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Made in China. On Loan to the USA

January 13th, 2010
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01.13.2010


Made in China. On Loan to the USA

original article written by Net Advisor

China has been a booming market over the past 10+ years. Ten years ago you would seem mostly bicycles in the streets, now those same streets are congested by cars: China surpasses USA in world’s biggest auto market.

China Facts:

  • China, as a nation has no debt. Zero. They have cash – a lot of cash (source: Telegraph, UK):
  • “China’s reserves are more than – $2 trillion, the world’s largest.”
  • China produces 80% of the world’s toys.
  • China surpassed the USA in manufactured goods in 2006. (source: Industry Week)
  • China has a booming middle class. (source: BBC; and CS Monitor)
  • “China Holds $800 Billion in U.S. Debt and Collects $50B a Year in Interest.” (source: CBS News)

However, the above CBS article is not accurate as it omits the fact that Hong Kong (HK) is controlled by China; and as of 10-09-09, HK holds $142 Billion of US debt, making China-HK holding $940.9 Billion of US debt, not just $800 billion as reported. (source: U.S. Treasury)

Why China Works:
China has a HUGE work force, far more than the USA, and does not have an aging-problems of retiring people (through at least 2050). And even when they do, China does not have socialism; no social security, pensions, medicare, etc., that will bust their economy.

If China stays on track with their exports, the U.S. government through its massive trade deficits, and massive issuance of trillions of debt, will be financing all of China’s economic needs for the next several hundred+ years.

China’s Current Concerns
Current concern of China is the booming “economic bubble.” This is likely a short term situation, not like the US’s long term debt problem.

Bottom line for China: It has all been good.

I don’t see China’s future population aging problem as a major economic risk to China as compared to the U.S.’s Baby Boomers.

How Big Is China Going to Get?

According to Carnegie Endowment.org:

“China will become the world’s largest economy in 2032, and grow to be 20 percent larger than the United States by 2050. Over the next forty years, nearly 60 percent of G20 economic growth will come from Brazil, China, India, Russia, and Mexico alone.”
—- carnegieendowment.org

U.S. Population Concerns on the Economy is Likely a Bigger Issue Than for China
In contrast, in the USA, the Baby Boomers have long been calculated to bust Social Security System around 2017-2018.

Naturally, Social Security won’t really bust, but technically, like a Citibank or AIG it will be technically insolvent. What the U.S. government is likely to do is just increase income taxes for everyone who is working, increase retirement age, and perhaps lower social security benefits. This last part is the hard sell for a Congress subject to lobbying, but may be necessary, or the U.S. National Debt may expand further, deceasing the value of the U.S. dollar and increasing inflation.

The Heritage Foundation states there won’t be a Boomer asset bust. True, the bust may not be the Boomers liquidating their assets, except for their involuntary current collapse in home values retirement accounts, lost jobs, which in my analysis may take decade or more to recover; and assuming no further economic problems occur over the next 20+ years, and the stock market has a long term up trend like it did post World War II. Somehow this is about as likely as everyone picking the winning number in the lottery.

Risk to the U.S. Tax Payer

U.S. National Debt problems will exacerbate with growing deficits, endless spending, not to mention burdening tax payers with health care costs that will go up, not down in the future as the current Administration will have people believe.

Watch: Ten Trillion and Counting (U.S. Debt Projections)

(source: A PBS Video Documentary)

Cashing In Early?
Given the current recession, U.S. News cited in 2009 that more Baby Boomers seem to be retiring earlier than expected:

“Applications for retired worker benefits are up 25 percent so far this year (2009) compared to fiscal year 2008. The Social Security Administration was expecting a 15 percent boost in applications this year…(and) attributes (part of this due) to the economy.”

China’s Aging Work Force?
There is some concern about China will have a decreased work force by 2050. This is the result of their one child policy, thus a shrinking labor force.

The one child per family is a general rule, but Chinese can have more than one child. They have to pay for them: Like a fee to the government and they must be approved by government. This is very in depth here. China has contemplated the one child per family rule, and I bet this will change for good one day.

An economy’s success is not determined by population, rather than by efficient productivity, cost controls, and competitiveness. This is why cheap labor from China and India are winning, and expensive labor and mass regulation in the USA is losing.

Complicate an economic system by socializing a free market and you no longer have a competitive free market, but a controlled market. Further complicate that by burdening those costs on existing labor and you have a decrease in lifestyle and earnings. This is what the U.S. is currently doing.

As soon as people get out of their political hole and start taking a look at simple economics and start asking — what is the long term impact and true costs of this policy or that policy; only then one will have a sense of reality to answer, is this the kind of economic system I want to pay for?

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