Kyoto Protocols Would Have Accelerated China’s Plan to Reverse-Exploit EurAmerica

In 1978, the year China emerged onto the world stage with its four modernizations, China, a country with four times the population of the United States, had a paltry gross domestic product of $216 billion, less than eight percent of the United States. China exposed her strategy of four modernizations to the world as if to say,”Please invest in China and we will ensure that our workforce is educated, and that our business infrastructure is stable for your investment.” Yet, this openly expressed strategy, that may have seemed to the rest of the world as a difficult but noble goal for China to achieve, was only the tip of China’s Grand Plan, and only the part she wanted the world to see.

EurAmerica’s history with China was one of gunboat diplomacy, exploitation, and forced trading. When China opened her borders again in 1979, EurAmerica’s merchants were enthusiastic to exploit an opportunity once again. Yet, China had not forgotten EurAmerica’s role in the Opium War, the Sino-Japanese War, and the Boxer Rebellion. China would never open her border again to be exploited. When she finally opened her border in 1979, it was from a position of power, deep strategy, and long lived planning that suggested EurAmerica was finally ripe for reverse exploitation. China’s grand plan was to emerge as the 21st century world power.

What boldness of purpose China must have felt as she aligned her nation’s efforts to that decade’s long task. Looking back today on her impossible achievements, one must give pause to the monumental economic goal she set for herself in 1978, indeed greater than America’s technical goal of landing on the moon early in 1961. Yet, with such a miniscule $216 billion GDP and few material assets how could China possibly build her empire to surpass that of the United States?

Through a hybrid statist-capitalist political structure, China would create a conduit through which American businesses would willingly draw down the wealth of Europe and America and transfer it to China in order to share in the prosperity of that wealth transfer. Through the centralized imposition of forced savings on its people, China would provide low cost labor to sell goods at low enough prices to cause EurAmerica to look the other way as their neighbors’ jobs went to China. Through low interest loans, China would entice EurAmerican politicians to spend beyond their means to temporarily ease the pain of EurAmerica as China’s sucked away their life force. These were the basis of her strategy.

Similarly to how a business cycle contains early adopters and late stage laggards, China planned a capital extraction cycle for EurAmerica, in which China would extract capital in multiple phases, each phase having an optimal extraction strategy. First extraction would be through the early adopter “gold rush” investors rushing into China to stake a claim. China would also plan for early majority, late majority and laggard’s capital extraction.

In 1978, China assessed America’s assets:
• America’s most valuable assets were intellectual capital that resulted from 200 years of publicly funded primary and publicly subsidized secondary education
• America’s physical assets included business assets, commercial, and residential real estate worth $7 trillion in addition to public assets of land, buildings, and infrastructure
• America produced 26% of the world’s GDP at $2.8 trillion and consumed a quarter of the world’s goods
• America’s debt was as low as it had been since WWII as a percentage of GDP and its 110 million workers were capable of doubling their loans to provide China more capital
• America’s Baby boomers were entering a peak spending phase followed by peak saving
• America’s constitutional republic allowed a relative few capitalists to control the direction of her economy

By 1978, multinational corporations had steadily grown in number and size for two decades. China’s success depended on corralling MNCs through direct foreign investment to create massive inflows of capital quickly monetized as hard assets and infrastructure.

China would entice merchants to invest by offering access to the future potential purchasing power of its people. However, given China’s low household incomes, market penetration would be low to start. Therefore, to entice the early adopters, China would create special economic zones that provided the perfect investment opportunity of cheap educated labor, loose regulation, low taxation, strengthened business law, and enhanced infrastructure and transportation, in which businesses could produce goods at very low arbitrage costs to sell back to their home countries for high margins.

With low cost of goods from special economic zones, early adopter businesses were highly profitable and banks poured investment into China as a result. But, China could not complete her Grand Plan to multiply her GDP 50 times by enticing early adopter investors alone. She had to implement a plan timed to extract maximum dollars from EurAmerica at each phase of her exponential growth.

