The Brewing War With China

Addison Wiggin – October 12, 2011

  • How a “trade war” with China could lead to “hot lead”… both are closer than you might think…
  • Alas, hope springs eternal… the vapor behind the Esperanto market rally…
  • Prayers unanswered: Harrisburg, Pa., files for bankruptcy….
  • Readers “flabbergasted” that we’d find any similarities between the Tea Party protesters and Occupy Wall Street… how dare we… editors begin to converge on Charm City for safety and survival

   “I want to go to war with China,” declared a presidential candidate last night on national TV.

Granted, we’re taking this declaration out of context. A little, anyway. “I don’t want to go to a trade war,” said former Sen. Rick Santorum. “I want to beat China. I want to go to war with China and make America the most attractive place in the world to do business.”

   Before we begin, we have to say we’ve been dutifully ignoring the “China issue” for months.

Jim Chanos’ dire prediction of a collapse of the red charade amid our own fledgling effort to get a publishing business started in Beijing have put a damper on much of our enthusiasm since spring 2010.

Not to mention the fact that following our trip to China in May of that year, we made a series of stock recommendations for Chinese companies listed on U.S. exchanges… they were about as popular among readers as a pimple on the arse of a bus driver.

Still, the rhetoric among political candidates, and a growing pile of evidence that the rancor between the New World and the Middle Kingdom threatens to dominate the headlines in 2012, has lead us to break radio silence today.

Let’s follow the breadcrumbs…

   Yesterday, by a vote of 63-35, the U.S. Senate passed a chest-thumping bill that aims to punish China for “manipulating” the remnimbi.

“The proposed legislation,” explains Singapore’s Business Times Washington correspondent, Leon Hadar, “would replace the current system under which the Treasury Department is required to cite countries that ‘intentionally’ manipulate their currencies.”

Instead, we’d get a system “under which the Treasury would determine whether any foreign currencies are in fundamental misalignment, and propose ways to correct the imbalance with countries that are named. Countries that fail to fix their currencies would be subject to anti-dumping duties and other penalties.”

   The reaction from Beijing was swift. The official Xinhua News Agency invoked the ghost of the Smoot-Hawley Tariff Act that helped turn a depression into the Great Depression.

“Comparing the current political and social situation with that of 80 years ago,” said Xinhua, “we can find stark similarities: an economic downturn, a high unemployment rate, marked popular discontent and growing political conflicts, especially when presidential politics is getting hot.”

Thus, hours after the vote were TV viewers treated to the sight of another candidate, Mitt Romney, saying he’d immediately brand China a currency manipulator upon taking the oath of office. But he hastened to add, “I don’t want a trade war with anybody.”

Too late. A different kind of “trade war” is already underway.

   China has already outmaneuvered the United States for the postwar oil spoils in Iraq… without ever firing a shot.

“China is the biggest beneficiary of Iraq’s oil treasure,” declares Gal Luft from the Institute for the Analysis of Global Security. “Chinese companies backed up by the Chinese government enjoy serious advantages over the international oil companies (IOC) and also have better bargaining power.”

In the summer of 2009, Iraq awarded contracts to develop seven major oil fields. China’s CNPC was the big winner… along with Russia’s Lukoil, Malaysia’s Petronas and France’s Total. Exxon Mobil got leftovers.

In the summer of 2011, the Iraqi and Chinese governments signed two economic cooperation deals. China builds pipelines and other infrastructure, Iraq gives China access to oil.

PetroChina is already planning two pipelines that would stretch from Iraq all the way to China. “Exxon, on the other hand,” says Morningstar analyst Allen Good, “has shareholders to answer to and can’t simply bid up resources without regard to return on investment.”

   “China has the money and is clearly a rising power,” explains Cameron Hanover analyst Peter Beutel. “It can offer political help, technological help in some cases, military aid — which none of the major [oil companies] can.”

“So take Libya, for example. China can offer guns and weapons and can offer political protection to the new government. So can France, but the majors can’t. That’s the biggest difference right there.”

That would be ironic, considering how some experts believe the Libya war was a Western attempt to checkmate China. “China has extensive energy investments and construction investments in Libya,” said former Reagan Treasury Department official Paul Craig Roberts last spring. “They are looking to Africa as a future energy source.”

   In November 2006, China invited leaders of 48 African countries to Beijing to discuss economic issues. No. 1 on the agenda was access to energy and minerals:

China’s big move

The following month, the Bush White House authorized the formation of AFRICOM — a new U.S. military command with oversight for Africa. Previously, the duties were split among three other regional commands.

Discussing it during congressional testimony in late 2007, Defense Department adviser Peter Pham was explicit about AFRCIOM’s aims: They were “protecting access to hydrocarbons and other strategic resources, which Africa has in abundance… a task that includes ensuring against the vulnerability of those natural riches and ensuring that no other interested third parties, such as China, India, Japan or Russia, obtain monopolies or preferential treatment.”

…and America’s countermove

AFRICOM had its first “big war” this year… in Libya. “Washington is trying to cripple its main rival, China,” declares Paul Craig Roberts, “by denying China energy. That’s what this is really about: a reaction by the U.S. to China’s penetration of Africa.”

   There’s also a looming U.S.-China conflict in China’s own backyard.

“Today, America maintains the most powerful military in the Pacific region,” writes John Feffer of the Institute for Policy Studies, “ supported by a constellation of military bases, bilateral alliances and about 100,000 service personnel.”

