June 18, 2007

The bunny senses trouble on the way.

All the chest-thumping and saber-rattling over a trade war with China (http://www.csmonitor.com/2005/0616/p16s01-cogn.html, http://www.foreignaffairs.org/20050701faessay84407/neil-c-hughes/a-trade-war-with-china.html,
http://www.iht.com/articles/2007/02/02/business/chitrade.php) isn't helping anyone. The massive US trade deficit with China (not helped by prodigious American consumption of Chinese-made goods and a stampede of American investors chasing the dragon), as well as China's enforcement of its currency level despite white-hot economic growth, hardly makes for a level playing field. Then there's the touchy issue of copyright infringement (always a hot topic in an election year), which China is accused of flagrantly ignoring along with other WTO regulations (not entirely a baseless charge, since China's ability to reverse-engineer anything on the planet surpasses even Japan's once-vaunted ability to reverse-engineer anything on said planet).

Then there's the thorny matter of China's trump card--its huge holdings of US public debt. China owns a ton of it. Japan comes close, and any trader with a heart condition likely remembers June 23, 1997, when Japan's prime minister pondered aloud about the consequences of selling some of its US debt holdings, giving the Dow its biggest single-day drop since the crash of 1987. (http://www.thetrumpet.com/index.php?page=article&id=2265) If the US follows through on its tough talk towards the PRC, Beijing may simply decide to dump its US debt holdings. And why not? It's not like they haven't hinted at it already (http://www.chicagotribune.com/business/chi-0703100152mar10,0,4916055.story?coll=chi-business-hed). The impact in the US would be enormous, driving up interest and mortgage rates which would be felt across the board, from buyout/buyback-hungry corporations to anyone carrying debt on a house, car, business, or their education (not to mention the impact on an already weakened dollar).

The bunny thinks this latest slopping-out of Washington rhetoric as being similar to the the latrine full of anti-OPEC litigators. (For more on that lunacy, check out Josef Herbert's 5/22/07 AP filing "House Approves Anti-OPEC Bill", as well as Tina Seeley's Bloomberg dispatch "US Gas Prices Are Due to Outages, Demand, FTC Says" on the same date.) He knows that China has been exporting its unemployment and using its trade surplus to buy other currencies (a process known as "sterilization").

But just as the US cannot maintain its rate of debt increase, so China cannot indefinitely maintain its annual rate of growth (as much as 15%). In time, China's chosen path will force a change in its policies. (The bunny suggests looking at the generation gap in China, between semi-skilled factory workers in living in projects in Shenzhen and their offspring who own--or want to own--cars and cellphones, and who wirelessly surf the Web to brush up on the latest releases from Milan and Hollywood. It's not that wide, and he asks you to consider just how badly the new generations would want to go back to the Good Ol' Days.) But rampant protectionist legislation will only do more harm than good. We should know, we've already tried it. Remember Smoot-Hawley. (http://www.state.gov/r/pa/ho/time/id/17606.htm)