>
> I agree with Hcksche2000 that the empire(s) of the 21st century will
> be essentially purely economic empires. With weapons which can cross
> oceans and obliterate cities, military empires are certainly much
> too expensive, and more likely simply obsolete.

Aug 03 10:46 AM

[Ricard:]

I agree with nearly all of your comments, except the one about wealth disparity.

Something to keep in mind is that the coastal regions generally enjoy a standard of living comparable to other cities in Asia, which (excluding Japan) is only at most slightly lower than developed nation standards. However, the poorest of Chinese (the vast majority of the population) live in conditions that are pre-industrial. According to Wikipedia (best I could do in 10 minutes), the disparity is the highest in the world as of 2003, higher than any African nation, and much higher than developed world standards, where they have had time to sort out the inequities caused by rapid industrialization.

People need to realize that any developed nation is on a whole much more socialist, and probably much more communist, than today's 'communist' China. One trip over there is all it would take to convince you.


On Jul 31 11:27 PM Jeff Nielson wrote:

Aug 03 05:35 PM

[KeithW:]

> However, the poorest of Chinese (the vast majority of the population)
> live in conditions that are pre-industrial.

So are the conditions for people in central park.

Noone deny that there are a lot of poor in China, but you cant deny that 200-300 million chinese moved out of absolute poverty in recent years and I dont see that trend stopping.

Even if 70% of the population living in the rurals areas are poor, the 30% who live in cities are a size larger than the population in the US. Go to any major city in China, the place is full of new modern apartment blocks all owned by individuals. You can hardly suggest people who own their own homes as poor. They may earn less than the average American, but at the same time it's possib;e to have a pretty decent meal for 2 for $2 in China.

Aug 04 08:43 PM