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Feature
China: American Financial Colony or Mercantilist Predator?
The perverse effects of the world dollar standard.
China is an important trading partner of America. But it may also be a mortal threat. And not for the conventional reasons usually cited in the press. Ironically, it is a threat because China is in fact a financial colony of the United States, a colony subsidized and sustained by the pegged, undervalued, yuan-dollar exchange rate. Neither the United States nor its economic colony seems to understand the long-term destructive consequences of the dollarization not only of the Chinese economy but also of the world monetary system. While the Chinese financial system has been corrupted primarily by tyranny, deceit, and reckless expansionism, it is also destabilized by the workings of the world dollar standard. Neither the United States nor China has come to grips with the perverse effects of the world dollar standard.
The social and economic pathology of 19th-century colonialism is well studied, but the monetary pathology of its successor, the neo-colonial reserve currency system of the dollar, is less transparent. In order to remedy this pathological defect, the United States must rid itself of its enormous Chinese financial colony, whose exports are subsidized by the undervalued yuan in return for Chinese financing of the U.S. twin deficits. Both China and the United States must also free themselves from the increasing malignancy of the dollar reserve currency system, the primary cause of inflation in both China and the United States.
In the end, only monetary reform, including an end to the reserve currency system, can permanently separate the dollar host from its yuan colony. Without monetary reform, the perverse effects of the dollar reserve currency system will surely metastasize into one financial and political crisis after another — even on the scale of the 2007–2009 crisis.
It is, of course, a counter intuitive fact that China has been financially colonized by the United States. But why is this a fact? Simply because China has chained itself to the world dollar standard at a pegged undervalued exchange rate, choosing therefore to hold the exchange value of its trade surplus — that is, its official national savings — in U.S. dollar securities. It is true that the dollar-yuan strategy of America’s Chinese colony has helped to finance a generation of extraordinary Chinese growth. But China now holds more than 3 trillion dollars of official reserves and more than a trillion dollars in U.S. government securities. These Chinese dollar reserves directly finance the deficits of the American colonial center. This arrangement clearly resembles the imperial system of the late 19th century. The value of a British colony’s reserves were often held in the currency of the imperial center, then invested in the London money market. Thus, the colony’s reserves were entirely dependent on the stability of the currency of the colonial center. While China is America’s largest financial colony, most other developing countries are also bound to neo-colonial status within the reserve currency hegemony of the dollarized world trading system.
CHINA’S DOLARIZED monetary system reminds us of nothing so much as the historic colonial financial arrangements imposed by the later British Empire on India before World War I — India actually remaining a financial colony of England long after its independence in 1947. How did the sterling financial empire work? The imperial colony of India, beginning in the late 19th century, held its official Indian currency reserves (savings) in British pounds deposited in the English money market; independent developed nations at that time, like France and Germany, held their reserves in gold. That is, France, Germany, and the United States settled their international payment imbalances in gold — a non-national, common, monetary standard — holding their official reserves, too, in gold. But the London-based reserves of colonial India were held not primarily in gold, but in British currency, helping to finance not only the imperial economic system, but also the imperial banking system, imperial debts, imperial wars, and British welfare programs. Eventually, as we know, both the debt-burdened British Empire and its official reserve currency system collapsed.
For more than a generation now, a similar process has been at work in China. China is America’s chief colonial appendage. The Chinese work hard and produce goods. Subsidized by an undervalued yuan, they export much of their surplus production to America. But, like the Indians who were paid in sterling, the exports of Chinese colonials are substantially paid in dollars, not yuan — because bilateral and world trade, and the world commodities market, have been dollarized. And thus it may be said that the world financial system is today an unstable neo-colonial appendage of the unstable dollar.
China, like its predecessor the British colony of India, has chosen to hold a significant fraction of what it is paid in the form of official dollar reserves (or savings). These dollars are promptly redeposited in the U.S. dollar market, where they are used to finance U.S. deficits. Every Thursday night, the Federal Reserve publishes its balance sheet, and there we now read that more than $2.5 trillion of U.S. government securities are held in custody for foreign monetary authorities, 40 percent of which is held for the account of America’s chief financial colony, Communist China. It is clear that without financial colonies to finance and sustain the immense U.S. balance of payments and budget deficits, the U.S. paper dollar standard and the growth of U.S. government spending would be unsustainable.
