How China could throw a parasite off its back (but is missing the opportunity)
TMFDeej has a post titled "Is the dollar really doomed?" In it, TMFDeej makes a compelling case for the dollar - and the US economy. His main point is deceptively convincing: he argues that China would hurt itself by running things differently, ergo, we again come out ahead, letting China buy our toxic assets that we openly intend to multiply by zero by rampling up inflation. I agree, but for a different reason. I would argue that America is winning, but not through any objective advantages that it has (it has none), but merely through the stupidity, ignorance, incometence, and cowardice of its competitors.
Let us reverse-engineer the myths that seem to hold such powerful sway over the minds of central bankers in Beijing.
Myth 1. China can't sell its treasuries without hurting itself.
The only grain of truth in it is that China WOULD have to recognize SOME paper losses, and even that is only true because its incompetent leaders missed the right time for it (last November) and held on to their toxic assets until the Treasuries bubble did start to deflate. However, the argument that buying Treasuries = avoiding pain, doesn't hold water. If I realize what Enron stock means to my portfolio, then I should get rid of it precisely to AVOID greater pain. It doesn't matter that the stock will tank as I unwind my position. In the ideal world, I would find some greater fool to sell the stock to at the same high price, but in the real world, I must be grateful to all those bagholders who will buy the tanking shares from me for 10 cents on the dollar. Still, it's better to have 10 cents that to own all 100% of Enron. "Avoiding" pain in this situation does not really avoid anything. If you hide your head in the sand, thinking that you have thus "avoided" the predator, it just means that you have the brain of an ostrich. But where the logic of Treasury fans goes completely nuts is when they suggest that China should BUY MORE of the toxic stuff to INCREASE the perceived market value of the dog poo that it ALREADY owns. Now, this is just sheer lunacy. Buying more shares of Enron in an effort to prop up the price of existing shares is not a good investing thesis, but a sure way to ruin the remains of your portfolio. Any economist who advocates more purchases of Treasuries as a way to reverse the losses from the earlier purchases of Treasuries must be either an idiot or an enemy of the Chinese economy. If anything, THE ONLY PRUDENT COURSE OF ACTION FOR CHINA IS TO SELL AND RUN while the market still gives them something close to $2 trillion for that POS they bought. When stated correctly, the above argument should read thus: China should sell its treasuries to avoid hurting itself.
Myth 2. China must buy treasuries to keep its renmimbi low.
Reality. By keeping its currency low, China is only stabbing itself in the foot without any chance to increase its exports appreciably. If China is manufacturing shoes at the cost of $1 to be sold in New York for $100, then by accepting only 50 cents instead of $1 it will only lose one half of its already-too-small paycheck but it won't increase sales even by 1%. And conversely, if it starts charging $2 for the same pair of shoes, it won't make Walmart even THINK about taking production somewhere else because for them, either $1 or $2 or 50 cents mean the same thing: essentially zero cost. There is no chance American workers are regaining these jobs. For that China would have to raise the exchange rate at least fivefold and more likely, tenfold, or else American workers would have to accept $1-2 an hour. The fact is that China should stop buying treasuries, among other reasons, in order to help its renmimbi appreciate against the dollar and start receiving more adequate compensation for its labor. The fact that its exports are dropping does nothing to change that. It simply means that Walmart customers have some problem with paying $100 for that pair of shoes, and this is something beyond China's control. If Americans are refusing to purchase shoes for $100, these shoes won't be sold for $99.50 either. A $30 discount is needed, but it's only the Amricans who can make it happen because the percentage of Chinese labor in the cost structure is essentially zero. A stronger renmimbi would simply help China earn more dollars with no negative effect on its trade.
