Tigers! They come in two sorts; tame or with a temper. A modern Seigfried with a golden wedge of hair has entered center stage, or is that Roy? Regardless to whom Trump will be likened, we all know it’s going to be a crazy, wild show. It doesn’t really matter whether you want a ticket to the show, or not, the US Treasury has reserved you a seat. The arena is locked down and the Tiger has skipped breakfast. C’mon Roy, poke that sucker!
In my preceding Trumponomics article last week I introduced the idea that unabashed free trade – the first face of the Janus of neoliberalism - has been the obvious cause of the persistent current account deficit between the hungry China Tiger and the US. This is not a revolutionary idea.
The crux of that article was that this trade deficit is, in fact, the main incentive fueling the overspending addiction of the US Federal Government, helping to lock in a persistent budget deficit; the two are cyclical and deliberate. Cause and effect! This government debt is the bastard child and second face of the Janus of neoliberalism. This is willfully ignored by most liberal economists as if it were not the inevitable conjoined twin of the first. Neoliberals simultaneously cry about big government while praising laissez-faire free trade with any and every nation.
For a nation like the US which holds the status of de facto World Reserve Currency, large quantities of US dollar government debt has to be held overseas by many important trading nations. 25% of US government debt is held by foreigners; very high for a developed nation. If other countries are holding your nations currency as a foreign exchange reserve, generally speaking the majority of it will be held in government treasuries, simply because bonds hedge well for inflation. Only a moderate amount of the reserve is held in cash on deposit/repo because these have lower returns adjusted for inflation. Trends in foreign exchange reserve holdings are always in flux.
If cash becomes depleted, central banks simply liquidate your government bonds for cash when they need to enact active monetary policy. When deciding which type of foreign exchange debt to hold, the most liquid and low risk is of course governmental debt - of nations. Nations are in the too-big-to-fail class compared to municipalities or corporations which don’t have a money printing machine. Not even EU countries have this advantage anymore, they've ceded their control over monetary issuance and policy to the supra-national ECB, even though their bonds are still issued by their national treasuries.
Following this logic, the overall problem with having the world reserve currency - as does the US - is there exists heightened incentive for such a nation to issue too much debt, blowing the proceeds on deficit spending, developing what is known as the twin-deficits phenomenon. This is the case with the US. On the Chinese side of the equation this has created a substantial current account surplus – a merchant windfall.
This article will focus on the Chinese side of ‘Chimerica’, among other topics, whereas the previous article focused on the US.
Winning! Government trade intervention
As can easily be seen above, this merchant windfall is large. In its wake it has left behind mountains of US Treasuries, US Agency debt such as Ginnie, Fannie and Freddie, US equities and dollar deposits; as of January estimated at $1.5 trillion. This can never realistically be sold off without a big drop in the market value of the same. In the meantime this paper all pays out somewhat satisfactory returns, while held, but for how long? For the sake of brevity we’ll just call these paper claims on the US a windfall for China, allowing China to industrialize beyond their wildest dreams.
There’s clear benefit to having absorbed this debt. Bringing a nation this big up out of the slime, in less than fifty years, is unprecedented in world history. In the 1970’s China was a backwater but today it’s an economic powerhouse. Quite the transformation. On the other side of the world can been seen the opposite effect; the rusting industrial interior of the continental United States caused by this Chimerican free trade insanity.
The Chinese government however does not have a balanced budget, or even a budget surplus, so it can’t claim twin-surpluses. This doesn’t matter in the game of trade though. No large external debts are owed by China to foreign creditors, unlike the US. Large Chinese internal debts exist but it needs to be understood that most of this government debt is owed to state owned financial and investment institutions, which directly subsidize and power the industrial sectors which are winning the export war against western countries. This is weaponized trade output; a feature of classical mercantilism.
In 2017, Chinese general government debt was 47% of GDP compared with 105% for the US and 253% for Japan. As I’ve mentioned before regarding Japan this government debt is majority owned by Japanese investors. Likewise, the Chinese government follows the same pattern with tiny amounts owed externally. What is this pattern? It’s the pattern of governments which manage their balance of trade through cunning intervention, keeping their current account either balanced, or in surplus; a feature of classical mercantilism.
They do this by working very closely with their major exporters and importers. Known as government sponsored/tolerated export cartels in Japan, China is no exception. Their primary function for export trade is to facilitate dumping. The government supports/forms these export cartels - known legally as foreign sovereign compulsion - to keep the current account healthy. This is another feature of classical mercantilism. This is in no way laissez-faire capitalism. If China and Japan are not plugging trade holes using fresh government debt sold to foreign entities in order to buy back their own currencies earned by said foreigners, it follows they won’t have external government debts to repay in the future.
