“Soft despotism is a term coined by Alexis de Tocqueville describing the state into which a country overrun by "a network of small complicated rules" might degrade. Soft despotism is different from despotism (also called 'hard despotism') in the sense that it is not obvious to the people."

Wednesday, August 08, 2007

Thinking the Unthinkable. China and the US Dollar. (Part Two), The Clinton Effect.

Comment: Make no mistake about it, the Clintons think they have found a winning strategy with China. Hillary unloaded big time at last night's Democratic AFL-CIO debate. There are plenty of areas to clean up between the US and China relationship. No part of the relationship is more perilous than the financial partnership that has evolved. It is too big and too critically unbalanced. It should not be manipulated to serve political ambitions. The Clintons are playing with fire.

Hillary Clinton has called for legislation to prevent America being "held hostage to economic decisions being made in Beijing, Shanghai, or Tokyo". With foreigners controlling 44% of the US national debt, America is acutely vulnerable. One US currency strategist has said, the Telegraph reports, that Clinton is sending a message to the US Senate as legislation is prepared for the August session.

"The words are alarming and unambiguous. This carries a clear political threat and could have very serious consequences at a time when the credit markets are already afraid of contagion from the subprime troubles," .

Lay Off Or Suffer The Consequences, China Tells US

FN Arena

China has often been curt in the past year when dealing with constant US pressure to allow the renminbi to revalue at a more rapid pace. Yesterday Beijing turned the heat up another notch.

China's trade surplus with the US continues to grow, and its holding of US dollars continues to grow, despite all the softly-softly fiscal and monetary measures taken by the Chinese government over the last few years. The renminbi is pegged within a trading range against the US dollar, at a level which represents significant undervaluation. This has allowed China's export industry to explode into the force it is today.

The US is the largest buyer of Chinese exports. The US has also outsourced much of its production process to China in order to take advantage of minimal wage costs. US companies have invested in the Chinese growth machine. In turn, China has parked the vast majority of its foreign reserves - garnered from its global export sales - into US Treasuries. As Americans have lapped up Chinese exports, the US has built an historically large current account deficit. In short, China funds US spending.

The result has been the loss of US jobs in traditional manufacturing industries and, as far as the US is concerned, a perilous debt situation. It also hasn't helped that recently many Chinese exports, from toothpaste to toys, have found to be compromised in quality and in some cases downright dangerous. There has been a build up of support on Capitol Hill from both sides of government to introduce protectionist measures as a means of forcing Beijing's hand. This has not been well received.

The wave of support is building momentum as presidential favourite Hillary Clinton hitches her wagon to the anti-China train. This now has Beijing very concerned.

"Thanks to the trade surplus, China has accumulated a large sum of US dollars, and China's foreign exchange reserves, the world's largest, are mostly in US dollars," said He Fan, an official at the leading Communist Party body the Chinese Academy of Social Sciences, in the China Daily. "Such a big sum, a considerable portion of which is in the form of US treasury bonds, contributes a great deal to maintaining the position of the US dollar as an international currency.

"But the Chinese central bank will be forced to sell US dollars once the renminbi appreciates dramatically, which might lead to a mass depreciation of the US dollar against other currencies."

In other words, you force an appreciation - we trash your currency. And China has every opportunity to do so simply by selling out of its massive US treasury holdings, just as the likes of Russia, Switzerland and several other countries have begun to do.

But what Fan is most eager to point out is that the real loser in any attempt to force Beijing's hand will actually be the US itself.

If the renminbi appreciates too fast, Chinese exports will be reduced. The US will then need to turn elsewhere for its necessities and may not find cheaper. The US international balance will not be improved.

If China loses market share, economic growth will slow, thus reducing demand for US imports. Neither will this improve the trade deficit.

If the renminbi appreciates, profits from US investment in China will be eroded.

"As a matter of fact," said Fan, "the US has more to gain if China maintains the renminbi at a stable level".

The London Daily Telegraph's Ambrose Evans-Pritchard notes Chinese state media is calling any move by Beijing to start selling US Treasuries as the "nuclear option". Perhaps not the best choice of phrase, but the implication is obvious. As Evans-Pritchard suggests, such action could trigger a US dollar crash at a time when the US currency is already breaking down through historic support levels.

