The Obama Administration's War on Prosperity: Their China Syndrome

by LAWRENCE SELLIN, PHD August 29, 2012

According to the June 26, 2012 Congressional Research Office report China has been among the world's fastest growing economies, with real annual gross domestic product averaging nearly10% through 2011. China has emerged as a major global economic and trade power. It is currently the world's second largest economy, largest merchandise exporter, second largest merchandise importer, second largest destination of foreign direct investment, largest manufacturer, largest holder of foreign exchange reserves, and largest creditor nation.

Some forecasters project that due to slow growth, a fragile fiscal situation, persistently high unemployment, increasing public and private debt, a weakening dollar followed by crippling inflation, China will overtake the United States as the world's largest economy and preeminent power within ten years.

Barack Obama is doing his best to make that prediction come true.

Obama's 2013 budget, released on February 13, 2012 proposes the same stale and unsuccessful policies of the past three years; bigger government, more spending, higher taxes, and deeper deficits financed by growing borrowing and printing of money.

As of August 23, 2012, the debt held by the public was approximately $11.2 trillion or about 72% of Gross Domestic Product, a value near historic highs. Intra-governmental debt was $4.7 trillion, giving a combined total debt of $15.9 trillion.

Of the $11.2 trillion debt held by the public, foreign holders account for approximately one-third of the total with China as America's greatest creditor, owning about $1.2 trillion or 10%.

Chinese policy does warp the global economy through subsidies of state-owned enterprises and maintaining an artificially low currency to fuel its export-driven economic development, areas where the current administration has been entirely ineffective in addressing. Instead, Obama should acknowledge the biggest American distortion of U.S.-China economics: our huge budget deficit. Among other things, the budget deficit draws Chinese money to U.S. government bonds that could be spent on American assets, goods, and services.

The more money the U.S. borrows, the more the American economy needs China. The more desirable Treasury bonds are, the more China needs the United States to invest its enormous surplus of cash. In 2010, China's foreign exchange reserves had climbed to around $3.2 trillion.

The danger resides in the sustained, gigantic deficits embedded in Obama's budget policies. The longer these last, the more likely it is that U.S. treasuries will become relatively less attractive, thereby tipping the balance of influence toward China. The U.S. could come to need Chinese purchases more than the China needs American bonds.

Many U.S. policymakers, businesses, and labor groups have argued that the Chinese currency, the yuan-renminbi (RMB) is undervalued by as much as 40 percent against the dollar, making Chinese exports to the United States cheaper, while putting massive dollar flows in the hands of the Chinese. Critics contend that undervaluation of the RMB has expanded the U.S. trade deficit with China, hurting U.S. manufacturers and depressing U.S. employment.

Protectionists say that a weak Chinese currency costs American jobs and that a strong one would restore jobs. The facts state the opposite; that a weaker RMB is associated with low American unemployment and a stronger RMB is associated with high American unemployment.

Focusing on China's currency is merely a distraction from other drivers of U.S. debt, such as structural fiscal deficits and a low level of personal savings. Furthermore, the United States runs trade deficits with eighty-seven other countries, making it ludicrous to believe that there can be a bilateral solution for a multilateral problem.

Nevertheless, Obama Administration policies have allowed China to drive Federal Reserve behavior and will tax Americans in order to punish China.

The Federal Reserve's relentless money printing, otherwise known as Quantitative Easing (QE), is an attempt to force China to revalue its currency upwards. The first QE program lasted from November, 2008 through June, 2010. The second, QE2, lasted from November, 2010 through June, 2011. After hitting a 19-year high in late April, 2012, the Chinese RMB has again weakened a factor along with other lackluster economic indicators that may encourage QE3 in September, also to help boost the stock market and increase Obama's chances for reelection.

Printing money increases the national debt and can lead to inflation. In addition, Obama's "solution" for the Chinese currency situation, significantly increases the cost Americans pay for Chinese goods, without any direct effect on employment.

The term China Syndrome describes a fictional situation where an uncontrolled nuclear chain reaction causes the core components to overheat and melt, which then burn through the containment facilities and down through the Earth "all the way to China."

At a Congressional hearing entitled "Investigating the Chinese Threat, Part I: Military and Economic Aggression" held before the House Committee on Foreign Affairs on March 28, 2012, not a single sentence was devoted to the true facilitator of the Chinese march towards global dominance; America's coming economic meltdown produced by the uncontrolled federal spending and the dollar-destroying policies practiced by the Obama Administration.

We need to stop "investing" in America's decline.