China Called “The Biggest Risk to the World Economy” But History Shows that War Can Always Straighten This Sort of Situation Out (Update 1X: China Missile = “No-Go Zone” for U.S.?)

~~By InsightAnalytical-GRL

We’ve be writing later about the strength of China, but lately there has been some talk rising about a possible bubble being created in China.  In the Telegraph (U.K.),  Ambrose Evans-Pritchard has written a piece which looks at what’s going on titled China has now become the biggest risk to the world economy.

This article shed a totally different light on the views of Larry Kudlow that I wrote about in my previous post, Larry Kudlow Has a Fit as Obama the “Declinist” Opens His Mouth in Japan; Says Obama is “Not His President”.

Evans-Pritchard argues that China is not going to take over as the growth engine of the world economy.  I’ve heard quite often that China cannot pull the world out of its economic troubles.  The stats that I’ve seen indicate that China, no matter how robust, simply is still too small an economy to accomplish this.

Evans-Pritchard has concluded that China’s policies” continue to play havoc with global trade and risk tipping the world into a second leg of the Great Recession.”

Why?  According to the piece, there’s plenty of overcapacity in China.  I saw a report the other day showing empty structures, built for basically no use.  The article explains:

“The inherent problems of the international economic system have not been fully addressed,” said China’s president Hu Jintao. Indeed not. China is still exporting overcapacity to the rest of us on a grand scale, with deflationary consequences.

While some fret about liquidity-driven inflation, Justin Lin, World Bank chief economist, said the greater danger is that record levels of idle plant almost everywhere will feed a downward spiral of job cuts and corporate busts. “I’m more worried about deflation,” he said.

Paul Krugman is quoted in this piece and he explains that China’s policy to hold the value of the yuan down versus the dollar is basically “stealing American jobs” as it relies on cheap exports to stave off massive unemployment. And other Asian countries must do it, too.

Of course, our capitalists use the cheap labor in China and, as the author says, “then lobby Capitol Hill to prevent Congress doing anything about it. This is labour arbitrage.”

But, China doesn’t hold all the cards, although it seems that way.  Evans-Pritchard writes:

Washington can bring China to its knees at any time by shutting markets. There is no symmetry here. Any move by Beijing to liquidate its holdings of US Treasuries could be neutralized – in extremis – by capital controls. Well-armed sovereign states can do whatever they want.

So, what’s the situation in China?  Their much-heralded stimulus has been spent building up more capacity to ship more goods and they’ve been investing in property and stocks. There is a huge credit explosion and production is booming.  BUT, Evans-Pritchard reveals:

Once you know that Hunan authorities have torn down two miles of modern flyway so that they can soak up stimulus by building it again, or that the newly-built city of Ordos is sitting empty in Inner Mongolia, you know what must come next.

A crash, right??

The Chinese consumer is supposed to be the solution to all this overcapacity and oversupply, but it won’t happen overnight.  Meanwhile, China’s central bank is tightening and fewer loans are being issued.

Evans-Pritchard concludes:

The world economy is still skating on thin ice. The West is sated with debt, the East with plant. The crisis has been contained (or masked) by zero rates and a fiscal blast, trashing sovereign balance sheets. But the core problem remains. The Anglo-sphere and Club Med are tightening belts, yet Asia is not adding enough demand to compensate. It is adding supply.

My view is that markets are still in denial about the structural wreckage of the credit bubble. There are two more boils to lance: China’s investment bubble; and Europe’s banking cover-up. I fear that only then can we clear the rubble and, very slowly, start a fresh cycle.

In my earlier post, I included the quote by Obama that Kudlow ridiculed:

While he also talked of multilateral cooperation and human rights, he came to Asia to deliver the message that the rapidly growing export-driven economies can no longer count on the U.S. consumer to keep them afloat.

It seemed a bit arrogant, particularly because Obama hasn’t really been pushing China much:

As for Obama, during the presidential campaign Obama promised to “crack down on China” but during the primaries there was chatter: “But his commitment to that point of view was thrown into doubt during the primaries when a Canadian official said an Obama adviser had privately characterized his tough stance on the North American Free Trade Agreement as political posturing.” (As an example, see: U.S. to Impose Tariff on Tires From China, Wall Street Journal, September 12, 2009.  Detractors figure that “the tariff won’t result in more jobs. Tires will simply come in from other low-cost countries, they say, and U.S. manufacturers, keep making their cheaper tires in China.”) Of course, this is classic Obama…all that “get-tough” talk and “insisting” while we have to go “hat in hand” to China…more blowing smoke.

