How The US Paper Tiger Crumbles

paper tigerThe Statists who take pride and comfort in the US being the world’s foremost military power (which others see as bullying) seem not to notice how unsustainable this condition truly is. History teaches us that all empires die from within. All extend themselves beyond what they can support. The US is no different.

Nations before and after Rome rose and fell from world leadership and dominance as a result of decay from within. Understanding the precise cause of each rise and fall is not necessary. All involved either overreach or the decay in economic conditions needed to support the superstructure developed. Overreach or decaying of economic power (or both) explains them all. The US will ultimately be no different.

The US embarked on its downfall in the mid-Sixties when Lyndon B. Johnson introduced the Great Society while at war in Vietnam. The term “guns and butter” described the idea that the US could both be at war and provide for its citizens at the same time. Fifty years later, guns and butter has been taken to new levels. Indeed, it has been institutionalized. The US is almost in a constant state of war with someone, somewhere and  it has become a true Welfare State with all the social payments and disincentives that implies.

military spending

The chart to the right shows military spending. Clearly, the US dominates almost the rest of the world combined. The might of the US forces is incomprehensible. Yet, every dollar spent on the military is a dollar not spent on producing products that people want. Fifty years of this has weakened our economy. So too has the explosion in welfare payments, again an unproductive endeavor. Over this period the US has hollowed out its economy. It is no longer capable of supporting what has been committed to. Something must give and eventually it will.

The Democrats say it should be the military and the Republicans say it should be the welfare state. Neither party is willing to compromise while both continue to expand. The absence of decisions does not mean a continuance of the status quo. Something that cannot go on will not, as noted by Herb Stein. We are at or near our breaking point. Something will soon give, bursting likely both our military and economic false senses of security.

The methods that kept the US afloat are disappearing. In recent decades much of the smoke and mirrors has been achieved via debt, spending money we didn’t have or tax for. That support seems to be ending.

The chart below, from Zerohedge, shows incremental treasury holdings of the Chinese, our biggest banker. In December they sold a substantial amount of treasuries ($48 billion), especially when compared with other months in 2013.

China TSY Holdings DEC_0

china reservesThe graph to the right shows the same withdrawal from US assets by China.

Concern regarding the reduction(s) was expressed by Zerohedge:

That this happened at a time when Chinese FX reserves soared to all time highs, and when China had gobs of spare cash lying around and not investing in US paper should be quite troubling to anyone who follows the nuanced game theory between the US and its largest external creditor, and the signals China sends to the world when it comes to its confidence in the US.

The weak and vulnerable condition of the US economy and the US dollar are all that China needs to have its way in the world. Their military would lose big in any major confrontation with the US, but they don’t need their military to get their way. They hold the US economy and the dollar hostage.

Suppose, for example, China told the US that they intended to take Taiwan back. It has always belonged to them, at least in their eyes. The US has vowed to protect Taiwan against any such attempt. To accomplish this, all China has to do is pick up the phone and tell the US that they want Taiwan. If that is unsatisfactory, China will begin dumping its dollars and treasuries. Sure, that would hurt China in terms of the effect it would have on all dollar denominated assets. But it would be cheaper than going to war with the US. Furthermore, this route is a guaranteed success.

The US would be forced to capitulate to this threat rather than experience the consequences. In short, the Chinese are in position to ruin our economy any time they choose. Financial power and financial blackmail works when a nation’s survival is at risk. That is the position that short-sighted policies from both political parties have left us in. We lived beyond our means and now our banker owns us. 

How likely is this to happen? Given the animosity between China and the US, I would say it is likely. Avoiding it for another year or two does not help the US. It only makes us more vulnerable as we continue to live beyond our means. 

Nor does the blackmail have to end with Taiwan. You see, the economic shell that the US has become is so fragile that China can break it any time it chooses.

The US digs a deeper hole with every day that passes. It continues to spend well beyond anything it can afford. Current economic policies offer no hope for any economic recovery. They ensure that we will remain economically impotent for as long as they are in place. It is difficult to imagine the Chinese designing more effective policies to achieve their goals.

China has reasons to not play their trump card so long as we continue to be a big importer of their goods and don’t get in their way. However, we are becoming poorer by the day and our ability to live beyond our means diminishes every day. Once our economy implodes, and it will given the policies we currently follow, the US is of no use to China anymore.

The so-called Paper Tiger will be treated with disgust by the Chinese and many former allies around the world.

Of course the US collapse could be precipitated from within. That could happen before China decides to play its strategy card.

Or it could happen because China is as much of a Paper Tiger as the US. A recent column by Michael Shedlock entitled China Fooled the World (but it canot last) explores this increasingly popular opinion.

In either case, things don’t look good for the US and its continued hegemony.

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