The Pence Doctrine

I subscribe to Jim Rickards's Strategic Intelligence newsletter, which combines political with stock market intelligence. Rickards devotes the last issue to the Pence doctrine, based on the speech, embedded above, which the vice president gave at the Hudson Institute last October.  Rickards compares Vice President Pence's speech to George Kennan's Long Telegram, which set the stage for the Cold War containment policy of Truman and subsequent Cold War-era presidents.

Without revealing Rickards's proprietary stock advice, I conclude that investing in China is going to be a bumpier ride than most analysts have thought and that the rationales for the Trump trade war are  more complex and subtle than I had previously thought.   The arguments for free trade are correct, but they are entirely economic. Economics does not justify trade when trade creates a political or military threat. Chinese industrial espionage and its use of economic power to coerce trade secrets from American firms do create broad military threats whose costs are not borne by the firms that do business with China but who benefit from trade.

If economic actors are politically neutral and the Trump administration can wrangle concessions from Germany and China and then go back to free trade in short order, investors will be happy and economically the world will be better off. However,  Vice President Pence makes clear that there are intransigent political and military reasons to curtail trade with China, and these will not go away anytime soon even if the Chinese adopt a policy of reciprocity. (Economically, we are better off adopting a free trade stance even if a trading partner is protectionist. However, if we are selling ee cummings's nipponized "old sixth avenue el" to World War II Japan, it's a different matter.)

That American politicians and businesses have been willing to ignore China's history and ongoing practice of mass murder and political incarceration has been, until now, a moral disgrace. Americans, including me, have ignored torture and mass killing in the interest of a cheap sponge mop.  Pence states that one million Muslims are currently incarcerated in Chinese reeducation camps, where they are tortured and brainwashed.   Beijing continues to murder political dissidents; they continue to suppress minority religions, including  Tibetans and Christians as well as Muslims; they continue to attack free speech. Beijing's socialist state  has killed and continues to kill more human beings than almost any other in history--with a handful of similarly socialist exceptions.

Tech companies like Google and websites like Quora have long been apologists for China's mass murder regime. I was chastised and then I terminated my Quora account after a moderator insisted that my criticism of Chinese mass murder was outside Quora's speech parameters.  

As Vice President Pence points out, the Chinese state is taking control of  American newspapers and TV and radio stations. It runs cloaked newspaper advertisements on behalf of its political interests; it uses American airwaves as propaganda vehicles.  The Chinese mass murder state censors speech and scholarship in American universities.

The Chinese Scholars and Students Association functions as a spying organization against Chinese students here, and information it has gathered has been used to attack families of Chinese students.  It censors movie studies, and it has made direct changes to American-made films.  (Its power to do so comes from selective granting of access to its market.) In other words, Hollywood has been willing to sacrifice American security interests for access to the Chinese market.  It has attacked the New York Times and cyberattacked the Hudson Institute, where the vice president gave the speech.

President Trump, through the concerns enunciated by Vice President Pence, is the first president since Nixon's détente to identify the  threat that China poses. This has not been recognized in Democratic Party-dominated universities, Democratic Party-dominated newspapers, or Democratic Party-dominated media.  

If Rickards is right and the Pence doctrine is going to become foundational to American policy, the trade issue is going to become more complicated rather than less, and we may be in for a protracted cold war with China. 

The Tendency toward Self-Destructive False Equivalence

During the past year, I have heard many advocates of protectionism claim that without tariffs trade is not fair.  The Chinese have tariffs, so we need to have tariffs as well in order to make trade fair.  Trade must be equivalent. If they buy from us, we need to buy from them.

This reasoning makes as much sense as this:   Since I buy from Wal-Mart but Wal-Mart doesn't buy from me, I should stop buying from Wal-Mart.  It isn't fair that trade is one way.

That is mistaken, of course. If we buy from the Chinese, but they do not buy from us, the dollar will become weak, and the Chinese currency, the yuan renminbi, will become strong. The Chinese goods will become expensive, and Americans will stop buying them. That has not occurred because of the policies of China's communist dictators.

China's communist dictators believe that if they do not subsidize demand for their manufactured products, then their regime may collapse.  If rural inland farmers who have migrated to the cities find themselves unemployed, then they will riot.  As a result, the communists depress wages.  In accordance with the law of supply and demand, low wages stimulate employment.  The migrant farmers do not realize that their $8,000-a-year paycheck is small.  They do not know that Americans who are less productive than they are earn $40,000 a year.  

The Chinese use a few methods to keep wages low and to make their urban migrants suffer in exchange for social passivity.  These include printing ever-larger amounts of yuan; using much of the printed yuan for valueless real estate, ghost cities, and pet projects;  suppression of the yuan by directly purchasing US dollars; purchasing treasury bonds with purchased US dollars; and tariffs. 

