–China in deep trouble – or maybe not. Should we care?

Mitchell’s laws:
●The more budgets are cut and taxes increased, the weaker an economy becomes.

●Austerity starves the economy to feed the government, and leads to civil disorder.
●Until the 99% understand the need for federal deficits, the upper 1% will rule.
●To survive long term, a monetarily non-sovereign government must have a positive balance of payments.
●Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.


Here are excerpts from an article in today’s New York Times.

China Confronts Mounting Piles of Unsold Goods
Forbes Conrad for The New York Times

GUANGZHOU, China — After three decades of torrid growth, China is encountering an unfamiliar problem with its newly struggling economy: a huge buildup of unsold goods that is cluttering shop floors, clogging car dealerships and filling factory warehouses.

The glut of everything from steel and household appliances to cars and apartments is hampering China’s efforts to emerge from a sharp economic slowdown. It has also produced a series of price wars and has led manufacturers to redouble efforts to export what they cannot sell at home.

Problems in China give some economists nightmares in which, in the worst case, the United States and much of the world slip back into recession as the Chinese economy sputters, the European currency zone collapses and political gridlock paralyzes the United States.

Let’s stop at this point to ask ourselves:

Why does China export? Answer: To obtain foreign currency.
What does China do with foreign currency? Answer: Either spend or invest it abroad, or exchange it for Yuan, to be spent or invested domestically.

Hold those thoughts and let’s continue with the article:

China is the world’s second-largest economy and has been the largest engine of economic growth since the global financial crisis began in 2008. Economic weakness means that China is likely to buy fewer goods and services from abroad when the sovereign debt crisis in Europe is already hurting demand, raising the prospect of a global glut of goods and falling prices and weak production around the world.

China not only is the world’s second-largest economy, but its government is Monetarily Sovereign. That is, the Chinese government has the unlimited ability to spend. Through its spending, it has the unlimited ability to create Yuan, as well as the unlimited ability to exchange Yuan for foreign currency.

As a Monetarily Sovereign nation, China does not need to export.

Do you see where I’m going with this?

Let’s continue:

Corporate hiring has slowed, and jobs are becoming less plentiful. Chinese exports, a mainstay of the economy for the last three decades, have almost stopped growing. Imports have also stalled, particularly for raw materials like iron ore for steel making, as industrialists have lost confidence that they will be able to sell if they keep factories running.

When jobs are less plentiful, the Chinese workers could run short of Yuan. But the Chinese government never can run short of Yuan.

Real estate prices have slid, although there have been hints that they might have bottomed out in July, and money has been leaving the country through legal and illegal channels.

Wu Weiqing, the manager of a faucet and sink wholesaler, said that his sales dropped 30 percent in the last year and he has piled up extra merchandise. Yet the factory supplying him is still cranking out shiny kitchen fixtures at a fast pace.

Premier Wen Jiabao has imposed a strict ban on purchases of second and subsequent homes, in the hope that discouraging real estate speculation will improve the affordability of homes. The ban has resulted in a steep decline in residential real estate prices, a sharp fall in housing construction and widespread job losses among construction workers.

The Chinese auto industry has grown tenfold in the last decade to become the world’s largest, looking like a formidable challenger to Detroit. But now, the Chinese industry is starting to look more like Detroit in its dark days in the 1980s.

Inventories of unsold cars are soaring at dealerships across the nation, and the Chinese industry’s problems show every sign of growing worse, not better. So many auto factories have opened in China in the last two years that the industry is operating at only about 65 percent of capacity — far below the 80 percent usually needed for profitability.

Yet so many new factories are being built that, according to the Chinese government’s National Development and Reform Commission, the country’s auto manufacturing capacity is on track to increase again in the next three years by an amount equal to all the auto factories in Japan, or nearly all the auto factories in the United States.

Let’s put it all together. The Chinese economy is controlled by its Monetarily Sovereign government, which can produce unlimited Yuan and distribute them to the Chinese people in any manner and amount it chooses. China’s government also can exchange Yuan for Dollars, for import purposes.

As a large, Monetarily Sovereign government, particularly one that doesn’t need to worry about political agendas, China, and the Chinese people, never should have a shortage of their sovereign currency.