IT IS OFTEN overlooked that these enormous official dollar reserves held by China are a massive mortgage on the work and income of present and future American private citizens. This Chinese mortgage on the American economy has grown rapidly since the suspension of dollar convertibility to gold in 1971. China — poor and undeveloped in 1971 — was at that time very jealous of its sovereign independence, sufficiently so to reject its alliance with the Soviet Union — even earlier to attack U.S. armies on the Chinese border during the Korean War. In an ironic twist of fate, China surrendered its former independence and, as a U.S. financial colony, joined the dollar-dominated world financial system. China’s monetary policy is anything but independent. It is determined primarily by the Federal Reserve Board in America, the pegged yuan-dollar exchange rate serving as the transmission mechanism of Fed-created excess dollars pouring into the Chinese economic system. Perennial U.S. balance of payments deficits send the dollar flood not only into China but also into all emerging countries. The Chinese central bank buys up these excess dollars by issuing new yuan, thereby holding up the overvalued dollar, and holding down the undervalued yuan. Much of these Chinese official dollar purchases are then invested in U.S. government debt securities. So even though America exports excess dollars to China, China sends them back to finance the U.S. budget deficit — much like marionettes walking off one side of the stage, merely to reappear unchanged on the other side.
This is the little-understood arbitrage mechanism of the pegged exchange rate system by which Fed-created excess dollars are bought and held as reserves by the Chinese central bank, in exchange for which newly created yuan are issued, thereby supercharging inflation in China. The Chinese dollar reserves, which are reinvested in the United States, help to ignite inflation in the United States. It is clear that the workings of the official dollar reserve currency system cause purchasing power to be multiplied, or at least doubled, in both countries. But these central bank issues of new money are unassociated with the production of new goods and services during the same market period. Thus total spending, or purchasing power, exceeds the total value of goods and services at prevailing prices. When total demand exceeds total supply, the price level must rise.
But just as the subservient, colonial Indians were constrained not to sell their sterling reserves too quickly, so the Chinese are constrained — by politics, diplomacy, and self-interest — not to dump their depreciating American dollars. The Indians had to consult their imperial bankers, even though the English were debtors to their Indian colony, because the Indians did not wish to anger the colonial center, nor to precipitate a sterling crisis. From time immemorial, creditors with too large a stake in an over-sized debtor often beg leave of their debtor to get their money back.
China is frustrated by circumstances similar to those of a colony of imperial Britain. Hostility has arisen in the debtor — the United States. Fear of setting off a dollar slide haunts the hostile creditor, China. The difficulty of finding a suitable portfolio of alternatives for a trillion dollars in U.S. government debt annoys the outspoken Chinese financial colony, as it calls for a new world monetary system. But there seems to be no genuine alternative to the very liquid dollar market. De facto illiquidity of official Chinese dollar reserves is enforced by political sensitivities, not by market salability. The debtor, as the saying goes, is “too big to fail.” Thus arises an unstable stalemate, a yuan-dollar pegged exchange rate regime constantly on the edge of a crisis.
The “exorbitant privilege” of the dollar is matched by the insupportable burden of America’s overvalued reserve currency role, which has tended to deindustrialize the colonizer, gradually increasing social inequality by reducing the standard of living of lower- and middle-income American families. The reserve currency country then feels compelled, as the Fed does today, to depreciate the dollar in the vain hope of eliminating the trade deficit and the balance of payments deficit — by becoming more competitive abroad as it becomes poorer at home. The perversity of the official reserve currency system is endless as China now endures high inflation engendered by its colonial status in the world dollar system.