But Evans-Pritchard comments (above) about Washington’s ability to really shove are food for thought. To repeat, “Well-armed sovereign states can do whatever they want.”

Now, I’m not suggesting Barack Obama is going to start a “real” war with China.  I don’t even think a sane Repbulican would.  (Then again, the Chosen One may just be arrogant enough????)

But, what about an INSANE Republican or Democrat, for that matter, since the elite in Washington are all about the same?  George W. Bush and his oil buddies decided to mess around in Iraq and look what we’re stuck with.  (George and his father were too busy with their long-time ties to China, so Iraq filled the bill for George II.) Barack Obama is worrying about that pipeline in Afghanistan that’s attacked so often by the Taliban that it hasn’t even been able deliver any oil yet.

But, there are lots of INSANE Republicans and Democrats around and who can trust ANY of them?

And, there’s history which shows a link between trade and wars.

Over at the RGE Monitor, Kevin O’Rourke wrote in a 2008 piece  titled Lessons of 1000 Years of Trade History: (my bolding)

Even more fundamentally, the continuation of a broadly liberal international trading environment will require that the geopolitical system adapt to the rise of China, India and other ‘Third World’ giants.  In a historical context, this represents of course the restoration of the status quo ante, the end of a “Great Asymmetry” in international economic and political affairs caused by the Industrial Revolution, which was itself in large part a product of the interactions between early modern Europe and the rest of the world.  But that is not to say that such an adjustment will be easy.  The international system has historically done a pretty poor job of accommodating newcomers to the Great Power club. German unification and industrialisation during the late 19th century led to tensions with Britain and France over colonial and armament policy, while Japan’s rise to regional prominence during the interwar period, and its search for secure sources of raw materials, ended in war against United States and its allies.  Both precedents are worrying, in that similar questions are posed today, both in terms of the rights of emerging nations to rival the established powers’ military capabilities (notably with regard to nuclear weapons), and in terms of the strategic importance to countries like China of ready access to oil supplies and other natural resources.

The last point should cause us to reflect that, Cobden and Montesquieu notwithstanding, interdependence and trade do not necessarily guarantee peace.  The world economy of the late 19th century was extremely interdependent, to the point where Norman Angell famously felt able to pronounce, on the eve of World War I, that major conflict was now unthinkable.  Interdependence implies vulnerability, and vulnerability can lead to fear, with unpredictable consequences, as Anglo-German rivalry in the run-up to the Great War, and Japanese reactions to the Great Depression and Smoot-Hawley, both indicate.

Impermanence appears to be the most enduring feature of the human condition, and if there is one lesson which we can safely learn from history, it is that history has not ended.  Hopefully it will not repeat itself.

We know that Barack Obama knows nothing about history (in fact, dismissing the entire Viet Nam experience), and I’d bet that none of our future leaders will know it either. And, even if they DO, I doubt they’d actually pay any attention to any lessons to be learned.

***

UPDATE 1

Looks like China isn’t missing this military angle:

Related Story from Bloomberg News, November 17, 2009 (excerpt):

China’s New Missile May Create a ‘No-Go Zone’ for U.S. Fleet

China’s military is close to fielding the world’s first anti-ship ballistic missile, according to U.S. Navy intelligence.The missile, with a range of almost 900 miles (1,500 kilometers), would be fired from mobile, land-based launchers and is “specifically designed to defeat U.S. carrier strike groups,” the Office of Naval Intelligence reported.

Five of the U.S. Navy’s 11 carriers are based in the Pacific and operate freely in international waters near China. Their mission includes defending Taiwan should China seek to exercise by force its claim to the island democracy, which it considers a breakaway province.

The missile could turn this region into a “no-go zone” for U.S. carriers, said Andrew Krepinevich, president of the Center for Strategic and Budget Assessments in Washington. (MORE)

3 Responses

  1. It looks like you are back in the game — good article and great links — Thanks.

  2. I truly hope Evans-Pritchard is right about China not holding all the cards, but I doubt he took the ramifications of the Coward-in-Chief into consideration. China (and the rest of the world) knows he won’t do squat. They also know they have 1 calendar year to make whatever power play they have up their sleeves, because once the democrats lose Congress the window of opportunity will close.

    • …which will put Republicans in who are on this globalization, transfer of wealth West to East on steroids!!!

      Can’t win. Really, I’m not kidding. That’s how it all plays out over the next 10-20 years. We’re only in the early stages, remember!!!

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