Podcast: Brad Setser Explains The China Thing

Much as I appreciated Adam Davidson's interview with Brad Setser, I think we should consider erring on the side of caution when dealing with an ideological, political, and military adversary like communist China. I refer the reader to "Unrestricted Warfare" (1999, by Qiao Liang and Wang Xiangsui, Senior Colonels in the Chinese People's Liberation Army). It is the Chinese Army's blueprint for the defeat of the United States, which in the following paragraph does not quite agree with Mr. Setser:

"The world's number one debtor nation, a country which relies on the inflow of foreign capital to support its economic prosperity, the United States, would definitely have. . . heavy economic losses. Such an outcome would certainly be better than a military strike."

So much for the idea that China doesn't
want us in debt.

Further:

"Today, when nuclear weapons have already become frightening mantelpiece decorations that are losing their real operational value with each passing day, financial war has become a "hyperstrategic" weapon that is attracting the attention of the world. This is because financial war is easily manipulated and allows for concealed actions, and is also highly destructive."

Can we agree it's time for a wake-up call?

Obviously, the government won't help us. Neither can any political promise protect us from our own short-sighted, ignorant greed.

We could hardly be more self-destructive. But Americans can wake up and realize how powerfully we ordinary citizens influence the economy, how loudly we speak, every time we go to the cash register and cast yet another vote against ourselves, another vote for "Made in China."

America's wealth came from productivity: manufacturing. Manufacturing ultimately pays the bills. By choosing not to support American manufacturers, we're choosing not to support our own country, our own communities, our own children. The trade deficit with China alone last year was $256 billion, and nobody held a gun to our heads--not yet, anyway, though the prospect of borrowing money from China to check Russia's and China's imperialism is more than a bit unsettling.

I very much appreciated the NPR commentary and have e-mailed the link to everyone I could think of. For another fresh approach, I'd like to recommend "Dollar to the Giant," an exceptionally powerful, insightful video currently on YouTube:

http://www.youtube.com/watch?v=TUj8leZxmK8

All of these China-manufactured "bargains" are really the most expensive consumer goods the world has ever seen.

But there's hope, I think. If we got ourselves into this mess, we can get ourselves out. Two simple rules:

1. Whenever possible, buy goods made in the USA.

2. Don't buy anything made in China.

With awareness and responsibility, we can rebuild our country and create enough prosperity for everything we need. And we do need money--lots of money.

Sent by George Krainovich | 6:38 PM ET | 09-08-2008

Thanks, Adam and David. Very clear and understandable, on an important modern topic.

In response to George's comment, though, I would like to offer a less confrontational perspective. Even as China grows stronger, it will not be a polarizing geopolitical force in the next ~50 years. The EU, Japan, India, and everyone else are still around to stabilize things. These countries are risk-averse with large populations that don't want another war.

Therefore, we should not willfully dream China into becoming a dangerous military threat, and should rather strengthen our economic, political, and cultural ties with China and these other powers that be.

However, The USA will face some large economic difficulties as our many creditors (not just from China) start borrowing less or even divest their dollar-based portfolios.

In terms of the USA's strategy to address these difficulties, I would choose diplomacy with more multilateral emphasis, coupled with the "Geo-Green" concept and tech-sector focus promoted by Thomas Friedman. (although he is unfortunately also prone to unproductive nation-state-war alarmism)

In agrarian societies, like the 1800s American Midwest, fat was sexy because it was a sign of health. These days, slim body types have become sexier because our modern health problems tend to come more from overeating than from hunger.

Likewise, Americans are realizing that hybrid sedans are sexier than Hummers, and that central heating is more hassle than convenience.

Patriots should express their nationalism by trying to buy USA-made products. That's why the new Prius factory in Blue Springs, MS is so important in pointing the way ahead for our recovering oligopolists from Detroit.

However, avoiding China-made products in particular isn't patriotic - this idea sounds rather more xenophobic.

To sum up, the short downturn following a phased-in carbon tax is far easier to handle than an explosion of our growing bubble of dollar debt. It will also speed our development of efficient products.

The high-volume business that the world wants from the USA, and will buy at premium price from the USA, is high-tech efficiency. High-tech reaches far beyond manufacturing, and depends on smart government investment. We need to take the long view and retool to provide our customers the efficiency they demand, and give our workforce the long-term jobs they deserve.

Sent by Steven Bhardwaj | 6:08 PM ET | 09-12-2008

I dismiss Steven's condescension as dangerously naive--at best--and refer the reader to yesterday's New York Times article entitled "Cash Helped China Win Costa Rica's Recognition":

http://www.nytimes.com/2008/09/13/world/asia/13costa.html?_r=2&ref=world&oref=slogin&oref=slogin

Some excerpts:

". . . to persuade Costa Rica to shift its diplomatic recognition from Taiwan to China last year, China used the muscle of its. . .$1.8 trillion in foreign exchange reserves, the world's largest such cache of foreign currency, to further its political goals, despite promises that it would not do so."

". . . in return for Costa Rica's shutting its embassy in Taiwan and expelling Taiwanese diplomats, China agreed to buy $300 million in bonds. It also agreed to give $130 million in aid to Costa Rica, as well as other incentives, including 20 scholarships each year for Costa Ricans to study in China."

"China for years has devoted considerable diplomatic energy and financial resources to persuading other countries to sever ties with Taiwan. After Costa Rica's switch to China last year, Taiwan was left with only a small circle of 23 international supporters, most of them tiny, poor nations, while Beijing commands the support of 171 nations."

Like "Dollar to the Giant" says: "we're led to every trap the giant made."

"Dollar to the Giant" on YouTube:

http://www.youtube.com/watch?v=TUj8leZxmK8

Maybe, just maybe, the People's Republic of China does not put our interests ahead of their own.

Sent by George Krainovich | 5:45 PM ET | 09-13-2008

I loved the podcast, but I almost wished that you had focused more on the actual vicious cycle instead of talking about the potential reprocussions of the cycle of debt. It was explained well though, despite my opinion. It's important to note that China has %10 of its GDP invested in Freddy and Fannie. I was searching for a similar article on NPR about China's role in Freddy and Fannie that my teacher showed to us in his economics class, and though I couldn't find it, I did find this podcast, and I must say I will be listening in the future, it was good.

Its kind of Ironic how closely we tie China's growing economic might to potential to grow with military might. China will eventually have a larger military, and even though it likes to produce its miltary hardware domestically, it might even end up getting gear from US defense contractors, if its a matter of investing or spending large amounts of US dollars in the US system...sad to think that is about all we make anymore.

Sent by Matthew Gonzalez | 7:42 PM ET | 09-16-2008

Great podcast! (Ever consider a job in radio?) I thought today's was even better (I'm working my way backwards). I hit pause many times to ponder what I'd heard, but since the medium allows it and I'm overly prone to ponder, I don't think that implies you should be taking us any more slowly through the steps or dumbing them down. One place my mind hiccuped was the what-if scenario of "China" henceforth buying not one more T-bill or mortgage derivative. "They hold on to the U.S. cash? What's wrong with that? Oh, they need Chinese money. So the Chinese Central Bank sells their dollars for Chinese money? There are currency markets, right? But they just bought them for Chinese money. So maybe they stop doing that and so now it's the smaller Chinese bankers or even the Chinese exporters selling their dollars on the currency markets...and driving down the dollar...and then..." To explain any ensuing effect in world finance I guess requires a few possibly bold assumptions about which dynamics continue as usual and which absorb the impact of the event whose effect you're trying to explain (like in a mathematical solution by "perturbation" [ask Kestenbaum]).

Sent by Oliver | 10:53 PM ET | 09-22-2008