China Will Be World's #3 Economic Power This Year

Elaine Meinel Supkis

History is the story of the rise and fall of empires. Most economic web pages like to track money making opportunities. Mine is all about the earth, humanity and history. We are a speck around one of the smallest stars in the galaxy and our galaxy is very small compared to all the others moving near us, all flying towards some unknown fate in the future. We are seeing the slow degrading of the US global empire and like all previous imperial collapses, ours will shake the power relationships of the world. Proof that the world is seeing a profound change is the news today that China is displacing Germany as the world's #3 economy. As far as industry is concerned, it has displaced the US already. This is very significant news.

From Market Watch:

Statistics due this week are expected to show that China is on track this year to pass Germany as the world's third-biggest national economy, behind the U.S. and Japan, in another indication of the rapid change of the global balance of power, according to a media report Sunday.

Recent estimates put the size of China's gross domestic product in the past year at $2.8 trillion, breathing down the neck of Germany's $2.9 trillion national output for the period, The Wall Street Journal reported in its online edition. Only the U.S. at $13.2 trillion and Japan at $4.4 trillion have bigger economies, according to International Monetary Fund data cited by the Journal.

The US has the world's largest economy but it is pure debt. Throughout my life, I heard about this thing called 'the engine of the economy.' It wasn't just assembling stuff. It was the entire manufacturing process from conception of products to making the materials used in the process to the finished object which then can be sold to the masses thanks to the sharing of profits with the workers who do the labor embedded within this entire process.

The capitalist makes a profit which can then be put to work back within the system by expanding it and the workers use their own profits to buy the increasing output so they can live longer, healthier, more comfortable lives. A big element in all this is sheer optimism: the belief that things will always get better thanks to the industrial/capitalization cycle.

When, due to political power and population situations, the ruling elites and the holders of capital gain the upper hand and end up reducing wages and political influence of the working classes, the system collapses because it is 100% based upon the ability of labor to gain the fruits of industrialization. Always, profits shoot up for a while as workers in various locations still manage to stay ahead of the collapse of buying power via either central bank-inspired inflation or via super-cheap loans handed out for political reasons that are below this rate of inflation caused by the banks. This always ends badly as the last workers lose buying power via inflation/loss of loans/foreign competition seeking lower wages.

A historic moment in my own life was when unions in the US were able to evade the central bank's inflation in the 1970's. Wages for unionized workers shot up but for non-union workers it fell. I was the only woman back in the late 1970's to take carpentry courses. Everyone in my group that graduated was invited into the Carpenter's Union except for me even though I took the top prize for my final project. So I had to fight for work the hard way which meant working for less than union contractors.

I sued the union. And eventually won but who cared by then? I was a contractor making very good money buying Victorian houses and then reselling them for 100% profits. But by the time I won, the union was a dead male walking. Except for government contracts, it is now ignored by everyone.

The death of all the unions is not a surprise to me. They simply defended their own, very often very male, turf and were therefore bested by the international banking community and the political system. To the average American, unions=inflation. This is embedded in the entire philosophical community of eocnomic thinking and writing. It is propaganda intended to keep the working class helpless.

Labor can equal inflation but the real player in the inflation game is the banking system and the buying habits of the government. The Black Death, when it swept Europe, showed how population levels can influence inflation. Namely, before the plague, labor was cheap, especially farm labor. When 1/3 of the population was eliminated in just one year, inflation raged because workers suddenly could demand more money for work. Enraged rulers and lords quickly passed laws forbidding the movement of serfs and the demand for more wages but this failed because workers simply sat on their hands and outlasted the rulers.

This led to a big surge in all economies. The increased wealth in the lower classes set the stage for the revival of all the economies of Europe that had been in a depression for around 1,000 years. This was the long, long depression caused by the collapse of the Roman economy.

Today, we have had the brief benefit of the drop in price of all goods thanks to the entry of 2+ billion workers in India and China into world labor markets. This didn't cause an instant depression only because the American empire's labor force enjoyed a brief moment of happiness whereby the difference, the gap between the average wages of these new workers was so great compared to American workers, even with dropping wages here in America, the price of everything else fell so swiftly, the 'wealth' factor kept labor peace.