These are self-impoverishment strategies: They make the average citizen poorer because they weaken the yuan.  At poorer wages, employment is stimulated, and citizens are too busy to riot, but most are poorer.

In exchange, Americans benefit from the option to purchase inexpensive merchandise that is cheaper than we could purchase without China's self-impoverishment strategies.  The cost of that is that some manufacturing plants close, but the benefit outweighs the cost.  If every American spends more on manufactured goods, the cost is enormous; if there is a 20% increase in manufacturing employment, the benefit is small. 

Americans follow similar but more moderate self-impoverishment strategies.  For instance, America's Federal Reserve Bank prints lots of paper money and hands it to unproductive Wall Street stock jobbers, investors who are so incompetent that they required a $29 trillion bailout ten years ago and continue to require ongoing monetary subsidization.  

The ongoing subsidization of Wall Street makes Americans poorer, of course, because someone has to pay.  At poorer wages, Americans enjoy full employment, but we don't go as far as the Chinese because our farms have been integrated into the modern economy.

Nevertheless, Wall Street benefits from other self-impoverishment policies. The subprime crisis and excessive investment in technology both have benefited investors at the expense of American workers. However, Wall Street does not benefit from tariffs and trade impediments, which are also a self-impoverishment strategy.

The decision to establish tariffs would ordinarily make Americans poorer; however, do not underestimate the stupidity of the Chinese.  They may decide to make their citizens poorer still by further purchasing additional dollars.  This may result in Americans' becoming richer as the dollar strengthens; however, there will be further disinvestment in domestically produced importable merchandise--the opposite result of what Trump's supporters want.

The tendency toward self-destructive false equivalence is seen on the left as well as among Trump's supporters. Many leftists make this argument: America is the only country to have a political commitment to freedom; isn't that a reason to end the political commitment to freedom?  Well, yes, the rest of the world has a history of gassing dissenters and Jews, and left-wing, social democratic regimes are in that long tradition.  The left has a long history of self-destructive, delusional false equivalence. It is sad that the majority of Trump's supporters have adopted it as well.

The Fed Is Responsible for US Jobs Exiting to China

Gerald Celente of Trends Journal and Trends Research Institute just e-mailed with a special report about the exodus of jobs to China.  Celente takes a protectionist tack, with which I profoundly disagree. He writes:

"Libertarians and “free market” economists praise Wal-Mart’s low prices achieved by offshoring, but these prices do not include the costs of the decimated state and local tax bases that are destroying American cities, the costs of the high unemployment and the personal depression, crime, and income support programs. These and other costs are expenses imposed on third parties by the movement of American jobs abroad in order to maximize profits...



"Free trade works, if it works at all, only when capital and technology remain in the domestic economy and find their best use or comparative advantage. Offshoring is the contradiction of free trade. It is the pursuit of lowest factor cost and absolute advantage."


The basic statement of free trade, comparative advantage, is still valid.  There is no reason for an ongoing exodus of jobs under a free market system where there is no paper money system to artificially inflate the dollar at the expense of workers.  This has occurred since 1913, especially since 1970.

The dollar is used as a reserve currency around the world, not just in China. Its reserve currency status elevates its value. There are $10 overseas for every dollar here, with central banks around the world holding trillions in treasury bonds.  If the foreign dollar holdings were to be exchanged and the treasury bonds sold, as happens with bubbles, the dollar would be worth less than its current value. This happened to the pound in the early 20^th century.  Americans would be poorer, but manufacturing would return here. A Faustian bargain.

Under a libertarian system, a metallic standard, overseas investment would depreciate the dollar, eventually forcing overseas investors to repatriate their investments.  The flow of gold or silver would pose a market-based mechanism to limit expatriation of investment. This has not happened in our state-dominated economy because of the paper money system and the limited ability of planners like Bernanke and Geithner to function independently of special interest pressure.  Such pressure would not evaporate under a tighter degree of regulation. New forms of regulatory privilege would emerge. The current system is the result of government intervention and Progressivism.  When the Sherman Anti-trust Act was passed in 1890 and the Fed established in 1913 firms were far smaller, there was less monopoly, there was no possibility of unlimited expatriation of capital, the average real wage was rising (unlike since 1970s, when the gold standard was removed) and although there had been depressions in the Gilded Age, they were milder and briefer than the post-Fed depressions and recessions in 1920, 1930, 1974, 1978 and today.  Where does the investment capital to invest overseas come from? The Fed. It is not a libertarian free market phenomenon.

Celente's suggestion, to impose regulatory limits on where and how capital is deployed, would create impediments to investment and cause a stock market crash because of increased riskiness and regulatory controls. Small as well as large investors would be hurt.  This is what occurred in the early 1930s, with the Smoot Hawley tariff contributing to the Depression. 

