Tuesday, 22 June 2010

China is winning the war

Written by John Mangun
Outside the Box
Business Mirror
http://www.businessmirror.com.ph/index.php?option=com_content&view=article&id=26750:china-is-winning-the-war&catid=28:opinion&Itemid=64

And President Obama is too incompetent and too ignorant to realize it.

World War III began in January 2008. The date was January 3rd. That was the day the gold price broke and held above the January 1980 high of $850 per ounce.

The Chinese, though, had been preparing for the war for many years, using the same strategy that both Japan and Germany had used during World War II. The lesson that the world learned from World War I was that you did not want to get America involved in a war of attrition. The US is just too large and too strong to fight in an arm-wrestling contest, where endurance and persistence determine the outcome.

Both Germany and Japan made smaller strategic moves, Japan taking China in 1937 and Germany moving into Austria in 1938, long before the US entered the war in 1941. By then, the US was forced to fight on several fronts and on several continents. While Japan and Germany have been waging war for several years, the US had to immediately turn from peacetime economic production to wartime. Ultimately, the factors that saved the US was an economy that had tremendous excess capacity both in factory production and labor force (because of the depression) and a leader, Roosevelt, who understood the urgency of stopping the aggressors.

China made the decision a decade ago that it was not in a position to pursue a win-win economic policy with the West. China believes that the global economic pie can only be so large, and they wanted as much as possible. China is wrong in its philosophy, as history has shown, that with advances in technology, the pie can grow almost indefinitely. But China’s distorted world economic view shaped by communist/socialist thought has led to its actions.

While past wars have been fought with bullets and bombs, this current war is fought with currencies and commodities, all through trade.

For 20 years, China has been sucking the economic lifeblood from the US and Europe through increased trade. Starting slowly and then accelerating into the 21st century, China exported to the US and Europe, weakening those economies more every year. While the US whimpered about a few thousand jobs being outsourced to the Philippines, for example, millions of jobs were being lost to China. In return, though, the US and European consumer got lower-priced goods, but at what price.

Between 1999 and 2000, the US trade deficit increased by 30 percent, much going to China. Between 2000 and 2005, the trade deficit doubled.

China used the money that it received for its exported goods to buy hard assets in the form of commodities such as cooper, gold, oil and anything else that has intrinsic value. This, in turn, further weakened the Western economies through higher prices.

The West is addicted to and dependent on Chinese products. The West has no choice now, because all the factories that made shoes, toys, clothes and other basic Chinese imports are gone. In fact, the largest amounts of US imports from China are not inexpensive items but are electrical machinery and equipment and power-generation equipment.

It may seem confusing and even contradictory that while China depends on exporting to the West for its income, these exports are killing those economies. How can China avoid killing the goose that lays the golden egg? The answer lies in the weapon of currency.

The breakout of the price of gold signaled the beginning of the war because that was when China made a conscious decision to use currency as a weapon and the smart money fled to gold as the only defense. China kept its currency cheap to fuel its exports, like a drug dealer keeping prices low to get the addict hooked. The Obama administration has reacted by begging China to allow its currency to float, hoping that the renminbi would appreciate against the dollar, increasing the price of Chinese goods and reducing US imports. That is sort of like the police asking the drug dealers to increase their prices to reduce addiction.

The main agenda of the G-20 Nations Economic summit in Canada this week is to push China to float the renminbi. But this is war, remember, and you do not let the “enemy” set the agenda.

Last Saturday the Chinese announced that they would allow their currency to float. Of course, the fool that he is, “Obama praises China’s move to allow its currency to float.” Why is Obama a fool? Because the Chinese have said they will allow a float against a basket of currencies, including the euro. The Chinese currency has been depreciating these last months, down 15 percent against the euro. Europe is China’s largest trading partner.

Therefore, theoretically, because of the appreciation of the euro recently against the dollar and the depreciation of the renminbi against the euro, by some estimates, the renminbi may be overvalued against the dollar. By floating against a basket of currencies rather than just the dollar, if the dollar appreciates against the euro so does the renminbi, keeping the renminbi/dollar rate the same. And Obama thinks he has won just like the Allies thought they had won when the German army marched in and took over Czechoslovakia instead of France.

Where does the Philippines stand in the war? Neutral is not a possibility. It is not a matter of choosing sides; it is a matter of protecting the nation.

The Philippines must diversify even more out of its dollar holdings. The Philippines must get rid of the mindset that values the peso only against the dollar. The Philippines cannot allow past “dollar mentality” policies to continue as the “war” continues and grows larger and more intense.

Backing the dollar, or worse, being backed by the dollar will inevitably lead to higher domestic interest rates to keep the peso from a potential collapse, and may lead to higher inflation as the price of imported goods, primarily oil, goes higher and higher.

E-mail comments to mangun@gmail.com. PSE stock-market information and technical analysis tools provided by CitisecOnline.com Inc.

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