by
Bill Bonner
There, in today’s International Herald Tribune, is our favorite columnist, Thomas L. Friedman. And there he is, commenting on US-China trade. This ought to be amusing... Friedman has no enemies that we are aware of, but even his friends must think he is an idiot. But first... "I know what is happening to you," said our friend at dinner the other night. "You spent the first 30 years of your career trying to make money... and now that you’ve made some, you’re wondering what it’s all really worth." It is not quite that simple, dear reader. Nothing ever is. But as a working hypothesis, it is a fair one. We are thinking about life and death, love and marriage, wealth and poverty... and about what really matters. Two friends married recently. Another is breaking up. "You know, many of us spend our lives repairing damage from childhood," she added. "That’s what happened to me. My parents divorced when I was little. So, I was determined not to let it happen to me. That’s why I stayed so long in a relationship that really didn’t work for me. But I’m still young... I think I still have a chance to get what I want. I know it won’t be easy and I know there are a lot of dangers. But at least I have to try... " More about this, tomorrow... in part deux of our series: Love in the Time of Viagra. Why mention it today? Because it is on our mind. And because the conductor has cranked our Eurostar train up to a speed we have never before seen. We think he may have lost his mind. The countryside is flying by, we wonder how fast this train can go before it slips off the rails. He’s probably had an argument with his wife this morning. She probably admitted that she has been sleeping with the vicar. He’s decided to end it all in a spectacular way. Won’t she be sorry! At any moment, we expect to see a steward or an armed guard rush to the front of the train and put a pistol to the conductor’s head. Or maybe we are on a runaway train... . Well, it seems like a good time to think about important things... and if the train derails, we just want you to know what you’ve missed. Back to Friedman... Once again, he doesn’t let us down this morning. He sees a great bargain at the heart of the U.S.-China relationship. "Call it the Tiananmen-Texas Bargain. After Tiananmen, China’s leaders struck an implicit bargain with their people, argues Steven Weber, director of Berkeley’s Institute of International Studies. ‘The bargain is that China’s voters give up the right to vote, and the Chinese government guarantees China’s middle class 9% annual economic growth. China’s political stability today depends on that bargain.’ "The Texas side of the bargain came from the Bush team. For a long time, it ignored China’s undervalued currency so China could sell us lots of cheap stuff and would continue holding our devaluing dollars and helping to keep U/S.S. interest rates low." Friedman sees the two countries as "Siamese twins." This is typical of Friedman; he never bothers to think about what he writes. America and China are joined in a curious trade relationship – but they are no more "twins" than a toad is twin to a runaway locomotive. They’re not even fraternal twins. China is almost the exact opposite of the United States. If they are joined at the hip, commercially, it is strange beast they make. One works; the other eats. One saves; the other spends. One gets rich; the other gets poorer every day. None of these differences does Friedman worry about; instead, he fusses that China is not a democracy. What that has to do with it, we don’t know. Friedman doesn’t either. So he changes the subject. "We now have to adjust the bargain at the heart of that relationship. Whether we can do that delicately, without destabilizing Beijing or the global economy, could be the big geopolitical story of 2005," he opines. Like a blind man throwing darts, Friedman has hit the bull’s eye: it is the big geopolitical story, not just for 2005... but further into the future. But it is not a bargain that can "we" can adjust. There are no dials that can be turned, no levers that can be jerked. The real problem is that the United States has lived beyond its means – enabled by the Fed, China, Wall Street, greed, fantasy, and imperial conceit. China can dump her deadbeat U.S. customers. It won’t be painless or easy, but there is plenty of ready need and purchasing power in Asia. But here is no conceivable adjustment that can be made that will spare the United States a drop in living standards. No matter how good the surgeons who try to separate these twins, one of them is going to die. • Here’s one way to get the U.S. world-improvers to mind their own business – threaten them with nukes. Beijing has claimed that it will use military force to prevent Taiwan from becoming a formally independent country, and if the U.S. military intervenes in any conflict over Taiwan, China could use nuclear