Creating paper money with one hand and then imposing regulatory controls with the other disrupts expectations. Investment capital flees. New irrational bubbles form. Rather than expand firms’ investment here, investors would find overseas firms in which to invest.  Many US firms would leave the country. Why stay here? The wonderfully educated work force? A stable government? Low taxes? I don’t think so. Voluntaristic solutions work better than state compulsion by planners with human hence limited mental capacities and motivations.  

Managing Your Life in a Declining America

China's and Russia's announcement that they will use the ruble or the yuan to trade bi-laterally seems to have struck financial blogs, but few others, as important.  Market Watch writes in an understated tone:

>China and Russia will stop using the U.S. dollar to settle bilateral trade and instead use the ruble or the yuan, though the move is not meant to signal a challenge to the dollar, according to reports Wednesday. China's Premier Wen Jiabao and Russian President Vladamir Putin made reference to the new currency trade pact late Tuesday, following meetings in St. Petersburg that also saw the signing of bilateral trade and energy-cooperation agreements, according to a report in the state-run China Daily. "About trade settlement, we have decided to use our own currencies," Putin told reporters, according to the report. Earlier this week, China added the ruble to the list of currencies that can be traded against the yuan on its domestic exchange.


I searched the words "China Russia trade dollar" on Google and got 238,000 hits, but the leading hits were all financial blogs.  Moreover, the ostriches have proven eager to bury their heads in the central Asian sand.  Tyler Durden notes that Russia and China made a similar bi-lateral statement more than a year ago and nothing changed then.  Also, the dollar has risen since the announcement.

But the dollar has risen since the announcements of numerous momentous decisions that will depreciate it, such as the bailouts and the massive expansion of the monetary base in 2008. Wall Street's short-term faith in the dollar has over-ridden longer term logic since 2008. Unless the Fed decides to reverse its policies of the past ten years there is little reason to believe short term market fluctuations.  Of course, as investors we need to consider such fluctuations.     

It would seem that a decision to drop a long standing business practice will require adjustment. It would also seem that along with the dollar habit Russia and China may be concerned with US power.  How long did the abolitionist movement in the US continue before slavery ended?  Even in 1776 Jefferson wanted to include more aggressive statements against slavery than the Southern delegates to the Continental Congress allowed in the Declaration of Independence . If it took 86 years to abolish slavery, might it take a few years for the Russians and Chinese to switch to an alternative currency?  By the time they and other global players make the decision the markets will have digested the information. At that point dollars will be worth a small fraction of what they are worth today.  Hence, the head-in-the-sand response may prove to be insufficient.

There are several possible outcome scenarios to long term dollar depreciation and American economic decline.  First, the Fed's monetary expansion could work for another round. The economy will grow in a valid way, jobs will be created and the public will become wealthier.  The nation's jobs picture would improve and there would be little inflation. I don't think that will happen. The  Fed has not been successful in stimulating sound economic growth. Although the past twenty years saw considerable economic activity, most of it involved the creation of unstable, low-end retail jobs.  The high unemployment of today results from the economic illusion for which the Fed has been responsible.  The Fed not only creates illusion but also transfers a wealth to Wall Street and corporate interests as well as to privileged workers in government, construction and big business. The past 10 years have seen a massive increase in privilege to the wealthy because of Republicrat policies. But until recently the illusion has been sufficient to keep Americans happy. Blissful ignorance might continue despite the Tea Party.  If the Fed's monetary policies work, then the stock market will shoot up. I don't think that will happen in the long term, but I do think that there will be short to medium term strength in the stock market, say into 2011. After that, all bets are off. 

The second possible outcome will be that the Fed's policy works but causes significantly higher inflation. This would happen if  the commercial banks convert all of the money reserves the Fed  has created into loans. That would stimulate a high degree of unproductive economic activity similar to the sub-prime building of the last decade. Economists will say that the economy has recovered, but Americans will become poorer. If you recall the seventies, then you have a sense of what higher inflation feels like. But the inflation this time around may be worse.  This is the scenario I think will occur.

The third scenario is that the banks will not lend a multiple of the reserves that have been created and instead contract their loans. That would result in deflation.  The markets have been afraid of this scenario but it would turn out better for the average American (except for the unemployed).  Stocks and bonds would decline as would non-monetary commodities.  Gold and silver both seem to behave today as monetary commodities.  Hence, they may do as well in this scenario as under inflation.  However, agriculture, DBA would not. As well, the stock market will probably fall as profits and consumer demand decline along with the availability of money.  There will be high unemployment but the government will become increasingly paralyzed.  I do not think this will occur because there will be too much pressure on the money center banks and the Fed to purchase US debt. Even if the banks do not lend to the public, the Fed will continue to monetize the federal debt, and government will continue to spend in value-destroying ways, resulting in inflation or dollar depreciation.