"It would also cause a spike in US bond yields," notes Evans-Pritchard, "hammering the US housing market and perhaps tipping the economy into recession. It is estimated that China holds more than US$900 billion in a mix of US bonds."

He Fan's China Daily interview backs up comments made last week by finance chief at China's Development Research Centre (which holds cabinet rank). Xia Bin suggested Beijing's foreign reserves should be used as a "bargaining chip" in talks with the US.

Hillary Clinton has called for legislation to prevent America being "held hostage to economic decisions being made in Beijing, Shanghai, or Tokyo". With foreigners controlling 44% of the US national debt, America is acutely vulnerable. One US currency strategist has said, the Telegraph reports, that Clinton is sending a message to the US Senate as legislation is prepared for the August session.

"The words are alarming and unambiguous. This carries a clear political threat and could have very serious consequences at a time when the credit markets are already afraid of contagion from the subprime troubles," he said.

There is already draft legislation in place, calling for trade tariffs on Chinese goods. US Treasury secretary Henry Paulson has suggested any such sanctions would undermine US authority and could trigger a global cycle of protectionist legislation.

The threats on Capitol Hill last week prompted a group of in excess of 1,000 economists from both sides of the political fence to implore politicians not to go down the protectionist path. The last time such a group took such measures was to campaign against Herbert Hoover's intended equivalent actions. He ignored the advice and went ahead anyway. Therein followed the Great Depression.


  1. My initial thoughts were back to Bill Clinton's first run for the Presidency. He too was talking tough about China. He was threatening to revoke "Most Favored Nation" due to China's human rights abuses. I suspect that Hillary is simply using the Clinton formula.

    Apparently, it's okay to bash Chin these days. The television show, 24 ,regularly portrays China as a villain.

    Thirty percent of China's exports got to the United States. It's not in anyone's interests to upset the apple cart.

  2. hmmmm...

    Don't know if this site is reliable, but the numbers are compelling.

    Foreign investment has also been linked to our Roads and Bridges. Many parts of the NAFTA Superhighway will be foreign owned.

    I receive letters from an Arab interest about once every 6 months wanting to buy a piece of property I have.

    The fact that we have high foreign investment and ownership of American property and interests is to be accepted. Using it in a political campaign is dangerous, especially considering that Hillary will open up even more foreign involvement within our borders after complaining about it.

    Remember, the ends justify the means to a Democrat, and for Republicans? - well, the ends justify the means!

  3. Why sure it is, whit, in some folks interests to upset that apple cart.

    Not just the US's.

    China's Goals are not our own, they will, have, taken hugh human losses to gain their goals. The idea that they'd not sacrifice a little material gain, to achieve their long term objectives, foolish.

    We look at most all these challenges through rose colored glasses, from a US perspective. The US is becoming the tail, trying to wag the dog.

    Policing 25 million miscreants in Iraq is to great a problem for US to handle with dispatch and economy. China, on the other hand, those boys will just roll over for US.

    Right ...

    Identify the enemy, then move against them. with vestiges of "soft power". But China is not a US enemy, it is a "partner". Partnerships are dangerous things, in law and fact. The worse form of business organization, from a personal security point of view.

    "We are partners in diplomacy working to meet the dangers of the 21st century," Bush said. "We are full members of a world trading system that rewards enterprise and lifts nations."
    "China has discovered that economic freedom leads to national wealth," the president observed. Bush said that the growth of economic freedom in China gives reason to hope for increased social, political, and religious freedom, and said that "[i]n the long run, these freedoms are indivisible and essential to national greatness and national dignity."

    The constructive relationship between the two nations allows for candid discussion of disagreements, the president said. "The growing strength and maturity of our relationship allows us to discuss our differences, whether over economic issues, Taiwan, Tibet, or human rights and religious freedom, in a spirit of mutual understanding and respect"

    So said Mr Bush in 2003, look at how right he was, how far China has moved over the issues important to US vis a vie China, the "economic issues, Taiwan, Tibet, or human rights and religious freedom, in a spirit of mutual understanding and respect"

    No pain, so no gain

    The Chinese and their relationship to US, so much more important than Iraq, given so much less time, effort or thought, by Bush 43. Tricky Dick would be rolling in his grave, if he knew that a US President, from the GOP, had taken his eye off the ball, with regards China.

    The Clinton era, worse, as those Chinese were buying every secret they could, during Clinton 42 years. Stealing what they could not buy.
    Guess we'll see how Clinton 44 handles those pesky Chicoms.

