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American Recession Imminent?

10.13.2005

From FTW, a piece ran in the China Daily recently giving Beijings take on the markedly unhealthy, unsustainable state of the american economy.
Ive gone on about China before and often sound like a conspiracy theorist Im sure, yet i encourage all of you to consider the argument outlined above, considering its origin in an organ of a huge US creditor. It lends more than simple journalistic insight to the issue, more a clearer, more distinct view of Chinese thinking on the Dollar and the sustainablility of US upswings in the long run.
This is a topic which I find genuinely fascinating considering the knock on effects that may take place in the global system should it come to pass. FTW is hardly the first to call it, but it is certainly one of the more consistent in its arguments. The premise of the argument that the US is on the ropes in economic terms comes from a confluence of events that are gradually eating away at what is an already unhealthy US economic setup. The US debt is financed by foreign Central Banks and investors who buy dollar assets to hold in reserve. The US uses this facility as a form of credit and it allows for deep deficits to exist relatively unpunished.
However, increases in oil prices, competition for resources from China and the increasing deficits in Bush's budget, make many consider current US forms of dominance untenable. Key findings from the US China Commission reported on the massive negative effects on the US trade with China is doing.
The counter argument to this finding is that Western States particularly the US with its military industrial complex are replacing low-end manufacturing which moves overseas with high-end high technology capabilities and services. Those who support such a position might wish to consider the findings I outlined above;
"

-- The rise in the United States' trade deficit with China from 1989 to 2003 caused displacement of production that supported 1.5 million U.S. jobs. The loss of jobs due to the growing trade deficit with China has more than doubled since it entered the WTO in 2001.

-- China's exports to the United States of electronics, computers, and communications equipment, along with other products that use more highly skilled labor and advanced technologies, are growing much faster than its exports of low-value, labor-intensive items such as apparel, shoes and plastic products.

-- The U.S. trade deficit in Advanced Technology Products (ATP) with China is now $32 billion, equal to the total U.S. ATP deficit.

-- China is also rapidly gaining advantage in more advanced industries such as autos and aerospace products."

So external deficits look set to keep balooning

Looking ahead it is difficult to see the US trading its way toward some rebalancing of the deficit, many wonder which will go first, the US economy or Chinese funding of the deficit. Consider the points made by FTW on the whole prospect of recession in the US. He is referring to the China Daily article first and then the story below, the potential Bankruptcy of GM.

"China pulls very few punches here and this public statement about Beijing’s tea leaf reading pulls few punches. It was kind of them to estimate a collapse in a year or two instead of right now. Had they said right now it might have started a dollar run before China could liquidate holdings at the top of the bubble. Now, before the winter cold hits and energy shortages become more than an inconvenience, the two key signs we should watch for are a Chapter 11 filing by GM (likely) and any moves by other countries to liquidate dollar holdings.

Critics and skeptics are quite right that a Chapter 11 filing is only for reorganization. But it would also allow GM – if the courts permit it – to dump all of their pension obligations off on the US Treasury and the Pension Benefit Guaranty Corporation which is already insolvent. Don’t think of the damage caused by weakened GM shares. Think of what happens when millions of pension checks stop flowing. At least two airlines (Delta and Northwest) are dancing around that same move right now."

Coupled with talk of GM filing for Chapter 11 and further weight being subsequently placed on social security to pay pensions which private firms were supposed to be managing well enough to handle, the article looks like a stark prophecy. It may not turn out this way, but if we say it enough then it probably will come true eventually.
China and its burgeoning allies in the awkward squad are going to pose a threat sooner or later to the current dominant ideology of international relations. Major reforms at UN level should have been far sighted enough to see the need for emphasising Democracy across the world and its insitutions. I mean genuine democracy, not puppet regimes and controlled climates of business. Hawks in the US are already looking keenly toward Chinese military build up and increasing share of global trade. Few are unconvinced of the inevitability of friction and standoff.
I realise that a recession doesnt turn the world on its head, it should give cause to contemplate, from the crash of 1929 we got a new world order and a massively destructive war. If recession is coming, there is need to be ready. A chaotic US society could take years to sort on the path to recovery. I fear those in charge have neither the time nor the vision to handle this problem, would they even want to? Perhaps this talk of isolationism and unilateralism need to be set aside and cooperative measures found to ensure a bust doesnt kill off the era of the "end of history".
RR
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