Monday, November 16, 2015

China, Forex and Robert Rubin

There is much talk of China's foreign exchange reserves. it is a subject of concern for some and for back-patting by globalization pushers. It is good old fashioned mercantilism, where the Chinese manipulate the trade set-up to pull in more and more investment to build up its manufacturing base. This has led to the horrible situation of knock off products full of impurities being sold in the domestic Chinese market. The counterfeits make up 40% of the market. This is bad for everyone, but a product of the American FIRE economy.

Why would anyone manufacture products in China, not for China, but in China? It does not have the skilled manufacturing expertise to match America or Germany's bases, and definitely not in the '90s. Several years ago, a website contrasted the safe, automated and machine perfected casting techniques of a product made in America versus the hand casting done in China that was prone to errors and hazards. Didn't matter. It was cheaper in China, so orders were sent there. The reason is for wage differentials. Capital will always seek cheaper labor costs.

For quite some time, companies could pull in workers from the interior  to work for Gavekal platform firms and wages would remain steady since the demand for labor and the labor supply met well above subsistence farmer earnings, so labor supply was always available. American companies could lower labor costs, squeezing the blue collar class. This also did shift more focus to supply chain management, marketing, design and other white collar work, and give better returns to capital owners in America whether debt or equity. Who did the Left abandon when the McGovern Coalition formed? Blue collar workers.

It was a good system to screw over the American middle and working class. No corporation of size would make huge investments though because China did not have Most Favored Nation trading status. This was a problem and obstacle that was debated in the US Congress. Candidate of Main Street and the working man, President Bill Clinton, is the president who changed that. During the 1992 presidential campaign, Clinton criticized President Bush's approach to China for not being tougher on China for human rights violations, and for coddling them for economic reasons.

Clinton changed his tune. Clinton did so in '94, and the floodgates opened. From the link, below is one section that was the repeated lie sold to American workers for free trade.
Many major American businesses see even greater potential in Chinese markets, expecting China to become a massive purchaser over the next decade of the phones, electronic gadgets and thousands of other products made in America.

Uh-hunh, and I bet that Iphone you have says "Made in the USA". This was a lie as everyone should have been aware that capital will always flow faster than labor if unrestricted. With no trade restrictions, there were plenty of reasons to invest in China. Now if you pay attention to China's forex reserves, you can see the history and where they really take off in the '90s; right after that MFN decree. This allowed for massive investments in China, and the growth in American manufacturing stopped even as the '90s consumer boom grew. From 1987 to 2000, America had roughly the same level of manufacturing jobs: 17.5 million.

China performed on more trick, and this was one that served the Chinese regime as well as our elite. Because of their foreign dollar recycling program, trade imbalances were never restored. Wages never rose in China to reach equilibrium. Their manufacturers earned dollars, traded them to the Chinese central authorities for yuan at the peg, and China accumulated Treasuries. It was the great addition of China to the petrodollar recycling program. Some economists called this Bretton Woods Two, but not yet, and I will get back to this. The Chinese needed this for growth, jobs and whatnot so that they could increase the standard of living and please their people while keeping the voices of the chattering class that wanted political power quiet. America needed this because it created buyers for our debt, helping to push interest rates down. With our FIRE economy, we were dependent on there always being a marginal borrower (consumer or business), and the way to guarantee that was a never-ending decrease in rates for all types of debt. As Eric Janszen has written, it created an economic Mutually Assured Destruction situation.

The forex hoard grew through the '90s (hundreds of billions) and came in handy when the Asian financial crisis hit. In overly simple terms, many Asian Tigers had hot flows of money from direct foreign investment turn sour, and the money flew out. They blew through their forex to maintain their currency, but were broken. The key thing that happened was that the IMF, therefore the USG, imposed strict rules on the Asian nations. The US, with Robert Rubin, Tim Geithner and Lawrence Summers leading the way, brushed off a Japanese proposal to have an Asian led rescue package.

This entire fiasco led to political upheaval and lo and behold, reform of their economies along the neoliberalism economic approach. Some Asian nations still bristle at the memory of '97. Much of the protectionism in affected nations was gone, dismantling long-standing economic interests as well as changing political leadership. Odd Rubin coincidence is how South Korea had to open up their financial markets, which led to Citigroup entering them after the crisis, and of course, Mr. Rubin was in a sinecure executive role at Citigroup at that time. China survived unscathed. The US did not meddle with China at all. China retained their political and national sovereignty by giving up the money printing power to the FED through the yuan-dollar peg. Every damaged Asian nation saw how China survived and copied China's peg and forex accumulation. This was the start of Bretton Woods Two.

This funneled even more money into our debt. Everything is tied to its risk premium over Treasury rates, so the lower Treasury rates went, the lower other debt could drop due to normal risk spreads. This fueled the rise of FIRE to greater heights and pushed misallocation of our capital towards instruments that could be securitized and sold to buyers who just wanted to keep their currencies devalued. The explosion of China's reserves in the 2000s was more due to the US deficit spending and the credit bubble after the dot com implosion. We printed more, and therefore, they had to print more just to offset the printing and prevent their currency from rising. They were not alone as the other Asian nations in Bretton Wood Two followed suit as no one wanted to move out of step with China and lose investment. This pushed even more investment and economic power into our banks, who unsurprisingly kept consolidating and merging with one another.

Now America is on the verge of importing Buicks made in China. America was suppose to be sending Buicks to sell to the Chinese market. Did not happen. Their consumer goods market is 40% counterfeit, and it's not like anyone in America's power structure is going to push to force American made goods onto Chinese shelves. This is because of Clinton's decision. In reality, it is because Clinton sided with Robert Rubin's decision to benefit the FIRE economy's interests rather than the manufacturing economy's interests. A decision maker works with the words whispered into his ears by his counsel.

In one sentence, Robert Rubin beat Robert Reich once more in the Clinton administration because Wall Street was now writing campaign checks and promised more to help Clinton. In Rubin's autobiography, he says how he supported the MFN decision and thought it would make China engage with America more. Instead, the relaxing of economic rules and increase in benefits in trade only made them more economically powerful. It only allowed them greater freedom and sovereignty.

Shucks, Rubin, a legitimately brilliant man, was either wrong out of incompetence, or it was the plan all along.


罗臻 said...

The Chinese printed way beyond their foreign currency holdings and currently have a money supply to forex ratio worse than that of the pre-crisis Asian Tigers. The problem for Wall Street is it's tough to get a major currency crisis going when China's not a full part of the global financial system. Now if they have to open up in order to get into the SDR basket...

Son of Brock Landers said...

The SDR thing is interesting because China has said SDRs are not the answer but that gold is, yet they know that SDRs are going to be a train stop along the way.

Anonymous said...

And the French? How they will recover from this?

peterike said...
This comment has been removed by a blog administrator.
Son of Brock Landers said...

Anon - Who knows? But that answer reveals enough about the state of France.
Peterike - I accidentally deleted your comment. What was the video?

peterike said...

It's a Barbie commercial featuring a totally fagged out little boy, and a gratuitously mixed-race girl. Plus a regular albeit snotty white girl. Weimerica on overdrive.

IA said...

You forgot that corporations compete against each other. If your competition pays $1/hr for labor without workers compensation, health care, retirement, affirmative action hires and associated costs compared to you, you go out of business. Unlike governments, corporations have to make a profit.

peterike said...

Unlike governments, corporations have to make a profit.

Which is why governments can normalize prices at the water's edge, taking away the labor cost advantages of other nations. This was standard procedure for a very long time. Common sense, in fact. But then, in those days we had a nationalist government, not a government of globalist traitors.