If we look at the makeup of the internal debt in China, however, we see a messy picture. It’s the picture of a country still so centrally managed that it constantly finds itself having to take rash actions to plug holes caused by past rash actions. Allocation of capital into stable investment pipelines can be diverted from their internal, natural, free market destinations by government actions believed by the communists to be necessary for reasons of ‘stability’.
Stability means keeping Chinese employed, no matter what, regardless of the long-term consequences. The post-GFC world demonstrated that western central banks are just as interventionist - though in a purely monetary sense - so people in glass houses shouldn’t throw stones. With 1.4 billion Chinese packed into a country equivalent in size to the United States, stability means preventing potentially explosive unrest; which would at first be economic, then social, then political, threatening the current regime. The plan? Keep people working, keep some people happy, but at least keep most sheltered and fed.
Although this internal economic situation may seem alien from the perspective of neoliberal western market economies, nothing changes the fact that Chinese government debt, owed almost entirely to Chinese subjects and institutions, prevents foreign interference within their internal markets and affairs - much like Japan. China can deal more easily with its own subjects than foreigners because the former fear their own government whereas the latter can be far more difficult when they’re your creditors.
Mercantilism: The ‘Modern’ Great Wall of China
On the world stage this lack of external government debt insulates China from threats of bond dumping or creative use of said debt as a weapon against their nation on world markets. The Chinese are masters at insulating themselves from the odious foreigner.
Building monumental walls for thousands of years, more recently the Chinese have somewhat protected themselves subtly by dragging their feet internationalizing their currency; refusing to sell anything but token government debt to foreigners (including restrictions on Panda bonds); refusing to expose themselves to much at all; except US Treasuries, other dollar debt, and a mountain of other world assets dwarfing any other nations holdings.
If the Chinese government hadn’t chosen to buy so many US Treasuries, one might be tempted to call this, on all counts, a text book case of classical mercantilism in the twenty first century. Significantly these foreign government debt purchases are the only notable difference between classical mercantilism and what we can perhaps call neo-mercantilism, because classical mercantilists never expose themselves to long-term counterparty risk.
If the Chinese were demanding gold bullion as payment direct from the US Treasury rather than accepting IOU’s and, if the US were obliging, China would already be today, by far, the richest nation in the world by hard wealth. All US bullion reserves would already be in China and they’d be buying up most of the newly mined world supply annually (together with Russia the latter is materializing). It’d be as if a time machine had transported China back to the glory years before 1839, right before the Daoguang Emperor decided he’d had enough of the opium smugglers, banning its sale, triggering an Opium War which he then swiftly lost.
For China after that First Opium War, it was all down hill from there. Back then all the precious metals in the west flowed east into China. Nothing could stop the flow; except that is, the Royal Navy, British Marines, tons of opium chests and a competing mercantilist Empire on which the sun would not set until it later gave up on mercantilism. Forcing opium down Chinese windpipes fixed that twin-deficits problem for Queen Vicky.
Nations operating under mercantilist agendas in the modern world with drastically reduced shipping costs are more difficult to maintain. Shipping costs used to be a prohibitive barrier between the supplier and the market, especially when the suppliers were Chinese and the markets were in Europe or America. Over a hundred years ago, slow, small tonnage sailing ships requiring sailors for longer, ships with increased chances of vessel and cargo loss at sea from weather, were the norm. These self-enforcing costs were more efficient at limiting trade than managing a tariff regime without them.
In this past age, profitability of potential exports was drastically reduced. This was especially the case if the destination were also to apply a tariff on the goods being imported. In the modern age we have supermassive cargo ships with small crews and we utilize advanced port loading technology - mechanized and containerized - making the cost of shipping a widget almost un-noticeable from what it used to be. Ships lost at sea are almost non-existent.
To drop trade barriers completely with a mercantilist nation like China in such a world is industrial suicide. Despite this reality, neoliberal prophets have announced that by doing so, some miraculous equilibrium will balance all trade worldwide, unleashing a panacea of prosperity. There will be a pot of gold at both the beginning and end of every rainbow. All nations will integrate economically. Nations will all equally become more efficient and governments will be smaller because they won’t have any need to intervene in the affairs of Paradise.
