 China Gets
It Right, But Hurts America
John Browne
Nov 13, 2008
The announcement of a massive
stimulus package of almost $600 billion shows that China means
business not just in reviving, but also in rejuvenating its economy.
As both America and China confront
the prospect of a global depression, both countries have chosen
to fend off potential unrest with liberal government spending.
But the Chinese move is bolder and more likely to succeed.
The most remarkable aspect
of the Chinese stimulus plan is its enormous size. Despite the
massive publicity surrounding its formidable growth rate, the
Chinese economy is still 'only' one-fifth the size of America's.
Relative to its economy, China's stimulus package would be the
equivalent of a $3 trillion package in America.
The Bush-Greenspan asset booms
were so extreme, and the resulting deleveraging so massive, that
government actions in multiples of trillions of dollars are needed
to make any meaningful impact in slowing the asset bust.
Based on this yardstick we
can see that the differences in the Chinese and American approaches
could not be more dramatic. The divergence bodes ill for the
future.
The impact equivalent of China's
package of $3 trillion is 17.4 times that of America's $172 billion.
Of course, this does not include the $700 billion Bush TARP that
was agreed to by Congress last month. But then, China did not
have a financial system which needed a massive taxpayer bailout.
Although some Chinese investors
may have been taken in by smart Wall Street salesmen peddling
mortgage backed securities, the scale of these investments does
not present systemic risk to China's financial markets.
China has announced that the
lion's share of its stimulus spending will focus on modernizing
the infrastructure of its country in preparation for challenging
America as a super power in just a few more years.
In contrast, the focus of the
Bush Administration plan is to boost consumer spending. America's
decaying infrastructure has been virtually ignored. This will
render America's economy ever less competitive in an increasingly
competitive world.
Even the follow-up packages
in America are likely to throw increasing amounts of taxpayer
money at highly leveraged banks and failed corporations, like
General Motors.
When the world recovers from
the looming depression, China will emerge greatly strengthened
and as a far more serious challenger for super power status.
Since the ancient times of
Babylon, super power status also has been reflected in any 'uber'
nation's currency. While China's economy is dominated by roaring
manufacturing and infrastructure development, America's economy
is comprised of 72 percent by consumers. In reality, America
is consuming more than it produces and is eroding its national
wealth at an alarming rate.
In contrast, emerging nations
like Brazil, Russia, India, and China (the so-called BRIC nations)
are producing far more than they consume and are creating real
wealth in the process. It follows that BRIC corporations and
even their currencies should be attractive long-term investments,
relative to those of the United States.
On November 15th, the
G-20 leaders meet in Washington to discuss threats faced by the
world economy. Today, there is decreasing faith in paper currency.
The G-20 leaders must address this crucial problem. It may well
be that they seize this opportunity to establish an international
currency, under the auspices of the IMF, but linked to Gold.
Should they fail, a resurgent
China can be expected to veto any subsequent attempts in an effort
to replace the U.S. dollar with its own as the world's key 'anchor'
or reserve currency. Such a change in reserve status will confer
on China a number of competitive advantages previously reserved
for America.
Unlike America, China is unlikely
to borrow to finance its stimulus package. Indeed, it is likely
to spend its own national earnings rather than continue to invest
in U.S. Treasuries.
Worse still, China might even
begin to sell part of its massive holdings of some $1 Trillion
of U.S. Treasuries. This will put upward pressure on U.S. interest
rates, tending to drive a recession into a depression.
However it is financed, China's
stimulus package is decidedly bad news for America.
###
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Nov 12, 2008
John Browne
Senior
Market Strategist
Euro Pacific Capital, Inc.
1 800-727-7922
email: jbrowne@europac.net
website:
www.europac.net
 John
Browne is the Senior Market Strategist for Euro Pacific Capital,
Inc. Mr. Browne is a distinguished former member of Britain's
Parliament who served on the Treasury Select Committee, as Chairman
of the Conservative Small Business Committee, and as a close associate
of then-Prime Minister Margaret Thatcher. Among his many notable
assignments, John served as a principal advisor to Mrs. Thatcher's
government on issues related to the Soviet Union, and was the
first to convince Thatcher of the growing stature of then Agriculture
Minister Mikhail Gorbachev. As a partial result of Browne's advocacy,
Thatcher famously pronounced that Gorbachev was a man the West
"could do business with." A graduate of the Royal Military
Academy Sandhurst, Britain's version of West Point and retired
British army major, John served as a pilot, parachutist, and communications
specialist in the elite Grenadiers of the Royal Guard.
In addition to careers in British politics and the military, John
has a significant background, spanning some 37 years, in finance
and business. After graduating from the Harvard Business School,
John joined the New York firm of Morgan Stanley & Co as an
investment banker. He has also worked with such firms as Barclays
Bank and Citigroup. During his career he has served on the boards
of numerous banks and international corporations, with a special
interest in venture capital. He is a frequent guest on CNBC's
Kudlow & Co. and the former editor of NewsMax Media's Financial
Intelligence Report and Moneynews.com. He holds FINRA series 7
& 63 licenses.
321gold Ltd
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