China, Built on American Debt

Last May, echoing the sentiments of President Trump I wrote an article entitled, “America, China’s Piggybank.”  In it I explained why China needs U.S. dollars, which they receive in trade for exports to America.  Essentially, since the early-1970’s Federal Reserve banks on Wall Street have owned the franchise of issuing U.S. dollars, in practically unlimited quantities, sending them all around the world, expecting the U.S. military and intelligence services to enforce their value.  That system has a name.  It is called, “the petrodollar system.”  As a result, the world still uses dollars as its predominant trading platform, which explains why China, the world’s largest exporter of goods, must always have a significant supply of dollars.  One way China obtains dollars is to produce cheap goods that Americans, always shopping for a deal, unwittingly import.

Now if you didn’t realize that the U.S. military and intelligence services have been enforcing the value of the dollar around the world, just know that in 1999, Saddam Hussein declared he would no longer take dollars for Iraqi oil, daring to leave the petrodollar system for Euros. By 2003, Saddam was holed up in a bunker under the ground in Tikrit.

Similarly, after his election as President of the African Union, Libya’s Moammar Qadhafi initiated a policy to create a gold-backed African dinar and require the world to pay for African exports with gold.  That would have made the forever-struggling African nations the among richest in the world.  By 2011, however, Qadhafi was found hiding in a culvert in Sirte, where he was subsequently dragged through the streets and murdered. That is what happens to world leaders who violate the petrodollar agreement.

But back to our story, during the early 1970’s over 60% of the world’s oil came from OPEC nations, the largest producer being Saudi Arabia.  It was during that time that China would receive the opportunity to become the preeminent exporter of goods to the world.  China would receive that chance because it had the world’s largest untapped source of cheap labor. 

The Vietnam War, begun by Lyndon Johnson after the assassination of John F. Kennedy, was winding down.   But that war would have a much larger purpose than any alleged reason of preventing Communism from taking over the small Southeast Asian nation.  The larger purpose would be to drive up American debt necessitating to-be President Richard Nixon to abandon the gold standard in place since the end of WWII.  As long as the gold standard remained in place, nations around the world could rightfully demand that dollars they held be redeemed at the rate of $35/oz of pure gold.  Because American war debts resulted in a massive over-issuance of dollars, ending up all around the world, continuing to allow nations to redeem them in gold was not a viable option.

But shortly before Nixon’s historic announcement allowing massive Wall Street dollar-printing and borrowing by the U.S. Treasury, Secretary of State Henry Kissinger secretly visited China’s Premier Zhou Enlai to discuss opening relations.  Shocking the world, on July 15, 1971 Nixon announced a Fall visit to Communist China, first by an American President.  Exactly thirty days later Nixon would make his announcement “temporarily” ending to the gold standard, after which Federal Reserve banks could practically issue as many dollars as they needed, enabling the U.S. Government to borrow them and pay off the War.

But Nixon’s abandonment of the gold standard did something else too.  Taking the training wheels off of Wall Street’s money-creation machine, Nixon not only worked out the first trade deal with China, but also a method to pay for all those new Chinese imports.  As billions of dollars might leave America each year for China, billions would need replacing.   Nixon’s China trade deal created demand for borrowing new dollars Wall Street would be more than happy to fulfill.   Uninhibited by the former gold standard, Wall Street could now issue as many dollars as needed and loan them to the American people to replace those sent overseas for Chinese imports.  Over the years, as the Chinese export-based economy grew, resulting American debt would grow in proportion. 

How America Built China

In 1999, President Clinton gave the Chinese economy a boost it has never forgotten.  After granting China “Most Favored Nation” trading status five years prior, Clinton approved China’s entry into the World Trade Organization.  That meant the WTO, rather than the United States, would establish the rules under which the two countries would trade.  American tariffs would not be part of the deal.  Chinese tariffs would.

And so as long as China and the world would keep accepting dollars in exchange for exports to America, Wall Street would be happy to issue and loan them out, placing the American people in ever-increasing debt, while driving America’s industrial foundation to relocate to developing countries, such as China, where costs of production could be minimized.  Thus, China’s export economy has been built on American debt, which is why President Trump claims, “America is China’s piggybank.”

And that is precisely why Trump knows he will win any trade war with China.  America made China’s economy the second largest in the world.  What America creates, America can destroy.  The Chinese economy is overwhelmingly dependent on exports, the American economy now heavily on imports, which explains why Trump is working diligently to restore the American manufacturing base. 

So when Trump says China must make a deal, he is stating a fact.  Without American trade, the Chinese economy cannot survive.