China's Growth -- America's Problem ~ Steve Blitz Morning Notes
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Thursday, July 16, 2009

China's Growth -- America's Problem

Reports today of China's strong 2nd quarter growth and how it got there, assuming the reported data are accurate, means that the U.S. is facing commodity price pressures in the short-run and a political problem longer-term for addressing China's mercantilist policies that, along with the Fed's blind eye, created the credit bubble now burst. This from today's Financial Times Lex column --

Beijing has pressed every button at its disposal – which in a state-controlled economy is basically all of them – to plug the shortfall caused by falling exports. The economic model has shifted, but mainly into government hands.

Yes living in a fascist country has its upside -- China's second quarter 7.9% growth rate was aided and abetted by the government forcing the state controlled banks to make loans.

But what China has done is a sign of weakness not strength. The recent ethnic riots are suggestive enough that that the underlying social fabric requires jobs for all those young Chinese men heading into the cities and those already there. At the same time China is stuck with lots of dollar debt, the result of their own misguided policies and they can ill afford a 20% currency markdown on their holdings, and their reserves are again growing apace.

The old saw about the dollar was -- our currency your problem. Well the Chinese economy is now like that for us. China's domestic political/social needs require an economic policy that ends up raising global commodity prices and holds the dollar hostage from the market forces that would revalue the Yuan against the dollar and help create more balanced growth for the U.S. A policy bind if I ever saw one.

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