Likewise, in this dream, at no point will any of these nations attempt to game the system because they all seek the same benevolent destination. They will all liberalize and synchronize, singing in a well-honed angelic choir. Magic in action! Conjured up by the collective mind of the planet, it’ll be organically driven by the invisible hand of the ‘free market’ egregore.
It's a Jensenine Evangel!
The Corporate Cosmology of Arthur Jensen
As Arthur Jensen remarks to Howard Beale in the multiple Academy Award winning 1976 MGM feature film Network :
You are an old man who thinks in terms of nations and peoples. There are no nations. There are no peoples. There are no Russians. There are no Arabs. There are no third worlds. There is no West. There is only one holistic system of systems, one vast and immane, interwoven, interacting, multivariate, multinational dominion of dollars. Petro-dollars, electro-dollars, multi-dollars, reichmarks, rins, rubles, pounds, and shekels.
It is the international system of currency which determines the totality of life on this planet. That is the natural order of things today. . . . We no longer live in a world of nations and ideologies, Mr. Beale. The world is a college of corporations, inexorably determined by the immutable bylaws of business. The world is a business, Mr. Beale. It has been since man crawled out of the slime. And our children will live, Mr. Beale, to see that perfect world in which there's no war or famine, oppression or brutality - one vast and ecumenical holding company, for whom all men will work to serve a common profit, in which all men will hold a share of stock, all necessities provided, all anxieties tranquilized, all boredom amused.
And I have chosen you, Mr. Beale, to preach this evangel.
Hallelujah! It’s obviously satirical but this is exactly what unabashed neoliberal doctrines preach.
The big problem with this ecumenical vision? There’s a thing called the real world. Obviously, third world countries with virtual slave labor run by dictators and oligarchs do exist. This was China before the trade doors of heaven were swung open by Kissinger and Nixon in the early 1970’s, allowing uncontrolled buying of dollar denominated debts, which presented the Chinese with a mechanism to further game exports into the west, to conquer the US industrially, by cheapening their currency.
Additionally, in the real world, there are indeed Arab nations and they don’t seek to feed as many imports into their consumer markets to balance their trade as prayer would demand. Their petrodollars are mostly fed into the western debt, equity and real-estate markets for the benefit of a select few royal princes and aristocratic sheiks. They’ll however take in large armaments trades whenever offered - or demanded - obviously to gear up for wars in which Allah will bless each of their endeavors against every other ethnicity/sect blessed equally by Allah, probably also receiving US armaments.
This context makes the first part of Arthur Jensen’s speech seem timeless :
You have meddled with the primal forces of nature, Mr. Beale, and I won't have it!! Is that clear?! You think you've merely stopped a business deal. That is not the case. The Arabs have taken billions of dollars out of this country, and now they must put it back! It is ebb and flow, tidal gravity! It is ecological balance!
Well blow me down and call me Howard Beale! - at least Howard before he converted to the “corporate cosmology” of Arthur Jensen. Every time Theresa May stands at the podium of a philo-Islamic (Wahhabi) love fest such as the 2017 Qatar-UK Business and Investment Forum to preach the sermon of tolerance and diversity, do you get the impression that her constituency is not actually the native British voter?
Does her tongue move purely for the proceeds of Arab LNG imports and petrodollar flows which the City of London markets require reinvested to remain buoyed and liquid? Is her tongue moving in competition for favor and party donations which the Tories and Labour both now need to compete for? Do you like those Sharia lobbies making inroads into Whitehall, your universities, schools, the BBC, your local governments? How about the Mosque development trusts which the planning approval gods seem to have showered blessings upon from heaven?
“Hell, they already own half of England” ~Howard Beale on Arabs.
If you’re in the UK: Thank Thatcher, Major, Blair, Brown, Cameron and now May for this neoliberal diversity paradise. Money speaks no matter the flag it’s draped in.
If you’re in the US: After signing a $350 billion arms deal with the Saudi's last year - the largest in modern times - this is how a political leader acts when offering vassal platitudes to one of your foreign creditors and lead OPEC asset. Petrodollars will buy his hypocrisy and then bureaucrats and media whores go right to work convincing citizens there’s nothing obvious for them to be flabbergasted about. Media will criticize Trump for many things, but they'll always treat petro-sheiks with kid gloves. With Hillary in the hot seat it would merely have been a woman repeating the same plattitudes.
Debt weapons of mass disruption
Notably in regards to the Arabs and Chinese, it’s important to highlight the grave dangers of foreign investment caused by run-away trade deficits. Investopedia sums up the dangers well :
“… nations running a current account deficit are beholden to their suppliers. The exporting nations have the ability to apply financial and political pressure on the importers. This can have significant fiscal, political and even national security implications.” ~Investopedia.