Myth 3. There is no one but Americans who can consume that surplus of goods
I already mentioned that the volume of Chinese-American trade is determined by the cost of American inputs and is outside the control of China anyway. But even if China did have control over it, consuming the surplus domestically would always be an option. True, there are SOME export products that would have a hard time finding domestic buyers (for example, American flags), but these are exceptions. The main bulk of exports is made up by products which would find plenty of willing buyers in China. And here is how it's going to work. You print some yuans in exactly the same way as Bernanke prints greenbacks, and distribute them among the population, which then takes these yuans to the supermarket and buys the produce of domestic factories that had been earmarked for export. With productive capacity that's more than able to meet that demand, there will be no inflation, but simply monetization of transactions within the domestic economy. The lack of Chinese demand is a myth, whose origin really lies in this simple observation: if I am a farmer and I stop growing food for myself because some Harvard-trained economist has told me I'm too poor to buy my food from myself, and if instead I convince myself to hand over my farm's produce to my rich neighbor for just $.99, then, sure enough, I WILL be both poor and hungry, and with only $.99 in my pocket, I surely WILL fail to increase my domestic consumption within that flawed economic paradigm. But as soon as I call the Harvard economist an idiot, kick him down stairs, and apply my own brain to my little problem, I will immediately see that in fact, I can easily afford all the food that my farm produces. All it takes is to put a "10,000,000 yuan" sticker on the food, print and give to myself a paper with says "10,000,000 yuan", clear the transaction, and enjoy my new-found economic independence.
Myth 4. There is no better use for that currency reserve anyway.
Again, it is an argument one should only hear in a nuthouse, and that should never be a part of economic discourse. First, if you don't see any use for dollars, you should never have agreed to work for those dollars, period. There is one and only one excuse for the Chinese to produce anything in exchange for a stack of green paper, and it is to use this stack of green paper to buy something they may need. So my first comment is: make up your mind, and decide what American products you wish to have. If you can think of something you need, then go ahead, buy it now and don't wait for Bernanke to make your dollars worthless. If nothing comes to your mind, then shut down your exports so you don't give away stuff for free. It's happy people that don't need anything, so you can count yourselves happy. You will then be running an economy based on autarky (i.e. self-sufficiency), which is by itself a good thing provided you REALLY don't need to import anything. North Korea thinks it doen't need this Western stuff like IPhones, so it doesn't export anything either. You will be like them. If, on the other hand, you DO need something that America can provide, then stop pretending you don't. On my part, I admit that it's tough to find legitimate goods and services in a country that produces nothing but financial bubbles, but for all that, even I can easily identify some American products that you might actually benefit from in case you wonder what to do with those 2 trillion dollars that you have:
-American farmland. Useful for growing corn, wheat, soybeans, and for raising cattle.
-ISRG medical robots. Useful for improving the health of the population.
-A dozen of promising solar companies. Useful for handling the energy needs of China. It's not so much the hardware but the technology that you'll be paying for.
-Iron ore deposits.
-DE tractors, CAT heavy machinery, fertilizer producers, steel and copper industry.
-Buy Intel. They've got some cool technology.
-Buy some cars from bankrupt Chrysler if you care for them.
-IBM notebooks. Time to make your people computer-literate.
-Innovative nanotechnology start-ups. It's high risk, but the potential return cannot be overestimated.
-Buy Hollywood, shut it down, and have the place bulldozed, if only to silence that propaganda mouthpiece.
-Buy timberland. There is plenty in New England and it holds its value over time.
-Buy commodity futures. This way your industry will never run out of raw materials.
-In case you think of something else later on, buy some INVESTMENTS now - you know, those things that provide a stream of cash. Buy some rental real estate if you're smart. If you're stupid, buy stocks. Get some corporate bonds that pay high yields.
-Buy Moody's, if only to stop these clowns from telling everybody: "American Treasuries gooda, China companies no gooda".
-Buy Nobel-Prize winning scientists, import them into China, and employ them in your university system.
-If after all this, you still have a surplus of dollars, invest them into US Treasuries, but into a new kind of Treasuries - the ones that will carry a variable yield and be indexed not to official CPI figures (like the TIPS we have now), but to the actual number of dollars printed by the Fed as reported by an independent international auditing committee. Bernanke will be foaming at his mouth at this suggestion, but you will explain to him that you won't lend him money on any other terms.
This dispells the "no better alternative" myth. There is always an alternative if you're not an idiot.
Having said all this, I now have to agree wholeheartedly with TMFDeej that there is no viable alternative to the dollar, because of the incredible stupidity of the pig-headed Chinese leaders whole lack of brains won't allow them to see any alternative to snapping up more debt obligations of a subprime treasury. Of course, all of the above also applies to Japan, Korea, Singapore, and others as well. And sure enough, against that background even a dimwit like Bernanke looks like an intellectual giant.