Murder Suicide

Ed Harrison, writing in his blog Credit Writedowns has an arresting take on the subject: “With this trade war looming, one must wonder if Chimerica, the marriage of China and America as one economic entity, will end in murder-suicide, taking the global economy down with it.”

Follow the link above to Alan Kohler's article in today's Business Spectator. The concept of Chimerica, and economic union between the United States and China is a fallacy. It is best described as a co-dependency where China produces and America consumes. It is a core part of the Chinese mercantilist economic policy which has so damaged the US's productive base. It could be fairly said that this is not due to China alone, but over the last decade its has been the strongest contributor to this process. I was actually quite surprised with the Chinese response to the US tyre tarriffs. A trade war with China will hurt the US, but it would be a disaster for the Chinese economy. This would clearly be an area where quiet diplomacy would be in China's interest. Playing the trade war card with the US is in my opinion a grave strategic mistake from the Chinese. It seems that nationalistic sentiment, spured on as a tool of social control by the Chinese communist party is developing a life of its own. Nationalism and totalitarianism are the key foundations of fascism. A point no doubt that we will be increasingly made aware of as the economic relationship between China and the West breaks down and a new one rises to take its place.

The Elephant in the Room

I refer to today's Australian Financial Review, page 63, and the article titled "Bernanke's duty to come clean" written by Vince Hooper, at the University of New South Wales.

In this article Mr. Hooper has clearly outlined the reasons why (I believe) there can be no medium term global economic recovery.

"The world needs to know how the US intends to reduce its mountain of domestic and external debt."

True , I think the US needs to work it out first! Mr. Hooper outlines three ways the currently unsustainable level of US debt can play out:

1. The US does nothing but continues to accumulate further debt. Not actually a strategy or outcome, but a description of the current state of affairs.


2. The US selectively defaults on its debt obligations. Possible, but the concomitant annihilation of the US dollar will send us head first into Great Depression II. In my mind this is the doomsday deflation scenario. The flipside of this scenario is that lenders no longer support US's borrowings leading to a rapid rise in the US interest rates.


3. The US monetises its debt. This is the high-inflation scenario.

There is no easy way out of the hole the US has dug for itself. The reason Bernanke hasn't annunciated a strategy to extricate the US from its current unsustainable debt position is that there isn't one politically acceptable. The only way forward for the US is probably a combination of the following:

• global disengagement


• massive reduction in military spending


• lower standards of living


• reduced imports


• higher taxation


• currency devaluation


• progressive rebuilding of its industrial base

A cursory review suggests that this will need to be imposed on the US citizenry by circumstance rather than choice.