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Economic Time Bomb

Unheard and as yet unseen, a global economic time bomb is ticking away to that inevitable time when it is set to explode and engulf the world’s major economies. At this moment in time (the end of July 2003), we are as yet unaware of the “set time” for this to take place. How much time we have left is as yet unknown, but the unfolding events during the next 18 months may determine when this shall take place. This is not to say that the explosion is imminent, other than to express that economic events during this time-span will hopefully warn economists of its existence.

The answer to that as yet unspoken question as to why it exists will hopefully be answered by the time this article has been brought to a close. Perhaps the best way to expose its existence is to start with the remark that all recessions, minor or major, requires an ECONOMIC ENGINE to pull ---- or start to pull some of the other major economies “out of the doldrums” of recession. A major effort by a strong economy to start the ball rolling as it were, but alas there is no such engine this time. For America has the largest economy, and the “hoped for” strong economy to do the job. But alas that economy is itself “in the doldrums” with no signs that it has the strength and the ability to do the job required of it. Not only mired in debt, the Federal Reserve has set in motion the creation of a mountain of New DEBT by the continuous lowering of interest rates in order to stimulate the consumer side of the economy.

To further confound the situation, government has lowered the tax rate and the “tax take” and AT THE SAME TIME has to borrow heavily to replace not only that missing taxation, but as well to provide for additional massive deficits created by excessive new expenditures to “kick-start” the economy by hopeful new job creation. There are no discernable positive results as yet, and one would think that all of this is in the end-wasted effort during valuable “economic time.” To add to this menu or economic “pot-puree’ there is as well a massive balance – of – payments deficit unfolding at the same time.

Why will this not work, and what is the malaise and its symptoms --- is that as yet rhetorical unasked question. The simple answer may be “ that you cannot spend your way out of a recession” ---- if you have not got the money to do so.

Some would answer by drawing one’s attention to all that debt creation as supplying the   money required to kick-start consumer spending and thus job creation. What seems to have escaped attention is that new debt is being created from an ever-diminishing supply of money. THE MONEY IN CIRCULATION!! In reality the velocity of debt circulation is in progress. The re-cycling of debt giving the impression that more money is in existence within the system, whereas in fact a shrinking or static economy is incapable of increasing the money supply. We will return to this aspect again.

To confound the issue is the complete lack of major other economies with which to generate increasing trade in order to strengthen the United States economy and that of those others whose expected economies would be strengthened through increased bi-lateral trade. The second biggest economy, Japan has been in recession for 12 years and is presently in stagflation due to negative interest rates being applied. Ironically, the United States is now following the same disastrous path into negative interest rates. The next largest and “strongest” economy is that of the European Union, whose major “economic engine” ---- Germany, has serious economic problems at present. Thus Europe is in the economic doldrums as well, with little signs of pulling themselves out of recession. The final element common to all three economies is that of China with whom the United States, Japan and Europe are doing increasing trade. NOT WITH EACH OTHER ---BUT WITH A COMMON ECONOMIC ADVERSARY.

This common element is the basic ingredient, the explosive element inside of that time –bomb. Instead of increasing trade with each other, they are all bent on increasing trade with that one common denominator with whom they are all incapable of competing with price-wise. China lacks the foreign capital resources to be a major economic engine in the same sense, as it has always applied to in the past with America, Japan and Germany, or as in this present case, Europe.

The “trigger” to the economic bomb is the common supply of foreign capital to China by the very three economies to which the world would normally have turned to in order to drag their economies out of recession. That brings us back to our statement made that we would return to, that stated fact of a dwindling money supply within the United States economy.

If China has been, and still is relying on foreign investment to grow their manufacturing component of their economy, then those funds must be coming from the other three economies we keep on mentioning. Whether it is direct investment by foreign conglomerates or through other major financial institutions that money emanates from, or other capital resources, or bonds, or other debt instruments within those three economies, it is thus denuding them of the capital resources they themselves need to strengthen their own economies. Thus their domestic debt grows while the capital emanating out of this new debt creation flows out of their economies elsewhere. Sowing their own economic demise as it were.

We do not have the precise figures of trade between each of them and China, but are prepared to make the statement that they each have adverse balance – of – payments in their trading relationships to China. We recently came across the last known trade figures between the United States and China, and, while we stand to be corrected, we recollect these figures to have been that imports from China totaled $126 Billion and exports to China as being $32 Billion, giving a trade imbalance of $94 Billion. If a similar situation exists with both Europe and Japan, then that economic time bomb not only exists, but it is also already primed to explode some time in the not too distant future.

