Is China the next money machine?
By far the biggest question facing the global economy is where the money supply will come from going forward. Money is debt, and money is really only created when consumer debt is created. Government debt simply shuffles existing debt around. Since the 1944 Bretton Woods agreement the U.S. consumer has been the global source of new debt, but we are tapped out. Consumer debt is plummeting at an unheard of rate and this is causing deflation around the world.
The average U.S. consumer is now indebted for the rest of his life and current generations cannot be counted on as a reliable source of debt creation. We've had an incredible stint as the primary money creation engine of the world, what with our consumerist culture and our willingness to take on new debt to buy a Big Mac and all, but we're tapped out, and a new source of money must be found. Our current system of compounding interest and debt-based money has been around for some 600 years and the people who own the most debt would certainly like to see it stay intact if possible. It's a wonderful system if you own the debt, not so much if you create it like most of us do.
One development which I'm watching closely is whether China can be harnessed as the source of world money creation. I'm now seeing the first rumblings of this as evidenced by Tim Geithner's recent trip to Beijing:
"One of the objectives of the trip . . . is the importance of laying the foundations for balanced, sustained growth in the future," the official said. "For China this involves stronger domestic demand growth. It involves shifting the structure of the Chinese economy to [spur] domestic demand."
They certainly have the population to do this with an estimated 1.3 billion people, the only question is whether their culture is as amenable to lifelong indentured servitude as ours is.
The mechanics of this will be interesting. For example, one of the biggest questions is what currency will be used to denominate this new debt. I would not be at all surprised to see the Dollar floated as a potential global currency since China already holds so much of it and so much of America is already indebted to China in this currency.
This bears watching as this has enormous implications for both business and our way of life. If we see manufacturing start to shift back to the U.S. we'll know that the game is afoot. It could be a complete reversal of the last 30 years. If this is indeed what's happening it will require some nimble maneuvering from an investing perspective to stay in front of the new wave of money pouring out of China.
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