The floating, pegged exchange rate system based on the dollar has been slowly decaying since the end of World War II. But the dollar-based reserve currency system, because of the unmatched scale and liquidity of the dollar markets, could last another generation. When it will collapse cannot be predicted. That it will collapse, without systemic reform, I think inevitable. Few predicted the timing of the collapse of the pegged dollar system of Bretton Woods. But it did collapse in August of 1971, followed by America’s worst decade since the Great Depression.
ULTIMATELY AMERICA, the leader of the unstable world financial system, must choose between two options.
1. The United States can wait for the eventual demise of the world dollar standard under chaotic conditions, similar to the final sterling collapse and the subsequent collapse of Bretton Woods in 1971. This option is analogous to the intrepid daredevil who leaps from his 10th floor window, secure in the fact that he is still unhurt two floors from the street level.
About the Author
Lewis E. Lehrman is a senior partner at L. E. Lehrman & Co. and chairman of the Lehrman Institute.
Letter to the Editor View all comments (30) | Leave a comment
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Melvin| 9.13.11 @ 7:16AM
First let me remind those that wee wee all over themselves bout China, because they looked so cute at the Olympics, and hey what about those preteen Chinese gymnastics that weren't of correct Olympic age, but because Chinese officials said they were, IOC said, "It's cool.'
Oh, I'm sorry that one thing that many have forgotten. The Chinese are still and always be
"C O M M U N I S T S" One party rule, contributing to Democrat candidates , Peoples Liberation Army engaging in sweat shop practices working Chinese workers for .85 cents a hour, billeting them in deplorable conditions,that make a dog house look like a condo, a casino turned into a operational aircraft carrier.
I have spent the greater part of my adult life in Asia, I married an Asian who attended a Chinese School. And let me tell you what the Chinese are teaching in that school isn't 2+2. It is more like hammering home the Dragon will devour the Eagle. PETA has demanded that we remove the Eagle from our National Crest yet have they?
"! Hey thats us, you mean those cute little in sync people, want to come over here and destroy us? No, they just want our National resources, Iron ore, Coal, minerals of all kinds, Crude Oil, I'm sure you get the drift now.
The Chinese like the Japanese are resource poor. As big as that Country is they don't have a damn rock that is work smelting, what coal they do have is full of Sulfur and dirty as hell. I had the pleasure of visiting China once. That place is the most filthy, smelling, disgusting Country on Earth.
Our EPA and environmental NAZIS over here would have a massive, massive case of Hemorrhoids, if they went to China and even attempted to clean up that Chinese National toxic waste dump.
That is one of the reason that beat us at every turn when it comes to manufacturing. You see the Chinese have only one rule. And that rule is, economically cripple and or destroy the United States so that it cannot influence it's sphere of National interests, and remove it's manufacturing capability to wage war.
Chairman Mao and Uncle Joe Stalin didn't agree on much but they did agree on one thing. The United States of America is a threat and it has to be destroyed economically or militarily because the US is the single greatest threat to Communist ideology.
Damn straight the Chinese are a Mercantilist Predator, and the sooner our powers that be realize that the sooner we can counter, but we can't because many of the powers that be that are supposed to be looking out for our National interests are employed by the Chinese Peoples Liberation Army.
Thats exactly why former President Bill Clinton allowed major US Defense Contractors sell military technology to China. Hmm I wonder if the Chinese paid Bill Clinton .85 cents an hour as an employee.
POST American| 9.13.11 @ 8:38AM
-----Well, a Globalist financial colony perhaps.
Meanwhile, not a word about the ONLY issue
there is ---our 4 decades finishing off Globalist
RED China set up, sellout and TREASON OP.
Even as the fallout from Globalist collapsed
Japan rains down on us along with
the with the usual CHEM-trails,
and as 30 MILLION Mexicans roam
our landscape from Globalist collapsed Mexico.
"Remember, Globalism, 'Free Trade'
and EUGENICS are always intertwined. ALWAYS."
-ALAN WATT
-----And along with that, an unaccountable,
psychopathic FAKE money system (ie USURY)
---and, of course, TREASON.
------------AGAIN ------------ALWAYS.
