Play Hardball with China

Chinese President Hu Jintao visited Washington this week. China wants to oust the dollar as the international currency of choice in favor of a basket of currencies, or better yet, replace it with the Chinese yuan. There is nothing less at stake than the future of the supremacy of the United States as a world power. The United States must play hardball with China.

China has moved swiftly from the depths of the Cultural Revolution to the economic miracle of Asia. Shanghai, with its twenty million people, is the show place of China and Asia…the place where China flexes its economic muscle as it moves from a communist society to a capitalist one. Well, sort of. At the end of the day, China’s economic system is “state capitalism” still governed by an authoritarian government. People are routinely displaced and moved with no say in their future. For many Chinese, for the bulk of the Chinese still living inland out of the economic zones, it is still a subsistence living. The Chinese miracle has been built on the backs of low wages, no benefits, a privileged wealthy class, and an artificial currency.

The Chinese currently have $2.7 trillion in foreign currency reserves, with close to a trillion in United States dollars. Compare that with the $14 trillion debt facing the United States. Big corporations, in cahoots with the American government, are willing participants in this dubious Chinese miracle. There is a reason we have unemployment at 9.5% while corporations are making record profits. We are willing participants in the Chinese flim-flam for cheap goods made by cheap labor working slave hours. We salivate over the billion Chinese market. That has been the American dream for 150 years. I have news for American corporations and our government…the Chinese will NEVER concede its home markets to western business. It will use western corporations so long as it is advantageous to it, then blow them away.

I have seen the commentators from the government, business and the media try to rationalize this away. It may seem like there are big business deals coming from this trip. It is hollow. These deals, no matter how many zeros, are chicken feed…crumbs the Chinese have chosen to throw our way to appease a restless public. You can’t dress this pig up.

The Chinese have deliberately built their economy on a currency that is set artificially low in a world trade system that demands floating currencies to cure trade imbalances. We can’t win with Chinese currency currently set approximately 30% below the value of the American dollar. The Chinese government has allowed it to rise a percent or two. Big deal!! All other nations in world trade organization have to let their currencies float, except the Chinese. Enough is enough.

The only way we can regain our manufacturing footing is to end this charade with the Chinese communists and their brand of state capitalism. Our government won’t do it. We are trading our future for cheap light bulbs.

There is one bright note. While our government has failed to act under both Democratic and Republican administrations, the Federal Reserve is doing an end run. Many questions have surrounded the second quantitative easing (tr: printing money) by the Federal Reserve. Many commentators say we don’t need it. But either deliberately or by accident, it is giving the Chinese fits. When money is printed, it has to land somewhere…and apparently it is landing in China. The Chinese rate of inflation is almost 10%. The Federal Reserve has apparently taken the position that if China won’t inflate its currency, we will deflate ours, making their foreign reserves worth less and less, and causing inflation in China as commodity prices begin to skyrocket. It is a dangerous game. It will work if the inflation rate in the United States remains less than in China. If not, we are in deep do-do.

Whatever the Fed is doing, President Hu has been in Washington this week screaming about it. Let him scream. And add some tariffs to muffle the noise.