Ji sheng (A Parasite)

By now you have probably read a few score theories on what caused the fiscal panic that has devastated our economy. We have absorbed the sub prime, easy money, home equity/refinancing, real estate stock speculation, CDO toxicity, budget and budget and trade deficits theories deeply into our economic consciousness. Yet with all due respect, allow me to offer one more theory that can help us understand what happened. The theory is not completely new, aspects and facets of it have been advanced and discussed before, however to my knowledge not as the prime mover of the economic crisis.

The root cause of the economic crisis is the parasitic economic relationship between the United States and China. When you see shuttered factories and millions of jobless roaming the countryside in China and lines of American workers at “job fairs” you know something is wrong and that both countries are suffering mightily, and facing social unrest from innumerable personal economic calamities. How did this happen? First, a definition. A parasitic relationship is by definition one that in the long run, benefits neither the parasite nor the host. Energy, nutrients and life forces are drained by the parasite and ultimately the host is weakened or killed thus destroying the parasite in the process.

Under the guise of two magic words that had no relationship with reality, a parasitic relationship was built between two great countries. Those words are: free trade. Free trade with a country whose wage level was an infinitesimal fraction of ours. Free trade with a country that kept its currency so low that no nation could produce anything in competition with it. Free trade with a violator of every known copyright law, every known intellectual property law or trademark protection. A country that pirated every export we could possibly send, be it software or movies or pharmaceuticals.

So under this free trade fiction, 99% of everything the American worker purchased at Wal-Mart was made in China. Thus, the entire high wage world of American union manufacturing jobs were hollowed out and disappeared to slave or low wage Chinese factories. With the fiction that this was a boon to American purchasing power and beneficial to the global economy, we basically stopped manufacturing anything in America and became an importer from China of everything.

Economists told us not to worry about this trade deficit because those dollars had to return here as the Chinese had to sterilize them and keep them from becoming an inflationary nightmare if they were kept in China. So as we know they bought United States treasury debt, mostly short term highly liquid paper. This became a form or monetary crack. Wall St. disinvestment houses used it for countless leveraged transactions; CDO’s, LBO’s, synthetic CDO’s, endless subprime tranches of multi-sliced debt offerings. Households used it too, this easy liquidity allowed for refinancing and equity extractions from home assets that were turned into current consumption like vacations or useless toys like jet skis or snowmobiles.

As we have written before this differed from the Japanese goods invasion of the 70’s and 80’s because the Japanese turned there US cash into US hard assets like Pebble Beach, downtown L.A., Columbia Pictures and the state of Hawaii. China bought nothing; they didn’t even shop on Fifth Avenue or the malls of Dallas. Our cash was handed back to us in the most dangerous form imaginable, short-term liquid debt.

A more patriotic sentient investment class would have seen this and done one or two things: demanded that this debt be placed in 20 or 30 year instruments where it could be more stable or demanded that it buy assets that would have cemented the relationship into one of mutual responsibility. But that didn’t happen, the Chinese myopically just wanted to keep producing and flooding the world with low priced goods to keep everyone there employed thus absorbing the staggering number of rural to urban peasants. The American economic community and the disinvestment bankers wholly in the throws of voodoo economics misappropriated this capital, the results of which we are now seeing and suffering. We don’t make anything anymore and the rust belt has spread to all regions. We can never assemble a dishwasher or toaster or ski jacket for the price the Chinese can nor should we want to. The Chinese will never let our companies compete with them in the areas we are better at. Theft of patents, self-serving regulation, piracy and corruption will ensure that the trade relationship will forever be in China’s favor.

Now both giants are lying wounded on the ground, their people poorer, their opportunities less. Both giants are trying to restimulate their economies. Of course we’re worse off as we have to use debt to do that while China can draw upon its trillions in reserves. But to what end will this Chinese stimulation be? To put more Americans and Europeans out of work? Who will buy all of those luxury brands now made in China that were once assembled in Northern Italy? Where will the purchasing power come from to buy everything made in China at the nearby mall? For the U.S., reflating with debt and sending that debt to China to be placed into more U.S. shorter term paper will only make the next crisis even more punishing.

This is not a call for protectionism or trade barriers. What it is, is a honest call for the two global producers and consumers to realize that the parasitic relationship they have developed has ended, as all parasitic relationship must, with the weakening of both parties. If anyone wants my advice on how to do it, they can just ask me.