If all of this really exists and is “fact”, then what are we to do about it? We have a few alternatives at this stage, but the later it is left to implement, the less those alternatives may exist or indeed may be possible to implement at all --- or in time. To us it boils down to an  “either / or ” situation or --- a “both” situation. If the desire is not to tackle China “head – on” with an economic “war” then the “easy out” is for the United States to merely start to “print Money.” This bald statement does not imply that any type of debt Instrument has to be “engineered” in order to cover the issue, but that it is printed expressly to enhance the money supply. It is filtered into the economy by a debt purchase of bank debt and / or other debt instruments by either the Reserve Bank or The Treasury. How much is required is not for us to decide. Nor for how these funds should or could be utilized for the purpose of job creation.

If these funds were to be left in the hands of banks and financial institutions merely to create further debt, then it would be preferable for government to control these funds, to be utilized for specific job creative purpose. A type of local “Marshall Aid” as it were. What is of importance is that it be “non-repayable” funds, which over time will be absorbed into the economy in a non-inflationary manner. Local job creation is the only way that will grow the economy. How much money may be required, is the question that should be asked. Not an easy one to reply to. However, what may be an interesting fact to contemplate is that it is estimated that ALL DEBT --- or TOTAL DEBT in the United States amounts to something in the region of  $38 TRILLION!! This encompasses Federal and government debt, domestic and foreign. All company and private debt including mortgages, loans and credit card debt. All of this is upheld by no more than perhaps $465 BILLION of money IN CIRCULATION! This equates to $1304 of money per capita in circulation to uphold a per capita debt load of $133,300.

That would be the first important step. The second --- and equally important step would be to determine how quickly and in what manner enhanced trade with those other two major economies could be generated. That is; trade with Japan and the European Union.

Without the assistance of those two economies, the global economy will stagnate for perhaps several more years before any signs of an insignificant or minor recovery becomes apparent. A worse case scenario could see a perceptible decline into stagflation by both the United States and Europe.

DOES THAT ECONOMIC TIME BOMB EXIST---THAT IS FOR YOUR DECISION.

Addendum

The two primary occasions in which China is mentioned on this website, is in two articles titled “ The Big Picture written sometime in 2001 or 2002, the other being in “The Economic Time Bomb written in July of 2003. This being so, it has been decided that the same addendum be appended to each of those two articles.

Two factors are proving to be of historical importance to the rest of the world as we approach the closing month to the year 2009. The first factor was the final admission of China to the World Trade Organization several years ago, and the other was to give China the “right of veto” in the Security Council at the formation of the United Nations after World War 2.

Since the beginnings of recorded history, there is little or no evidence of the desire of China “to go to war” with other nations. No desires of requiring “more territory.” --- or seeking to subjugate foreign nations. However, “The GREAT WALL OF CHINA” bears witness to two factors; the first being the desire to defend its existing borders from invading enemies when built, --- and the second factor is that the “WALL” is no longer the existing boundaries to its territory. So at some time further gains in territory were made. And --- finally of course is that thorny subject of TIBET!

However, returning to the WTO membership and “the right of veto” --- a different and more ominous situation has recently been unfolding. In order to grasp what we feel is underway, we are going to make several “statements of fact” to bolster our argument. So let us start with North Korea. During --- and since the end of the Korean War, China has been North Korea’s basic and only ally. Using – or threatening to use innumerable veto's, China has protected both the dynasty of “father and son” as well as the welfare of the impoverished state. Presumably because it remains a communist governed state. Despite the many times that sanctions have either been proposed or instituted, China has managed to soften or assist in alleviating its impact on the regime ---despite the nuclear threat that endangers the rest of the world. This prolonged protective shield has again become markedly evident these past 5 years with its protection of Iran.  Again--- the use or threat of the veto --- and again--- the softening or overcoming of sanctions both proposed and imposed. This --- again --- despite the threat of another NUCLEAR ROGUE NATION.

The use --- or threat of the use of the veto is not unique to Russia and China. Other nations on The Security Council have done so on many occasions --- when they thought their Sovereign rights were at stake.

The Alarm Bells should have started ringing ages ago!

So now to the WTO. (A toothless tiger --- if there ever was one!) Despite misgivings by the west, they eventually capitulated, and agreed to their membership, provided all its rules and regulations were adhered to --- in so far as trade was concerned of course. The greatest pity of course --- is that ALL TRADE has a monetary value, and this is expressed in “currencies.” --- over which the WTO has no control. Thus countries who whose currencies are not “free-floating” --- have a DISTINCT and UNFAIR advantage over other members. China has --- and still does --- exploit this factor!

In addition, fraudulent copies of trademark apparel, goods and merchandise and patents still flood world markets.

