Dr. Susmit Kumar, Ph.D.

 

1.     Introduction

In 2009, Pentagon for the first time conducted series of economic war game exercises. In each exercise, the US consistently lost to China. According to Lou Crandall, chief economist at Wrightson ICAP, which analyzes Treasury financing trends (“U.S. Debt Expected To Soar This Year,” Lori Montgomery, Washington Post, January 3, 2009):

 

While the current market for [US] Treasuries is booming, it’s unclear whether demand for debt can be sustained. There’s a time bomb somewhere, but we don’t know exactly where on the calendar it’s planted.

 

The US is the Titanic of the present time and age, due to go down sooner than later. China has the time bomb to destroy the US dollar and US economy. It is up to China to fix the date to detonate it. The US President Trump, with a five-year-old child brain, has given a wakeup call to China to hasten the process to take over the rein of lone superpower status from the US.

It is worth noting that in the name of the bogus theory called Reaganomics, the corrupt US politicians, in collusion with the Wall Street bankers, bankrupted the US government by giving tax-cuts to ultra-rich (paid by China) and in the name of corporate profits, sent jobs to China, creating the Frankenstein China which is now in a position to swallow the US.

The US economic collapse will force the Asian countries like Taiwan, Australia, New Zealand, Japan, Indonesia, and Philippines to look towards India for leadership against the Chinese aggression.

 

2.     2009 Pentagon Economic Warfare Exercise

 

In March 2009, the Pentagon for the first time held a series of economic war games exercises. In each scenario, the US lost to China consistently. The soldiers were Wall Street traders and executives, economists, and academics—all were American citizens. Wall Street bankers were flown in from Manhattan to a bunker at the Applied Physics Laboratory in Maryland for the two-day event. They were assembled in the Warfare Analysis Laboratory, surrounded by uniformed officers of the highest levels in the Pentagon, facing a dizzying array of screens normally used to simulate nuclear world war. Only this time the weapons were stocks, bonds, and currencies. The group was split into five teams: America, Russia, China, Pacific Rim, and a "grey team", representing shady outfits such as terrorist organizations. They were sent into "bunker rooms" and told to use financial or economic tools—currency, debt, stocks, gold—to bring their enemies to their knees. Then the teams were presented with different scenarios—North Korea is imploding; a major global economy is melting down—and told to do what was in their best interests. Everything was conducted via computer, and they could be as devious and ruthless as they liked. At the end of that Pentagon session, the 80-odd players returned from their bunkers and assessed the damage. China won, without so much as reaching for a gun (“Pentagon prepares for economic warfare,” Helen Rumbelow, The Australian, August 20, 2011; “China’s giant economic sway,” Eric J. Weiner, Los Angeles Times, October 6, 2010.) 

 

The reason for the 2009 Pentagon economic warfare exercises was the fear of dumping of Chinese US holdings at the onset of the 2008 Great Recession. At the onset of the 2008 Great Recession in US, Russian President Putin contacted the Chinese to dump their US holdings to severely damage the US economy. Russia had only $400 billion in US investment whereas China had $1.8 trillion in US investment at that time. Hence China might have lost a lot as compared to Russia had the US dollar and US economy gone down drastically due to their actions. That’s why China did not heed to Russian advice. In a BBC interview, Hank Paulson, the then US Treasury Secretary, described the incident (Russia 'planned Wall Street bear raid', Robert Peston, BBC, 17 March, 2014):

 

Mr Paulson: "I was talking to them [Chinese ministers and officials] regularly because I didn't want them to dump the securities on the market and precipitate a bigger crisis.

 

While asking the US-based firms like Apple, Cisco, Boeing and Pratt & Whitney to stop manufacturing and also doing business in and with China, President Trump forgets that these firms would not like to lose the world’s largest consumer market as China’s population is four times the US and its market for consumer goods has already surpassed the US in several categories; especially for Boeing and Pratt & Whitney, they would not want to lose the largest growing market to their competitor Airbus.