The best historical example of such an attack on the western world using vital commodity exports was the OPEC action of 1973 when they enforced production cuts and an oil embargo against western allies of Israel. As I explained in a previous article, the ramifications of this were monumental and rewired the modern history of world finance. This birthed the monstrosity of the petrodollar system.
Though China doesn’t export product as important and vital to the US as crude oil, the years of hollowing out US industry would not so easily be repaired if Chinese goods were suddenly to become more expensive due to Trumpian tariffs - especially steel. The zombie riots in Walmart might be impressive. The time delay between price hikes and sector repair would cause price inflation - at least in the short term - as capital investment into reviving sectors took substantial time to rearrange itself, before operations came online.
This higher inflation would conflict with the shorter term Treasuries on the yield curve, forcing higher interest rates. Additionally wage costs would always be higher in the US, though this would be a boon to the GDP, fueling velocity of money. You lose some, you win some. If China were to dump their over one trillion in US Treasuries with gusto, the effect would be a strengthening of the renminbi against the dollar; unless they converted it into a third-party foreign exchange reserve like the Euro, damping the effect (which is beginning).
Such dumping would harm Chinese exports which would become more expensive as the renminbi strengthened. This is exactly what the US government has been saying it wants China to do since the early 2000’s - or at least giving lip service to the idea as if to appear concerned. In 2005, China finally announced it wanted to begin internationalizing and freely floating its currency globally. China, being clearly mercantilist rather than neoliberal, has dragged its feet purposefully in this regard, knowing this will have a negative effect on employment.
Did China ask us if it was OK to devalue their currency (making it hard for our companies to compete), heavily tax our products going into..— Donald J. Trump (@realDonaldTrump) December 4, 2016
their country (the U.S. doesn't tax them) or to build a massive military complex in the middle of the South China Sea? I don't think so!— Donald J. Trump (@realDonaldTrump) December 4, 2016
The US isn’t serious though. Does anyone really believe that most people in the Federal bureaucracy are actually concerned about China continuing to prop up the US Treasuries market, allowing the Feds to perpetually delay tax hikes? At this point government bond experts at the Treasury and the various Federal Reserve Banks are probably suffering from cognitive dissonance over what to cry most about, or wish for.
When your lover leaves you at the altar
Even with this sword-of-Damocles for potential attacks by foreign creditors hanging over their heads, neoliberals seem to care little about national distinctions or borders. Economic sovereignty is an afterthought, if at all. No matter the culture or ideological agenda, if some other country can muster credit, they say “good”. Or if foreigners can supply a product cheaper this must be “because they’re more efficient than the inefficient domestic competition”.
The centrally managed economy of China is strategically subsidizing certain export products to target US sectors while continually buying up dollar debts rather than allowing their currency to appreciate. To this neoliberals say “muh free trade” and accept the pin-less grenade as a wedding gift. The neoliberal cares not for this reality, because to apply any government interference would break an “immutable bylaw of business”, as Jensen put it. It screws with their ‘free market’ fundamentalism.
Neoliberals don’t seem to care that their neoliberal agenda was not first followed to the letter on the Chinese end, but they’ll ‘self-deprecate’ on behalf of their own nation if it were to ever upset the gods of non-intervention. So if your trading partner is not playing ‘fair’ and not allowing their currency to appreciate naturally to a place where your converging neoliberal economies embrace each other like angels of love at the pearly gates, are you supposed to sit back and say, “Well at least I played fair! Soundly I sleep in failure!”? Well blow that! Blow that right off! Has the west become this weak and pathetic?
It is time for the libertarian ideologues to realize that their lover has dumped them at the altar of laissez-faire free trade. You cannot have free trade if you don’t control the agenda of your lover. There’s no sign at all that many of the more important lovers of the US like China are willing to sacrifice their own economic sovereignty to globalist institutions. They value it. You are the one that obviously does not. It’s time to start realizing that the last fifty years have been a mistake. You were dumped by communists, but the deception was a product of your own delusion.
Don’t blame the Chinese for wanting to retain their garment of mercantilist celibacy while you ripped yours off in a frenzy, running around starkers and ranting about the coming of a neoliberal Paradise. You’ve embarrassed yourself and the guests are now leaving. Perhaps this is a funeral though: Is that bride packing a Colt AR-15 under her dress and did the groom pay for the weapon? Well this is awkward.