American Consumers: Pure Genius
American Consumers: Pure Genius
Shopping at Target, thanks to China's economic and trade policies
By Patrick J. Garot, CPA, MM
The new stereo system is in our family room, underneath the Sony 52-inch HDTV that we could not afford, and next to the $700 Cox Cable HD-DVR that we're amortizing over the next who-knows-how-many-years.
We bought the new stereo with borrowed money. In this case, another ding to the already bloated $9,000 balance on our Citibank Upromise Visa card - itself proof of American marketing brilliance ("spend! ... and save for college").
So we couldn't really afford the new stereo. Except, it can do everything. It upconverts our DVDs, plays CDs and MP3 disks, has seemingly infinite surround sound settings, has 6 speakers with a 1000 watt rating and its own iPod dock, and - get this - its universal remote control lets you surf your cable or your iPod menus from 30 feet away.
Basically, I never dreamed such functionality existed. Back in the day - the late 1980s, say - I paid $500 for a "dumb" Yamaha receiver alone. This new one is a Philips, and though its brand doesn't have the equity of Nakamichi, Yamaha or Denon, the sound quality seems as good.
Thing is, we couldn't afford NOT to buy it. It cost us $199 at Target yesterday. And the fact that we hit our bloated credit card to buy this wunder-stereo says everything about global economics, geopolitics, and the genius of the American Consumer.
This Philips was made - where else? - in China. China's central bank has for over a dozen years pegged its currency, the yuan, to the American dollar. "Pegged" means that China's government lets the yuan trade only in a defined range to the dollar.
Now, everyone knows that much of what we Americans buy at Target, WalMart, or other retailers come from China. America's trade imbalance with China is $200 Billion a year, and increasing.
If China had a "free-floating" currency, that huge trade imbalance traditionally would mean that the yuan would go up in value in relation to the dollar. The yuan strengthening would make Chinese products more pricey on our shelves. Then, American consumers would buy fewer Chinese goods, and our retail stores would buy from domestic or other countries' manufacturers.
But China's Central Bank won't allow their currency to go up. They rebalance our trade deficit with them, to depress the value of the yuan, by manipulating currency flows - the supply and demand, of the yuan versus the US dollar.
China takes most of the dollars they have sucked from the US, and either spends them on world markets (buying oil from our "friends" in the Middle East) or re-invests them back into our debts. Our "debts" that China lends on include our federal and state government budget deficits, and mortgage-backed securities.
So this 3600 square foot house that we can barely afford (wherein sits the stereo, TV, and cable box that we cannot afford), was financed, to some extent, with Chinese profits from selling us all the other stuff we couldn't afford.
So far, we American Consumers are looking really stupid. We've spent and spent, until we borrowed and borrowed, and then we spent and borrowed some more. Where's the genius in all this?
The genius is: this can't last forever.
Sooner or later, history tells us, the yuan will have to rise.
China doesn't want that to happen. China's historic excuse, which is wearing quite thin geopolitically, is that it has got 600 million people in its hinterlands who live in extreme poverty. Over half of China's population toils in farming villages, in subsistent squalor. Moreover, these are a malcontent lot - the country "China" is comprised of hundreds of ethnicities (many of them peoples conquered by the Han), that speak dozens of separate languages and worship dozens of different religions.
They have their problems. In fact, China's problems - with Muslims, Buddhists, and others - have the potential to be far worse than fundamental Islam's war on Western civilization. In China's case, the enemy is well within the gates.
China's only and best strategy to deal with malcontents - brilliantly developed by Deng Xiaoping - was to use its poor and ample labor force to produce cheap, high quality goods. Hopefully, it would result (and has) in an "economic miracle" similar to Japan's after World War II.
China reasons: it can't lift the bulk of its people from malcontent squalor if the yuan goes up. Americans would stop buying the newly more expensive Chinese goods. That would mean less production in China, and less economic opportunity for China's peoples. And history tells us, civil wars are a neat outgrowth of failures in economic opportunity. As a patch-worked country, China is particularly ripe for such.
But that is China's problem. Meaning, China's potential for civil unrest or war is not the responsibility of the US, or the European Union (which now runs a similar trade deficit with China). And central bankers in the US and EU are now feeling political heat to provide for their own: more production in China has meant factory closures around the Western world, and less opportunity for our own poor to climb the economic ladder.
The West also is facing political, security risks. The growth of off-shoring production to China means that certain skills and trades are being lost in the US and Europe. Jobs with little glamour - machine-tooling, metal fabrication, circuit board printing - are essential to a modern country's ability to defend itself.
China's devaluation of the yuan can't last forever, and it won't.
Either through tax and tariff, or through "shadow policies" like the recent onslaught of news on whether China's products are safe, Western governments will nudge our trade deficits down, or the value of the yuan higher.
The genius of the American Consumer is, we are buying those cheap Chinese goods today. We are improving our living standards, and we are using the artificially strong dollar (relative to the yuan) to do it. We are financing our houses at interest rates made cheap by China's efforts to manage currency flows.
When the Sh-t hits the fan, the yuan will go up.
That stereo I bought won't be $199. It will be $229 or $259. My 30-year mortgage fixed at 6% won't be available. Fixed rates will rise to 7%, or 8%.
The "hard assets" that we Americans own - particularly real estate, like our homes - will absorb a hit after those mortgage rates increase. But then home values will rise, and rise again: because the inflated, expensive dollar will finally be devalued. Hard assets will be worth more, relatively, than dollars. You'd rather have a piece of land, any given day, than a few more dollars in your pocket.
The American Consumer is Pure Genius. Our relentless consumerism - with our babies watching TV advertisements from their cradles - ultimately hones "We The People" into the sharpest, savviest buyer of goods and services on Earth. The American Consumer is smarter than all of the politicians, the government agencies, and certainly the central bankers. Put together.
Now all we've got to do is figure out how to pay for that new stereo.
11 July 2007
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