The Continuing Rise of China
I am not a fan of conspiracy theories so what follows is not based on that but on the economics of both good planning and seizing opportunities that come your way.
China has long been the favorite punching bag of the West, largely because of the threat its rapid and continued economic growth posed in terms of challenging the notion that our combined market and democratic institutions would lead to higher living standards compared with other modes of economic governance.
I also still subscribe to this notion.
Freedoms are always to be preferred for choice and enterprise. Constraints are also needed for good governance when those in position of government are given the reins of decision making in areas where personal and public interests are bound to differ or come in conflict. So there is no attempt made up front to extol the virtues of socialism.
However with the coronavirus one has to look with great admiration at two outcomes:
First, that China responded with some degree of precision in nipping the coronavirus crisis, even as a first time mover with no advantage of having the experience of other nations to observe, in the bud.
Second, China is now poised more than other countries to reap the benefits from the impact of the virus on other countries including the assumedly richer more advanced countries of the world like the United States, United Kingdom and the European Union.
We call the actions China took in addressing the coronavirus draconian because it is what we call the actions that China takes, especially as it takes on the form of heavily enforced actions that limit freedoms.
They were draconian indeed by Western standards. We watched the video clips and the memes as they played out in social media and the popular media as the government clamped down on all activities using drones and other measures to forcefully quarantine people in a bid to limit the spread of the virus.
Emergency production was directed toward providing facilities to treat the sick, provide the equipment needed for healthcare professionals. We all read about the emergency hospitals that were built within mere days and we were wowed.
The outbreak began in December of 2019, and in three months the cases within China have declined significantly. Daily infections are now almost entirely limited to only the Hubei area where the outbreak was reported as having first begun.
What was called draconian by the West is now being hailed as necessary as we look at Italy's current crisis in failing to be as draconian in its initial response. Here in the US we also have started to take similar draconian measures. California, New York, Ohio and some other states have initiated lockdown measures that restrict all forms of movement except those that are absolutely necessary.
We have taken a leaf out of China's book and are waiting with bated breath to see good results. Time will tell, but it should be noted we are still not as draconian and extensive in our response as of today.
China is the second largest economy in the world and notwithstanding its developing country level living status (since we define that by weighting its income by its 1.3 billion population), it is flush with cash.
The report currently being pushed by conspiracy theorists is that by engineering the virus they successfully got major stock markets around the world to crash, such that at the ensuing low prices they have gone ahead to purchase these stocks. Whatever truth lies behind this is yet to be revealed. But the generally low stock prices at the moment presents opportunities for those with cash to purchase these assets at a cheap price, and to experience an increase in their value and subsequent wealth after the economy recovers, while having impoverished those who sold them while the markets plunged.
Also important is the fact that countries are now in the process of providing various forms of stimulus to their economies. Unlike monetary policy markets seem especially responsive to fiscal policy, and in particular, as at the time of typing this piece, they appear to be upbeat about the $2 trillion stimulus plan being worked out by Congress and the Administration.
But where is this stimulus spending going to come from?
If the US government says it is going to spend $2 trillion on something, that it previously did not have plans to spend on, that is a new amount of money that has to come from somewhere. In fiscal year 2009, we ran a federal budget deficit of $984 billion. For fiscal year 2020, that started October last year and runs through September of this year, the estimated revenues are $3.8 trillion and $1.08 trillion in deficits estimated. This does not include the stimulus being proposed.
So with the fact that there are (and continues to be) fewer and fewer people working, and with corporation profits likely also to be in decline, we are looking at a downward revision of the revenues numbers expected. While government spending will also be expected to fall as well, it may not be as constrained as the private sector is and so we might expect the deficit without the stimulus to be bigger, and then with the planned stimulus we are looking at borrowing that will probably get as high as $3.5 trillion dollars and possibly more.
Who is going to finance this borrowing?
Let's try to answer this question by looking at the present breakdown of who holds US federal debt. Now while much of the total federal debt is held internally, that is because historically we have been able to tap into domestic sources including the social security trust funds. Increasingly we have had to borrow from foreigners.
The US federal debt currently at about $22.7 trillion has about three-quarters of that classified as debt held by the public (that is, not owed to US government accounts or trusts), of which foreigners hold about 40% of that amount, that is roughly $6.5 trillion.
The largest foreign holders of US debt are China, Japan, United Kingdom, Brazil and Ireland. A cursory look at these countries and the current situation of their economies suggests that all, but China, would be actively looking to provide monetary stimulus to their economies during this period and may not have dollar reserves to purchase US debt in large quantities. Further, all of these countries except China and Japan are on net, debtor, and not creditor nations.
So who is the US going to borrow funds from to finance this stimulus plan during a crisis where domestic private investors are already burned and needing stimulus themselves?
So we see that China is strategically positioned to increase its accumulation of both private and public US assets, further enriching it, and giving it more control over the leading countries in the world, who are now in a position of financial subservience to China. China's portfolio holdings of debt in many of the key advanced economies is now in the neighborhood of 5-10% of their GDP (statista.com) and looks to keep climbing.
If these countries attempt to resort to gimmicks such as creating new digital currencies to facilitate their stimulus spending, or having their Central Banks, like the Federal Reserve System (the FED) in the US, monetize the deficit (by explicitly or implicitly purchasing sovereign debt offerings), in order to avoid increased dependence on foreign creditors, they will only bring about inflation in these economies and dilute the stimulus.