A fourth scenario would be total economic breakdown.  This might occur if there is disruption to the power grid through terrorism or some other disaster and the government lacks the resources or competence to respond, a kind of global or national Hurricane Katrina.  I know people who fear this but usually what goes wrong is what you don't expect, not what you do expect.  If you have a year's supply of dry food in your pantry I personally wouldn't call you crazy but I don't believe you will need it. At present I do not have any dry food, silver bars or firearms.  But having a rifle and an ample supply of junk silver (pre 1960 coins or one ounce silver bars) might be a good idea. You likely would never need that stuff but if you have five thousand dollars to invest in an insurance policy, you might consider those steps.

It seems to me that at this point cash is still safe, although the days of cash may be drawing to a close.  Gold and silver are highly speculative because of investment or speculative demand, but their persistent rise suggests that a broader-based demand for gold-as-money is motivating the price increases.  I have about ten percent of my portfolio in commodities and I am going to allow the percentage to increase for quite a while, purchasing some additional amounts.  I am also taking care of whatever home improvements I can afford, and if I inherit an additional $100 grand will buy myself a Boxster S.  I aim to invest in what I know or plan to know.

China Crash?

John Derbyshire of National Review.com has an interesting post (h/t Larwyn) concerning the possibility of a China crash. Derbyshire notes that two previous times in modern history have nations run up large foreign reserve balances:

>"The first time occurred in the late 1920s when, after a decade of record-beating trade and capital account surpluses, the United States had accumulated what John Maynard Keynes worriedly described as "all the bullion in the world." . . . The second time occurred in the late 1980s, when it was Japan’s turn to combine huge trade surpluses, along with more moderate surpluses on the capital account, to accumulate a stockpile of foreign reserves only a little less than the equivalent of 5-6% of global GDP"

In May 2008 I noted that a Chinese tragedy is in the making despite the major strides that the Chinese economy has made. Like the political leadership of all managed economies, the Chinese government is subject to massive errors and missteps that are far worse than would occur under laissez-faire. I wrote then:

"Tragically, the Chinese perceived the spectacular image of large-scale development and have attempted to emulate Robert Moses's approach with large construction projects, continuing to limit the intellectual and economic freedom on which economic development depends. Equally sadly, Americans lost sight of the reason for their success, and passed laws and regulations, and imposed punitive taxes, that have inhibited entrepreneurship, slowing American economic progress, even as they have increasingly provided welfare payments to incompetent bankers, real estate developers, academics and Wall Street stock jobbers who do not produce wealth.

"This country and China have squandered resources in stupid ways. The bubble will burst as all credit bubbles do. America may have enough resources to reassess its errors. The Chinese likely do not, and many there will be hurt."

Which Is Better: Strong or Weak Dollar?

My old childhood friend from Queens, Barry (actually, it goes further back because our mothers were friends in the Bronx in the 1930s and 40s), just sent me this message about the dollar on Facebook and I respond.

Barry:

>Is the "problem" with the dollar that it is too high or too low in comparison with other currencies? If the dollar falls, all of our export industries become more competitive, but we end up with a dose of inflation because our imports become more expensive. If the dollar strengthens, we keep cheap imports but have an increasingly hard time competing abroad. Which is better?

My response:

>That's one of those paradoxes, much like wages. Should an employee be paid more or less? If less, he cannot afford to pay his bills. If more, his employer may go under. Which is better? The answer is that practical human reason cannot answer that question. Rather, market forces can deliberate for us. Allowing the market to do so has the effect of allowing resources to be used most productively. If we set wages too high, there will be a reduction in demand for labor and a surfeit of supply. If we set them too low, there will be a labor shortage and the best people will start their own businesses. Rather, let us allow the market to tell us how high wages ought to be, and firms produce efficiently and fairly.

Being fair to both sides allows supply and demand, including supply and demand for labor, dollars, shoes and anything else, to fall into equilibrium. With respect to dollars, that would be done by letting them float. Firms might lose some predictability with respect to their overseas plants, but why should the public subsidize the risk aversion of big companies? Let them stay home if they wish to avoid currency risk.

In the post war period there was a peg to the dollar. But President Nixon printed too many dollars and so the peg was not sustainable. There was a run on the gold in Fort Knox as foreigners (Americans were not permitted to do this by law) cashed in their dollar bills for gold. So Nixon (a) abolished the transferability of Euro dollars into gold (that had been done for American dollars by Roosevelt in 1932) and (b) floated the dollar. Floating exchange rates, which I believe were suggested by Milton Friedman, work great in theory, but firms required long term stability to make plant decisions. To accomplish this stability, the central banks, the Chinese, Japanese, Saudis, Europeans and others have been holding onto large sums of dollar denominated bonds, informally duplicating the pegging system of the post war period. But the US has been printing more and more dollars. This makes us richer at the other countries' expense. You can cheat others once or twice, but over many decades they began to grow weary of it.