  4. NAFTA, the I-35 Corridor, setup to bust the Ports, the Unions of the US's western ports.

    Chinese goods will enter Mexico, Union free, then be trucked to US warehouses for distribution. By passing US dock workers on the west coast.

    Part of the "greater Americas" program. Mark my word, hermanos.

  5. I'd like to be able to put some stuff in my shopping cart that's not made in China. But it's the devil of a hard time finding it.

    I'd buy 'made in America'--if I could find something 'made in America'....

  6. Services and retail, bob, that's all the US needs. We can buy everythiing elsewe need, with new clean dollar bills, everyone wants those, for now.

    Those Chinese, the folks whom we killed hundreds of thousands of, while attempting to invade their country, through Korea. They, like my dad, don't hold a grudge, no they love theri former enemies,
    I know reconciliation can work, why after all these years, bob, Gramps bought a Toyota.
    Assembled in the USA he was sure to explain. Last of a breed, my dad.

    But the Chicoms, they harbour no love for US, and do not plan nor demand results by the quarter.

  7. I got to study up on this issue, a big one. I don't know a damned thing about it, really. All I know for sure is we still grow a lot of crops. Which is a hell of a good thing to do too, as we are not going to starve to death, come what may.

  8. Why not take a lesson from the Chinese. Cap the sale of treasury bills to foreigners to 15 percent. Use a 15 year time horizon to get there. Same for all real estate and corporate investments. That will insure that all US corporate interests pay their fair taxes and don't hide abroad using tax evading schemes. Then enact legislation for a 15 percent flat (consuption & income) tax across all econonic stratas. Last, shoot people like Ash dead.

  9. mats,

    What do you think would happen to demand for treasuries if purchase were limited? Are you looking for a back door method to force the US government to balance its books by limiting its ability to borrow?

  10. Ash,

    You're nothing to me. You're not a brother, you're not a friend. Kapish?

  11. Just from the synopsis:


    "The attached trip report does, however, show there is still a tenuous case for strategic patience in Iraq, and for timing reductions in US forces and aid to Iraqi progress rather than arbitrary dates and uncertain benchmarks. It recognizes that strategic patience is a high risk strategy, but it also describes positive trends in the fighting, and hints of future political progress.

    "These trends are uncertain, and must be considered in the context of a long list of serious political, military, and economic risks that are described in detail. The report also discusses major delays and problems in the original surge strategy. The new US approach to counterinsurgency warfare is making a difference, but it still seems likely from a visit to the scene that the original strategy President Bush announced in January would have failed if it had not been for the Sunni tribal awakening.

    "Luck, however, is not something that can be ignored, and there is a window of opportunity that could significantly improve the chances of US success in Iraq if the Iraqi government acts upon it. The US also now has a country team in Iraq that is far more capable than in the past, and which may be able to develop and implement the kind of cohesive plans for US action in Iraq that have been weak or lacking to date. If that team can come forward with solid plans for an integrated approach to a sustained US effort to deal with Iraq’s plans and risks, there would be a far stronger and more bipartisan case for strategic patience."

    As strategic patience is a high risk strategy, and Cordesman is making the case for it, I'd ask him if he sees a medium risk strategy - or any other strategy at all. I'd ask because Cordesman (whom I've been reading for years, and who desperately needs a proof reader other than himself) has from the outset been committed to a verrry long nation building project in Iraq. I regard him in fact AS a nation builder, which make his reports all the more interesting.

    Anyway, the country team can give "interim" testimony in September that has the effect of lining up support through early 08. The PRTs need that time and the security presently provided by US forces.

    But everyone's going to be asking for the political plan of action, which is Crocker's chief responsibility. Something that satisfies on paper and that Maliki (somehow) feels "encouraged" to make lots of positive noise about. If the surge (Look! We did something good!) isn't going to be the cover for orderly withdrawal - the administration appears to want the whole enchilada - that paper is. For the next president, anyway.

    "Sunni tribal awakening." That's a nice way to put it. That was in the pipeline under the previous country team. It became a part of the Surge post fact.

  12. From what I've heard, the problem with Cordesman isn't his proof-reader, it is the fact that his researchers do most of his writing for him. Which partially explains how he publishes so much.