During the next stage, the early majority stage, China manipulated baby boomers’ peak spending phase:
• China’s low prices secured America’s baby boomers as loyal customers
• Prior to America noticing a substantial loss of jobs, China secured free trade agreements, and mined American businesses for their intellectual capital.
• She reinvested profits back into America’s debt to keep America’s interest rates artificially low in order to spur on higher levels of consumer spending and government borrowing.
• China supported lobbying of America’s mass investment vehicles to fund MNCs. 401Ks and IRAs, created in ‘80and ’81, funneled money through the stock market into MNCs for investment into China.

Then, America was drawn into the late majority stage as America’s baby boomers entered their peak saving years. 401Ks and IRAs artificially fed the stock market frenzy. Baby boomers sensed they knew how to invest in a bubble market that kept rising. With access to low interest rate loans kept low by China’s reinvestment, speculators borrowed money to bet on the rising stock market. America ultimately increased its debt to pump up stock values to build more Chinese factories.

Inevitably, the stock market bubble burst, leaving America’s baby boomers with lower retirement savings. The stock market that seemed destined to go up forever finally reversed rapidly decreasing valuations. However, the debt that had funded its escalation remained.

During the late majority phase:
• More businesses began to invest in China just to remain competitive with businesses that had moved offshore earlier.
• Tens of thousands of businesses transferred factories to China to obtain low cost labor
• Millions of Americans lost jobs
• With a generation of education completed, China now was able to take more advanced jobs as well as factory jobs. America’s bastion of protected, more technically competent jobs was not a bastion after all.
• American retail outlets for Chinese goods grew exponentially
• China continued to loan its excess profits back to the American government to keep interest rates low.
After having lived through the weakness of the stock market, real estate appeared to be the baby boomers’ best retirement savings alternative. In the early stages of the Great Ponsi, housing prices went steadily up. With low interest rates, Americans could now borrow on the value of their homes to continue funding China’s growth. China’s final stages of extraction saw the housing bubble increase beyond what had ever been experienced before.

Even though American jobs were increasingly being driven offshore, the frenzy of increased housing prices allowed additional borrowing from Americans, feeding the China gold rush further. This behavior was not unexpected, following a pattern of historical boom-bust cycles and was part of China’s planning. As a result of the stock bubble and the housing bubble, America’s total debt had risen to over $55 trillion. With such exuberance in the housing market, secondary debt markets participated in credit default swaps to the tune of an additional $42 trillion. China now had extracted close to the maximum of America’s value, leaving America with the corresponding debt.

So China extracted maximum value, first in trade secrets and early adoptive money, then by IRAs and 401Ks, then by stock market and home equity loans, then by 2nd mortgages and housing speculation. China monetized the massive cash flows as quickly as possible, building infrastructure and excess manufacturing capacity, while leaving America holding debt in exchange.

Without any other rising asset values to borrow from, America has tapped out its debt. Having maxed its debt, America can only print money to finance its trade deficits. Without further real debt derived money extraction to give China for infrastructure investment and without a real ability to pay for low cost Chinese goods, America is fast losing her worth to China as an infrastructure vehicle. Recognizing that maximized extraction and rapid monetization of America’s wealth is nearing its end, China is now finalizing the implementation of her strategy, that of pulling out of American debt before other countries that maintain reserve currencies create a run on the dollar.

In thirty short years, China was able to accelerate her GDP from $216 billion to $11 trillion. She amassed reserve capital of $3 trillion. She reversed America’s fortunes from the greatest creditor nation to the greatest debtor nation. She gutted America’s factories while creating the world’s largest manufacturing base in her own country. A measure of output that highly correlates to GDP is energy consumption. In June of this year, 2011, China surpassed the United States as the largest consumer of energy on the planet. While the U.S consumes 19 percent of the world’s energy, China consumes 20.3 percent.

