But I want to use this question to bring up a possibility, one that is quite disturbing. Although it is just a possibility it is one that we would be naÃ¯ve to ignore.
The Federal Reserve (the Chairmen as well as a chorus of governors, all singing with perfect harmony) has âassuredâ the U.S. public that our debt is not too high and that we âshould not be concernedâ that so much of it is owned by foreigners.
These words are inherently disingenuous not because there is certainty that they are not telling the truth, but because there is at least a chance that they are wrong and the consequences of this error are immense. And they know that there is âat least a chanceâ that they are wrong.
In order for us to be âassuredâ and ânot concernedâ we would have to be certain that the Chinese will always behave in the best interests of the U.S. I contend that you have to at least consider that they will not. I contend that the Chinese will always act in their own best interest and not necessarily ours. Right now they are acting in our best interest (by using their dollars from trade to buy our treasuries to keep our interest rates low), but that is only because right now their interests align with ours. If they ever deviate, I think we can be certain that they will go their own path.
But what if it is even worse and they actually have a plan for their benefit at the detriment of ours. This is at least a possibility, the consequences of which are significant. Our government has left us exposed to this possibility.
The yuan is artificially weak, being pegged to the U.S. dollar. By definition, as we have âprintedâ gobs of currency, the Chinese have had to do the same in order to keep up. The âweakâ yuan has allowed them to take over much of our manufacturing base; they essentially work for us. The fact is that much of our domestic manufacturing base is being decimated, being chipped away at over years of trade deficits and exporting jobs. What if this is a plan (and it doesnât necessarily have to be a conscious one) of the Chinese?
Imagine this scenario. As our manufacturing base reaches âthe point of no returnâ and we become highly dependent on the Chinese to continue to âmake our stuffâ, they then decide to float the yuan. Normally this would put pressure on the Chinese to relatively lower the prices they charge us (this occurs because the yuan rises in value relative to the dollar) and makes U.S. manufacturers more competitive. But if our manufacturing base is already depleted (in some areas like furniture and clothing we may already be there, and how much stuff sold at Wal-Mart comes from China?), the Chinese would be in a position to NOT LOWER PRICES. The U.S., because we cannot ramp up manufacturing on a dime, would be beholden to pay those higher relative prices. We would be forced to import massive amounts of inflation.
The Japanese used a mild form of this strategy in the early 1980âs with cars: they lost money for years establishing a market through low prices. Once they were established they were able to raise prices slowly to profitability.
The Chinese own $180 billion of our treasury debt (and more of the GSE debt). They will certainly lose capital on a yuan revaluation as the value of their U.S. bonds will erode. But with a rising gold price they would not suffer greatly.
Besides, if your objective is to become the worldâs economic power (at least), you have to be willing to âtake some painâ. To the leaders of China this âpainâ may be well worth it.
I want to be clear that I am not suggesting this is definitely going down this way, but the point is that we are exposed to something like this happening. Unless of course we trust the Chinese to always act in our best interest.
When I listen to our Federal Reserve drone on about no risks I see something very different.
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