  14. Then his researchers badly need proofreaders.

  15. Spouse, friend, or you yourself?

  16. Just askin'. I have no bone to pick with CSIS or Cordesman. For that there's aristides over at Belmont.

  17. Friend, yes.

    Spouse, no. It is scary that people are starting to ask that question. Way too soon for me to be settling down.

  18. Cordesman sure knows how to ruin a party.

  19. It's gonna be 1999 before you know it, whit.
    Nothing Mr Cordsman can do about that, one way or the other.

    Clinton 44, it's gonna be special, they be breakin' out the Magnum, just for the pool party

    Mr Rubin or an acolyte, at least, left to deal with them Chicoms.
    What am I bid for these plans for a reentry heat shield, it's a good one ...
    Start the bidding at a million, do I have two? Now one and a half ...

    Sold to the fellow in the monk's robes ...

  20. Then read at westhawk how the General President has snubbed the US, again. Then, over to the BC where reports indicate to me the start of US vs Shia combat, while Mr Maliki is in Iran.

    Mr Maliki threatening the President of the US, on a conference call, though the nature of the threat not made clear.

    Obviously not the soulful longing glances Mr Bush gets from Senor Putin.

    20% of the population bled US for years, what will 60% of it do, if they become combustable. Mr Maliki will not get the paper agreement Mr Bush requires, will NEVER get realities on the ground to match the proposals on the paper, either.

    It's gonna burn, with General P and Lynch, in the middle.
    One of these times the Iraqi Army won't backdown. The US trained enemies will be evrywhere. No ISF member trustworthy of guarding a gate.

    They are playing with fire, the Bush Team is, in a fireworks factory.

    If you get my drift.

  21. As Rufus would say, daaaaaaaaaaaaaamn!

  22. dRat,

    The Shiia have nowhere to turn. The US is only thing that keeps their oil safe from Iran. I just wish the Americans would understand this, and stop wasting time negotiating with these jackals.

  23. Homeowner arrested after intruder falls

    A homeowner has been arrested and questioned by police after an intruder he confronted during an alleged burglary fell out of a fourth floor window.

    The man, 43, was left with what police described as life-threatening injuries after he fell up to 40ft.

    Police who responded to a 999 call found the man unconscious outside an apartment block in Chorlton-cum-Hardy, Manchester. He was taken to hospital with serious head injuries.


    Officers arrested the 56-year-old occupant of the flat on suspicion of causing grievous bodily harm with intent.

    He was later released on bail pending further inquiries.Yesterday, the occupant - whose identity is not known - was not at his flat and fellow occupants of the block refused to comment.

    The arrest is expected to revive arguments about the rights of householders to defend themselves against burglars.

    Farmer Tony Martin was jailed for shooting dead a burglar in 1999.

  24. Rush reported a record number of Britains are leaving, due to "immigrants," socialism, and no doubt this kind of s...

  25. No Superstion here, just drive.
    (20 years after she was chosen backup!)
    Once Endeavour was safely past the 73-second mark of the flight, the moment when Challenger exploded shortly after the call "Go at throttle up," Mission Control exclaimed, "Morgan racing toward space on the wings of a legacy."

    Immediately after the shuttle reached orbit, Mission Control announced, "For Barbara Morgan and her crewmates, class is in session."

    Morgan was McAuliffe's backup for Challenger's doomed launch in 1986 and, even after two space shuttle disasters, never swayed in her dedication to NASA and the agency's on-and-off quest to send a schoolteacher into space. She rocketed away in the center seat of the cabin's lower compartment, the same seat that had been occupied by McAuliffe.

  26. Speaking of which, Rat, Eric Martin at americanfootprints has a Morton Halperin exerpt from a couple of years ago, in response to missing weapons story (which is an old story - what's NOT gone missing?):

    First we need to ask who we are recruiting. Those involved in the screening process admit that is is very hard to do. The question is not whether the person has a criminal background but rather to whom he (or she) gives loyalty. In Vietnam we learned after it was over that about one third of those we armed and trained were actually in the Viet Cong Army. This meant surprise operations were impossible and a significant part of our force was actually on the other side. There is every reason to believe that this is true now in Iraq. There is no foolproof way to screen for insurgents [ed note: actually, I think a mere 30% infiltration rate would delight many of our commanders as the actual number is likely much worse - at least when using G'Kar's definition of "insurgents"].

