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Generational Dynamics Web Log for 20-Mar-2010
20-Mar-10 News - US-China relations deteriorate

Web Log - March, 2010

20-Mar-10 News - US-China relations deteriorate

Stephen Roach wants to take a baseball bat to Paul Krugman.

Animosity increases between U.S. and China

In the past few weeks, we've been reporting on the growing animosity among countries of Europe as Greece's financial crisis deepens and appears to threaten the entire euro currency. This kind of increasing animosity is typical of generational Crisis eras, as nations become more willing to pick sides, and less willing to make sacrifices to reach compromises.

The same kind of thing has been happening in US-China relations.

On Friday afternoon, former Secretary of State Colin Powell was interviewed by Judy Woodruff on Bloomberg TV. What he said about US-China relations provides a good introduction to the topic. He was asked about China's sharp reaction to American criticism of their management of the remnbini (yuan) currency as possible "currency manipulation" (my transcription):

"The very negative response from China - they don't like being instructed on how they should value their currency.

2009 was a good year in us China relationships. I think that the adminstration got off to a good start. But in the last few months, a number of things have happened that have caused the Chinese to react rather negatively. I was in China two weeks ago and heard it all.

Between the arms sales to Taiwan, the president seeing the Dalai Lama, just about the same time as the arm sale was being consummated, the Google problem, which is sort of a side issue, it's a corporate issue, nevertheless it plays into this -- and some of the trade disptures we've been having, and then you have the currency problem -- the Chinese are feeling a little bit under pressure right now, from the United States, and they're pushing back, and they're pusihing back harder than they usually do.

In my time as Secretary [of State], even as national security advisor 20 years ago, you would always have the Taiwan issue, and you would always have, "Don't see the Dalai Lama." But we'd always say we have to see the Dalai Lama, and we have responsibilities to Taiwan. and we would have an exchange of views, and then we'd move on.

But this time it seems like the Chinese are reacting with a little stiffer approach to it. I think it is manageable, and I think we can get over this hump, because the mutual interests that the two countries have with each other are so vital, based on trade and based on having good relations, so China is not going to become our enemy, but it doesn't mean that they'll follow lockstep in everything we do."

Powell doesn't see the generational trends going on here, but that's what's happening.

When Powell talks about the past, he's talking about a time when there were still plenty of people around who were part of the generations that survived World War II and, in China's case, the Communist Revolution that ended in 1949. China's president Hu Jintao and premier Wen Jiabao are both from that generation. The people who grow up during a generational Crisis war (like our Silent generation) suffer a kind of generational child abuse that causes them to grow up as compromisers and mediators.

But in both countries, younger generations are rapidly filling policy positions, and so positions are becoming hardened.

In the United States, where the Obama administration has taken a fairly conciliatory approach to China, the same can't be said of Congress.

Earlier this week, a bipartisan group of 130 US lawmakers issued an open letter to administration officials to label China a currency manipulator and impose sanctions. MarketWatch quotes the letter as saying, "The impact of China's currency manipulation on the U.S. economy cannot be overstated. "U.S. exports to the country cannot compete with the low-priced Chinese equivalents, and domestic American producers are similarly disadvantaged in the face of subsidized Chinese imports."

Chinese premier Wen Jiabao directed very harsh words against the US as well. WSJ quotes him as saying that U.S. efforts to boost its exports by weakening the dollar amounted to "a kind of trade protectionism." Wen also sharply criticized the administrations arms sales to Taiwan, and President Obama's meeting with the Dalai Lama. "These moves have violated China's territorial integrity. The responsibility does not lie with the Chinese side but with the United States."

These are not words of war, but these words are significantly harsher, on both sides of the Pacific, then they would been in the time periods, years ago, that Colin Powell was referring to.

Krugman and Evans-Pritchard get out the pitchforks

It's not just politicians that are becoming increasingly harsh with the Chinese.

Ambrose Evans-Pritchard, the international business editor of The Telegraph in London, says that "China's Politburo is spoiling for a showdown with America." He says that China has "succumbed to hubris," and "mistaken its own mercantilist bubble for ascendancy. There are echoes of Anglo-German spats before the First World War, when Wilhelmine Berlin so badly misjudged the strategic balance of power and over-played its hand."

