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Stock Ideas Top Headlines Is Economic Terrorism Right Around the Corner?
Stock Ideas Top Headlines Is Economic Terrorism Right Around the Corner? 
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| It's perhaps the best-kept retirement secret on Wall Street. On October 1, 2007—just 3 days from today— one Wall Street firm will cut a round of "Bonus Checks" worth more than $4.1 million. Just one week later, another round of checks will be cut for another firm —this time for $115 million. | |
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| Is Economic Terrorism Right Around the Corner? |
| Tuesday, 20 November 2007 | ||||||||
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Dear Reader, I must’ve missed the handshake. You know, the one that consigns the U.S. to second-tier economic status. I’ve been looking all over the Internet for a picture of our president shaking hands with one of China’s leaders. Can’t find it anywhere. Maybe it happened away from the bright lights of the media. But it must’ve taken place. How else can you explain the way these two giant economies mesh? We give China what they want and they return the favor. It’s the perfect marriage. Or is it? You already know that we’ve spent ourselves into a big black hole. Debt stinks – that goes as much for countries as it does for people. But as we’ve learned in the U.S., debt is not such a big deal if you have a cooperative bank willing to continually lend you money to help you pay bills and buy stuff. We’ve also learned that these banks can turn stingy in a heartbeat. The U.S. has its own cooperative bank. It’s called China. Every time we issue debt (our Treasury notes), China steps to the plate. We couldn’t ask for a more understanding bank. China allows us to keep spending. And when we go to the store and spend, we end up buying lots of Chinese goods. We’re China’s main market. And all our spending allows China to do what is most important to them – grow their economy. Our top priority? Well, it’s obviously not getting out of debt. Could it be economic growth, like China’s? Seems like when the economy is growing, good things happen. But the thing is, we can’t grow unless we spend. Consumer spending fuels two-thirds of our economy. nd we can’t spend unless we borrow. We’re a nation of debtors. The government is in hoc. And we, as individuals, are also in hoc. If it weren’t for China, we’d be feeling a lot poorer right now. Heaven forbid, we might feel compelled to deal with our debt. And there’s really only one way to do that. Get out of debt. And the only way to do that is to spend less and save more. And what if we did? There’s no doubt that economic growth would suffer. There would be more layoffs and fewer raises. In fact, things could get so bad that we could end up spending less and saving less. After all, if you’re unemployed, it’s pretty hard to save. That’s why our understanding with China gets so little mention anywhere, including economic summits like the G-20 meeting that just took place this past weekend in South Africa. The falling dollar dominated discussions. And China got a lot of the blame for protecting the unfair advantage its exporters have, thanks to the undervalued Yuan. French Finance Minister Christine Lagarde said that the Yuan is “causing tensions,” and Canada's Jim Flaherty said China (and other Asian countries) “need to do more.” That may be true, but the much greater “unfair advantage” is baked into our economic relationship. China is growing their economy on the back of an expanding American debt. And instead of telling them to stop, our politicians, economists, and Wall Street shake at the thought of China one day refusing to buy our Treasury notes. Meanwhile, diplomats everywhere are pushing for a stronger Yuan. But maybe the U.S. (if not other countries) should think twice. If a stronger Yuan does manage to cut back Chinese export earnings, the Chinese government in turn may one day have to cut back on the amount of government debt they buy from the U.S. Then all hell would break loose. We should never be this dependent on another country, even if it’s our closest ally. And as we all know, China is no ally. Nor is it our enemy. It is something in between, which means that we are just as likely to agree as disagree on an issue. We have opened ourselves to economic blackmail and the opening is getting bigger, not smaller. If you think our interests and China’s are destined to align more closely, maybe this is not such a big deal.
But from Taiwan to the chase for dwindling resources to geopolitical competition in Asia, Africa and South America, our interests diverge. I don’t see that changing anytime soon. As investors in China, we tend to think that all the risks come from an overheated market and an economy where graft and gross inefficiencies go hand-in-hand. Investors ignore, at their own peril, that our economic relationship with China is – plainly said – rotten to the core. Good Investing, AMG P.S. To let me know what you thought of today's article, send an e-mail to: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
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