September 10, 2003

Chinese Factories vs. the American Printing Press, Who Will Crack First?

My favorite image from the entire summer was Lance Armstrong getting back on his bike after crashing at the base of Luz Ardiden and obliterating his rivals. There's a great phrase for what happens to a rider when he can't keep up with the pace of a rival on a steep climb--crack. And now the world has been reduced to a contest between Ben Bernanke's Printing Press and Chinese Factories. Bernanke makes dollars. Lots of them. And with them, American's march off to the front at Wal-Mart and buy up Chinese goods. Can we buy them faster than the Chinese make them? We'll see. But the printing press is a weapon of mass destruction par excellence. It destroys the purchasing power of a currency. But as long as the Chinese keep lowering prices, even inflated dollars will get you a cheap pair of shoes. The game is afoot... A more serious question is whether the Chinese are deliberately putting the pedal to the metal in order to bankrupt American and foreign manufacturers. Out produce everyone, drive prices so low that only are left selling at above production cost (since your costs are so low.) Crack your rivals. 21st Century Economic Warfare VS. And today, we have this from Reuters: "Chinese factories powered ahead in August, churning out more cars, mobile phones and electronics to feed an insatiable export engine amid growing fears of an overheating economy. "Industrial output grew 17.1% percent from the previous August. " Song Guoqing the chief economist at China Stock Exchange Executive Council, said Chinese GDP would grown between 8% and the THIRD QUARTER. "A large proportion of such industrial goods are to be sold in the U.S. and European markets," he also said. You don't say? August's year-over-year rise was even better than the 16.5% rise in July and the 16.9% rise in June. Don't look now...but that looks like a sustained and perhaps, intentional rise, in production. It's possible this is post-SARS back-log kicking in. But it's also possible that a rising Eastern power realizes it can't compete militarily with a U.S. hyper power at its zenith. Yet the Chinese covet Middle Eastern oil. And they know that in the long run, there is probably more consumption growth to be had in the younger economies of Asia than in the American market. If you assumed that at some point in the next 50 years you and the Americans were going to be in a contest for scarce natural resources, and that as long as the Americans had the guns and navies and planes, you couldn't compete with them in conventional military ways, what would you do? What kind of unconventional war would you fight? Economic? Would you systematically over produce manufactured goods to gut your chief rival's industrial base? Would you use the dollars you got back from your huge export surplus to buy his bonds and literally indebt him to you? Or would you use those dollars to buy his factories and companies from him? And after doing this for 10 years or so, how much of his financial strength would you have eroded, or transferred to yourself? Would he have the resources to finance his military adventures anymore? And by owning his factories and a good chunk of his bonds, would you exercise a leverage over his foreign policy decisions that gave you everything you could gain from a military victory, without ever firing a single shot?


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