You are right that there are distributional effects of monetary policies. Under the current system the global demand for dollars is exaggerated (also exaggerated because the legal tender law increases domestic demand for dollars--we are not allowed to refuse dollars as payment for goods or services). As a result, the dollar made strong by foreign holdings makes our exports less competitive. More generally, the stability of the artificially propped up dollar has encouraged firms to move overseas. A propped up dollar benefits US manufacturing firms that have moved overseas, and so this policy has contributed to de-industrialization. Also, the Federal Reserve Bank's interest rate and monetary expansion policies have facilitated many firms' moving overseas.

The US government has thus encouraged de-industrialization, driving out manufacturers and sending them to China. China also has low labor costs, and it is difficult to say exactly how much of the move is due to the artificially high dollar and how much is due to low labor costs in China. My guess, which is completely intuitive and not rational, is 20% is due to money. So that 20% of manufacturing might come back here if the dollar were allowed to float.

The up side (besides the huge benefits to manufacturing firms and Wall Street) is that consumer goods have been cheaper.

The down side is that the system is unfair and so unstable. Winding down the dollar subsidies by the international central banks will hurt the vast majority of Americans. The dollar's purchasing power will diminish so that people will become poorer. The real cost (inflation adjusted) of all goods will go up, also guessing, 20%. Maybe a lot more, but no one knows.

So imagine a situation where there's a 20% increase in factory jobs and a 20% reduction in standards of living. Will most Americans appreciate the trade? I think there may be widespread dissatisfaction, and maybe rioting in the streets. But that extra margin (maybe 10% maybe 100%) of benefit to consumers will be lost to us.

On the one hand, the deal has been sweet for US consumers. But on the other, like all subsidies, for instance a rich heir who does not have to work, the windfall has made Americans used to an artificially high standard of living. Note that the standard of living we should be enjoying today is probably not that much higher than it was in 1971. Real (inflation adjusted) hourly wages from 1800 to 1970 increased around 2% per year. Since the abolition of the gold standard in 1971 real hourly wages have increased a total of 2% in almost 40 years. More people work two jobs now and much more families are two income, so it's not going to affect most people to the degree that they will have to give up all the consumer gains. But our standard of living, for the first time in history, probably needs to be adjusted downward by a sizable chunk. The retailing jobs that we will lose because of lower consumer demand will be replaced by manufacturing jobs.

SNL: Obama in China

Jim Crum sent me this video. Besides being well executed in the SNL tradition, the skit surprised me for expressing concerns about the world monetary regime and the US relationship to China that are normally off limits in America's Pravda-like Democratic Party media. Now that the 2008 election is long past, NBC is apparently willing to permit a little late night levity at President Obama's expense. But just a little. While we're not quite there, America is not that far away from soft totalitarianism, certainly where Democratic Party media like NBC is concerned.

Coming Chinese Instability

This is a tale of three nines: 1989, the year of Tiananmen Square; 1999, the year of the tech bubble; and 2009, the year of Chinese support of and complaints about the dollar.

The current global monetary regime seems to parallel the 1999 tech bubble. During the tech bubble investors believed that the stock of Drugstore.com and Cisco Systems would indefinitely escalate. Like all asset bubbles, the tech bubble came to an unhappy end. Ten years later, in 2009, the Chinese seem to think that if they keep buying dollars with yuan and threatening to withdraw the investments then in the end the investments will hold their value.

The Chinese have subsidized the dollar at the expense of their already low-wage workforce. If they keep holding up the dollar, then the Chinese people will become poorer. But if they pull out of the dollar, then their substantial dollar holdings will diminish in value, the Chinese workers will be thrown out of work and the Chinese people will become poorer because of the losses due to the dollar holdings.

Shall we conclude that the Chinese economy is headed for a rough ride?

What do we know about the stability of Chinese society? In 1989 the Tiananmen Square Protests led to hundreds of communist killings. Anyone who was conscious that year will remember the young man standing in front of the tank (see above). Since then, the Chinese have enjoyed a vibrant bubble economy based on fast money growth. But crashes inevitably follow monetarily induced bubbles.

When the Chinese economy tanks there will be alot of unhappy Wal-Mart-supplying factory workers. Perhaps the power of the Chinese state will prevent social unrest. Perhaps not.

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.

An Open Letter to Hu Jintao, General Secretary of the Chinese Communist Party

Dear Mr Hu:

If the Chinese adopt a systematic laissez-faire economic policy and a hard money, gold standard, then they will have the world's leading economy within 150 years. By the year 2250, the Chinese could regain its position as the world's wealthiest nation that it held until the 17th century and also outstrip the western nations with respect to technology.