Coupled with very low interest rates, the US working class could borrow amazing sums of money and buy ever-cheaper goods and so the dropping wages were ignored. This happy time, a one time event in our economic history, is now ending. Just like when a major part of the labor force of male workers were ruthlessly eliminated from 1914-1919, giving the US working class greater bargaining power with the bosses, the elimination of competition during 1939-1945 and the removal of that terrible competitive beast of burden, China, from all world labor markets meant the US worker could enjoy great power. But this is all gone and like in the depressed 1895-1914 world markets, we will see decreasing prices or currency-caused inflation coupled with a restive and growing labor market.

The Germans and Japanese kept wages for labor high via not having children. But this is now causing inflation so the last 15 years they used Chinese labor instead. And this has made China stronger than both of them. Soon, very soon, China will surpass Japan which is dying internally, literally, as well as using the deflation lever too much.

From Xinhua:

The initial public offerings (IPOs) of four companies, which all ended subscriptions on July 12, drained a total of as much as 2.01 trillion yuan (US$264.2 billion) of capital out of the Chinese stock markets, 100 billion yuan over the market value of tradable shares in the Shenzhen bourse.

The channeling of Chinese liquidity is a consuming passion for China's rulers. They are not done industrializing so they must keep wages low for a while. Just as the US allowed a flood of immigrants into the US to depress wages of workers here from the late 19th century till the world war, so it is with China: they know they are the source of deflation in the world and they also know that now they must raise the value of the yuan, this will swiftly end. Balancing this force with plans to be an industrial giant and then letting wages rise is a tricky business. China doesn't want labor unrest to be the means of gaining wage concessions from the capitalists.

This is why the government keeps the one child policy. The need to artificially depress the population is part of their desire to raise wages gradually.

From Xinhua:

China's currency, the yuan, hit a new high against the U.S. dollar on Monday, according to the Chinese Foreign Exchange Trading System.

The value of the yuan, or RMB, went up 50 basis points from last Friday's 7.5731 against the U.S. dollar to open for trade on Monday at 7.5681, the highest rate since the yuan was revalued by 2.1 percent from 8.28 yuan in July 2005.

China doesn't want the yuan to rise very fast or this will threaten their industrialization projects. They are irritated with the American dollar which gets weaker and weaker the more they use it. But they also know that the US, with its $14 trillion dollar economy, is extremely fragile and will collapse the minute China does release their $1.3 billion FOREX reserves. So it is also a weapon. Namely, they can bring on a global depression if they feel this is the only way to deal with the Federal Reserve and the financial wizards making money out of thin air.

From Bloomberg:

The yen traded near a record low against the euro on speculation investors will keep borrowing the currency to buy higher-yielding assets in so-called carry trades.

The currency weakened against New Zealand's dollar as an inflation report in that nation increased prospects the central bank will raise its benchmark 8 percent rate, which compares with Japan's 0.5 percent. The yen also fell after an earthquake shook central Japan, causing the closure of three nuclear reactors.

``There's no change in the carry trade trend and the bias for selling the yen,'' said Takashi Yamamoto, chief dealer of treasury at Mitsubishi UFJ Trust & Banking Corp. in Singapore. ``The quake may adversely affect the Japanese economy. Interest rates will probably stay low.''

So, Japan has a flood from a typhoon and then (typhoons trigger earthquakes) an earthquake. China is having floods too! As well as earthquakes. And plagues of insects and other irritations. China's currency is going up and up and Japan's is going down and down. Japan clutches at any event to justify their collapsing of their currency. Oh, look! Lots of frogs are causing the yen to drop! An infestation of jelly fish is causing the yen to drop! Holy Moses.

The truth is, as China catches up with Japan and then finally surpasses it, the Japanese response has been to destroy the buying power of the lower classes. And this weakens Japan because the vibrant heart of an economy is that lovely moment when workers can force capitalists to pay them rising wages.

From Bloomberg:

Just as international investors are reducing purchases of Treasuries, the U.S. government will be selling fewer of them thanks to no let-up in tax receipts.