Dan Mathewson| 9.13.11 @ 7:03PM
Holy cow! You are delusional! See here for delusion. http://www.cuttingthroughthematrix.com/bio.html
Dan Hirsch| 9.13.11 @ 8:52AM
Lewis,
Thanks for that particularly opaque description of the creditor's problem of letting one shiftless borrower get so over-extended that he'll take you both down if you cut him off. Especially when between the two of you, you are holding on paper more money than exists.
Lewis, would shifting from paper, moved around as wire transfers, over to gold be helpful? It takes a lot of time and trouble to move and guard the tons of gold (14,000 short tons) that a trillion dollars represents. In 2007, the world produced 2,400 tons of gold, (long tons or short tons, I don't know and it really doesn't matter,) and since we are borrowing over a trillion dollars a year, gold's out unless we price it at something like $10,000/oz. That'd be fun.
Nope, there's only one way this thing get's fixed - the US has got to give up it's Enron-Madoff-Wall Street ways. And go back to working, actually making products that somebody else wants at a price they can pay.
Sorry, dockworkers are not worth $120,000 a year (see the current labor situation in the Pacific NW), school principals are not worth $150,000 a year (look at any school district in the country,) non-defense government employees are not worth $100,000 a year. At least not while factory workers are worth $35,000 a year. Sooner or later those people will run out of other people's profit.
Inflation will fix this: everybody will be making $100,000 (the 50% with jobs) but bread will be $10 a loaf, gas $10 a gallon, electricity $1/kilowatt hour. And somehow, the SS COLA will have been maintained at 1%. Talk about inter-generational theft!
Sarah Palin had it right - it's not about liberal and conservative anymore, it's about the crony capitalists-government-gunion (New word, pronounced "GOON- yun") thugs versus the little people who actually do the work that makes the profits that the rest of them live off of.
We're not sure how many more we can carry!!!
Don't Tread On Me!!!
PS
A long time ago a friend said, "If you try to outsmart Darwin, he just moves to a bigger scale." We may have fooled Darwin for the moment, but the scale is about to change and it's going to be very painful, very painful for everybody. DH
DTOM
Bob K.| 9.13.11 @ 10:48AM
Defense government workers aren't worth $100,000.00 a year either. They still are government workers.
Sam Vaughn| 9.13.11 @ 9:09PM
He is suggesting gold backed currency that is transportable. Don't get excited, prior to 1971 that's what we did, read the article.
Bob K.| 9.13.11 @ 11:02AM
China has a rapidly aging population because of it's long term policy of 1 child per family. It has a higher percentage of middle aged people per capita than the USA does.
It must keep keep it's younger population employed to supply the taxes the government needs to maintain order and to feed this aging population. It's demography is it's destiny.
Demography is also the USA's destiny. Make of that what you will.
Kingofthenet| 9.13.11 @ 11:26AM
Where did the 'Tea Partiers' AKA:Mad Hatters ever get the idea that deficits were the problem with the Economy? Did they lose their jobs at the mall and the Bossman said to them: Sorry, we have to let you go because the Govt is borrowing too much money?
Dan Hirsch| 9.13.11 @ 3:17PM
Oh, king! Oh king!
Milton Friedman won a Nobel Prize for his work documenting the "Crowding out" of private sector borrowing when the federal Government increases its level of borrowing. The "crowding out" is very harmful to the economy - causing people who hold Tea Party beliefs and even those who don't to lose their jobs.
What's your idea on this? And where did you get it? Was it a prize in a Crackerjack Box?
Or did your gunion steward tell you...
DTOM.
PS "Gunion" is a new word, it's pronounced "GOON yun." Do you need me to explain it to you?
So where did you, oh great SAGE, get the idea that those pesky
Kingofthenet| 9.13.11 @ 4:46PM
I don't know about crowding out Private Industry. The banks are sitting on a SEA of cash, why they don't loan, I cannot say.
Ken (Old Texican)| 9.13.11 @ 5:47PM
well, king Perhaps I can inform you. Unlike most businesses, a bank's "assets" are the total amount of performing loans outstanding....not the money in their vaults.