The Chinese have made two crucial errors in their attempt to westernize their economy. (1) You have assumed that Wall Street and the American financial system is responsible for America's economic success. That is an error. Wall Street has been of at most secondary importance and may have served to reduce economic progress over the past century. (2) As a corollary to (1), you have decided to focus on exports to the US and to adopt a financial system that parallels America's. Although exports are useful and free trade is wise, it is wiser to allow the Chinese people to determine ways to satisfy Chinese markets. In part because of China's size, China cannot duplicate Japan's and Korea's export-led growth strategy. By focusing on exports, China has chosen a less stable and less productive path than would a free market or spontaneous approach.

One fallacy of America's economic policy is the idea that unconstrained flexibility in currency expansion can lead to better outcomes than a hard money (gold-based) system. Businesses are like children. They want ever more candy. But if you give them too much candy, it hurts their teeth. That is why today's American businesses from General Motors to Wall Street lack teeth. They have eaten too much candy.

For the past 110 years, America has lived off the innovation and growth of the 19th century. The reason is that America left the gold standard in 1933. The gold standard has the effect of stimulating innovation. Because of currency deflation, firms scramble to innovate. Workers enjoy rising real wages under deflation, and as a result can save and so do not suffer excessively during depressions. Depressions can be limited by insisting that banks do not lend excessively, by ending fractional reserve banking, and by requiring specie (gold) reserves.

American bankers and corporations have insisted that a "flexible" currency helps them. At the same time, they have engaged in double talk claiming that monetary expansion helps the poor. However, China is now seeing first hand the duplicity inherent in these claims. You are holding more than one trillion dollars in potentially worthless greenbacks and the losses due to America's reckless monetary expansion will cause harm to the Chinese people.

I urge you to familiarize yourself with the history of America's sixth president, Andrew Jackson, who abolished America's second central bank in 1836. The explosive economic growth that followed, despite a short term inflation and recession that followed, state-level paper money and the Civil War inflation, is testimony to the power of monetary responsibility.

America's economic success was due to laissez-faire. Even Marx does not claim that socialism is possible until laissez-faire has run its course. Should China adopt a laissez-faire policy and gold standard, I myself would be interested in living there.

Sincerely,


Mitchell Langbert, Ph.D.

Foreign Students No Longer View US As a Land of Opportunity

I had a long discussion with a someone who is a Chinese national on Saturday. The individual is a manager in a manufacturing firm in the New York City area and a weekend MBA student at NYU's Stern School of Business. This student mentioned to me that her Chinese expatriate friends regret coming to this country and are now thinking of returning to China because of America's declining economy, its incompetent policies and its unwillingness to confront its own decline.

Moreover, she was disturbed at the recent inflation of the American monetary base and the foolhardy bailout plan that the American mass media cheers. She said that hyper inflation has begun to afflict China, and the Chinese are not happy either with the American monetary policy or the fact that they are holding over one trillion dollars in treasury bonds.

Obviously, if the Chinese decide to sell some or all of the US bonds, there will be a dramatic decline in the dollar and hyper inflation as dollars return here. Over the long run factories would return here, but the adjustment would take decades.

In my view, the United States is no longer a free country. It is a slave state. Americans in many states, such as New York, pay more than one half of their earnings to the government. Only foolish slaves would be happy to live in this condition. Americans have become a nation who do not deserve the world's respect.

On May 13, 2008 I wrote a blog entitled "Chinese Tragedy Ahead". I wrote that:

'This country and China have squandered resources in stupid ways. The bubble will burst as all credit bubbles do. America may have enough resources to reassess its errors. The Chinese likely do not, and many there will be hurt."

Conservative Chloe on the US and China

Conservative Chloe (aka Jamie) has written me an e-mail. Jamie blogs at http://conservativechloemichigan.blogspot.com/.

Jamie used to work for the Michigan State Legislature (incidentally I briefly worked for the New York State Assembly Ways and Means Committee). Jamie has posted a good blog concerning progressive education in Michigan that for some strange reason the Chinese government has funded. The program's curriculum sounds familiar--it is the same drivel that "social justice educators" at the Natonal Council for the Accreditation of Teacher Education and the half-literate graduate schools of education have been advocating for a century. A good book on this topic is Diane Ravitch's Left Back: A Century of Battles over School Reform. Progressive education was a failure 50 years ago, but the education schools advocate it.

Jamie notes:

"The new mindset and curriculum these programs want to teach our children are quite frightening. Some of the objectives for preschool and kindergarten are as follows:

* The challenge is to help children appreciate the power they have to cause change and channel that energy towards positive endeavors. By providing opportunities to take action and observe consequences, children learn to appreciate their roles as change agents and become responsible for making wise choices. (In my opinion they are teaching our children to be activists.)