 

3.     US Economy is Highly Vulnerable to Foreign Investors

 

Taking advantage of dollar being the global currency, the US just prints its currency to fund its twin deficits—budget and trade—deficits. Then in return, the same printed dollars come back to the US in terms of investment in the form of Treasury Bills, Corporate Debts, etc. For the last one decade, China is the top buyer of homes in the US. For an example in Irvine, California, population: 280,000, “there are 65,000 houses... and 21,000 of them are owned by Chinese. For example, a $1.2 million house, they pay $1.22 million, all in cash. In recent years, Chinese investors made about half of all home purchases in the city, but that share has fallen to about 36% in 2019” (Chinese buyers pull back from U.S. housing market, hurting home sales, Yan Zhang, USA Today, August 23, 2019).

 

“For the last one decade, China is the top buyer of homes in the US. For an example in Irvine, California, population: 280,000, there are 65,000 houses... and 21,000 of them are owned by Chinese. For an example, a $1.2 million house, they pay $1.22 million all in cash.”

 

Table 1 shows the foreign countries’ investment in the US from 2002 to 2019. This data does not include the investments by foreigners in sectors like real estate which are also significant.

 

 

As discussed in my paper Part III Coronavirus - US Fed for Keeping US Treasury Interest Payment Low – Reason Behind Stock Market Bubble and World-Wide Inequality, due to President Trump’s tax-cut and huge stimulus to mitigate the Coronavirus the carnage on the US economy has increased the US treasury debt to a level which is unsustainable for the US government to pay even its interest every year and it is going to cause debt to increase exponentially which will explode the entire US economy. If the US puts undue pressure on China and China decides to dump its significant amount of Treasury Bills, the interest rate will skyrocket, precipitating a large scale crisis in the US economy which will eventually bring down the US dollar status as the global currency. As discussed in the same paper, the US Fed has gradually reduced the interest rate over more than the last two decades which directly affects the interest rate US government pays interest on its debt as shown in Chart 1 so that the interest payment by the US government would be manageable.

 

“Although the debt increased by nearly 300% (from 2000 to 2019), the interest payment increased by only 59% (from 2000 to 2019). The trick behind it is the US Federal Bank gradually reducing the interest rate.”

 

As shown in Chart 2, the US government is paying a historic lowest rate of 2.5% on its record debt which would be now about $27 trillion in 2020. Every percent increase in interest rate will increase $270 billion interest payment in budget, which will force the US government either to cut its expenditure somewhere, say, in massive military budget (which was $686 billion in 2019). Therefore as discussed in Section 2, if China would start the fire sale of its US Treasury Bills in case China is pushed into a corner by the US due to some domestic political reasons, all other countries would lose faith in the US dollars, which are nothing but just printed papers, and the US economy would have same fate as the 1990s Russian economy. The following statement by the economist Allan H. Meltzer at Carnegie Mellon University sums up how the US has been surviving since the 1980s (“U.S. Trade Deficit Hangs In a Delicate Imbalance,” Paul Blustein, Washington Post, November 19, 2005),

 

“We [United States] get cheap goods in exchange for pieces of paper, which we can print at a great rate.”

 

One point worth noting is that the 2019 total budget spending was $4.4 trillion and due to the massive stimulus package to mitigate the Coronavirus damage on economy, the 2020 budget deficit may be as large as $4 trillion (i.e. nearly total 2019 budget spending) in 2020 (Federal Budget Deficit Will Approach $4 Trillion In 2020, CBO Says, As The Economy Continues To Nosedive, Sarah Hansen, Forbes, April 24, 2020). Apart from the $4 trillion stimulus, Congress has passed an additional $3 trillion stimulus bill on May 15, 2020 to further stem the slide of the economy after the record 40 million Americans have filed for unemployment (House Democrats pass $3 trillion coronavirus relief bill despite Trump’s veto threat, Erica Werner, Washington Post, May 15, 2020; 1 in 4 American workers have filed for unemployment benefits during the pandemic, Anneken Tappe, CNN Business, May 28, 2020).

 

In 2019, total US budget spending was $4.4 trillion and budget deficit was $1.2 trillion. In 2020, the budget deficit might be $7 trillion due to stimulus fund spending.

