Thank America’s Debt for China’s Rise

China continues to make bold moves in the direction of fulfilling its ambitions of being the great global power. While China has certainly experienced economic fits—their stock market downturn in 2016 led many observers, including me, to ponder whether China was getting ready to collapse—they remain the country to watch. In fact, if present growth rates hold and the United States does not reverse its course, China will displace us as the most powerful country in the world in my lifetime.

Of course, there are many problems that Chinese leadership must surmount in the coming decades. For instance, their legal system is a disaster and imbues a stifling level of corruption. China’s fertility rate, like that in much of the modern world, is in the doldrums. Plus, many Western observers claim China will “get old before it gets rich.” There is also a grave imbalance in the gender ratio of the country thanks to China’s idiotic One-Child Policy. On the other hand, it is important to note that the presence of a large cohort of unmarried, single women just across China’s border with Russia, has already created a trend of Chinese men going on bride-finding expeditions in Russia’s impoverished Far East. This is bound to have political consequences, too.

Yet, despite all of these negative trends, China’s economic miracle does not appear to be abating. Naturally, 10 percent growth rates have declined to growth rates of around 6.8 percent over time, but this is still far higher than anything experienced in the West.

With a GDP growth rate of 6.8 percent, several well-respected economic analysts assess that China could overtake the United States as the largest economy (in GDP terms) at some point between 2018 and 2023 (depending on which analyst you prefer). The Chinese have already overtaken the United States as the world’s largest economy in Purchasing Power Parity (PPP) terms. Therefore, it’s only a matter of time before they overtake America in other quantitative, economic measures.

It would be easy to hope that, since China has an export-driven economy, they s are vulnerable to disruption (i.e., China depends on American markets being open to their goods). Yet, China is in the long-term process of transitioning from a production-model, industrial-type economy to a consumption-based, post-industrial-type economy. This shift is part of the reason why China’s growth rates have slowed in the first place. During China’s shift to a consumption-based model, the country will become increasingly dependent on imports. According to Yale University economist, Stephen Roach,  however, that fact will actually make the United States more dependent on China than it currently is, since Chinese demand for American goods will be needed to keep American exports going.

When the Music Stops…

The United States, meanwhile, continues its inexorable decline. You see, where many look upon the recent tax cuts as a great victory, I see the tax cuts as but a small, if necessary, step toward economic growth. It’s significance is largely political and symbolic. If the good results of it can begin to turn public opinion in the direction of additional measures like it, terrific. But by itself it barely scratches the surface of this larger economic problem. If combined with real tax policy reform and spending cuts, then the recent wave of tax cuts could be the victory many Trump supporters had hoped for.

The biggest problem is that the United States government (and the public opinion that drives it) refuses to address spending levels. Currently, entitlements (Social Security, Medicare, and Medicaid) are draining the country’s economic vitality—with the largest cohort of Baby Boomers ever set to retire in 2020, America’s economic woes are only going to worsen. Congress failed to repeal Obamacare entirely—meaning that, essentially, it is yet another unfunded welfare program. Then, the tax cuts of 2017 added an additional $1 trillion onto America’s gluttonous $21 trillion debt (to say nothing of the obscene spending bill that Congress recently passed, adding an additional $300 billion to our already unmanageable debt).

The Bubble That Won’t Pop

Now the Trump administration is pushing an infrastructure bill that would require more spending. To be sure, like the tax cuts of last year, modernizing (and expanding) our country’s infrastructure would be a great way to ensure future economic growth. The last time that the United States seriously enhanced its infrastructure was between 1933-1943, according to Robert Leighninger, author of Long-Range Public Investment: The Forgotten Legacy of the New Deal.

That investment in America’s infrastructure undergirded the prosperity of the 1950s and 60s. Between the Works Progress Administration (WPA) and, later, the Public Works Administration (PWA), the vast majority of America’s sidewalks, bridges, tunnels, and roads were built during FDR’s presidency. Despite the importance of those infrastructure projects, Washington, D.C. has been reluctant to replicate them in the decades since. Failure to build off those early investments in infrastructure now threatens America’s economic vitality.

