Mitchell’s laws:



Here are excerpts from an article in today’s New York Times.

China Confronts Mounting Piles of Unsold Goods
Forbes Conrad for The New York Times



Problems in China give some economists nightmares in which, in the worst case, the United States and much of the world slip back into recession as the Chinese economy sputters, the European currency zone collapses and political gridlock paralyzes the United States.

Let’s stop at this point to ask ourselves:

Why does China export? Answer: To obtain foreign currency.
What does China do with foreign currency? Answer: Either spend or invest it abroad, or exchange it for Yuan, to be spent or invested domestically.

Hold those thoughts and let’s continue with the article:

China is the world’s second-largest economy and has been the largest engine of economic growth since the global financial crisis began in 2008. Economic weakness means that China is likely to buy fewer goods and services from abroad when the sovereign debt crisis in Europe is already hurting demand, raising the prospect of a global glut of goods and falling prices and weak production around the world.

China not only is the world’s second-largest economy, but its government is Monetarily Sovereign. That is, the Chinese government has the unlimited ability to spend. Through its spending, it has the unlimited ability to create Yuan, as well as the unlimited ability to exchange Yuan for foreign currency.

As a Monetarily Sovereign nation, China does not need to export.

Do you see where I’m going with this?

Let’s continue:

Corporate hiring has slowed, and jobs are becoming less plentiful. Chinese exports, a mainstay of the economy for the last three decades, have almost stopped growing. Imports have also stalled, particularly for raw materials like iron ore for steel making, as industrialists have lost confidence that they will be able to sell if they keep factories running.

When jobs are less plentiful, the Chinese workers could run short of Yuan. But the Chinese government never can run short of Yuan.

Real estate prices have slid, although there have been hints that they might have bottomed out in July, and money has been leaving the country through legal and illegal channels.

Wu Weiqing, the manager of a faucet and sink wholesaler, said that his sales dropped 30 percent in the last year and he has piled up extra merchandise. Yet the factory supplying him is still cranking out shiny kitchen fixtures at a fast pace.

Premier Wen Jiabao has imposed a strict ban on purchases of second and subsequent homes, in the hope that discouraging real estate speculation will improve the affordability of homes. The ban has resulted in a steep decline in residential real estate prices, a sharp fall in housing construction and widespread job losses among construction workers.

The Chinese auto industry has grown tenfold in the last decade to become the world’s largest, looking like a formidable challenger to Detroit. But now, the Chinese industry is starting to look more like Detroit in its dark days in the 1980s.

Inventories of unsold cars are soaring at dealerships across the nation, and the Chinese industry’s problems show every sign of growing worse, not better. So many auto factories have opened in China in the last two years that the industry is operating at only about 65 percent of capacity — far below the 80 percent usually needed for profitability.

Yet so many new factories are being built that, according to the Chinese government’s National Development and Reform Commission, the country’s auto manufacturing capacity is on track to increase again in the next three years by an amount equal to all the auto factories in Japan, or nearly all the auto factories in the United States.

Let’s put it all together. The Chinese economy is controlled by its Monetarily Sovereign government, which can produce unlimited Yuan and distribute them to the Chinese people in any manner and amount it chooses. China’s government also can exchange Yuan for Dollars, for import purposes.

As a large, Monetarily Sovereign government, particularly one that doesn’t need to worry about political agendas, China, and the Chinese people, never should have a shortage of their sovereign currency.

China can buy all domestic production and simply destroy all excess inventory. It can close unneeded production plants, and put the workers on the government payroll. It can exchange Yuan for Dollars, and import anything in the world. The Chinese government has the financial and political freedom to do anything it wants. It can create Optimum Employment. There is no reason for the Chinese people ever to suffer poverty, starvation, unemployment, homelessness, a recession or a depression.

While China remains a net exporter, it doesn’t need to be. The U.S., also being Monetarily Sovereign, is a net importer. Our imports exceed exports by $600 billion. That’s net $600 billion leaving America every year, and still there is no possibility we will run short of Dollars. We really don’t need to export at all.

Only monetarily non-sovereign governments (Italy, France, Illinois, Chicago et al) need to be net exporters — one fundamental difference between Monetary Sovereignty and monetary non-sovereignty. So, if China imports less, the euro nations, which rely on export, will suffer. The U.S. will not need to suffer (depending on the actions of our leaders).

Just as China easily can avoid any economic downturn, we could do the same. Our recession could end tomorrow, and we could rise to the greatest prosperity we ever have known. But we have one constraint the Chinese may (?) not have: We have warring political parties, where the “outs” cynically want the economy to be as bad as possible, so they can win the next election and become the “ins.”

So far, our “outs” have done an excellent job of sinking America, by insisting on federal deficit reduction, which reduces Dollar creation. We’ll see whether China encounters a similar problem.

Rodger Malcolm Mitchell
Monetary Sovereignty

Nine Steps to Prosperity:
1. Eliminate FICA (Click here)
4. Long-term nursing care for everyone
5. Free education (including post-grad) for everyone
6. Salary for attending school (Click here)
7. Eliminate corporate taxes
8. Increase the standard income tax deduction annually
9. Increase federal spending on the myriad initiatives that benefit America

Federal Deficits – Net Imports = Net Private Savings