THE SOLUTION OF CHINA

  
Zihuatenejo, Mexico.  My wife and I have managed a quickie escape from Zeroland to stay at a friend’s home here.  If this isn’t paradise, it will certainly do until paradise comes along.  It’s hard to focus on writing with a view like this, but I’m trying:

My rationale for being here (as if I really needed one) is that my buddy who lives here has been a top advisor to more Global Fortune 100 companies for more years than perhaps anyone else on earth.  Who better to talk to regarding the meltdown of the global economy?

Name any major insider or player in global finance or global business, and the odds are high that my friend has known them well for a decade or two.  He’s been calling them up, asking them the same question I had for him:  What the hell is going on?

Their answer, which is the same as his answer?  "Damned if I know."

He tells me:  "Jack, I know the heaviest hitters out there.  And I’m hard put to think of any who weren’t blind-sided by this.  You could see damage coming, a recession, okay.  But a multi-multi trillion dollar total global wipeout?  No one I know saw it, nor can explain it, nor knows what’s coming next.  We’re all flying blind, and going broke doing so."

Naturally, I needed another Margarita after that. 

Our conversation continued, searching for possible solutions.  "Wherever solutions lie, they obviously aren’t in the US," my friend noted, "with this, this creature inhabiting the White House determined to make a catastrophe catastrophically worse."

"Remember that this is a global meltdown requiring a global solution," he said.  "The old model that was sustaining everything is over and gone."

"You mean the model of 300 million Americans buying the world’s stuff, especially China’s?"  I asked.

He nodded.  "Then the Chinese recycling our dollars into US Treasuries to increase government spending not private production," he added.

"But there are one billion more Chinese than us," I said, "and while our spending was on stuff we didn’t really need, these Chinese have such a low standard of living their capacity for consumption is several orders of magnitude greater than ours."

And so we came to the Solution of China.

Just as our economic model, borrowing from China to buy their stuff, is over, so is China’s.  That model has a name:  mercantilism.  Exporting your economy’s products to the world and restricting the world’s imports into your economy. 

One of the great benefits of the global meltdown, along with the collapse of oil prices, is the collapse of China’s exports – as we, along with other folks in the world, aren’t buying.

Note also in the linked story the concomitant collapse of China’s imports – Chinese can’t afford to buy stuff either.  The Chicom mercantilist model has failed, and unless it’s changed radically and fast, the resultant overall economic collapse will create a revolutionary situation that could sweep the Chicoms away.

The immediate killer danger for China is, with cosmic irony, protectionism, the Buy American, Buy European, Buy Brazilian, Buy Indian sentiment sweeping country after country.

This is of course, the very mercantilist protectionism practiced by China.  The only way to persuade other countries to abandon their protectionist policies is for the Chicoms to abandon theirs.

Couple this with Chicom realization that continuing to sink their forex into US Treasuries is a risky bad bet.  Already they are demanding "guarantees" that the $682 billion (some estimates are $100 billion higher) they already have will somehow maintain their value.

Good luck on that.  Anyone with a brain in their skull knows that Treasuries will be worth pennies on the hyper-inflated dollar in a few years.

It’s thus becoming increasingly obvious to the Chicoms that the best use of their almost $2 trillion in foreign reserves is to increase domestic consumption, such as by providing financing and consumer credit.  See for example this story dated today (2/12):  China’s New Loans Rise.

This opens the door for both domestic production for domestic consumption and for manufactured imports – a massive flood of them.  This, in turn, is what can ignite domestic production here in the US – domestic production for Chinese consumption, the very reverse of the now-failed now-obsolete economic model.

Such domestic US production – actual real productive production, not Zero’s make-believe stimulus porkfest – is, of course, the only way to revive domestic consumption in the US, rendering US consumers capable and willing to consume.  Consume American products – and Chinese.

Right now, America, China, and everyone else is spiraling down in a vicious circle of no production for no consumption.  The only sustainable hope is to reverse this into a virtuous circle, and only the Chinese can do it.

Further – only the Chinese can force Zero to comply.  His only hope of financing his "stimulus" debauch is the Chicoms’ buying his Treasuries.  That is, like, so over.  Forget it, Zero.  Be a good little boy.  You can engage in onanismo all you want getting your Stimulus Bill passed with an elaborate signing ceremony. 

But you better shut down implementing all its spending provisions, as the Chicoms won’t be footing the tab.

Disaster impends in 2009.  But it is going to enfold in incredibly interesting and unexpected ways.  And one of the most of both is how Zero responds to the Solution of China.