China Sees Opportunity

For as long as I can remember, in every economics class of the latter 20th century and early 21st, we have been taught that the United States is the industrial leading behemoth that cannot be surpassed because of its sheer fiscal might. Every currency exchange in the world still compares its local currency to the US Dollar and the United States is still the target for every worldwide consumer innovation, as it is the largest most lucrative market in the world today.

But times are changing. Let's step back and understand the passing of the torch that saw the United States rise as the worldwide economic leader. People who don't study or pay attention to history, may not realize that by the turn of the end of the 19th century and the beginning of the 20th, Great Britain was the world leader in most major industrial and financial measurements. However, by this time the British Empire grew beyond its means. With its empire stretching across the globe and the financial stresses inflicted by various conflicts, that standing became very tenuous. The beginning of the end was the beginning of World War I, where Britain extended itself further fiscally, and just could not keep up with the rising growing economy of the United States.

Despite going through the Great Depression, the United States kept growing in every phase of its economy. The final straw that unseeded Britain from the top spot was the havoc World War II inflicted upon its people, infrastructure, and finances. Soon their colonies, once the cornerstones of their financial income, began to break away as independent sovereign nations. Then their industries began to be nationalized. Finally, their national budget proportionally became a shadow of its former self. This made the economy grow at a snail's pace and even contract at times.

The United States had none of these problems. The younger nation was buoyed by the end of the Civil War. The United States saw its greatest leaps in industrialization and natural resource discoveries push the growth margin higher than ever during the "gilded age", leading up to the start of the 20th century. By the time of the roaring 20s, the country was now an economic contender on the world stage. But because neither of the world wars saw any extensive damage to the United States infrastructure, there was no pause and no rebuilding cost. This freed up the United States to invest in its growth further and leap past its European competitors with a seemingly insurmountable advantage into first place.

It is a spot which we, as a nation, have not relinquished since. However, our supremacy on the world stage has diminished over time. Since the late 20th century, the United States government has continuously mismanaged its budget to the tune of a financially devastating fiscal deficit. As the GDP and per capita income increased, so did the manufacturing costs. As a result, we have transformed our economy into a service, credit, and consumer economy. All the while shipping our blue collar manufacturing jobs overseas. With that transition we have also given the technical expertise and the income, which was previously kept in house, to nations we never saw as our competitors, let alone our equals.

But this is exactly where China finds itself today. Having absorbed decades of manufacturing and assembly handover from Western nations, China has acquired both the infrastructure and the technical knowledge base necessary to compete on the world stage as equals. Furthermore, Chinese government has acquired sufficient sovereign debt of every Western nation, including the United States, to be able to have political and economic leverage it previously dreamed of.

But now, having accumulated sufficient wealth, China is transitioning. It finds itself at the exact same inflection point that the United States found itself in the late 19th and early 20th century, when it was breathing down Great Britain's neck. Except now it is China ready to overtake the United States as the leading economy in the world. Chinese government is well poised for the role, with a bank roll of foreign debt and a national cash surplus that now seems more attractive to global investors than ever before.

As the conflicts of the world swirl around, the safest place for foreign cash is still the United States, as it is being recognized for its past fiscal dependability. But the winds are changing, and the Asian powerhouse that is China sees opportunity in this crisis. Up until now, they have been able to manipulate its currency and keep the value of the Yuan down to keep its manufacturing infrastructure viable on the world stage, and its Yuan-denominated sovereign debt purchases high in value. But their per capita incomes and currency value is growing beyond these controls. Soon enough, China will find itself in transition to a consumer economy. And that's exactly when the United States will be faced with a similar fate that Great Britain faced in the 20th century.

What do you think? Will China become a major consumer economy within the next decade? Will foreign investors see it as the new capital safety market? Will the US Dollar Standard crumble within the next decade? Please Leave your thoughts below in the comments section.

Accountability

My former co-worker, as well as a good friend of mine, and I were discussing the various causes of present day financial crisis. Naturally, the Real Estate Bubble of 2006 came up along with the subsequent crash of 2008. After a long spirited exchange of supposed scapegoats like oil speculation and Ponzi scheming financial firms, I went on to talk about government intervention and policy failure.

My argument centered on the deregulation of the banking industry and the loosening of the lending standards. The repeal of the Glass-Steagall Act in 1999 opened the door for Banks to become giant conglomerates that could perform savings, loan, insurance, investment, as well as other types of business under one roof. The Glass-Steagall Act was passed originally in 1933 in order to stem the abusive corporate tactics that led to the market crash of 1929 and the subsequent Great Depression. This act prohibited banking institutions from engaging in other businesses - in essence, they could no longer take on unacceptable risk with people's savings. This was one of the first steps taken by the United States to get out of the Great Depression.

The loosening lending standards began to escalate in the past decade due, in part, to the demand of the Democratic party that everyone in America deserves a chance to own a home. The other part was the realized profitability by the newly "unchained" banking institutions. So when the banking institutions saw the Democrats' demands, their eyes lit up with dollar signs. They helped the Democrats' lobby for the Federally sponsored mortgage programs, and the rest is history. Soon, the massive lending led to soaring profits which led to even looser standards and more profits. By 2006, the peak of loosening lending standards led to the sub-prime mortgage era - where people with atrocious credit rating could get a mortgage at a substantially inflated interest rate. Everyone was raking in the money and nobody was paying attention that the money earned can never be realistically realized...

Let me explain that - you wouldn't lend money to a broke man without a job, because you would never see that money again. However, with banking institutions now having government protection and willing insurance branches to protect in the event of default, the banks lost all sense of responsible lending.

My good friend argued in turn: "You can't blame the banks and politicians. Surely the people who took the loans they knew they could never repay deserve the blame."

My response to that was: "You have people who are responsible and irresponsible. The bottom line is the people in charge must put measures in place that decrease, if not eliminate, these kinds of noncollectable loans. When the savings of ordinary people and the health of economy is at stake, you have to have responsible and accountable people take the right action at the top."

My friend replied: "I refuse to blame the banks for the fools who borrowed irresponsibly and contributed to the financial crisis. The blame is in the borrower."

My response: "The borrower does have a certain degree of responsibility to themselves. However looking at the bigger picture - if you're in charge, do you really want the health of the nation resting in the hands of the people you consider to be irresponsible fools?"

There is a Russian phrase that roughly translates to - "the fish rots from the head down". In this context, it means that the irresponsibility present in the society of a nation is a direct reflection of the leadership of that nation. On the other hand in a well run society, the leadership are more intelligent having the integrity and accountability to the people. The leadership must be responsible to the rest of the people, who may not be as intelligent, but are willing to work and contribute to society as a whole.

Accountability by the leadership ensures accountability by the rest of our society, with appropriate indisputable retribution in the event anyone fails to conform in this regard. The society is only as corrupt and irresponsible as the government and the government is nothing more than the representation of the people's ambitions.

So the question is - are you ambitious enough to force a change of who represents us as a nation?