In 1992, the world came together to discuss the impact of climate change resulting from energy consumption. The talks resulted in Kyoto protocols being initially adopted in 1997 that attempted to create a framework for reducing greenhouse emissions. The protocols called for 33 industrialized nations to reduce their greenhouse gases to 1990 levels and then to maintain emissions at those levels. Although it called for emerging countries like China to voluntarily lower levels, it did not require them to be mandated.

Of course, all of the countries who had no requirements to reduce their emissions signed the agreement. The United States, under scrutiny from environmentalists and others did not sign. China did sign. This was an additional strategy perhaps not envisioned in 1978 that nonetheless would have assisted in accelerating America’s slide had we signed.

GDP highly correlates to energy usage. In 1990, America’s real GDP was about $8 trillion as compared to $14 trillion in 2011. Kyoto would have caused America to either:
• Invest billions in the attempt to lower our energy usage per dollar of GDP
• Pay billions to other countries to have them produce less so that we could grow our GDP from $8 to $14 trillion
• Or, maintain our GDP at 8 trillion

In the meantime, China’s GDP in 1990 was $1.3 trillion and has since grown to over $10 trillion. China’s energy use has correspondingly grown as well until the point that this month, she overtook America as the greatest polluter. Kyoto was a grand idea that was doomed from the start because of the flaw that allowed the now greatest polluter to play by different rules. It attempted to cap the economic growth of America while allowing other countries to grow unfettered.

China had a Grand Plan that has been executed with the finesse expected of a centrally planned economy. Kyoto added nicely to that plan. America has been thwarted by China’s plan but now has the ability to reverse course. Given China’s size and growth rate, she will pass us soon if she has not already and her stride will be too great for us to catch her. However, by avoiding traps like Kyoto, and understanding that economic gamesmanship can accomplish a much greater destruction of a nation’s wealth than warfare ever could, perhaps America can once again right its course.

Did China Learn from Japan? You Bet!

In 1853, Commodore Perry, demonstrated United States military force on behalf of U.S. business interests. Perry intimidated Japan into a one sided treaty with threat of vanquishing Japan’s much less industrialized military. Having been subjected to America’s use of colonial might, Japan embarked on the Meiji revolution, a modernization frenzy for 60 years, much as has been occurring in China since the 1978 Four Modernizations.

Just as America colonized through WWII for economic dominance, rationalized with a mistaken belief of cultural superiority, Japan colonized through imperial treaties and war for decades through the 1930s. During this time, similarly to China today, Japan’s leadership inspired a deep devotion to Japan’s destiny through education, media, military and other institutions.

Similarly to China’s concerns today, Japan was unable to limit its urbanization and required rapid GDP growth through the 1920s. When Japan’s economy was devastated by the Crash, instead of leaning socialist like America, Japan’s submitting culture turned militaristic, assassinating its elected Prime Ministers in favor of military leadership.

Japan’s military miscalculated its securing of oil from U.S. controlled colonies and eventually lost the war. After the war, the world, retreating from its wounds, was unable to contain decolonization. However, friendly autocratic governments mostly replaced colonies with terms favorable to business interests. The U.S. policy of world military dominance secured these relationships for a time.

In this environment, Japan thrived applying its discipline and tightly controlled banking and industry to a growth miracle. The miracle ended with bubble inflation caused by non secured raw material inputs, loose monetary policy, and a large rise in the valuation of the yen. Japan’s economy, like the United States, also succumbed to globalization.

Did China learn from these events as it prepared to reenter the world stage? You bet.

Of course, Chinese people are not evil and Chinese have long endured too much racism in America. But, no-one should be deceived by the Chinese government’s strategy to secure enough raw materials during this relatively peaceful period as possible for the future inward growth of their nation before such hegemonic relationships are hindered. China learned from Japan’s pre-war mistakes and will not repeat them.