The projected 7 percent increase in tax revenue will help the U.S. budget deficit shrink by 17 percent to about $205 billion for the fiscal year ending Sept. 30, the Bush administration said last week. As a result, the Treasury Department sold less securities from January through June than matured, the first time that has happened since 2000.

A drop in supply is good news for a market that in the second quarter lost 0.4 percent when including reinvested interest, the biggest decline in more than a year, as an accelerating economy drew investors away from fixed-income assets, according to New York-based Merrill Lynch & Co.'s U.S. Treasury Master index. In fact, the fiscal outlook is so good that investors and strategists are beginning to handicap which maturities the government may stop selling or even buy back for the first time in five years.

Pray, how tell is our economy 'accelerating'? Are we opening more factories or closing them? Are wages rising or stationary or falling? Are unions doing give-backs or demanding more? Is this 'acceleration' connected with the immigration people arresting illegal aliens and thus, bringing up wages? Carpentry work has absolutely awful wages today thanks to illegal labor. The housing boom created great profits because of the flood--and I assure everyone, it was a very big flood--of non-union carpentry labor into the housing market...these profits are still part of the liquidity matrix.

From Economy In Crisis:

Ford gave its new CEO $28 million for four months on the job according to a recent CNNMoney report citing a proxy statement with the SEC.

With sales lagging, hundreds of thousands of blue collar jobs being cut, plants being closed and losses being reported across the board, the CEO gets an $18.5 million bonus!? Something here doesn’t seem right.

The struggles of Ford and the surge in salary of the CEO is reflective of a growing trend in the American economy today, that of declining middle class wages and booming paychecks for the top 10%, and especially the top 1% of all income earners.

While in 2004-05 GDP improved 3.2% and productivity grew 2.1%, real market income fell .6% for those outside the top 10% in the income scale, the Economic Policy Institute reports, citing an Emmanuel Saez and Thomas Piketty study. Those in the top 10% saw their income grow moderately, and those in the top 1% saw it skyrocket as much as 16%, said the study.

Namely, thanks to cheap labor depressing the finances of workers building houses, we saw this housing boom that enriched non-workers and this was trillions of dollars of profits in real estate that created liquidity within the banking system which then made it look as if we are suddenly rich. The Federal Reserve handed out cheap loans which meant our main industry for 7 years was cheap illegal alien labor making profits for the housing industry.

This isn't going to happen again for a long, long time. The flood of money is going to end. The last of it is being soaked up in a madcap race of various financial giants in a buying frenzy wherein they buy each other out or frantically try to form consortiums or monopolies so they can control prices and charge more. Only they can't if there are no buyers with rising incomes. Right now, taxes are flowing into the US Treasury so we can think things are going well. We are still overspending by over $200 billion a year, an astonishing amount that looks good only compared to the half a trillion we overspent each year at the height of the 'boom'.

Treating the private funds or banks buying each other out or buying up industries so they can make them invisible to the eyes of the public isn't an ecnomy, it is a disaster. Instead of stopping this mess, our governments are run by guys who make money this way. The $14 trillion US economy can become a $4 trillion economy in a flash. During the Great Depression, prices and the GNP fell 40% in less than two years! This is astonishing. And what is the dollar doing? Dropping 40% vis a vis all other currencies?

Well, not quite yet! It has dropped only 3% against the yuan! But once it begins to drop rapidly against the yuan, we will see an inflationary depression here. Dropping wages cross rising prices=complete chaos. The indifference of the ruling elites to the drop in buying power of the working classes is typical. They never want to see this as a bad thing. To them, dropping wages is heaven. This is why we always have cycles. But this particular cycle is pedalling straight off a cliff. Our empire can't run the way it is set up, forever. Banks can't buy each other forever. Hedge funds can't suck up all industries forever. Japan can't keep its sub-1% interest rates forever.

All this makes China stronger and stronger. China will not only sail past Germany but will easily sail past Japan and in 5 years will be wrestling the crown of the economic world from our foolish heads and we will grab at it and do stupid things like fight more wars. This is why China is working day and night to build up an economic alliance with much of the world so when the time comes, they can ask us to surrender nicely.