In light of the above, it is becoming increasingly evident that both China and Russia now deem the UNITED STATES to be now “A toothless tiger.” This, despite the USA still deeming itself as the last remaining “SUPER POWER!” If this supposition on our part has substance, then it possibly has its roots in the fact that the USA is and has been involved in two costly wars in Iraq and Afghanistan. Additionally perhaps, they also feel that the present catastrophic monetary recession has so weakened its economy, that it in turn has made them vulnerable to foreign policy action weakness.

The decline in the value of the US dollar, coupled to the debt load, coupled to the holding of massive volumes of US currency in the reserves of foreign Central Banks, may also have a bearing in the way the USA is perceived today.

Europe is today primarily concerned with the European Union and its internal problems. Whereas before they constituted each other’s allies in time of trouble, little is done these days in that regard. Russia has for a number of years now --- had Europe “over a barrel” as their main supplier of heating gas and oil. And Russia itself has problems shaking off the shackles of communist rule, while still being ruled by the old KGB hierarchy. Desperately trying to hold on to resources as “State Property.” So-called democracy will evidently take a long time to establish itself there.  Unfortunately as well, their preoccupation with the perceived danger of the advance of NATO membership towards its borders, as well as old members of the Russian Federation seeking European Union membership adds “fuel to the fire.” Meanwhile Russia is as well “protective” over Iran and North Korea, obviating sanctions having any valid effect. So much for the art of diplomacy!  Russia is the builder of the Nuclear Reactor that the world fears, while North Korea supplied the “know-how” for centrifuges for fuel enrichment and for that of Iran’s long-range missile technology. Russia as well regards Iran as a valuable trading partner.

Apart from the relevance of all the above factors, The WEST --- believe-it-or-not is still relying on China to pull the ENTIRE WORLD OUT OF RECESSION!!

 IT IS LIKE ASKING A CROCODILE FOR A RIDE ON ITS BACK --- IN ORDER TO CROSS A RIVER!!

Despite China’s massive growth these past nine years, they do not have the “economic muscle” to accomplish that task. Not even with the help of expected economic growth from India. China’s rise in economic growth has stemmed mainly from both foreign capital injection as well as foreign manufacturers opening subsidiary plants in their country.

While these two factors fueled growth, it’s end result was massive cheap exports to the entire world --- with resultant massive TRADE IMBALANCES. All of this has had two debilitating effects on the rest of the world. The first was the slowing creation of JOB CREATION AND ECONOMIC GROWTH everywhere else, and the second was that due to the massive requirement of raw materials, prices of commodities reached astronomical heights, fueling inflation and debt creation worldwide on a massive scale.

 IT WAS THESE INGREDIENTS THAT SET THE FOUNDATIONS OF THE ECONOMIC CATASTROPHE PRESENTLY ENGULFING THE WORLD! 

Surely the world does not want a repetition of what it has been going through these past two years?

Were we to ASSIST China and India in generating MORE CHEAP GOODS AND SERVICES --- FOR EXPORT --- where in the- hell is the rest of the world going to be creating the domestic jobs required to repair their own domestic economic well being! 

The next bubble is already underway. The US dollar is “in free fall.” If we are not prepared to create a new world “trading currency then only two options are open to us before the GLOBAL ECONOMY COLLAPSES ONCE MORE! China has to revalue its so-called ”peg” to somewhere in the region of say 4.5 to 5 to the US dollar --- or un-peg the Yuan-Renminbi and let it “ree-float” to all currencies. The same factor is required for the Hong Kong Dollar; for although two different types of “governance” are being used --- they are essentially ONE COUNTRY producing the same type of merchandise.

While we discuss a change to the present fixed rate as well as the possibility of a “free-floating” alternative --- we have on a number of occasions said that fixed rates, reviewed at regular intervals are preferable to the “free-float” which is left to that so-called “euphemism” called MARKET FORCES to determine the value.

President Bush tried several times --- and failed. President Obama recently sent an emissary --- and he failed. On his recent visit HE TRIED --- and was evidently given a “diplomatic” answer that it would be re-considered in he “near future.” The heads of the IMF and the World Bank --- have tried and---BOTH FAILED!

 Perhaps the time for DIPLOMACY HAS PASSED!!

If we are to either have a repetition of Global Monetary Disaster, or a DECADE of STAGNANT GROWTH OR DEFLATION, then our only recourse is to APPLY TARIFFS AND QUOTAS to imports in order for all other economies to SURVIVE AND PROSPER!

Despite all we have had to say about China and Russia, we have a very high respect and regard for both the Chinese and Russian peoples. We examine facts as we see and understand them --- and draw our own conclusions --- and express them. NO MALICE IS INTENDED WHAT-SO-EVER.