 

Chart 1 Average Interest Rate on Treasury Bill

 

 

Table 2

 

 

 

Table 3

 

 

Chart 2. 2019 US Budget

 

 

 

If Mr. Trump escalates the trade war with China, the US might witness its own “Suez Fiasco” that caused the United Kingdom and France to lose their superpower status. Describing the stranglehold of China over the US economy, Richard Haass, President of Council of Foreign Relations, a premier US think-tank, said (“Don't be distracted by Greece: Americans must also face financial facts,” Justin Webb, The Telegraph (UK), June 25, 2011.)

 

Essentially the U.S. took advantage of Britain’s Sterling problem to exercise economic leverage over the British government, and that led to a hasty retreat in the 1956 Suez War (despite defeating the primitive Egyptian army on all the fronts, the invading forces had to withdraw). So one can imagine a situation nowadays, where, say, there is a crisis over Taiwan between the U.S. and China—which holds a significant number of dollars—and one can imagine the Chinese might be prepared to threaten the dollar, make some comments to weaken it unless the U.S. backs off some of its support of Taiwan.

 

The 1956 Suez War is also called the “Suez fiasco” that caused the United Kingdom and France to lose their superpower status.

 

After all the Western countries, except the US, Japan and Canada, joined the China-led Asian Infrastructure Investment Bank in 2015, Lawrence Summers, a noted US economist, ex-President of Harvard University, and the Treasury Secretary during Bill Clinton administration, said (“A global wake-up call for the U.S?" Larry Summers, Washington Post, April 5, 2015):

 

This past month may be remembered as the moment the United States lost its role as the underwriter of the global economic system. True, there have been any number of periods of frustration for the United States before and multiple times when U.S. behavior was hardly multilateralist, such as the 1971 Nixon shock ending the convertibility of the dollar into gold. But I can think of no event since Bretton Woods comparable to the combination of China’s effort to establish a major new institution and the failure of the United States to persuade dozens of its traditional allies, starting with Britain, to stay out.

 

In his 2011 book Eclipse: Living in the Shadow of China's Economic Dominance, India’s ex-Chief Economic Advisor and Senior Fellow of Peterson Institute for International Economics, Dr. Arvind Subramanian predicted that the next 20 years China would be a superpower and the biggest economy in the world. He further said, “When Asian trade becomes more China-centred there is no reason for it to be dollar-denominated. It will be progressively denominated in RMB, settlements will happen in RMB, and financing will happen in RMB.” (China's renminbi will be premier reserve currency by end of decade, says economist, The Hindu Business website, Updated on March 12, 2018  Published on October 07, 2011).

 

Most recently the European Union foreign affairs chief, Josep Borrell, asked the 27-nation bloc to have a “more robust strategy” toward China amid signs that Asia is replacing the United States as the center of global power. He told a gathering of German ambassadors that we were witnessing the end of an American-led system and the arrival of an Asian century (Top EU diplomat: U.S. is fading, but China is gaining and requires ‘robust strategy’, Los Angeles Times/AP, May 25, 2020).

 

As per a UBS survey also, China will replace the US the world’s biggest superpower by 2030 China will replace the US as the world’s biggest superpower by 2030: UBS survey, Scott Saloway, Yahoo Finance, January 24, 2020.

 

As per the Bank of England governor Mark Carney, China’s renminbi is likely to become a global reserve currency to rival the US dollar (Bank of England head: China's renminbi could one day rival the dollar as the world's currency, Oscar Williams-Grut, Yahoo Finance UK, January 9, 2019).

 

4.     Weimar Republic and Hyperinflation

Weimar Republic was the German state from 1918 to 1933. As a term, it is an unofficial historical designation that derives its name from the city of Weimar, where its constitutional assembly first took place. Weimar Republic is synonymous with hyperinflation. Because Germany was not solely responsible for starting World War I, it was with great difficulty that Germans swallowed the Treaty of Versailles which has reparation clause. Germany paid the first installment of 1 billion marks as reparations. It did so by printing paper Deutsche marks and selling them in the open market. This caused horrendous inflation of the German currency. Following this, Germany asked for a four-year moratorium on reparations. Without consulting the other Allies, French and Belgian military forces immediately occupied the Ruhr, the industrial heartland of Germany, in January 1923, in retaliation for the German failure to pay up. Instead of acceding to French demands, Germany told its workers not to work, which caused production to shut down. This industrial shutdown caused hyperinflation of the German currency, although the government paid the workers. By mid-1923, the Deutsche mark was losing value by the minute. A loaf of bread costing 20,000 Deutsche marks in the morning would cost 5,000,000 by nightfall. Restaurant prices went up while customers ate their dinner. Workers were paid twice a day just to keep up with inflation. On November 15, 1923, when final economic collapse arrived, it took 4.2 trillion German marks to buy a single U.S. dollar (The New Encyclopedia Britannica, Volume 20, Ed. 15, Chicago, 1991, p. 118).