From Bloomberg:

Royal Philips Electronics NV, Europe's biggest maker of consumer electronics, said second- quarter profit rose fivefold after the sale of shares in Taiwan Semiconductor Manufacturing Co. as it exits the chip industry.
*snip*
Revenue was hurt in the second quarter as the dollar lost value against the euro. The dollar was on average 6.7 percent weaker than a year earlier, reducing the value of U.S. sales.

The Chinese basically own the semiconductor industry. Our financial games are now serioiusly beginning to hurt Europe. The only reason they tolerated the rise in the euro was very simple: the advantage of buying oil cheaper than the US and Japan has been a fantastic differential. But the rise in oil prices continue beyond the rate of inflation of the dollar. This is shifting world wealth to oil pumping nations and in particular, Russia. And so here is the strategic situation in a nutshell: China and Russia are growing stronger and the US, Germany and Japan are weakening. This is a big change in world power.

From Market Watch:

Instead, effective incentives get to the heart of what's on the minds of potential buyers -- the overall cost of the home and the monthly payments they'll have to manage, he said.

Help in bringing down the interest rate of the mortgage for a year or two by paying points, for example, can go a long way in giving one home an advantage over another, said Dave Dalzell, owner/broker of Dalzell, Realtors in Abilene, Texas. Contributions to the down payment and common closing costs could especially be of help to a first-time home buyer, said Greg Zadel, owner of Zadel Realty in Firestone, Colo.
*snip*
In addition, buyers and sellers need to make sure that they don't exceed the lender's allowable seller-paid assistance, Ledebuhr said.

The entire point of having 'points' and demanding a down payment was for bankers to see if a client has the ability to live within his or her means and the ability to plan for the future. Allowing any sort of tricks to get around this so lower interest rates can be obtained means the housing collapse will worsen. For this stuff is all about people living in a fantasy. They can't afford houses anymore so they pretend they can afford them. Due to falling real wages versus inflation, all sorts of tricks are used to keep the economic game rolling.

This is a sign of bad health. If housing sells on this basis, this is bad. For any banks to use or allow brokers to use this trick is a bad sign. It means, banks are desperate to make loans to deadbeats and it means housing is still overpriced vis a vis wages. Our government frets about mortgage brokers and real estate agents 'cheating' customers but this is false. 90% of the business going on is everyone conspiring to cheat the ultimate investors in housing: the people putting up the money in the first place. And this threatens the entire banking system of the world! We can't keep on pretending we can buy valuable properties.

From Market Watch:

U.S. home prices dropped 1.4% in the first quarter compared with a year earlier, the first year-over-year decline in national home prices since 1991, according to the S&P/Case-Shiller index released Tuesday.

A year ago, home prices were rising at an 11.5% pace. Prices have been falling for the past three quarters.

And so prices are dropping. The gold rush is over. The relative value of housing is dropping just like our incomes. And the dollar. These things are all attached to each other. While values drop and dollars are inflated at home as they drop in value overseas, we get some curious side effects that make it look as if things are going well, the chief item being the stock market shooting up. Everyone finds our markets to be a bargain. Europeans gaining power over us via currency trading can take their euros and buy up our stocks and then see their euros grow faster than the decline of the dollar. Americans aren't piling into the stock market, foreigners are.

From CNN Money:

U.S. import prices rose 1 percent in June for a fifth straight monthly increase, led by higher petroleum costs, the Labor Department said Friday.

Wall Street economists were expecting to see a 0.7 percent gain following an upwardly revised 1.1 percent increase in May. Compared with a year ago, June import prices were up 2.3 percent.

Imported petroleum prices climbed 4.7 percent in June, the fifth straight monthly gain, after an upwardly revised 3.7 percent rise in May. The government said that petroleum prices were up 28.1 percent since January but only 2.1 percent from a year ago.

Excluding petroleum, import prices - which Federal Reserve policy-makers monitor closely as a potential source of inflation - edged up 0.2 percent after a 0.5 percent gain a month earlier.

