Yesterday's front pages of The Wall Street Journal and Financial Times were dominated by the apparent failure of America to negotiate concessions from China.
We have resisted commentary on these vitally important talks until the results were known.
Playing to the world stage and in order to give an appearance of goodwill, China threw out a few preliminary tokens, such as a $3 billion investment in Blackstone (only some 0.4 percent of their reserves) and a slightly wider trading range for the yuan, on the eve of the vital talks.
However, in any event, even super negotiator and China expert Hank Paulson, Treasury Secretary of the world's largest consumer market, was seen to have failed in the face of Chinese tenacity.
Acutely conscious of its growing and vitally important "public image," (and the key importance of international "acceptance" with a successful Olympic games, due to open at 8 pm on 08/08/08 (a series of "8s" are seen as most significant in China, as reported in the Journal.)
Story Continues Below
[Who said that sport is not significant in international relations-remember Nixon's Cold War-breaking ping pong match?], China allowed for a few (American face saving) token concessions on air-routes, yuan-denominated credit and the slight lifting limitations of foreign ownership caps.
However, absolutely no real progress was made upon, currency realignment or on the far more important issues of financial "openness" and intellectual piracy.
In short, the up and coming superpower, China stood firm. America is now faced with the stark alternative of continuing to bleat or starting to compete.
From editorial comment in the mainstream media it appears that bleating will continue in our land and political "China bashing" will dominate the headlines in the months ahead.
The prices of certain China-related stocks, trading in the U.S. have already started to slide, in anticipation of this likely increased tension.
[Editor's Note:Forget China. Discover Asia's Newest Tiger - Click Here Now]
Even our President bleated that he will "be watching to see whether China appreciates its currency."
And this, our readers will remember, were the words of the leader of a country who's currency has appreciated by only 7.23 percent against the yuan, (since the yuan/$ peg was broken on July 15, 2005), but has itself depreciated by 8.83 percent against its own international index and by a whopping 12.24 percent against its main reserve competitor, the euro!
Talk about whistling Dixie! We feel our president will wait in vain and so will the American people.
What appears difficult for our leaders to comprehend is that, like Iraqi insurgents, China is winning under the present rules. Why on Earth would China agree to changes that it does not see are in its interests?
Most amazingly, our President publicly stated that he wanted to persuade China to transform its people "from savers into consumers!" Well, well, what a bleating admission of a losing hand and a vivid display of an unwillingness to compete, from the top of all places!
What is far worse is that this crucial and revealing strategic statement stems from a vast government con-trick on the American people - giving us false information.
We are normally restrained in criticizing our government, but feel that a dose of reality is now overdue to allow our readers to continue to invest with prudence.
It is an ancient maxim that "the enemy of my enemy is my friend" (at least for the present!). As a Sunni Muslim, tyrant Saddam Hussein held radical Shia Iran at bay, at times with our help, creating "stand-off" stability in the Arabian Gulf area.
[Editor's Note:Cash in on dollar slide. Make 25 to 50% in six months.]
Strategically, Saddam was our friend, if only temporarily.
However, apparently blind to this fact and on the false premise of weapons of mass destruction (a con-trick on the American people) we invaded the sovereign nation of Iraq and got rid of our "friend" Saddam.
It is of note that, even in October 2003, the Economist cover page was of a photograph of President Bush and Prime Minister Blair sitting by a microphone. The caption read, "Wielders of mass deception."
This same government of ours, currently issues a CPI inflation figure of some 2.1 percent.
We wonder if our readers, when filling in their tax returns in April, found their deductible expenses up by only 2.1 percent on 2005. We most certainly found them to be far higher.
As we have said many times, we believe that the same government who gave us weapons of mass destruction in Iraq is continuing to distort our inflation figures to the down side. (In yesterday's "MoneyNews.com" we described the method used in some detail as we have previously, in even more detail, in our sister publication FIR of Nov. 26, 2006.)
Even the normal indicators of inflation are misleading.
The TIPS spread is, in our opinion, meaningless when most investors actually believe the CPI at 2.1 percent.
Contrary to popular belief, the market price of gold is most definitely not a "free" market price. It is distorted to the downside by the massive (500 tones each year) central bank sales by major nations that are coordinated and timed via the IMF to "de-monetize" the metal, under the Central Bank Gold Agreement (CBGA).
Gold is thus no longer a fair indication of inflation. Its rise in price understates inflation.
Meanwhile, the central banks of most major nations see inflation and continue to raise their rates.
How is it that we Americans, who import more then we export and spend all we can of our vast liquidity are alone in having low inflation?
The answer is of course that our inflation books are cooked.
(The Financial Times published a most important but deeply worrying article on expectations of an unprecedented worldwide boom in food prices. Even Hershey cut its 2007 profit forecast, based upon increased milk prices. We await with interest to see if food follows energy and house prices out of the make-up of our CPI!)
[Editor's Note:The 3 Best Income Stocks in the World]
As far as trade with China is concerned, the key result of this falsely low American inflation figure is that it creates falsely low interest rates.
In their turn falsely low interest rates create a falsely low, even negative national savings rate in our country.
This falsely low savings rate boosts our consumer society to spend, spend, and spend. Today, our consumer society is even borrowing against the future, just like our government, in creating an asset boom in almost every asset class.
Stephen Roach, chief economist of Morgan Stanley commented late last year upon the chronic U.S. adverse trade balance with China. He said, "It's the relative savings rate, stupid, not the currency."
We feel this was a seminal remark and are concerned that it did not reach the desks of our law makers or many in the mainline media.
Roach went on to explain that, "The Chinese save most of their income [because they have positive interest rates], leaving little spare cash to spend upon luxury [non-domestic] imports."
Of course, publishing falsely low inflation figures allows our government to keep interest rates low, credit flowing and consumers spending as never before.
In light of this, it was all the more staggering to watch our President say, he tried to persuade the Chinese delegation, of half their Cabinet, to turn their people from "savers into consumers."
How the Chinese must have laughed behind their hands. For who would willingly turn their people from financial winners into financial losers?
We sympathize with, Treasury Secretary Paulson, a China expert, was moved to express his "frustration."
The Chinese tend to believe in their great guru, Sun Tsu, who wrote that, "The greatest skill in war is to defeat one's enemy without firing a shot."
With this in mind, our belief is that, until the completion of the diplomatically vital 2008 Olympic Games, China will be willing to talk politely, but give America nothing more than a few token chips for goodwill.
Following 2009, we expect China to start progressively dictating terms to America and much of the world.
What are we to do?
We believe that, left to its own devices, American business and finance will compete successfully, just as they did when facing the vast trade surpluses of Japan a decade or so ago.
However, we feel strongly that our government must allow or businesses to compete. In short government must get off our backs.
In short, we want less government bleating and more good old Yankee competition.
First, government should repeal overly restrictive legislation such as the Sarbanes-Oxley act.
Second, government should encourage us to save, by allowing our interest rates to rise to reflect the "real" rate of inflation.
Finally, the government should remove the debilitating second mandate from the Fed, which requires it to encourage growth. Growth should be "privatized" and our Fed (and currency) allowed to compete on equal terms with the central banks of other nations.
With our Fed liberated, we would have a positive saving rate, inflation under control and a strong dollar.
Then, we would be able to negotiate with China and other nations on equal terms
Editor's note:
Forget China. Discover Asia's Newest Tiger - Click Here Now
Cash in on dollar slide. Make 25 to 50% in six months.
The 3 Best Income Stocks in the World
Doctor Reveals `Fat Burner` Supplement - Go Here Now
Stop believing the cholesterol myth – Click Here