Yes, the Chinese government is manipulating the value of its currency to give it an advantage in the international market. The idea that it is somehow unfair is a bit weird to me. If China wants to accept fewer dollars for its labor, why is it not entitled to do so? The world’s insistence on revaluing currency higher is just a system like any other. China is only copying a technique well implemented by Japan earlier.

Its U.S. strategy has limits, and China is coming to the end of those limits. China has fed off of the United States as much as it can. As a potential fatal flaw, it may have sucked too much life from its host. China must now somehow realize these saved dollars before Bernanke has a chance to take them back through QE2 and Qex’s.

Will the Chinese government collapse any time soon similarly to the end of the Japanese miracle? Heck no.

Whether Hot or Cold Governance, Middle America Seeks Change

Ah the pleasure of food that is either cold or hot! Place ice in coffee and it becomes lukewarm, and neither hot nor cold, to be spit out of the mouth. Since the time that Barry Goldwater and Mao Zedong coexisted, perhaps the world’s economic and political systems have globalized into a lukewarm concoction, unappealing to the senses, pulled headlong by a decentralized mass of multinational corporations.

As America’s current leadership struggles to redistribute wealth, some in the administration, have reflected admiringly on the ideals of Mao. From Anita Dunn, who said that Mao was her favorite philosopher to President Obama, who was influenced by Saul Alinsky’s Rules for Radicals, the American administration points its ship in the direction of a distant socialist star. In stark contrast, elected Tea Partiers in Congress, repulsed by the mire of Washington’s lukewarm beauracracy, are waving the libertarian flags of Goldwater’s limited government.

Meanwhile, as America’s governance continues to linger in lukewarm languidness, China’s political class is struggling to keep ahead of mass entitlement implied by a move toward socialist capitalism. While a mildly heated temperature can still be felt in China’s economic success, as the acceleration of the Chinese economic miracle begins to fade, the vast middle of China will feel the lukewarm effects of unfulfilled promises as well.

As the great middle of each in our societies is impacted by our own brands of lukewarm politics, some will yearn to spit them out in favor of a fond memory for hot and cold.

Is China’s Growth a Well Executed, Sustainable Strategy or a Short Lived Emergence?

If I were a strategist for China’s planned economy in 1978, I would look to America’s Gilded Age as my playbook and model.  America did not rely heavily on exports to grow her enormous wealth for that time.  She connected her internal markets through the building of the great railroads, with supporting industries like steel to build the rails.  Our entrepreneurs’ first strategy was to build internal trade with our settlers to the west.  This strategy, or perhaps happenstance, would later support the growth that ultimately allowed America to supply the First World War, and to emerge as the world’s 20th century hegemonist.

During the Gilded Age, America’s wealth accumulated in the very few hands of our “Captains of Industries”.  Searching for the needed imported mining materials to continue our rapid growth, our Captains encouraged Theodore Roosevelt to embark on one of the greatest engineering and construction feats the world had known of that time, a canal to cross the Isthmus of Panama.  Through the opening of the canal in 1914, we created an economic path to mining materials that would later supply our war industries.  America had the luxury of growing our internal markets first, connecting with third world suppliers through hegemonist relationships second, and exporting war goods to Europe third.

In China’s case, she has a much larger internal market to feed than America did at the turn of the century.  If China has planned her economy well, she knows that to sustain internal consumer growth, she needs secure access to much of the world’s raw materials. She also remembers that lack of access to commodities inevitably led Japan into World War Two.  Therefore, secure commodity control through hegemonist relationships is critical prior to China accelerating internal consumer growth.  The question of how to acquire the funding for these relationships might lead China to Japan’s export growth model. 

While Japan’s model proved unsustainable during the eighties, by copying it for a brief thirty years, China could acquire the needed capital to first build the hegemonist trading relationships needed for later internal growth.  Unlike capitalist democracies, China’s planned economy, using capitalism as its means, could command the ability to concentrate wealth as easily as America’s Captains for this purpose.