China can buy all domestic production and simply destroy all excess inventory. It can close unneeded production plants, and put the workers on the government payroll. It can exchange Yuan for Dollars, and import anything in the world. The Chinese government has the financial and political freedom to do anything it wants. It can create Optimum Employment. There is no reason for the Chinese people ever to suffer poverty, starvation, unemployment, homelessness, a recession or a depression.

While China remains a net exporter, it doesn’t need to be. The U.S., also being Monetarily Sovereign, is a net importer. Our imports exceed exports by $600 billion. That’s net $600 billion leaving America every year, and still there is no possibility we will run short of Dollars. We really don’t need to export at all.

Only monetarily non-sovereign governments (Italy, France, Illinois, Chicago et al) need to be net exporters — one fundamental difference between Monetary Sovereignty and monetary non-sovereignty. So, if China imports less, the euro nations, which rely on export, will suffer. The U.S. will not need to suffer (depending on the actions of our leaders).

Just as China easily can avoid any economic downturn, we could do the same. Our recession could end tomorrow, and we could rise to the greatest prosperity we ever have known. But we have one constraint the Chinese may (?) not have: We have warring political parties, where the “outs” cynically want the economy to be as bad as possible, so they can win the next election and become the “ins.”

So far, our “outs” have done an excellent job of sinking America, by insisting on federal deficit reduction, which reduces Dollar creation. We’ll see whether China encounters a similar problem.

Rodger Malcolm Mitchell
Monetary Sovereignty

Nine Steps to Prosperity:
1. Eliminate FICA (Click here)
2. Medicare — parts A, B & D — for everyone
3. Send every American citizen an annual check for $5,000 or give every state $5,000 per capita (Click here)
4. Long-term nursing care for everyone
5. Free education (including post-grad) for everyone
6. Salary for attending school (Click here)
7. Eliminate corporate taxes
8. Increase the standard income tax deduction annually
9. Increase federal spending on the myriad initiatives that benefit America

No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia. Two key equations in economics:
Federal Deficits – Net Imports = Net Private Savings
Gross Domestic Product = Federal Spending + Private Investment and Consumption – Net Imports


11 thoughts on “–China in deep trouble – or maybe not. Should we care?

  1. Yes, they can create all the Yuan they need, and they do not need to depend on exports for growth.

    The problem is that despite falling auto sales, the government continues to build auto factories way in excess of any demand for Chinese cars, foreign or domestic. GM or Ford wouldn’t build new plants unless they thought they could sell the output. And they’re continuing to make faucets and housing, which will also go unused or unsold.

    In a market economy, the government deficit would be spent on things that are in demand, and to expand production of those things instead of things that are already in oversupply.

    MS is good for China, but it is not the answer to this problem. Freedom is the answer.


  2. Just curious about your thoughts on the “ins” President Clinton chose wisely to work with in his last two years as President; the Republican lead House of Representatives and Senate, and for the surplus budget that ended up being his claim to fame? Also. what are your thoughts about the current “ins” Democratic lead Senate that have not passed a budget under President Obama, whereas the Republican lead House of Representatives have? As I sit in our company warehouse my family is squatting in after having lost our second home to foreclosure due to not sale in a continuous bad economy since 9-11, I must say I’m so weary of the political team mentality, when our economy is suffering so. How about let’s vote in USA patriots – smart ones – and start rocking the forward momentum again?


    1. Kathryn,

      Clinton’s surplus helped cause the 2001 recession.

      Obama’s biggest mistake was thinking the Republican party wanted to end the recession. So he tried to work with, what became known as “The Party of NO” (which Sarah Palin proudly called “The Party of Hell NO.”)

      Unfortunately, the Republicans wanted the economy to fail, so they could blame Obama and win subsequent elections. They set limits on the federal deficit spending that would have grown the economy. They have made it virtually impossible to progress.

      Kathryn, I’m sorry you live in a warehouse. The reason you’re there is the myth that the federal deficit should be cut. A huge increase in federal deficit spending would grow the economy, reduce unemployment and give you a decent place to live.