Two:
Right now, the only businesses that are seeking loans from banks are in desperate shape. The well founded and run companies aren't borrowing.
We haven't borrowed dime in over two years.
axbucxdu| 9.21.11 @ 1:07PM
What Ken says. I would only add that the Fed is gaming the system so that to a bank it appears that government securities are a better bet than risk investments (for you, read that as loan K-O-N) in you know, the real economy, the one that works for a living.
PattyMor| 9.13.11 @ 5:46PM
We've probably never going to get back to trading based on gold bars. But, recent events like QE1 and QE2, show that we need to end the Federal Reserve and link the Dollar to either Gold or a basket of metals, which include gold. This will constrain the politicans from wild spending sprees. They would probably fight this tooth and nail which is why we need reforms driven by the 50 States.
Quartermaster| 9.13.11 @ 5:46PM
Banks are sitting on an ocean of cash because the FedGov gave it to them. Crony capitalism at its finest!
The chances of returning to honey money is about as great as being able to make ice cream inside a blast furnace. Welfare statists would not be able to fund their transfer payments with taxes denominated in real money, and those would be taxes that would be truly painful.
The only medicine that will be taken by the crack smoking capitalists is that which is forced down their throats after they have been tied to the gurney and a funnel inserted into their gullets. I would cheer for such a day to come, and it is coming, but it would affect a lot of people that don't deserve it.
I may hurt as a result of what is coming, but I will laugh at both leftist political parties and their gullible supporters when the crash does come.
Ken (Old Texican)| 9.13.11 @ 5:57PM
Lewis,
sorry, but you have shown your ass. Not one person , (except perhaps me), on this forum has one bit of influence upon the conundrum you have so eloquently (stupidly), described.
Try this instead for your next article:
"Screw China...Quietly"
Where the hell else are they going to sell their flip-flop sandals etc. except the US?
It is a See-saw. (listen and learn), "lean forward on our see-saw seat."
I discussed that at length in my new novel
"America Alone Said NO!"
www.americaalonesaidno.com for reviews
aware| 9.14.11 @ 6:24AM
If China dumps even 1/3 of its U.S. Treasury notes in, say, a 4 hour period you will be living in the stone age in 30 days. Even the threat of doing so means the end, see Suez 1956 when we did exactly that to the British.
What the article is about is honest money that protects is value and rewards saving. As far as the banks "releasing" the pile of "money" they have, if they do you will have Weimar Republic instantly.
faxmatter| 9.15.11 @ 11:02AM
Mr. Aware: Your paragraph 1 is incorrect. What this article implies but perhaps does not state clearly enough is China buys Treasury notes to keep their own currency weak relative to the dollar so that their export machine does not break down ("mercantilism"). If they stopped buying, the Fed would step in and buy most Treasuries by creating more fiat dollars, effectively QE3 (quantitative easing).
axbucxdu| 9.21.11 @ 1:18PM
Chicken or egg there, faxmatter. Our currency has an international function that must inevitably conflict with its domestic role. All are enslaved by the Triffin Dilemma.
LVS| 9.13.11 @ 7:12PM
Everybody talks about the gold standard. What use is that? You are replacing paper money with something almost equally useless.
You should have an egg standard! - one unit of currency is guaranteed to buy you an egg (or whatever is the local complete food). As a government you always make sure you have enough stock of the food to honor the promise at the level of the needs of one person per day - but this allows you to issue as much money as is required to sustain the economy. Because eggs (food) rot, you are forced to continuously replenish the supply, and if you print too much money you will not be able to.
aware| 9.14.11 @ 6:29AM
Gold useless? Not in 5000 years of history. In fact you can buy a house today with the same amount of gold you could have 100 years ago, but you will need about 200 times as many dollars. And what if you find a Spanish ship sunk 500 years ago loaded with gold? Has the gold "lost" its value? Quite the contrary.
Bob K.| 9.13.11 @ 9:00PM
I don't think this can be done. Other Nations would inevitably have a say in this. Only 20% of China's exports go to the USA. And only 7.7% of it's imports come from the USA. Even if the US arbitrarily changed the dollar/yuan exchange rate China seems to have diversified it's trading enough with other nations to survive it.
http://en.wikipedia.org/wiki/Economy_of_the_People's_Republic_of_China
The days of colonization, financial and otherwise, are long gone.