Could China’s interdependence with America really have been only a needed transitional step to acquire America’s wealth and trading relationships for China’s second phase of inward consumer trade and rise to 21st century hegemony dominance?  Was China’s plan, “Export first, acquire hegemonist trade second, and build internal trade third?”  Was this a masterful, long horizon strategy, executed with age old discipline, or was it happenstance which will prove a short lived emergence for China?

Will China’s Economic Engine Derail?

While many were questioning how to catch up to Japan’s economic peak, she entered a valley that has extended 20 years. After World War 1, the United Kingdom enterred a valley from its 19th century of hegemony and ceded the peak to the United States.  I question what will derail China’s economic engine.

Just as the United States has regional cultures; its fast paced, driven New York, its mercurial collegiateness in our nation’s capitol, its stoic yet heartfelt community of Iowans, and its new wave, multicultural progressiveness of California (I am ,with apologies, stereotyping), I saw similar threads in China in 1993. Hong Kong seared with international commerce. Guangzhou had the business mind of a Chicago. Inland provinces, with their peasantry, certainly seemed more agrarian than even poorer parts of Mississippi that I saw as a child. But Beijing?

I was forbidden to speak of Tiananmen Square while in the country, but I was able to freely stroll through this immense open ground. As I did, I could sense the eruption that had precipitated there just four years earlier. The backlash of the economic reforms begun in 1978 was that students and workers gathered in the square to demonstrate for social reform in 1989. The government of China, through the live fire clearing of that square, let it be known that reforms would be economic, not democratic.

Like in no other city or province that I visited, I saw many in the streets loyally touting traditional communist garb, expressing support of the regime that would carry on China’s dynasty. Even as China planned for the tremendous economic growth we have seen in the last decade, her leaders were developing a sense for how socialist politics would keep a firm grip on capitalistic economic reform, and how capitalistic economics would provide gradual relief from their authoritarian rule for her citizens.

It seems that China planned to carefully pace its economic reforms while raising Chinese walls between the differing social mores of its provinces. Beijing would be as a socialist chariot tied to its racing horses of capitalism, its coastal economic engines such as the city of Shenzhen. China’s leaders have managed to engineer success very well so far. And even as inflation seems to threaten their near term horizon, direct foreign investment continues to spur their economic plans, accelerating to new levels in the past year. I do not foresee a long term derailing of China’s planned economy with capitalism as its means.

Has China Usurped America’s Era of Hegemony?

  When I travelled to China in the early nineties, I saw hundreds of Chinese citizens near Beijing carrying wet cement in cloth sacks on their backs to dump in front of other workers who smoothed out the globs of cement with wooden utensils to build ten lane highways, when no Chinese owned cars nor had the income to buy them. I saw scores of men, climbing dozens of stories into the air on bamboo scaffolding, building the skyscraper city of Shenzhen when China yet had no office dwellers to fill their glass towers.

These were my witness to China’s strategy of ascending to their position as the 21st century hegemonist; a strategy that has been executed with a decade’s long horizon since the late 70s. While China fed our baby boomers that were entering their demographic spending years in the eighties, she patiently accumulated financial strength on behalf of all Chinese that had come before, and of all that would thrive in the future. While China exercised discipline on behalf of her citizens, our Wall Streeters demonstrated sophistication over that same extraordinary demographic to lead our country through one bubble after another, achieving societal instability and accruing immense personal wealth in the process.

Yes, our country’s leadership was outmaneuvered by a Wall Street banking system that has gone unchecked for 30 years. But it has also asked for and has been self-servingly supported by an enabling central banking system that feeds congress’s compulsive appetite for debt. As a result, America’s role as the world’s orchestrator of monetary policy has been undermined, our wealthy are seeking safe haven in the next world order, and our citizenry is at a loss for why our standard of living seems to be entering the community or European nations. Can we, as a pluralistic democracy, gain the discipline that the dynasty to our east has shown, or is our century of hegemony over?