The Federal Reseve Bank Has Driven Innovation to China

I recently subscribed to Gerald Celente's Trends Journal. In the winter issue Celente makes the following point:

Innovation, once the province of the developed West, and especially the USA, is now too “Made in China.” In 2009, the Chinese processed some 600,000 patents, compared to 480,000 in the US. China plans to raise that figure to one million by 2015 and double the number of its patent examiners to 9,000, while currently in the US there are only 6,300 such examiners.

The reason innovation is now made in China is monetary. Under a market-driven monetary regime, as existed prior to 1913, if excessive numbers of manufacturing jobs were to move to China, its currency, the yuan, would rise in price. This would cause demand for Chinese goods to slow. Manufacturing would stop moving there, and move back. But the Federal Reserve Bank has not allowed that to happen. Because the dollar serves as the reserve currency around the world, the Fed has been given carte blanche to inflate the money supply without short-term consequence. This has fueled the federal deficit, consumer debt and real estate and stock speculation on Wall Street. The dollar remains firm despite the Fed's profligate monetary policy because the Chinese and other central banks hold treasury bonds as reserves. It seems cheap to manufacturers to move to China.

Thus, by voting for the Democrats and Republicans, Americans have voted to disemploy themselves. They have voted for politicians who have empowered the Fed to inflate while holding the dollar at excessive levels. Consumers have benefited, but when those consumers put on a hard hat or a white collar they have been harmed. Younger Americans have been increasingly harmed. The post-war generation consumed at the expense of boomers' jobs, and boomers consumed at the expense of gen-x's and gen-y's jobs. One of the offshoots of unlimited monetary expansion has been the expansion of government education programs, which churn out ever greater numbers of unemployed graduates who lack skills necessary to compete.

One of the offshoots of de-industrializing America is loss of innovation. Creativity results from familiarity with processes. Most advances are made by engineers and laborers familiar with specific production processes and problems who attempt to build on the status quo with respect to a particular process. Innovation is particularistic, it is not theoretical. Einstein's science, while broad, imaginative and impressive, has done little for important innovation. Tesla, who lacked theoretical breadth, had an enormous impact on human standards of living. Innovation does not generally come from theory. It comes from creative thinking about specific practice. So if practical activity moves to China, then innovation will move to China as well.

The loss of manufacturing, therefore, has graver implications than loss of jobs. It implies the loss of America's future as the Chinese replace the Americans as the world's innovators. How long will it be after that until the Chinese grow weary of holding treasury bonds that steadily decline in value? The final step in America's turning itself into a Third World nation will occur when the Chinese and other nations sell, and the dollar crashes. Then consumers will find prices increasing just as producers they have been able to find only low-wage retail jobs.