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China Flexes Its Muscle, America Should Respond

Tuesday, 08 Sep 2009 02:43 PM

Money is power. Let’s face it, the person who has the money, has the power.

Right now China has the money, and it was only a matter of time before they started demanding the power.

For years, China has slowly and methodically moved toward removing the dollar as the world’s reserve currency, subsequently establishing itself as the world’s dominant superpower.

First, there was currency manipulation of the yuan. China’s currency was kept artificially low for years so that Americans and Europeans could enjoy cheap Chinese products. Eventually U.S. manufactured goods were more expensive than their Chinese counterparts, so the production of goods moved to China.

In other words, the U.S. manufacturing industry died.

Don’t believe me? Open up the battery port for one of your radios or look at the back of any electronic item you own. Odds are it will say “made in China.”

Eventually, China allowed the yuan to appreciate against the dollar. From mid-2005 to mid-2008, China let the yuan appreciate to about 6.82 yuan per dollar from 8.2 yuan per dollar.

That meant that, during our economic boom, China raised the price of all of its goods without us even knowing it or having any way to do something about it.

More recently, China has been pushing to remove the dollar as the world’s reserve currency. One of the reasons why the U.S. dollar is so strong is because the world does business in U.S. dollars.

For instance, if Brazil wanted to trade with China, it would purchase goods and services in dollar-denominated amounts. That meant that Brazil would go into the open market and buy U.S. dollars with their national currency, the real. They would then take those dollars and give them to China in exchange for goods and services. The reason behind this is because the dollar was thought to be the world’s safest currency in which to do business.

That’s no longer the case.

Last June, China and Brazil agreed to bypass the U.S. dollar in trade relations and deal exclusively in the Chinese yuan and Brazilian reals. That means that they no longer have to buy dollars anymore, and that means that the dollar will be less in demand.

Basic economics says that when demand goes down, so does price. So when you go to the supermarket and find out that your dollar doesn’t go as far as it used to, that’s because the global demand for dollars has dropped. That’s not even to mention the increase in the supply of dollars, which could cripple the U.S. economy in years to come.

But recently the biggie came.

China has agreed to purchase the first ever International Monetary Fund (IMF) bond for

$32 billion SDRs, which is a type of international currency set up by the IMF by combing a group of international currencies. That bond purchase translates into roughly $50 billion U.S. dollars.

But why is that so important?

Many people believe that President Obama is creating money out of thin air or that he’s just gone mad with the printing press. While some of that is true to a degree, the United States gets money by selling Treasury securities. An example of this would be a U.S. Treasury bond.

Whenever someone buys a U.S. Treasury bond they give actual money to the U.S. Treasury in exchange for a government IOU, with a little bit of interest. The government, in turn, takes that money that you’ve given them and spends it on things such as bailouts, TARP, stimulus, healthcare, and Cash for Clunkers.

Currently, the single largest holder of U.S. Treasuries is, you guessed it, China. It currently holds $776.4 billion worth of U.S. Treasuries.

China takes its yuan, purchases dollars, and uses those dollars to buy U.S. Treasury securities.

Well, if they are no longer buying dollars, that means that demand for dollars is falling, which means the purchasing power of the dollar goes down.

Brazil, Russia, and India are all looking to follow China’s example and buy these new IMF bonds instead of U.S. Treasuries. Ultimately, this could result in a major blow to the strength of America in the global marketplace.

Let’s get one thing straight: I’m for free markets, and free markets are what make for free societies.

China has played the game, and some might say that they are playing it better than anyone else is, regardless if you think that they are breaking the rules or not.

The United States still has the highest gross domestic product of any country in the world, and China is not expected to surpass that until 2030.

Instead of blaming China for buying IMF bonds in place of U.S. Treasuries, we should make U.S. Treasuries more competitive, and make the dollar stronger. The way to do this is not to do so with fancy accounting or complex monetary policy.

The way to do this would be to make America stronger. Let’s produce more goods here in America. Instead of wasting trillions of dollars on government programs that we can’t keep track of, let’s save the money.

China didn’t get where it is by spending all of its money; it got where it is by saving, something that we used to do in America.

There once was a time where the United States had the money, and consequently had the power.

We were the world’s leader in industrial output and in agricultural output; we were self-sufficient.

Now we ship billions of dollars to the Middle East for foreign oil, import our food from all over the world, and don’t produce anything in America. Instead of becoming a nation of creators and innovators, we’ve become a nation of buyers and sellers.

So America, let’s stop for a moment. When China flexes its muscle, we should flex ours. Let’s show how we can create wealth and not squander it with frivolous spending. Let’s show how we can innovate to create the new products and services that will drive the new global economy.

In short, let’s show them we’re the United States of America, still the greatest land on earth.

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DanMangru
Money is power. Let’s face it, the person who has the money, has the power. Right now China has the money, and it was only a matter of time before they started demanding the power. For years, China has slowly and methodically moved toward removing the dollar as the world’s...
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