Like Colin Powell, Evans-Pritchard is noticing a change in China's attitude: "What interests me is Beijing's willingness to up the ante. It has vowed sanctions against any US firm that takes part in a $6.4bn weapons contract for Taiwan, a threat to ban Boeing from China and a new level of escalation in the Taiwan dispute."

Evans-Pritchard notices that China is willing to "up the ante," but he doesn't notice that he's doing the same thing.

Just as the situation in Europe has sometimes resembled a Laurel and Hardy comedy this week, the same is happening on the US-China subject.

It all started four days ago when NY Times far-left political columnist Paul Krugman has used some very strong language:

"Tensions are rising over Chinese economic policy, and rightly so: China’s policy of keeping its currency, the renminbi, undervalued has become a significant drag on global economic recovery. Something must be done. ...

[What China is doing] is the most distortionary exchange rate policy any major nation has ever followed. And it’s a policy that seriously damages the rest of the world."

Krugman goes on to reject reasoning with China, saying that "we’ve been reasoning with China for years ... and gotten nowhere." Instead, he proposes an enormous 25% surcharge on Chinese imports.

Krugman's remarks are very close to hysteria, but that's what happens in a generational Crisis era.

Morgan Stanley Asia Chairman Stephen Roach wasn't shy in a response to Krugman in an interview, excerpted by Seeking Alpha:

"They don’t want to look in the mirror. America doesn’t have a China problem. It really has a savings problem. America has the biggest shortfall of national savings of any leading country in modern history. And when you don’t have savings you have to run current account deficits to import surplus savings from abroad and run massive trade deficits to attract the capital. Last year America ran trade deficits with over 90 – that’s right nine zero –countries. ...

I think we should take the baseball bat out on Paul Krugman. I think the advice is completely wrong. ...

Isn’t it the height of hypocrisy that America can articulate a particular position in its currency but the Chinese are not allowed to do that."

This debate is far from over, and although it's only words, the words are going to become increasingly harsh.

Each of the two countries, US and China believes that it's stronger than the other, militarily and economically. There is hubris on the part of China, but also on the part of the US. Generational Dynamics predicts that China is headed for major financial disaster, an internal civil war, and world war with the West. At some point, the worsening war of words will start to go beyond words.

Additional Links

Odd homes built out of tires and trash, or other homes favored by environmentalists, are turning off banks, making it harder to get mortgage loans for them. WSJ

JP Morgan also used the same "Repo 105" accounting scam that Lehman Brothers used, prior to its collapse. Financial Times. This is not surprising in the least, since scams were increasingly the "norm" for banks, although it's interesting that it's now confirmed.

A United Nations report finds that 250 million people moved out of slum conditions in the past decade, thanks to rapid economic growth, especially in India and China. And yet, the number of people living in slums increased by 55 million in the same period. That's because of population growth. Reuters. It's a principle of Generational Dynamics that a major factor that drives nations into genocidal crisis wars is the competition for resources resulting from population growth.

There has been a lot of rioting in Jerusalem this week, following the Israeli announcement that 1600 new settlements would be built in east Jerusalem. However, deployment of 3000 police officers has brought things under control. In the worst rioting, 200 people, "mainly Palestinian teenagers with their faces covered," threw rocks, bottles and axes, at security forces. Jerusalem Post.

Israel's settlement announcement is also harming relations with Turkey. Turkish Prime Minister Recep Tayyip Erdogan condemned the announcement, saying that it proves that Israel "wants to erase the Palestinians step by step." Ynet

Phishing attacks by hackers on corporate computers shot up by 60% in 2009. A lot of the attacks were on large financial organizations. Dark Reading

Here's a good, readable explanation of what credit default swaps (CDSs) are, and how they're making the Greece financial crisis worse. Euro Intelligence.

Official figures show that 25% of UK adults are out of work. Those are definitely Great Depression level figures. Telegraph

(Comments: For reader comments, questions and discussion, see the 20-Mar-10 News - US-China relations deteriorate thread of the Generational Dynamics forum. Comments may be posted anonymously.) (20-Mar-2010) Permanent Link
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Generational Dynamics Web Log for 20-Mar-2010 20-Mar-10 News - US-China relations deteriorate

Animosity increases between U.S. and China

Krugman and Evans-Pritchard get out the pitchforks

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Generational Dynamics Web Log for 20-Mar-2010
20-Mar-10 News - US-China relations deteriorate