* Energy is the underlying currency that fuels the universe.

* As children extend their understandings to appreciate how human action affects the natural world, they can learn about species preservation. As children observe how plants thrive or die according to heat, rain, and soil conditions (i.e. global warming), they solidify their understandings of the ever important role of environment for all creatures of the earth.

"Throughout this curriculum are quotes from various intellectuals, including Confucius. Of course they can quote Confucius but not Jesus. But the bigger question is, what on earth are we doing in America teaching our children Chinese teachings and a global education curriculum? Is there any Legislator in Michigan willing to address this issue?"

The sad truth is that our own home-grown Bill Ayers and the lunatic fringe known as the education establishment are largely responsible for the ideas that Jamie is describing. I think that the American public needs to think in terms of home schooling and privatization of education. The voucher idea is good but it has run up against too much resistance from the entrenched teachers' unions. I think the best approach would be to fight to de-fund education so that parents are pressured to send their children to private schools or home school. The public education system in America is but one more Progressive disaster.

Bill and Hillary Clinton at the Emerson Resort and Spa

I exercise at an exclusive hotel in the Catskills, about 15 minutes from my home, called the Emerson Resort and Spa. Dean Gitter, a visionary entrepreneur who aims to turn the central Catskills into a gaming center, developed the hotel. It is truly a pleasure to be able to work out in a world class hotel, which boasts a beautiful spa as well as a first class gym. The pleasure is enhanced by the Emerson's generosity in extending reduced rates to the good people of the Woodstock-Pine Hill region in the east-central Catskill Mountains.

On Tuesday I was working out at about 5:00 pm and was the only one in the gym. This is part of the joy of being a professor in August. The door opened and I spied someone who looked like Hillary Clinton. The door opened further and Bill Clinton stuck his head in the door. I said "hi" and he did not really respond. About 1/2 hour later as I was nearing the end of my nautilus circuit a secret service agent came in and looked over the weights. About a dozen secret service agents were standing in the lobby when I left.

I did not blog about this until Thursday morning as I did not want to disturb the Emerson's confidentiality. The Catskills badly need exposure of this kind.

I did not get a chance to speak to Bill Clinton, and I have thought for two days what I would have said if I did. This is it. America's relationship with China has not been adequately managed. There will be a serious danger of a nuclear war in the 22nd century. I do not know this for certain, nor does anyone else know or not know. But it is more than a slim chance.

In 2007 Business Network (bnet) quoted former Secretary of State Henry Kissinger (Kissinger was Secretary of State under President Richard M. Nixon.):

''The center of gravity of the world is moving from the Atlantic to the Pacific. The key countries of the world are mostly located in Asia, or will be in the next 50 years,'' he said in a speech about future Sino-U.S. relations.

"When the center of gravity moves from one region to another and another country suddenly becomes very powerful, what history teaches us is that conflict is inevitable," he added.

The country Kissinger is describing is China. Because of today's important concerns about the Middle East and terrorism, the management of the Chinese relationship has been overlooked. The current Olympics highlights Chinese growth.

Kissinger adds concerning Chinese growth:

"There is nothing we can do about it, there is nothing we can do to prevent it, there is nothing we should do to prevent it."

I am fairly good at timing the stock market, and not too many people can say that. Dr. Kissinger has a point. I cannot prove it, but I do believe that there is a risk of nuclear war with China in the 22nd century IF we do not begin to manage the relationship with China more intelligently.

I would have urged President Clinton to make use of contact that he has with Chinese officials to educate them as to the advantage of the path of economic growth, free trade, and peace. The country that innovates fastest is the one that shows that it is best, not the country that displays the greatest military power. David Ricardo offers the Chinese a model that they have not contemplated sufficiently in their history.

President Clinton, please tell the Chinese leadership that a path of freedom, free trade and intellectual expression, as opposed to government control of "salt and iron" and military power, will prove Chinese excellence. I am certain that Mr. Clinton will have the opportunity to interact with high-level Chinese officials in the coming years. He can make an incalculable contribution to America's future by helping the Chinese to conceptualize the path to ascendancy.

Chinese Tragedy Ahead

The Chinese have decided to imitate American economic progress. But they have chosen to imitate the wrong thing. American economic success has come in spite of, not because of, government development schemes. In particular, the US government and the states granted large amounts of land and access rights to railroads in the nineteenth century. Although railroads contributed to economic development, they did so at much higher cost to the public than was necessary. The public donations of land were accompanied by considerable incompetence and corruption. More railroads were built than were needed. In today's world, the corruption associated with land grants has not disappeared. The Progressives of the early twentieth century believed that by rationalizing the corruption of the political bosses, government support for business could be rationalized and made honest. In the Progressive tradition, Robert Moses in New York and similar social democratic Progressives in other states involved state and federal governments in considerable grants to business. This tradition is not why America has succeeded. America has succeeded in spite of government support for business. Sadly, the Chinese have chosen to imitate the Jay Gould/Robert Moses tradition. They are attempting to modernize their country through government support for development coupled with inflation.

