The Fed and China's Grand Strategy

   by J. R. Nyquist, Global Analyst. June 17, 2004

On Tuesday Federal Reserve Chairman Alan Greenspan told the Senate Banking Committee: "we must remain prepared to deal with a wide range of events. Particularly notable in this regard is the fortunately low but still deeply disturbing possibility of another significant terrorist attack on the United States." After 9/11 the Fed expanded the money supply to ward off financial collapse. Now Greenspan talks as if prophylactic measures are required in advance of a second attack. Could it be that the Fed is expanding the money supply and suggesting a potential terrorist attack as a pretext? Could it be that the Fed is struggling to cope with more fundamental structural problems in the U.S. economy? And might those structural problems involve America's relationship with China?

China is an important economic player; and contrary to what you may have heard, China is not in the pro-American camp. It is a rival power that is currently using trade as a strategic steppingstone. Notion's of China's self interest being tied to China-U.S. trade are deceptive. China's political leaders want their country to become the world's leading power. They resent American military dominance and seek to undermine America's global position, using economic, diplomatic as well as military means. China's trade with America is a tool in a larger strategy that aims at America's downfall. Failing to realize this, American policy toward China has never been realistic.

The bipartisan U.S.-China Economic and Security Review Commission, set up by Congress, recently noted that China has up to 550 missiles aimed at democratic Taiwan. In addition, China is arming Iran, North Korea and Pakistan with missile and nuclear-related supplies. China-watchers are increasingly worried that China's military buildup seriously threatens Taiwan's existence as an independent state. In terms of the Fed's new inflationary policy, the signal for China unleashing its military against Taiwan may be connected with the falling value of the U.S. dollar and the obvious futility of financing U.S. indebtedness. Once the Chinese lose interest in the dollar their trade steppingstone will have outlasted its usefulness. War would then be a viable option. China-s two-track economy would switch from making consumer goods to military goods.

China has also outflanked the U.S. on the diplomatic front. According to the U.S.-China Economic and Security Review Commission, America may have to reassess its one-China policy, which gives way to the fiction that China and Taiwan are one and the same country. This fiction was the basis for America's diplomatic recognition of communist China in the 1970s. It was also the basis for America's economic relationship with China. To suggest that the United States renounce the one-China policy is to suggest a break with China - economically and politically. Yet this suggestion has now emerged and will begin to percolate through Washington. Quite possibly the economic shock that Greenspan is bracing for will not come from al Qaeda, but from China. Perhaps our relationship with China has been a ticking time bomb and now the bomb is about to explode.

The reality of the situation is this: China is preparing to take Taiwan by force. Taiwan is a democracy and President Bush will defend it. This suggests that China-U.S. relations have advanced from a false starting position toward a natural dead end. Chinese diplomacy attempted to isolate Taiwan over two decades ago. Yet Taiwan has flourished. The isolation was equivocal from the start. Now China is turning up the heat, using economic pressure against a vulnerable U.S. economy and military pressure against Taiwan.

The United States is facing a choice. Either give way to China or uphold Taiwan. Either suffer an economic break with China, and a possible war, or give China what it wants. But that would mean a betrayal of democracy. Furthermore, how could the Bush administration (or any administration) expect to uphold democracy in the Middle East while abandoning democracy in the Far East?

There is also a legal issue at stake. The United States has formally and stupidly agreed that China has sovereignty over Taiwan. This means that any Chinese invasion of Taiwan is within China's rights as recognized by the United States. In other words, a Chinese invasion of Taiwan is legally justifiable since Taiwan is technically a rebel province that is not officially recognized as a country by the United States. Here the hypocrisy of U.S. Far East policy is exposed in all its emptiness. American businessmen saw a profitable relationship with China in the 1970s and 80s, and political compromises were made that never should have been made. Now China's unfair trading practices, with its $124 billion trade surplus with the U.S., have put our economy in a difficult position – bolstering China's chances of taking Taiwan. Add to this China's cunning acquisition of U.S. debt and you see what powerful economic tools the Chinese have assembled. Even if America can repulse a Chinese assault on Taiwan, could the American economy weather an unprecedented inflation, with globally devastating effects?

China's economic policy has been calculated and deceptive from the outset. Deng Xiaoping, the communist leader credited with China's economic miracle, once stated: "We must not in the least neglect or slacken criticism of bourgeois and petty-bourgeois ideologies, of ultra-individualism and anarchism. It is absolutely wrong to lose faith in socialism and think that it is inferior to capitalism just because we have made mistakes." The goal of China, said Deng, "is to build a socialist civilization with a high cultural and ideological level, so as to inculcate ideals, morality, knowledge and discipline in all our people." Any other course, noted Deng, would be criminal. In 1977 he told the CCP Central Committee that communism was engaged in something called "the international united front struggle" which was a strategy about which the "American imperialists" know absolutely nothing. "We belong to the Marxist camp," said Deng, "and can never be so thoughtless that we cannot distinguish friends from enemies." He went on to say that Nixon, Ford, Carter and future "American imperialist leaders were all enemies."

Fed Chairman Greenspan is playing it cool with his statements about inflation and the need to brace for future terrorist attacks. Could it be that China is increasingly on his mind? Could it be that China is preparing – or already has begun – to economically squeeze the United States? And wouldn't the natural reaction to this be inflationary?

The plot thickens.

© 2004 J. R. Nyquist