Weekly Musings© - “If I were China in 2010"

Weekly Musings – If I were China in 2010

J. Sweeney
1/1/10
I just finished Dr. Paul Krugman’s editorial, “Chinese New Year”. Here is the link Chinese New Year . Dr. Krugman continues the party line that the US is only in danger of losing jobs due to mercantilist behavior in other countries. But, by now most of us realize something else is wrong.

Pennsylvania has a nasty bill coming due in 2012. The government has not been fully funding the retirement pensions of state employees and the tab will add approximately $1,300 per household to state taxes starting that year. Our commonwealth is heading for a fiscal awakening but some are pretending that cheap money will still be available and that we’ll just add to the amount we are borrowing.

The Federal Government is making the same mistake with money spent on non-critical defense, TSA, new health insurance benefits, etc. The misguided thinking is that we will continue to borrow money and then print money to pay off the debt.

Either this year, or in the next few, the US dollar is going to be dropped as the reserve currency of the world. Other countries do not want to lend money to someone that then repays with newly printed dollars created out of thin air. Those countries don’t want to sell their goods for $60 and then a few months later receive payment with similarly devalued currency.

“Too bad, we’re the US, we’re number 1, what can they do about it?”

Here’s what I would do if I were China in 2010. I would use my $2 Trillion reserves of US currency to buy mines, oil fields, timber rights, etc. At the same time I would encourage my people to begin holding their savings in silver, not gold as that is experiencing a bubble. Finally I would go to Saudi Arabia, Russia, Brazil, Germany, France, India, and Japan and talk about creating a new unit of account for foreign transactions.

The new unit of account would either be IMF special drawing rights or some more cleverly named unit like the BRIC. It would be based on a basket of goods including for example a barrel of oil, bar of silver, ton of rice, and a 60-year old oak tree.

Here’s how it currently works. The US borrows money say $1000 with a 5% coupon. Each year the government pays $50 dollars (5% of 1,000) and at the end of the loan perhaps 20 years it pays back the $1000. China lends the money by buying bonds and is repaid with dollars worth less due to inflation and our relentless printing.

Here’s how it would work. The US borrows $1000 at 5% or a $50 coupon. Let’s say for ease of computation that is equivalent to 2 BRICS. At the end of the first year instead of paying $50, we would need to spend however many dollars it took to buy 2 BRICS and pay that number of dollars (perhaps $60 now). If the US tried to monetize the debt (by printing money), like it is doing now, it would take even more dollars to buy the 2 BRICS as the newly printed money decreased the value of all dollars.

Before you think that this is ridiculous, let me point out that China is buying up mines in Afghanistan, oil fields in the Middle East, and soon will be buying timberland in Canada. They are publicly calling for their people to buy silver (not gold). Lastly, they have been pushing in the UN for a new unit of account and reserve currency based on IMF special drawing rights or some basket of goods or currencies.

Every other country on the planet is negatively impacted by our ability to print money to cover our debt and buy goods cheaply. In 1971 when Nixon took us off the gold standard he freed our government to spend money it did not collect in taxes and hide that fact by printing more dollars. The world accepted the arrangement because the US was so dominant.

It is time to return to the prudent behavior of a Republic and give up the illusion of Empire. We simply can’t afford to wait until our currency is dropped to put our house in order.

Either we fix this before the change or we fall into a true financial crisis. If you think this last one was bad, imagine going through it without the power to simply print money to cover the new debt.

Hopefully 2010 won’t be the year of our collapse. But if I were China…