By Elizabeth Brinsden
Could China be coveting the role of the next economic superpower, thereby supplanting the USA? If so, is China planning to do this by design or is it simply awaiting this result by default as a result of the total collapse of the American economic system?
Whether we like it or not, China has already become the 800 lb Gorilla in the dining room, economically speaking. We ignore this fact at our peril. Thus it may be advisable to reorientate our thinking from that of the rationalist, pragmatic thought processes which arose out of the Enlightenment and complement our thinking with something more akin to that of the Chinese.
In order to accomplish this, it is constructive to take a closer look at the ancient Chinese philosopher, Master Sun Tzu. In an earlier article , based on a book by Harro von Senger on this theme[1], I have attempted to do this in connection with the Special Drawing Rights[2], as advocated by the Chinese earlier this year. However, I will now examine this idea in the context of the the Chinese possession of US Bonds, a subject not only of relevance to these two countries, but also for the stability of the entire international economic system.
At a superficial level, it may appear to the onlooker that China has been sucked into a giant malinvestment by purchasing these bonds, but a closer look at Master Sun’s stratagems may reveal a well conceived and even cunning plan.
At the outset, according to the US Treasury website, China stopped purchasing US bonds in May, 2009[3]. With that, our attention must turn towards the possibility of a massive sale of these bonds on the part of the Chinese and the consequences this would have for the international economic system. This scenario is not new; it was the subject of a very interesting book published at the beginning of the 1990’s by James Dale Davidson and Lord Rees Mogg[4] . At that time it was Japan which held the most US bonds but the principle, as expounded by these two authors, still applies today.
Could this ever happen? To the Western thinker, the massive sale of US Bonds would amount to the self infliction of wounds on the part of the Chinese and thus would be deemed inconceivable . But perhaps Master Sun can provide a different perspective into this matter.
Master Sun Tzu was born in 544 BC and died in 495BC. ( whereby it must be pointed out that there is no proof that this was a real person at all ) His most famous work was The Art of War , which laid out 36 stratagems, originally conceived for application in war , but which have since penetrated other fields as well, particularly that of the business sphere. Even in the West , business conjures up overtones of a battle field. The question now becomes which statagems could be applicable to this case and here it becomes relevant to divide the discussion into two broad categories; acts of commission and acts of omission.
First of all , those which can be described as acts of commission. In this case, at least four stratagems could be applicable.
Stratagem Nr. 15
To entice the tiger down from the mountain
Here the humiliation of the debtor, the USA, towards the creditor, China, forces the economic superpower to descend from its throne to a level playing field with the so called lesser power.
Stratagem Nr. 19
To withdraw the wood from under the boiling pot
Ceasing to purchase US bonds, must eventually have an impact on the debt driven economic growth of the borrower.
Stratagem Nr. 28
To entice onto the roof and then pull away the ladder
The easy sale of US bonds to the naive purchaser must automatically lull the debtor into complacency whilst the ladder (i.e. bond sales) is removed.
Stratagem Nr. 30
The reversal of roles in which the guest becomes the host.
This stratagem must be considered to be the most important for the purposes of this article whereby the once economic superpower, is forced to assume a role of subservience to the newly emerging power of the creditor, China.
What about an act of omission in the form of a default on the part of the USA? How can the 36 stratagems be applicable in this situation?
Stratagem Nr. 4
Awaiting at one’s ease the exhausted enemy
If America defaults the answer should be self explanatory. But the question arises, how do we account for the self affliction of damage onto the creditor? A look at the recent ascent of the gold price may offer a possible explanation.
From an article written on the 23rd September, 2009[5], we learn that China has been purchasing gold and has raised its level to nearly 1050 tons from a mere 400 in previous times. It is reasonable to assume that this trend will continue unabated and it might be of interest at this point to take a short look at the the history of paper money in China[6].
The Chinese were the first to use paper money , for a period of about 300 years between the years 1050 to 1450 – during the S’ung, Yuan (Mongol) and Ming dynasties. The first use of paper money resulted in abuses but the most successful period was that during the early Yuan dynasty. These currencies were theoretically redeemable in some form, and were therefore not fiat money as we have experienced it since President Nixon cut the last tie to gold redeemability in 1971.
In the opinion of this author, present day China may well be heading in the direction of pegging its currency in some form to something else and that that something else, is very likely to be gold. Then China could offload its US bonds by sale , once again raising the price of gold dramatically which in turn would compensate for the dollar losses. But this could spell disaster for the international economy if done so at a too rapid rate.
Not only would this give China the only trustworthy currency in the world, but it would simultaneously and conveniently constitute the knock-out blow to the USA as the economic superpower. In other words, stratagem 4 , the awaiting at ease of the exhausted enemy , may offer an explanation for an otherwise seemingly sensless act of omission on the part of the Chinese.
Thus it seems highly likely, that China has America well and truly cornered from whichever angle one cares to examine the situation.
What could constitute a refutation of this conclusion?
One possible reservation could jusitfiably be raised that the gold reserves do not constitute the entire economy. That is indeed the case but from a historical point of view,i.e. for the last two hundred years at least, the country which has had the largest gold reserves, has also been annointed the economic superpower.( England in the 19th century, America in the 20th)
Now another possible objection could take the form of pointing out that America still has the largest gold reserves in the world, something in the vicinity of 8,700 tons. However , according to a chart from the year 2005[7], these reserves are encumbered , i.e. either sold or leased. In fact rumours are rife , (in their most extreme form) , that maintain that the once almighty Fort Knox may even be empty! Indeed the ultimate irony would have to be if some of these reserves should already have found their way into the vaults of China.
In conclusion ,when approached from the perspectives adapted from Master Sun’s 36 Stratagems, it is indeed highly likely that China is in fact intending to supplant the USA as the next economic super power and may very well succeed in so doing.
On this note , it may well be prudent for all Central Bankers et al., to take heed of something another famous Chinese thinker, Confucious, once said:”hold gold.”
Dr. Elizabeth Brinsden is a senior lecturer on the Faculty of Socioeconomics at the University of Jana Evangelisty Purkyne in the Czech Republic. . She can be reached at mailto:elizabeth.brinsden@ujep.cz
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