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June 25, 2008

Greasing the Wheels

Tom McLaughlin

We purchase billions upon billions of dollars of goods from the Chinese. They, in turn, take those dollars and invest in conservative and safe instruments like American T-Bills. This circular path has caused alarm among some that they have the power to wreck our economy and bring America to its knees. However, to destroy our economy would also mean wrecking theirs.


Culturally, the Chinese have been great savers. When they get their paycheck, or other funds, 50% of it usually goes into the bank. For comparison, the U.S., Australia and New Zealand save less that 1%, the Germans 11%, while the Indians put away 15%.


The dollars we send to China to pay for goods must be placed into national banks. It is then converted into the Chinese currency. The people are restricted from sending their currency overseas, a common practice among developing nations. Therefore, merchants cannot purchase large goods from western countries.


The Chinese government now has huge amounts of dollars to invest. Again, culturally, they seek the safest investments possible, which are T-bills. The money returns to the United States and earns about 3% interest depending on the market.


In turn, the money from the T-Bills is lent to banks and then to you and me. This flood of cash keeps our interest rates low and allows for money to grind through the economy. The 3% interest is then sent back to China. This may not seem like much but when you are talking about trillions of dollars, the amount becomes quite substantial.


However, the very thrifty Chinese refuse to spend the interest earned money. They are in desperate need of sewage and water treatment plants, schools, roads, hospitals and the many other items needed to build (or rebuild) their infrastructure. The reasons for this are not clear. Some say it is because they want to keep the peasants poor and not let them get used to a higher standard of living. This would keep the labor cheap and hence, the goods in the United States because the peasants would not demand any more than what they already have.


Others fear that an increase in the standard of living would result in more demands by the people, which would create political turmoil. This turmoil would result in the possible overthrow of the communist form of government, turning this stable country back into feudal divisions.


The best action for all concerned would be the spending of money in the United States. High technology items such as operating rooms, computers, college and high school laboratories and the hiring of individuals knowledgeable in infrastructure construction would be ideal. However, for convoluted and little understood reasons, this will not happen.


The right wing and fear mongers on the radio waves who rant about the demise of the United States if China did this or that, do not take into consideration that the results would not only harm the United States but China as well.


The disruption of this system would mean a recession/depression in the United States, which would then mean possible political upheaval in China because we could not buy and China could not sell.


The wheels must be kept greased until a new and better system comes along.


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