Friday, April 24, 2009

China's Coming Ascendancy

The United States occupies a prominent position in global affairs chiefly because of the period of laissez-faire that began in the early 19th century and ended in the 1950s at the latest. Much of the twentieth century's innovation, including today's wireless technology, continued to feed off 19th century breakthroughs. As laissez-faire ended, technological change slowed. Today what passes for technological change is trivial junk like hand-held computers. Major innovations such as television and air travel were the product of late nineteenth and early twentieth century innovation.

China could duplicate this process and exceed the US technologically just as the US exceeded Britain and Britain exceeded Holland. The requirement for technological innovation is limited government intervention, the winner takes the spoils, and private property whereby long term experiments can proceed multi-generationally and innovators can be rewarded.

The chief inhibitor of innovation is credit allocation by Soviet-style central planning bureau. America has adopted the central banking system, which is not qualitatively different from the central planning agencies of the Soviet Union and other communist states. The central bank makes one foolish error after the next, just as Gosplan did. The result is that credit is misallocated to foolish endeavors, sub-prime real estate, cornering the silver market and the like,

America has taken advantage of its reputation for a stable currency by outprinting all other nations' currencies. The reason for the dollar's reputation goes back 70 or 80 years, and in the past decade the dollar has fed off its past reputation even as the Fed has printed money at the clip of the Continental Congress, the modern inventor of paper money inflation. Those looking to the dollar for safety are like those who swam back to the Titanic.

So far, the Chinese and other US dollar holders have eaten the long term effects of dollar depreciation. This has been limited recently because of the dollar's rise. However, short term market manipulation and fluctuation cannot stop basic supply-and-demand relationships. If you triple the Federal Reserve Bank credit then you reduce the value of the dollar, maybe by less than three quarters, but maybe more.

Since China, Japan and Europe will suffer from dollar depreciation, it would seem that they would now be considering a currency alternative to the dollar. China advocated this at the G20 summit. If China decides to pursue this strategy, it has a chance to become the world's dominant power, just as Oswald Spengler predicted in his book "Decline of the West". Spengler did not look to monetary inflation as the cause of the west's decline, but that is the operating mechanism.

If China decides to pursue a hard money strategy coupled with a limited government approach, permitting grass roots innovation just as Andrew Jackson did in the 1830s, then China will become the leading technological nation. However, if China opts for central bank capitalism then it will just reassert the communistic central planning approach it has pursued so far. In that case it will not become so important a power.

In either case, if China does choose to adopt an alternative currency and can convince the rising eastern nations to follow it, the United States is in trouble. That will be the first leg of a major dollar decline as the world's dollar holders put a run on worthless dollars. As the dollar declines, the US will see its military power diminish. Consumers will suffer and there will be political unrest. But the third world factories can move back to the US, and US citizens can regain the jobs now held by Mexicans and Indonesians.

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