Hello, inflation. Since we must import far more than we produce, we are now caught in a classic trap, one that kills all empires. We will continue to overconsume until we stop and this stoppage will be unpleasant because who wants to stop spending? Like with all empires, it will be via bankruptcy. We will have to lose around 40% of our GNP in order to stop losing industries to China. Then the world will be balanced with China at $8 trillion GNP and the US at about $6 trillion GNP. If we don't have a world war, first.

From Yahoo:

As I discussed last week, the key to the outlook for U.S. equities is the credit cycle. High global liquidity has led to over $300 billion of deals during the first half of 2007, a record pace. And real estate has been the key driver of consumer credit during the current expansion in the U.S. economy. Eventually, subprime problems will hurt investor sentiment and bond spreads, and the credit cycle will turn from a tailwind into a headwind.Credit problems take a long time to fully emerge. Problems spread from weak borrowers to strong borrowers, and from complex derivative products to the mainstream bond market. As this happens, sentiment about credit starts to turn sour, and bond spreads rise for all forms of risky credit.

Finally, a mainstream economic writer who has a glimmer of truth. That $300 billion in deals is about how much our trade deficit was this last six months. Namely, they match. And this is because they are one and the same. Unfortunately, this writer doesn't make this connection. Connecting all things is important. Understanding how empires work is life and death. And understanding how industrialization equals political power is the biggest thing people in the mainstream media refuse to do at all.

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Comments

[Chris]

I will always remember an interview I saw with an Chinese up and coming businessman/manager a few years ago. He basically said he couldn't believe how stupid the West was for sending all their factories to China.

[Elaine Meinel Supkis]

Correct. Easy in, impossible to get out again. China wants to again, be the Workhouse of the World.

[blues]

The 130 member Bilderberg Club runs the USA -- And hates the stupid, patriotic, compulsively religious, habitually sycophantic, conformist, fat, lazy, SUV-joy-riding, blitherously edugandized, American slobs.

They despise us, and plan to turn all the posh suburbs, etc, into parched, dirt tobacco road Mcghettos. No, not 'plan' -- They will. In about five years.

No more American Pie for us.

[DD]

http://video.google.com/videoplay?docid=-9023187359471101619&pr=goog-sl

[aa2]

You definately understand how capitalism can work, and where it fails. Workers need to be cut into the growing productivity. In this day and age with rising productivity there is enough for each person to do better year after year. If we grow by 2% per capita, the worker can get 1.5% gain.. and the capital owners can take .5% all to themselves.

Which like you said the best investors of capital, then get even more capital to play with in the next year. But when workers actually are losing money, they can't buy the increased production. And a few wealthy individuals don't consume like tens of thousands of middle class people do. Although they might in the future who knows.

Either way right now the workers can't buy all the shiny new production that they are producing. So production becomes 'overproduction'. Which kills profit margins, and in that way also eventually destroys the capital itself. That capital which went rocketing up with cheap debt bidding, and increased profit from cutting wages too much..

[blues]

Elaine says:

""The Chinese basically own the semiconductor industry.""

I remember well when National Semiconductor used to make most of the 'glue' chips in electronics (the little black squares that surround the big ones that get hot). That was in Danbury, Conn. I even 'applied' for work with them (as they used to say). The process of making silicon 'chips' involves transforming the silicon semi-metal into a ridiculously toxic gas, which I was most happy to not be around when the inevitable 'leakages' were reported.

As usual, I eschew all kinds of fancy 'economic' explanations for things. The chip factory was shipped to Mexico, or somewhere, at least 20 years ago. The Chinese businessman was right. We were utterly insane to give them our factories in return for their cheap labor. I guess the height of 'capitalism' is when the Big Owners simply sell the seed grain off-shore, leaving the peasants (I mean consumers) to starve.

[CK]

Best of all possible worlds:
Imported Petrol prices rising
Milk prices rising
Ice Cream prices rising
Corn being redirected to alcohol production and away from animal feed. Looking forward to taking the Hummer to Dairy Queen.

[Elaine Meinel Supkis]

Home Depot prices climbing rapidly. Customers vanishing just as fast. Bad news indeed.