Bob K.| 9.13.11 @ 9:03PM
If the link does not work google "The Economy of the Peoples Republic of China."
Sam Vaughn| 9.13.11 @ 9:05PM
Well done article. As good a "top down" view as I've read in a while.
Jeff Koenig| 9.13.11 @ 9:09PM
I have my doubts about the currency issue. I wouldn't own Yuan since they Chinese gov prints and prints and has 40+% non-performing loan rate. It seems they have a shell game going too. Similar to the US and US targeted inflation?? The idea of China as a Financial Colony seems interesting however a different view is that they are simply capitalizing on the stupidity of a US government with an EPA/regulation/Union free zone along with tax and regulatory advantages. It seems to me that our Fed has been unwittingly attempting to revive our economy that has been choked to near death by the EPA, regulation, Unions, Taxes. Now the fed complicit with the gov is stealing from those, who have under normal circumstances prudently saved , to redistribute to other in a final attempt to overcome the imminent death by EPA, regulation, taxes, Unions. The business that has moved and is moving to China and elsewhere will not come back for an even deal ... the government needs to be better on all fronts than the Chinese opportunists.
patrick stanley| 9.13.11 @ 10:32PM
I believe the American "empire" was accepted as the default position after WWII rather than created deliberately as a copy of the British empire. What we need are discussions of how to unwind the unintended empire.
Roland| 9.13.11 @ 11:06PM
China has produced lots of millionaires in the last decade. The #1,2,&3 things they want are to get their families, their money, and themselves out of China. The Vancouver, BC real estate market has gone nuts due to the influx of Chinese $$. The world will continue to mistrust US politicians and the US$ less than their own into the foreseeable future. Unless unicorns take over the world.
POST American| 9.13.11 @ 11:10PM
---------------------FINAL WORD-----------------------
DON'T you understand? Your entire economy
has been betrayed, your entire culture
subverted, ALLL your soveriegnty, ALLL
your rights have been ILLEGALLY signed
away in covert treaties and agreements.
The agenda now calls for EUGENICS,
aggressive EUGENICS, to bring the American
population down by 100 MILLION come
2050.
This is to be accomplished via stealth weapon-ization of food, water, air and meds.
Google up the low down on cancer viruses
and mercury in vaccines, the cancer causing, sterilizing effects of GMO, the effects of those CADMIUM, ALUMINUM and BARIUM oxide filled, HAARP enabling CHEM-trails ---now mixing with steady fallout from the media buried
FUKISHIMA world nuclear disaster.
-------HOW MANY CLUES DO YOU NEED?
Bob K.| 9.14.11 @ 1:40AM
I can't answer your question about the clues.
Can you tell us when you are going to get one?
John| 10.2.11 @ 1:15AM
A quote from
Why the Super Rich should pay taxes
www.social-europe.eu
"Over four decades, tax rates on the very rich have plummeted. Between the end ofWorld War 11 and 1980, the top tax bracket remained over 70 per cent--and even after deductions and credits was well over 50 per cent. Now it's 36 per cent. As recently as the late 1980's the capital gains rate was 35 percent. Now it is 15 per cent.
That is the problem.
Bob From District 9| 10.13.11 @ 5:29PM
At last, an article in American Spectator I mostly agree with.
However, you got two points wrong. China may seem like an American Colony, but that's just a short term appearance. In reality, America is rapidly becoming a colony of China.
Many many many years ago I learned the normal relationship between a colony and the colonial power. The colony sends food and raw material to the colonial power, the colonial power sends finished goods to the colony.
Sound familiar?
The other point is the statement that the Chinese work hard. The Chinese work cheap, but no harder than any other group in this world. The poor do tend to work harder, but that's true in America also no matter how much so many wish to deny it.
Generally, the looming disaster you describe is falling on us. Too bad you didn't warn about it earlier.