Transcript (Podcast #1 to follow)
Terrance Power Released in 2010.
As a direct result of the global financial meltdown and the subsequent enormous stimulus packages and heavy borrowing by United States the symbiotic relationship that has existed between the United States and China has ended much sooner than it needed to.
At the close of Mao Ts Tung’s reign and following the complete collapse of China’s 10 year plan in 1977 Deng Xiao Ping’s outmaneuvered Chairman Mao’s chosen successor Hue Guofeng.
Deng made a seismic shift by commencing to move the nation from a command economy towards a socialist market economy in 1978. We need to understand that the Chinese perspective of a market economy is far different than the perspective held by those who have adopted Western liberalized democracy.
This is not unique for Chinese leadership.
At the end of the long march in 1949 Mao adopted the Soviet view of communism contained largely in the thoughts of Lenin— But quickly layer on layered the thoughts of Chairman Mao. It was and continues to be a different hybrid of communism. Today China has a socialist market economy with Chinese characteristics.
Fortunately Deng Xiao Ping did not demonstrate the same biases towards foreign technology and foreign products that hurt China’s modernization under Chairman Mao.
As a result the gross domestic product of China has grown over 8% per year since this strategic inflection point. Indeed in 2009 China has reported a 10.7% increase in its GNP measured in US dollars. This year it was about $4.7 trillion. By way of comparison America GDP about $14 trillion and the European Union, 27 nations is just less than $15 trillion.
Over the past 32 years a symbiotic relationship has existed between America and China. The Chinese saved and manufactured America’s goods and America spent and consumed the Chinese output. The dance worked well as long as they both could perform.
The result — China now holds about $2.6 trillion in its foreign exchange reserves of which is significant portion is promissory notes — treasury bills from America.
But the dance seems to be over.
Increasingly the Chinese and other countries primarily oil-producing nations are expressing their concern and reluctance to continue to accept the US dollar as the unit of measure for the price of a barrel of oil. Venezuela, Russia and a number of OPEC countries have made this threat. This places significant strain on the demand for the US dollar while at the same time the Americans are in the basement printing more paper thereby increasing the supply. It is inevitable that this trajectory misalignment between demand and supply can no longer continue.
To get a sense of the magnitude of the US debt I have put the link to the US national debt clock…org on this podcast notice. If you have not opened yet I would like to look at it for a moment — note the US national debt of $12.3 trillion keeping in mind the total revenues for the year — GDP are only $14 trillion.
It is estimated that in 2010– the next 12 months the US GDP will represent 96% of the revenues.
It gets worse—look down the right-hand column under the heading of the ‘actual unemployed’ —approximately 26.5 million workers out of the total US work force of 138.5 million —it is significant. These folks are not paying taxes and are drawing down against the USA’s social safety nets.
Finally I would draw your attention to the US unfunded liabilities over $107 trillion dollars. Folks there is no way America can raise $107 trillion.
So what are the ramifications of this?
At the time I wrote your text the economic interdependence between our two nations stood at about 84% to 86% of our manufactured goods and services were sold to America. Decoupling has and is taking place and today our economic interdependence is in the low 70 percent range. This still represents a significant economic linkages that if America was to sustain serious economic turbulence it would overflow into our markets. In particular those markets in Ontario and Québec.
Another ramification in the last two years is a shift of political and economic power to China.
Prior to the financial meltdown Canadians as did the globe look to America for direction and its news. American made announcements that would impact on Canadian business and Canadian individuals.
Today the announcements and decisions made in Beijing are taking on exponential importance. Consider for example if China said ‘NO’ on the first and 15th to America’s request for a loan against a new issue of treasury bills— where then would America gets funds to make payroll?
The result could be a number of things: ONE — they might consider is raising their interest rates in order to attract external lenders to purchase their promissory notes-treasury bills.
But there’s a problem.
You note on the debt clock the astronomical figures streaking upwards during this IPOD presentation –the interest on this debt today is at the extreme historical lows… prime rate Is about 0 to .25.
Now ask yourself if these rates went (not to the highs as they did in Canada in the 1980s on bank loans at 18 to 21%) but say a moderate increase to historical norms of 7-8 % . What does this do to America’s payment on the interest on these short term treasury bills?
Consider for a moment those of you that own homes that if the current mortgage rate on your home went up six to 7% what are monthly payments needed to accommodate this rise. I suspect for many of you it would be a disaster— well so it will be for America.
A number of you will say all this is true but the Chinese need America consumers.
I believe there is validity in this argument but equally I believe that the argument is stronger today than it will be tomorrow. I believe it is only months if not a few years until China will no longer be so economic inter dependant on American consumers. The population of America is about 308 million people and China is growing a middle class in excess of that number with s growing GDP that will be able to purchase internally the manufactured goods produced. Automobiles for example have an exponential sales growth curve in China.
So as Canadian business practitioners we need to reflect carefully on the seismic shift that is taking place between the relationship of the United States and of China. It has serious implications for each of us. I’m reminded of Churchill’s very timely comments in 1936, warning of the gathering storm of the Second World War stated — “The era of procrastination, of half-measures, of soothing and baffling expedients, of delays, is coming to its close. In its place we are entering a period of consequences.”