Hi, Blues. Happy to hear from you, as always.

Aa2: thank you for the kind words. I love to hear from readers and I love to see or read any URLs posted here. Thank you, everyone, for the emails, too. A great help.

[Canuck]

And for a spot of good news for the USA, it appears China really doesn’t want the Canadian oilsands…

http://www.albertaoilmagazine.com/
week_review.html

“China's largest oil company is turning its back on Canada's oilsands. Yiwu Song, vice-president of Chinese National Petroleum Corp., shocked a Calgary energy conference by announcing his company was shifting its interests from Canada to Venezuela.”

So the Chinese won’t own both the Orinoco Basin and the Athabasca Oilsands, just the Orinoco Basin.

[Elaine Meinel Supkis]

Thanks for the news, Canuck! I totally missed that in the news! Wow. Very interesting indeed. And then there is Russian oil...guess who gets that, too!

[Canuck]

Update: CINOPEC dumbasses contradict themselves in 1 week!

http://www.bloomberg.com/apps/news?
pid=20601082&sid=a4NQ.SRCfiwc&refer=Canada

“July 20 (Bloomberg) -- China National Petroleum Corp., the nation's largest oil producer, plans to expand its cooperation with Canadian partners on oil sands projects, refuting a company official's comment that it will slow down investment.”

Back where you started dear ole USA, I’ll be keeping a sharp eye on the approval process of that gateway pipeline. BTW Exxon has still officially dropped the Alaska pipeline due to cost projections, that won’t get any better. The Mackenzie valley pipeline isn’t faring much better.

[Elaine Meinel Supkis]

Thanks for the info, Canuck. I have included some of this in articles and will think about this latest bit of info!

[Canuck]

Here’s some thoughts for you Elaine, CINOPEC/Enbridge will never ever get a pipeline approved to ship synthetic crude or otherwise from Edmonton to Prince Rupert/Vancouver without major upstream investment (i.e. making good on their lease awards). They need significant economic inertia manifest in order that key players would decide to back the approval process and investment commitments which run contrary to the traditional export routes for energy. CINOPEC will not be allowed to construct or maintain a pipeline in Western Canada on their own even if they invest in their lease allotments and find some way to build or partner in on an upgrader. They need a major player (Enbridge, et al) to take the lead in the approval process order to accomplish a pipeline. Therefore the energy in question is essentially land locked and will flow south regardless of investment unless CINOPEC plays out a very significant investment. Bear in mind that all of Canada is currently affected by the scale of investments going on right now in Ft. McMurray. It’s a saving grace for Ontario even though they’re dearth to admit it.

So if you work from the position that CINOPEC never really intended to abandon their portion of the lease allowances (which I believe because the snapped to defend them within a week) a couple of scenarios come to play;

1. Pure stupidity in a statement by a major CINOPEC principle.
2. An attempt at a diversionary posture that backfired badly.
3. CINOPEC principals have a major communication failure endemic to their corporate culture.

But you can rest assured that what happened in Calgary is the equivalent to taking a dump on the coffee table at the company Christmas Party. Big Oil in Calgary does not take well to mixed messages, CINOPEC partners would have come under instant pressure putting the leases at risk. Enbridge managers in charge of pushing the years/decades long process of pipeline approval would have been apoplectic.

[Resell Rights]

As the Christmas shopping has continued, I’ ve racked up a number of the Discover Card 20 gift cards. The last time I picked up my cards, I chatted briefly with the Discover Card representative. I asked him how popular the promotion had been, and he said it had been quite successful. One comment led to another and soon he was telling me how they’ ve changed their program over the years. Continue Reading»

[zac anglogold ashanti]

You can place your ads offline and online they both work effectively. I would suggest using both methods. Placing your ads offline is pretty simple. Most people just post their ads everywhere but in reality you should target where you place your ads. If you are marketing a business opportunity then place your ads where people are, who would be interested in your type of opportunity. The same goes with your product, place your ads in places you would find your target market. Conventions and swap meets are...

[Rajneesh]

Excellent information.

thanks