Geopolitical Setback for U.S. in Japan

The Liberal Democratic Party's electoral loss in Japan is a big blow to the U.S.'s geopolitical position in Asia, because President Shinzo Abe has been a bright spot as our ally.

His willingness to support the U.S.'s battles is admirable, but his push to amend the constitution would have strengthened our hand in the region. Currently, their constitution only allows the maintenance of a military for defense. Heavy spending over the years has built a military as capable as any in the world (I have seen their Navy personally and it is capable of a lot more than defense) and President Abe wanted to reserve the right to use it.

The thrashing that LDP took at the polls will not only make Abe a lame duck (and according to this article he will be pressured to resign), but it will nix any future talk about changing the constitution. His successor would have to be mentally ill to pursue such a course after this election. Thats a setback for us because A free Japanese military would have assisted the U.S. in containing China through the mere implicit threat of force. China knows they could not compete with the Japanese military, more specifically their Navy, which would make them think twice about ill advised conquests.

Maybe next decade.

Trade Gap with China is Positive

This may sound counterintuitive, but the trade gap with China is not so bad. Most people believe that it is a negative because they long for an age when products were "Made in America". The longing is based more on nostalgia than economics. Was working in sweatshops for peanuts really the good old days? I say no. Let the low wage, low skilled work go overseas to places where they have the people to fill those jobs. We don't need them here. We have a service based economy which relies more on skills and education.

Secondly, the trade gap misses many knowledge based products. Is a student who comes to an American university and then returns home an export? Yes. Is that counted? No. The same scenario holds true for medical treatment, and some research and marketing (among others). This may account for a small percentage but it is worth mentioning.

Thirdly, our ability to import extremely large quantities exhibits economic strength, not weakness. It is because of our great wealth that we are able to buy in such large quantities. Maybe an analogy will help make the point. Using the logic that the trade deficit is bad then one would also have to believe that a lawyer who lives in a big house with several cars, and a boat is in a bad position because he is buying more than he is selling. He is producing no physical product and only sells his knowledge and abilities. His surplus of products shows his economic strength.

This story today about the record trade deficit with China will no doubt increase calls for protectionist measures which will surely hurt our economy. I wish I could blame this all on the Democrats, after all they are the worst economic demagogues, but many Republicans are going wobbly. I believe that the debacle of a war in Iraq will only increase public support for isolationist policies. This is very unfortunate but regrettably predictable.

China amazes again

“The central bank also ordered banks to hold 11.5 percent of assets as reserves, up from 11 percent. Many banks already have even larger reserves, however, as they have been swamped with deposits from China’s brisk economic growth and large trade surplus, and have had trouble finding ways to lend this money.” more here

I have to say that I am amazed by the economic growth in China. My prediction of slowing growth has not even come close to reality. The affect of the central banks order for banks to increase reserves had almost no negative backlash. The problem: banks are already awash in money and can’t find enough people to give it to. The only response to that is: wow.

It’s hard to believe that China’s growth is going to slow any time soon but when it does it may be devastating to the U.S. and the world.

China, China, China, Why is it always about China.

An article in the New York Times about yesterdays stock tumble (unwittingly) lays out how China's bureaucratic medaling in their economy is going have consequences far beyond Shanghai.

1) Its obvious that the government’s actions caused yesterdays stock drop because when they announced a reversal, the market rebounded. The Communist government originally tinkered with the market, I believe, to stop the spread of capital inflows. The Shanghai market lists mostly companies that the government has a majority stake . If investors are gaining a larger and larger share of "their" companies it can only lead to political liberalization, which prompted them to take action.

“Both mainland Chinese markets rose nearly 4 percent today after state-controlled media reported that the government might allow greater foreign investment in Chinese stocks and would not impose capital gains taxes on stocks soon.”

2) They have manipulated their currency on a massive scale.

“The Chinese government has limited the appreciation of the country’s currency, the yuan, by buying dollars on a massive scale. As a result, it has accumulated more than $1 trillion in foreign exchange reserves.”

3) The currency manipulation has over inflated the market (this makes a bubble burst more painful) and caused the economy to be dependent on exports to the US.

“To pay for the dollars, the Chinese central bank has issued hundreds of billions of yuan. The central bank has been able to absorb some of these extra yuan by selling more government bonds to Chinese banks and the public. But part of the extra cash issued to pay for currency market intervention has made its way into the financial system. This has contributed to steep rises in stock prices — the Shanghai stock market rose 130 percent last year — and in real estate prices. The slump in share prices on Tuesday has raised questions about the long-term sustainability of high prices for Chinese assets.”

“But the region remains dependent on exports, especially to the United States, Mr. Nag said. China is among the most dependent of all, he said, with international trade in goods equal to 65 percent of its economic output last year.”

4) We are now dependent on their money.

“China is now a leading source of global capital, with the money funneled back into global financial markets through Chinese investments in Treasury bonds and other securities. “So when people get anxious that China may turn that tap off, we get market reactions like yesterday,” Mr. Condon said.”

Lesson in Poverty Reduction

At its current pace, China will become the poster child for economic freedom instead of Democratic designs on making it a political piñata. China’s continued progress towards open markets will do more to lift people out of poverty than all of the anti-poverty government programs from every country in the world combined.

Pulling rural Chinese out of grinding poverty will also increase worldwide prosperity. Producers in America and around the world will soon reap the benefits of a free Chinese consumer.

"At the moment, China's consumer economy is about the size of Italy's, but in two years' time it is going to start adding an Italy every year” (Peter Ford)

The large numbers of Chinese entering the middle class will be able to buy American made products which will increase our overall prosperity, thereby killing the Lou Dobbs isolationist idiocy that rules demagogic circles.