December 21, 2008

Chinamerica in Crisis

POLITICS - Can China saves the United States economy from recession with more loaned money? Not likely, its just delaying the inevitable.

The United States, Europe and Japan's economies have all slid into recession and are looking to China for the cash to bailout their fiscal incompetence. Even Treasury Secretary of the United States Henry Paulson thinks so. He paid a visit to Beijing recently, asking for a Christmas gift from China.

Both the host and the guest were kind to each other but China is no Santa Claus, so there's no Christmas gift. Paulson was hoping the Chinese would raise the value of the Chinese Yuan so that American products could be competitive in the Chinese market. China responded: "Sorry, I'm now having a hard time as well."

Economist Niall Ferguson has created a new term, Chinamerica, explaining that China and the USA has become very symbiotic as the two countries cannot do without each other.

Americans spend money while the Chinese make money. If Americans didn't have enough money, China would loan them money... As the US National Debt grows the Americans issued bonds and printed US dollars while Chinese purchased bonds and bought US dollars as foreign exchange reserves.

See China buys more US debt and American economy lacks manufacturing.

Americans could then go out shopping and buy Chinese products only when they had money while Chinese tried to manufacture more and export products to the United States. After all China can manufacture products significantly cheaper than the USA and make a decent profit selling it to Americans...

But what happens when a recession hits and Americans stop buying those products? Factories in China start shutting down.

Thus when the United States economy fails, China will also suffer, and the tradition has been for China to just buy up a chunk of US National Debt, allowing the US government to provide more cash to banks, and banks in turn giving loans to Americans.

But that system is flawed and unsustainable. Eventually those loans have to be paid back. With many Americans losing their jobs (and those jobs going to China) the United States isn't making enough to pay off that debt. Unemployment is the highest in decades and new businesses can't get small business loans because the banks have found their cash has dried up.

And small businesses are not the only ones to be effected. Large corporations are seeing their profits sink into the red as they now face bankruptcy while millions of people stand to lose their jobs.

In China when a company goes bankrupt the owners have a tendency to do something spectacular... trucks come in the night and load up all the valuables. The next morning employees are stunned when they see an empty factory with a for sale sign and the owners have seemingly disappeared. Not even a layoff notice or a last paycheque. The workers are basically screwed out of their last chunk of wages.

In the USA companies at least (pretend to) care about their workers, but what about governments or corporations?

The silly thing is a lot of this problem could be fixed if American legislators simply put a cap on Chinese imports, raised tariffs on products from overseas... there is no reason why the products made in China couldn't be made in the USA, Canada or Mexico. We have the robotic technology to make everything here in North America, providing jobs to North Americans and keeping the profits in North America.

Some economists argue that globalization of the markets and free trade is a good thing, but what if it happens too fast? Countries and businesses need time to adapt. America may like buying lots of cheap products from overseas, but its unnecessary. We can build those things here and create jobs.

In this case buying things labeled Made in USA is becoming a matter of economic survival.

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