 

Due to high foreign debt and high trade deficit, the US economic situation would be that of the Weimar Germany, i.e. it would face high inflation and Great Depression for one to two decades as discussed in the article below. Unlike the three other economic superpowers—China, Germany and Japan—only the US has trade deficits year after year for last nearly 50 years. Hence, the moment the US dollar loses its global currency status, the US will have the same fate as the Weimer Republic.

 

“10 Ways Life Will Change If China Becomes The World’s Superpower”, MARK OLIVER JUNE 18, 2018

 

http://listverse.com/2018/06/18/10-ways-life-will-change-if-china-becomes-the-worlds-superpower/

 

 

 

 

 

 

 

5.     The American Establishment Knows the Impending Collapse of US Economy  (US-Style Capitalism is as Nasty as Soviet Communism) Following quote is from an article on the editorial page of New York Times (America's Truth Deficit, William Grieder, New York Times, July 18, 2005):

 

DURING the cold war, as the Soviet economic system slowly unraveled, internal reform was impossible because highly placed officials, who recognized the systemic disorders, could not talk about them honestly. The United States is now in an equivalent predicament. Its weakening position in the global trading system is obvious and ominous, yet leaders in politics, business, finance, and the news media are not willing to discuss candidly what is happening and why. Instead, they recycle the usual bromides about the benefits of free trade and assurances that everything will work out for the best (America's Truth Deficit, William Grieder, New York Times, July 18, 2005)

 

​Much like Soviet leaders, the American establishment is enthralled by utopian convictions—the market orthodoxy of free trade globalization. The United States is heading for yet another record trade deficit in 2005, possibly 25 percent larger than last year's. Our economy's international debt position—accumulated from many years of tolerating larger and larger trade deficits—began compounding ferociously in the last five years. Our net foreign indebtedness is now more than 25 percent of gross domestic product and at the current pace will reach 50 percent in four or five years.

 

For years, elite opinion dismissed the buildup of foreign indebtedness as a trivial issue. Now that it is too large to deny, they concede the trend is "unsustainable". That's an economist's euphemism which means: things cannot go on like this, not without ugly consequences for American living standards. But why alarm the public? The authorities assure us timely policy adjustments will fix the matter.​

Reporters and editors typically take cues from the same influential sources and learned experts in business, finance, and government. If the news media decided to cast these facts as the story of the world's only superpower losing ground in global competition and becoming financially dependent on strategic rivals like China, the public would take greater notice. But governing elites would regard such clarity as inflammatory. America's awesome trade problem is instead portrayed as something else—an esoteric technical dispute about currency values, the dollar versus the Chinese yuan. The context is guaranteed to baffle and benumb citizens.​

The possibility that the United States can no longer afford globalization, at least not as it now functions, is what opinion leaders do not wish to discuss. A few brave dissenters have stated the matter plainly and called for significant policy shifts to stop the hemorrhaging. Warren Buffett, the legendary investor, says the United States is destined to become not an "ownership society", but a "sharecropper society". But his analysis, and others like it, are brushed aside. (America's Truth Deficit, William Grieder, New York Times, July 18, 2005).

 

Warren Buffett blasted the continued the US trade deficit by saying, "A country that is now aspiring to an 'Ownership Society' will not find happiness in—and I'll use hyperbole here for emphasis—a 'Sharecropper's Society. But that's precisely where our trade policies, supported by Republicans and Democrats alike, are taking us." (Buffett: Berkshire Hathaway CEO Blasts 'Sharecropper's Society', Chris Noon, www.forbes.com March 7, 2005).