The way that America did succeed in developing its economy was entrepreneurship. Freedom of enterprise not only permitted entrepreneurial genius to innovate here, but also drew entrepreneurial geniuses from other countries. For instance, Nikola Tesla came to the United States because Europeans refused to invest in his concept of A/C electricity. Thomas Edison, Jonah Salk and an endless list of homegrown and immigrant innovators came here because of American freedom. But a long list of social democrats, media pundits, quack academic economists and socialists have done all they can to destroy America's freedom.

The development that occurred because of Jay Gould, Robert Moses and Bruce Ratner, the successor to the governmental welfare approach to business, is not the development that made America a great country. Rather, America became a great country in spite of Jay Gould, Robert Moses and Bruce Ratner. In the case of Robert Moses, the public housing on which he squandered billions of dollars and was supported by the New York Times caused massive increases in crime, destruction of neighborhoods and the near-bankruptcy of New York City in the mid 1970s. Jay Gould's and his contemporaries' railroads were incompetently run and cost the nation far more than they should have. Despite the massive tax on innovation that corrupt government support for business has posed, the US surged ahead because of the innovation of men like Edison and Tesla. The entrepreneur, free of government impediment and government welfare subsidy, thinks of ways to meet consumer needs and so makes himself wealthy and the world wealthier still.

Tragically, the Chinese perceived the spectacular image of large-scale development and have attempted to emulate Robert Moses's approach with large construction projects, continuing to limit the intellectual and economic freedom on which economic development depends. Equally sadly, Americans lost sight of the reason for their success, and passed laws and regulations, and imposed punitive taxes, that have inhibited entrepreneurship, slowing American economic progress, even as they have increasingly provided welfare payments to incompetent bankers, real estate developers, academics and Wall Street stock jobbers who do not produce wealth.

This country and China have squandered resources in stupid ways. The bubble will burst as all credit bubbles do. America may have enough resources to reassess its errors. The Chinese likely do not, and many there will be hurt.

New School, Hillary Clinton and Chinese Interests

Rumors are abounding that left-wing New School University (whose most famous division is the New School for Social Research) in lower Manhattan has been a conduit for Department of Defense funding and as well may have provided a link via Norman Hsu between the Democrats, especially Hillary Clinton, and the Chinese government. Blog impresario Larwyn has sent me some interesting links.

Doug Ross @ Journal asks whether "the New School has been a conduit between China and the Clintons?" He states that Bob Kerrey (not to be confused with John), the New School's president, has obtained DOD grants and speculates that Hillary was involved in procuring the grants. Doug Ross @ Journal also states that "the New School also has deep ties to Bernard Schwartz, former head of Loral, who allegedly instigated donations by the Chinese military to the DNC in exchange for the right to sensitive missile technologies". Moreover, he alleges that the New School gave Norman Hsu, a fundraiser for Hillary Clinton who was associated with earlier corruption scandals, a job, and that the New School has eight $100,000 fundraisers for Hillary Clinton on its board.

Doug Ross @ Journal cites the dailykos.com website, which alleges that Norman Hsu, who has "known connections to the Chinese nationals who were involved in the Clinton scandal of 96" has had "dealings with the Chinese mafia". Dailykos.com states that although Hsu was bankrupt, he made large contributions to the Hillary Clinton's campaign. Dailykos.com adds:

"Bernard L. Schwartz, who worked for the Chinese shell company that the Clintons gave the ballistic missile technology to after Bill Clinton's re-election put Norman Hsu on the Board of Trustees of the New School....Hillary Clinton ear-marked 750,000 dollars to the new school recently as a pork barrel project."

Ross notes that Kerrey had been involved in funding the National Geospatial Intelligence Agency's (real, not a 007 script) declassification project and subsquently became an "expert" in satellites.

Merv of PrairiePundit notes:

>"the Hsu scandal also is reverberating in a heartland Senate race that could be crucial to Democrats’ hopes to expand their congressional majority. If former Nebraska Sen. Bob Kerrey decides to run for the Senate, it’s clear that he will have to address his connections with Hsu, whom he recruited to serve on the board of the New School under his presidency...Bob Kerrey was not only a receiver of contributions [to the New School]...he actively recruited [Hsu] to the New School...
when Hsu was known as a prominent Democratic donor in New York fundraising circles...In addition to serving on the school’s Board of Trustees, he donated money intended for a school scholarship"

I have long opined that universities are concerned with money first; ideology is secondary at most. It seems that after his time as New School's president, Bob Kerry has some 'splainin' to do!