Chinese Hegemonic Effect Overtakes U.S.? Not So Fast

by: Larry MacDonald August 18, 2008    
Larry MacDonald

Larry MacDonald

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“We are in the midst of a sea change in U.S. hegemonic influence in political, financial and economic spheres. American financial, economic and political power has peaked,” writes Sherry Cooper, chief economist with the BMO Financial Group (as quoted in Jeff Sanford’s column). Really? Is it all that bad?

I wonder if Ms. Cooper and the growing chorus of similar voices are seeing all the warts of the beast they live close to and fewer of the blemishes on the beasts living further afield. While the U.S. certainly has its problems, so do other countries around the world — we perhaps don’t see them as much because of the distance and language barriers.

Take the economic miracle in China. It seems to me to be based in large part upon the suppression of market forces, which is not usually a lasting formula — especially for wrestling hegemony away from the U.S. Like Mother Nature, it’s not nice to fool with market forces. They release a lot of unintended consequences that grow and fester and eventually win out, undermining edifices built without regard for them.

Chinese exports are surging because appreciation in the Yuan has been held far below market levels by printing up scads of Yuan to buy up mountains of U.S. dollars. Supplementing this intervention are currency controls that restrict Yuan convertibility.

Any country can do this sort of thing and put up an impressive run for a time. Japan tried it in the 1980s and early 1990s. But most don’t do it, at least for very long, because it leads to an inflation problem — as highlighted by China’s current annual inflation rate near 8%. And again, this performance would look worse without market interventions: if oil prices in China weren’t subsidized below world levels, the inflation rate could be well into double-digit territory, closer to 15%.

Running the printing presses to suppress currency rates, oil prices, and other things is a recipe for galloping inflation and escalating wages, which, by raising the structure of domestic costs, eventually offsets the competitive edge due to artificially low exchange rates. And currency controls spawn black markets that in time defeat the intent of controls while having other negative side effects.

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This article has 10 comments:

  •  
    Aug 18 06:34 AM
    Rather than educating investors,go make some money based on your academic knowledge.While you were asleep tonight and dreamed how to survive in the coming market crash,that 1929 will look sweet,you country United States of America just went Chapter 8 which is complete bankruptcy.
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  •  
    Aug 18 09:37 AM
    I would argue that the economic miracle in China is based more on their discovery of market forces than on their suppression of certain market forces, though I don't dispute the general conclusions of your analysis. I would also argue that the U.S. has peaked as a world power resulting from decades of instant gratification and trends of political thought that have the US moving in the direction of destructive socialism at the same time that so many countries are moving in the opposite and very positive direction of increased respect for free markets.
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  •  
    Aug 18 11:40 AM
    Larry; it seems to me you believe Market just like god will sort every thing out in the end. Then why the FED and Mr Paulson were having difficult to stay put last 12 months; beacaue they knew the market is involved with million of selfish evil traders who are trying to make a few $ at any expenses. more than $!thrillion subprimes loss was the result of your free market believe; how much more loss you like to see before you could stop worshipping your god Market.!
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  •  
    Aug 18 11:43 AM
    The country has been doomed for the past forty years due to poor leadership in our top government positions.

    We have problems such as the twin deficits, social security funding, and oil dependence for the past 40 years; yet our government leaders knowingly have not been doing anything about these problems. Worse yet we the voters have not held our elected officials accountable. We are letting our next generation pay for our mistakes...
    Reply | Link to Comment
  •  
    Aug 18 05:30 PM
    Necessity is the mother of all invention. Pain is the catalyst for corrupt empires to change there ways. The last to change of feel pain is those at the top of government. Many States are appealing to the Federal Government as they fix 2009 budget and see huge shortfalls. The message is being sent to the Federal Government. The reaction will be interesting to see.

    China has unified itself as a culture and faces it's own unique sets of challenges. There culture and population have ambition and drive, ours currently feels lost. But those in the East oft make mistake the United States people are weak or foolish. That just happens to be about 1/2 our elected Representatives. We know what to do about that in our culture. Our peasants have more then machettes and pruning shears.
    Reply | Link to Comment
  •  
    Aug 18 10:31 PM
    You are absolutely right. I should also add that no country can get great by way of pure export growth. If China overtakes US (in whatever sense), where is it going to sell all that produced stuff? Think of Japan in the end of 1980s. Results are still incredible... Great Japanese Depression, beating all records.
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  •  
    Aug 18 11:29 PM
    To put things into better perspective, at current economic expansion, China will overtake US in GDP by 2030. However, GDP per capita is still
    one fifth of that of US.
    Reply | Link to Comment
  •  
    Aug 19 05:28 PM
    There growth will also be slowed by energy demand. Must be a good way to liquify all that coal we have and sell it to them for deisel fuel. Then sell them the air pollution systems next. I know, I am too much a capatalist for my own good but someone has got to yell in Washingtons face about. If they sold the Marxist rope to hang ourselves it's time to sell them a tree.
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  •  
    Aug 20 12:16 AM
    One of the greatest advantages of US in the past was its never ending capacity as own market for their goods and the same for the lending and borrowing wealth. But this is in the way of collapsing nowadays. China and India have more than two billion potential buyers of their own products and debt per capita is one of the lowest in the world.
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  •  
    Aug 20 03:05 AM
    "China and India have more than two billion potential buyers of their own products and debt per capita is one of the lowest in the world."

    Ignorance is a bliss.
    Reply | Link to Comment
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