 

6. Communism Collapsed Due to Collapse in Oil Price in Late 1980’s and German Banks – Not Due to Reagan

 

From the early 1950s to the mid-1960s, the Soviet Bloc’s economic growth was astounding. Its GDP increased at a tremendous rate following the planned economy program of transferring a large amount of manpower from the agricultural sector into industry. In many respects, the region was transformed more than western Europe during these few decades, although that may have been chiefly due to the fact that it was so much poorer and underdeveloped to begin with. Russia’s steel output, a mere 12.3 million tons in 1945, soared to 65.2 million tons in 1960 and to 148 million tons in 1980, making the U.S.S.R. the world’s largest producer; electricity output rose from 43.2 million kilowatt-hours, to 292 million, and then to 1.294 billion kilowatt-hours during the same periods; and automobile production jumped from 74,000, to 524,000, and then to 2.2 million units. The list of production increases could be added to almost indefinitely. The Soviet Bloc achieved an average of more than 10 percent annual growth in industrial output during this period. Its space program, which including successfully launching the first space vehicle, “Sputnik,” even surpassed the American space program, and the U.S. had to work hard to close the “space gap.”

 

In the 1970s, however, growth reduced to a rate of three to four percent. The previous high rate of growth had been due primarily to the use of vast, reallocated pools of labor and capital, and these had become utilized to their full extent, unable to provide further dramatic increases in productivity. Japan, by using modern technology like computers, telecommunications, and robotics instead of relying so much on labor, was able to surpass the U.S.S.R. in terms of GNP, as was the West. In comparison, Soviet equipment was outdated.

 

Premier Mikhail Gorbachev attempted to reform the Soviet economy in the 1980s with “glasnost” (freedom of speech, transparency in government) and “perestroika” (reconstruction of economy, economic reforms), for which he needed money. Western banks, especially German, initially gave the Soviet Union loans, but subsequently stopped, leading to economic crisis in the U.S.S.R. Soviet intervention in Afghanistan in the 1980s also resulted in a financial black hole. Lower crude oil prices during the late 1980s, oil being the primary Soviet export, further exacerbated the situation.

 

After record-breaking prices in the early 1980s, there was drastic reduction is price of crude oil, the main Soviet export, during late 1980s and early 1990s after the end of Iraq-Iran War (1980-88). Crude oil price dropped from an average of $78.2 a barrel in 1981 to as low as $7 a barrel one time. These two factors led to a rise in Soviet external debt. Oil was the main export and source of hard currency for the U.S.S.R. Insufficient investment and lack of the modern technology needed to harness hard-to-reach oil fields prevented her from expanding production, however, and in fact Soviet oil production began to decline. The government was also borrowing heavily to modernize its economy. These two factors led to a rise in Soviet external debt. In 1985, oil earnings and net debt were $22 billion and $18 billion, respectively; by 1989, these numbers had become $13 billion and $44 billion, respectively. By 1991, when external debt was $57 billion, creditors (many of whom were major German banks) stopped making loans and started demanding repayments, causing the Soviet economy to collapse (The End Of Poverty, Jeffrey Sachs, The Penguin Press, New York, 2005, p. 132)

 

Because of lack of hard currency Russia's shelves were empty of bread. In 1984-85, the USSR imported 55.5 million tons of both wheat and coarse grain, a record for a single country to take in one year. Beginning with the 1972-73 crop season, the Soviet Union imported more wheat than any nation had ever done. It is an irony that today Russia is the number one exporter of wheat in the world.

 

Even the CIA had not predicted the Soviet Union’s collapse in 1991. Despite being a military super-power, with significant number of aircraft carriers, submarines, military aircrafts and tanks, second only to the US, the Soviet Union collapsed due to the paucity of some tens of billions of dollars.

 

Had oil prices increased, like it did during early Putin administration (2000s) or had German banks financed Gorbachev’s Perestroika and Glasnost like Japan and China financed US debts since 1980s, the USSR and communism would not have collapsed in 1991 at all. Both Japan and China have invested more than $1 trillion in the US Treasury Bonds, each. Even countries like India and Russia had significant amount of their FOREX invested in the US financial system. It is just [US] Republican Party propaganda that this collapse was due to Reagan’s military buildup. Had Japan not financed American deficits in the 1980s, the U.S. economy and capitalism would have collapsed before communism.