    2. ” Also. what are your thoughts about the current “ins” Democratic lead Senate that have not passed a budget under President Obama, whereas the Republican lead House of Representatives have? ”

      A budget not being passed isn’t really that big of a deal. Spending gets done through appropriation bills. The Democrat controlled Senate did, however, pass the Budget Control Act, which accomplishes basically the same thing. The “budget” that the Republican controlled House passed isn’t serious. If the Senate passed a budget, they would still need to try and compromise with the House Republicans (lol) which will never happen. They’re likely to make a spectacle out of the whole deal, while accomplishing exactly nothing except to bolster the base a little more. Senate Democrats realize this, and have wisely refused to give them the opportunity to do so.

      It’s just another stupid talking point that doesn’t mean a damn thing.


      1. The Dems didn’t pass a budget in the first two years either, when they were running the House. They were not averse to spectacles, however, as they first passed the Obamacare bill without reading it, and then “deemed” the Senate version of it to have been passed in the House, without bothering to take a vote.

        Seems to me that the idea of passing or not passing a budget being a partisan issue is just another stupid talking point.


  3. The real story is Argentina and the President of the Central Bank, Mercedes Del Pont. Almost entirely ignored by the press of the world but she is testing your theory Rodger. Ms. Del Pont is converting foreign debt into Argentine Central Bank debt, (AKA Argentine Federal Reserve) By decoupling foreign debt from Central Bank debt, they will no longer be acting like a State and to become monetarily sovereign. This is the test of your theory. Watch closely. She is risking her life if this works.

    “Speaking at a conference, Central Bank President Mercedes Marco del Pont explained that despite the payments, Central Bank reserves remain strong. Admitting that it is not ideal to replace one debt with another, Marco del Pont asserted that “it’s better to be indebted with the central bank than with foreign creditors.”

    Marco del Pont described this strategy as “the centre piece of the policy to recover sovereignty by cutting in (foreign) debtedness.” Even a cursory overview (to read more on the Falklands/Malvinas, click here and here; for more on oil policy, click here) reveals that national sovereignty is one of the key issues in modern Argentine politics.”

    In a nut shell she will expand the money supply in a closed currency called the Argentine Peso. She does not have the power or quantity that the US dollar has but it should work like the pound sterling does. If she is smart she will relax banks like the US does and let launder money like the large US banks do to expand the footprint. Rodger you theory only works if you have enough of a float in the market to allow ownership of chips by the casino to work.

    Rodger, you theory is sound in its most basic form. The problem you do not address is the unintended problems that will happen from lack of faith in the dollar and the closed economy that is required that can operate withtout foreign capital for trade. An energy reliant US would be required.


  4. I was wondering about monetary non-sovereign countries outside of the Euro.

    Are you able to shed some light on why some countries (not being part of the EU) are monetary non-sovereigns, and if any of those reasons are reversible?

    According to one international court case I found, it suggests that no country ever really loses its right to sovereignty, but more in a sense ‘suspends’ it for various reasons. But it did not elaborate on what those reasons were.

    Are you able to shed some light on why for example, say New Zealand, or South Africa, Thailand, Mexico etc are monetary non-sovereigns (the countries themselves don’t matter, I just plucked them out of thin air – it’s more the principle behind the question I am after)



    1. Some small countries, if they are net exporters, use the US dollar (or Euros) just because they can, and they don’t have to have a central bank and all the overhead of that. With dollars flowing in each year in sufficient quantity to satisfy domestic savings demands, they have no need of constant government deficits. They can run balanced budgets without detrimental consequences.


  5. New Zealand uses its Dollar (not U.S. Dollar). South Africa uses its Rand. Thailand uses its Baht. Mexico uses its Peso. All are Monetarily Sovereign.

    Their disadvantage is, to greater or lesser degree, their currencies are not as universally accepted as is the U.S. dollar. Acceptance is important when exercising Monetary Sovereignty, since less acceptance is more likely to lead to inflation.


  6. oh ok..i guess then that a govt’s ability to exercise its monetary sovereignty is only ever as good as the trust and credit it can produce….as it is said in blacks law on the definition of credit:

    The credit of an individual is the trust reposed in him by those who deal with him that he is of ability to meet his engagements; and he is trusted because through the tribunals of the country he may be made to pay. “The credit of a government is founded on a belief of its ability to comply with its engagements, and a confidence in its honor, that it will do that voluntarily which it cannot be compelled to do. Owen v. Branch Bank, 3 Ala. 258.”

    Law Dictionary: What is CREDIT? definition of CREDIT (Black’s Law Dictionary)


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