During FDR’s administration the country’s debt level was never comparable to its present condition. An infrastructure bill that increases federal spending at any level seems inadvisable until spending cuts and entitlement reforms are enacted. If America’s spending issues are not dealt with in a timely manner, any economic gains made by the passage of last year’s tax cuts (and from the possible infrastructure bill) will be cut short when the debt leash yanks the economy back—and that day will come soon enough, especially with China’s rise continuing in the fashion that it is.

The United States should not take comfort in the fact that China, like the United States, has built a large part of its prosperity on massive levels of debt. Unlike the United States, China’s debt was incurred through copious investments into infrastructure over many years. Here in America, our debts have been incurred by entitlement spending, defense spending, paying for the bloated federal workforce pensions, and paying down interest on our massive debt. So, while China put itself into debt by investing in infrastructure programs, the United States put itself into debt to expand the power and size of Washington, D.C.

Which is more sustainable? Whose debt is preferable?

From Ghost Cities to Boomtowns

Take, for instance, the issue of China’s so-called “ghost cities.” As early as 2009, many Western observers claimed that China was building a real estate bubble that dwarfed America’s in 2008. It was assumed that China was creating massive, empty cities to prop up their growth rates during the Great Recession. In reality, recent reports from the international press indicate that, far from being abandoned, many of China’s “ghost cities” are populating at impressive rates. Anticipating future growth is why infrastructure development is so important for a modern economy. The Chinese have planned for the future. We have not. To a Westerner, that looks wasteful. So far, the Chinese are reaping the benefits and appear to be vindicated in their decision.

On the other hand, China’s debt burden is large—and it is growing. People like hedge-fund manager, Kyle Bass, are convinced that China’s debt bubble will burst and plunge the world into another global economic downturn. But, President Xi Jinping and his cadre appear ready to handle the issue, which is why Xi is advocating for structural reforms in China’s financial sector and overall economy.

Meanwhile, the United States is as indebted as China is, yet American leaders refuse to reform their own systems to prevent excessive deficit spending—especially on things that do not lead to economic growth (i.e., welfare programs, massive defense budgets, federal payouts, and interest payments on the already-oversized debt). In the words of financial expert, David P. Goldman, China’s “debt sits where the [Chinese] economy best can support it.”

This is a far cry from the reality of America’s debt today.

China Pushes the Petroyuan

If not for the fact that oil is traded exclusively on the U.S. dollar, Washington’s spending spree would have ended long ago. So long as the petrodollar remains unchallenged by other currencies, the United States government’s excessive spending will continue unabated. Unfortunately, none other than the yuan, China’s currency, is rising to challenge the petrodollar’s hegemonic position in the global economy.

The world accepted the dollar as the exclusive currency for trading oil simply because America was the most productive economy in the world. Those days are long over. In fact, the United States is no longer the largest importer of crude oil. Thanks to China’s growth rates—as well as the fact that China is now the leading importer of crude oil—the Chinese currency is slowly coming to be viewed as a safer alternative to the U.S. dollar. We are still years away from the petroyuan becoming a real threat to the dollar, but as China’s rise has shown over the last 60 years: big things have small beginnings.

Should the petroyuan become a real rival to the petrodollar, America’s spending spree will have to come to an end, and soon debt repayments would be required—something that the American economy will not be able to sustain.

Meanwhile, the petroyuan would allow countries like Russia and Iran successfully to circumvent Western economic sanctions, thus their threat to the West would increase tenfold. We are already seeing how Russia’s increasingly close relationship with China—and Iran’s alarmingly close relationship with both China and Russia—has damaged American national security. Imagine how dangerous things would be for the United States if these powers could completely remove the economic threat that America posed to them.

None of this would have been possible, had it not been for the systematic destruction of America’s economic vitality through excessive debt-creation. That wasn’t the fault of the Chinese. America’s current debt woes are solely the result of the decades-long grip on power that the “permanent bipartisan fusion party” of Washington, D.C. has enjoyed. Until “the Swamp” is drained, things will not get better.

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