    In Vietnam, another roughly one third of the trainees in the Republic of Vietnam's army (ARVN) would quickly take the weapons they were given and sell them on the black market. In Iraq we again see signs of the same thing with large desertion levels and US weapons showing up in insurgency hands. The remaining ARVN troops, neither secretly the enemy or ready to desert and sell what they had been given, were in it for the pay and for the prestige and the opportunity to plunder. It was no wonder that despite years of training and the provision of equipment far superior to the enemy the ARVN was never capable of winning either the guerrilla war or the full scale battles that marked the final stages of the conflict. This was not for lack of training but for lack of commitment....others lacked the incentive to fight since they lacked an allegiance which is the bedrock of campaign effectiveness.

    So in Iraq we put much of our faith and our hope in the process of training the Iraqi Army. The unstated assumption is that Iraqi men do not know how to fight and if only exposed to western methods will be able to deal with the insurgency. Even sharp critics of the war call for better and more training as if it would provide a way out. The unexamined but false assumptions behind this policy are monumental.

    Start with the question of who needs training. The insurgents clearly do not. Nor do the various militias who have challenged the government from time to time and are clearly better fighting units than the Iraqi army units we have trained. The militias guarding the various Iraqi leaders, including the President and Prime Minister, are effective fighting forces. None of them requires US air power or embedded allied forces to fight effectively. The insight is simple: Many Iraqis know how to fight and will do so when they are led by leaders to whom they have a clear allegiance. The United States and the vague notion of a unified Iraqi government is not sufficient. [emphasis added throughout]


    I'll only add: Recruits CAN be screened, but only by tribe. And then tribe has to be pitted against tribe. No other good way of doing it.

    Ditto to the rest, though.

  27. trish wrote:

    "Even sharp critics of the war call for better and more training as if it would provide a way out."

    I've been a sharp critic and I've never maintained that. I've always maintained that the armed forces reflect the same divisions apparent in the general society. Add to that the general trait of humans (and more prevalant in Arabia) to be suspicious (to put it mildly) of foreigners exerting control locally and you have a recipie for displeasure.

  28. Trish
    Wed Aug 08, 08:59:00 PM EDT
    Gee, all those years I thot we were inside their decision-making loops, or some-such.
    Kept reading it in some Blog...

  29. "Mr Maliki will not get the paper agreement Mr Bush requires, will NEVER get realities on the ground to match the proposals on the paper, either."

    Realities on the ground don't have to match the paper proposals; the plan of action has to be presented at some point. The plan of action helps buy time (or a little STFU Please) in Congress, which I assume the administration will be wanting to purchase. You get 6 more months. 6 more have already been purchased with and for the surge, so the next 6 have to be bought in early 08.

    Should the administration determine on its own that strategic political action is fruitless, the only worthwhile decision left is when to start going home. They're by no means ready for that.

    Without 18 month rotations they have to begin going to pre-surge by April regardless. That's @35,000 fewer troops to sit on that lid.

    Musharraf's in serious trouble at home - and the suggestion by the LA Times that his decision was influenced by noises made here concerning unilateral strikes is plausible. A third of the delegation isn't going anyway, because about a third of the delegation is subject to arrest upon arrival by Afghanistan, the US, and/or the Coalition.

  30. "Kept reading it in some Blog..."

    Ah, the good old OODA Loop days.

    If only "displeasure" came without mortar rounds and IEDs, ash. Letters of displeasure, that's what I'd urge on the displeased next time. We shall read your letters of displeasure and respond promptly with thoughtful letters of our own. And coupons for an evening out on us. I should have applied to the Green Zone.

  31. "It is scary that people are starting to ask that question."

    Only scary when they start to ask with a worried look why you're not. (Exempt your own mother.) That's a ways off.

  32. Maybe if we'd have stuck to only sending letters ourselves we all could've avoided all those nasty unpleasantries of which you speak Trish. Water under the bridge though...

  33. "Maybe if we'd have stuck to only sending letters ourselves we all could've avoided all those nasty unpleasantries of which you speak Trish."

    Except that as long as we were legally responsible for security within Iraq, we couldn't do that. We were legally responsible. If only it had been the UN (who would have contracted it out themselves). They were too smart for that.

  34. If only we'd stuck to sending letters back in 2002, well...

    Regrets, I've got a few.