weapons against the United States. "If the Americans draw their missiles and position-guided ammunition on to the target zone on China’s territory, I think we will have to respond with nuclear weapons," Maj. Gen. Zhu Chenghu, said at an official briefing. "If the Americans are determined to interfere, then we will be determined to respond," he said. "We Chinese will prepare ourselves for the destruction of all the cities east of Xian. Of course the Americans will have to be prepared that hundreds of cities will be destroyed by the Chinese." We’re hoping that the world improvers don’t take that as a challenge... • And in more news from China... the long-awaited yuan revaluation has taken place. Starting today, China will reform the exchange rate regime by moving into a managed float exchange rate regime based on market supply and demand with reference to a basket of currencies. Renminbi will no longer be pegged to the U.S. dollar, but to a basket of currencies instead. Chuck Butler, President of EverBank, and our own "currency counselor" gives us the skinny on the move... "Finally! China has announced that they no longer would peg the renminbi to the dollar. This had been the news that investors have waited for over two years to hear. The ‘floating currencies’ of Asia are moving stronger vs. the dollar on the news, and should continue as this new renminbi exchange rate regime unfolds. "I view this move by the People’s Bank of China (PBOC) as simply symbolic at this point, as the (PBOC) gets to soothe the feathers of the U.S., and slam the door on the fingers of the currency speculators. However, this will lead to other currencies in the region to allow their currencies to gain vs. the dollar. We’ve already seen evidence of this in the announcement by Malaysia that they would also drop their currency peg to the dollar! "There is no word at this point regarding the mix and weightings of the currencies in their new basket. I would think that a mix of 20% yen, 20% euro, 20% dollars, with other trading partner currencies making up the difference as a good start. If the final basket looks like this, I would think that yen, euro and other trading partner currencies would benefit greatly, while dollars would be sold, bringing the dollar back to the underlying weak dollar trend." • Although we all know we can’t always get what we want, we see no other option but to try. We know our investments, for example, are not likely to make us rich – but what else can we do but try to get rich? But that’s not quite that simple either. There are, alas, some things you can’t get ... .. a steward just rushed by towards the engine compartment. He did not seem terribly alarmed, but he had a purposeful look on his face... ... is the train slowing down? Not yet. He’s probably trying to talk the conductor out of his mad act of suicide and manslaughter. Since we are among the men to be slaughtered, we hope he succeeds. And yes... the train seems to have slowed down... slightly. Oh well, we’ll continue our ruminations while we await events... We were about to tell you how to get rich. Yes, well, we would like to lay aside the question of value... that is, of what it is worth to you. But we can’t. Everything that matters – marriage, housing, vacations, investments, what you read and eat – involves values. In each case, you have to decide what it is worth to you. If getting rich is worth the effort, can it really be separated from values? The surest and fastest way to get rich right now is to become a housing speculator. Stocks have gone nowhere for a long time. One of the best stocks in America – Buffett’s Berkshire Hathaway – has gone nowhere for 12 years. Yes, you might get lucky and find another Google, but the odds are against it. Housing prices, meanwhile, are still rising steeply in many parts of the country. The housing market is still subject to "speculative fervor," said Alan Greenspan yesterday. If you wanted to get rich above all else, the thing to do would be to quit your job and launch yourself quickly into full-time real estate speculation. Shop carefully. Buy the most expensive house you can afford... with the greatest potential for fast price-appreciation... better yet, buy two or three of them. Mortgage them heavily... use as much leverage as you can get away with.
You can do the math as well as we can. It doesn’t take long for a few million-dollar houses, growing in price at 15% per year, to add significantly to your wealth. But what is that kind of wealth worth? Did you earn it? Do you deserve it? Isn’t it a kind of fraud... like marrying a woman under false pretenses... that you are likely to pay for later? Hmmm... the train seems to have slowed to normal speed; it did so imperceptibly. We will not die on the 6:34 from London... not today. July 22, 2005 Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century. Copyright © 2005 Bill Bonner |
