The China Syndrome– The name given to a nuclear meltdown that reached critical temperature and mass and burns through the Earth to China. In reality, it burns until it his the water table, at which time it explodes in rapid steam generation.
We’re facing a similar syndrome. In this case, it’s the Chinese Yuan melting down. The alarms are going off. But the Chinese Economic Reactor is producing so much power that nobody wants to be the one to SCRAM the reactor.
A recent article in the Wall Street Journal attempts to shed light on the issue of underlying problems with the economies of Europe, China and the US. It’s well worth the read, and I’d like to expand on what they have to say. (And I’m glad this is not behind a paywall, because getting people to read articles like this explains just how dire the world economy is!)
In Europe, the tough decisions have been put off because the principal players don’t agree on how or why the trouble began. Germany and the other better-off countries blame the profligacy of Greece, Portugal and Italy and fear that an early bailout would relieve pressure on them to mend their ways. For their part, the debtor nations believe that the entire euro zone is out of balance and that more prosperous countries like Germany should export less and consume more to set things right.
Other Europeans say that a shared currency cannot survive indefinitely when monetary policy is centrally managed but each government decides how much to tax and spend. Still others warn that access to market capital requires a form of collective insurance, preferably in the form of a euro bond. Not surprisingly, Germany resists this solution because it implies a gradual transfer of wealth from the core economies to the periphery, a “transfer union” from rich to poorer states.
Europe is in serious trouble. The authors have the beginning of their troubles correct, but they recently were bailed out by China. China is floating their own market on currency manipulation. If Europe slips into recession, and it’s likely, the Chinese market will suffer from the decreased purchasing power of Europe. Europe’s lack of purchasing power will devalue the Chinese Yuan, which means….
2) China’s currency manipulation’s chickens will come home to roost.
To ensure long-term economic expansion (and political stability), Beijing must figure out a way to encourage Chinese consumers to buy more of the products that local manufacturers make. This will demand a massive transfer of wealth from the state and China’s state-owned companies to Chinese households.
But Beijing is moving in the opposite direction. The leadership responded to Western market turmoil not by boosting consumption but by increasing state and private spending on fixed investment, which now accounts for nearly half of China’s growth. The result has been an explosion in residential and commercial real estate, more state spending on infrastructure and more cheap loans from state-owned banks to state-owned enterprises.
The strategy of currency manipulation has tied to the yuan to the dollar and euro. As the euro’s star rose, so did the yuan. Unfortunately, the primary reason why the Chinese economy exploded was it had focused on imports and not on a sustainable Chinese economy. When Europe crashes, and when the Dollar inevitably crashes, the yuan will “crash” as well. And by crash, the Chinese will no longer be able to keep the currency artificially low. As the yuan gains strength, the export market will tank, and in doing so, they will not be able to sustain the 70% of their manufacturing and exporting economy. As a result, almost all consumer goods are going to cost more coming out of China. Which leads us to…
3) The US. First, the bad news. When the Yuan dies thanks to Europe finally suffering the effects of the 2008 recession, the Dollar is going to sink. It no longer has the Yuan to artificially inflate it, so the Dollar will fall. Of course, this will be met by the Media with wailing and gnashing of teeth. The purchasing power of the US will drop– the Dollar will be worth less. The good news? As imports decline, exports will increase. China will have to pay the piper of Market Forces when their manufacturing sector crumbles. It will actually be cheaper for the US to start manufacturing its own goods again! That’s right, the Made in the USA label will actually be making a comeback. Manufacturing jobs will increase, unemployment will decrease, the USA will regain its footing as a world economic power.
Now, should the Republicans control the House, Senate and White House, an enormous opportunity will present itself. The GDP will recover, and, if Paul Ryan gets his way (and he should), the US should start paying off its debt.
That’s a huge problem for China. With a weaker dollar and stronger Yuan, the US Bonds they will have purchased will be worth less than they purchased them for because the Yuan will be stronger. The Chinese will take another hit– possibly the hit that will send them into an economic depression.
So, there’s the real flaw with paying off our bills– we could do great harm to Europe and China. As odd as it sounds, maintaining a ridiculous $15 Trillion Dollar Debt may be the only way the US keeps China and Europe from years of depression and subsequent political upheaval.
The US is poised to see a booming economy. The manufacturing and house-building bubbles have largely run their course (and it would have taken a shorted time had government not interfered). If Obamacare, regulation, and horrible energy policy is changed, we can see a rapid shift to 4% unemployment by 2014.
But I’m just a chemist. I could be wrong. (And if Romney or Obama are President in 2013, we’re going to see a much slower recovery.)