“To Be Specific, It’s Our Pacific,” was the title of a popular American song during World War II. American leaders still see it that way. And they don’t like what’s building right now in the South China Sea.

“The time to use force has arrived in the South China Sea,” declared the Communist Party newspaper Global Times on Sept. 27. “Let’s wage wars on the Philippines and Vietnam to prevent more wars.”

China has a long-standing territorial dispute with the Philippines and Vietnam over two clusters of islands, the Spratlys and the Paracels. The region is estimated to hold 7 billion barrels of oil and 900 trillion cubic feet of natural gas.

“We expect South China Sea tensions to continue,” says former Philippine president Fidel Ramos. “China’s proximate aim, it seems to me, is to limit American freedom of access” and “erode the credibility of Washington’s security guarantees to the East Asian states.”

Not that the Pentagon would stand still for this. It has ambitious plans to build up U.S. forces on Guam — “a new aircraft carrier berth,” says UPI columnist Martin Walker, “submarine and logistics bases, facilities for more stealth warplanes, B-2 and B-52 bombers on Guam and to move 8,600 U.S. Marines to the island.”

   “This could be terribly, terribly dangerous if we turn into a trade war,” says Vancouver veteran and China bull Jim Rogers. “Whenever people get slapped in the face, they always think they have to slap back.”

And it wouldn’t even take a shooting war to do lasting damage. “If America does put tariffs on the Chinese, the Chinese have various weapons at their disposal; they can stop buying American government bonds; they can sell American government bonds.”

“If they did that, interest rates in America would go through the roof.”

Alas, this is the clipping of the U.S. government’s “credit card” we’ve been warning about. Overnight, the rates the U.S. Treasury pays on its long-term debt would explode. Government would have no choice but to drastically cut back services or simply print money.

The U.S. Senate just took us a step closer to this scenario. Perilous times, indeed. If you haven’t reviewed how to prepare for when the day arrives, there’s no better time than now.

   Sunny and misplaced optimism about Europe is driving U.S. stocks higher again today. The S&P is solidly above 1,200. The Dow is back to the high end of the trading range, where it’s been stuck the last two months.

   The rally comes despite the Slovak parliament’s rejection of a plan to expand the eurozone bailout fund.

Slovakia is the last holdout among the 17 countries that do business in the euro. One of the four parties in the governing coalition says it doesn’t want Slovakia to be on the hook for Greece’s excesses.

But because this is Europe we’re talking about, they’ll just keep voting until they get the “right” outcome. The main party in the governing coalition struck a deal with the opposition today: The opposition will switch and vote for the bailout later this week, and new elections will be held next March.

   The newfound market optimism is propping up the euro, too. The Esperanto currency has firmed to $1.382.

For its part, the dollar index has broken below 77 for the first time in three weeks.

   Dollar weakness is fueling a precious metals rally. Gold is up to $1,681 at last check — also a three-week high.

Silver has improved more than 2%, to $32.80.

   One of the municipal basket cases we’ve been intrigued by has finally given up. Harrisburg, Pa. — done in by a city guarantee for an incinerator — will file for Chapter 9 bankruptcy.

Guess the prayer vigil didn’t work.

The city council vote last night was 4-3. By going to bankruptcy court, the city forfeits any state aid… but the state was insisting on terms that a majority couldn’t abide by.

“They wanted to sell all of our assets and make Harrisburg destitute for decades to come,” explains city controller Dan Miller.

We wouldn’t doubt the state was driving a hard bargain; they’re in dire straits, too. According to an analysis by Northwestern University, it would take an annual $1,550 tax increase for every Pennsylvania household for the next 30 years to fund the state government’s pension obligations.

Where does your state stand? Our one-of-a-kind evaluation of all 50 states is still available. Learn more here:

   “Absolutely not!” begins a litany of responses after we drew “uncomfortable” parallels between Occupy Wall Street and the Tea Party protest. Our inbox is full. A version of our suggestion ended up on… and now those responses are hitting our inbox, too.

“The Wall Street protestors are the virus,” this particular irate reader continues, “the Tea Party is the antidote.”

“The stark and direct contrast between the two groups could not be more noticeable. We have one group demanding everything for nothing (Wall Street protestors). The other group is demanding the government stop taking, regulating and restricting everything.”

“This is another example of the failure of socialism. How about the Wall Street protestors start giving something, and maybe they will become enlightened to the failures of their beliefs?”

   “You are so wrong,” begins another. “Evidently, you are not exposed to the vast majority of hard-working Americans who are looking for the way things used to be, when you could get up in the morning, and by the end of that day, you came home with a job.”

“Those that do have a job are sometimes working 12-hour days for the same pay or less than they made 10 years ago. Wall Street greed and dishonest practices put us in this place.”

   “You almost got it right,” says a third, “but I’m not ‘uncomfortable,’ I’m flabbergasted!

“I amazed at any analysis that seems to find some level of equivalence between the groups. While both are ‘mad’ at Washington for their financial dealings, the perspectives couldn’t be more different.”

“The Occupy Wall Street people seem to complain that ‘the rich’ got the money, and their problem is they would rather see Washington handing it out to all of them by forgiving debts and paying for everything they would like.”

“Tea Party advocates say that Washington should not be bailing out failures, spending money they don’t have and, generally, messing in the economy and grossly misusing tax revenues.”

“To me, finding commonality is like saying the Palestinians and the Israelis are really kindred spirits because they both are concerned about tensions in the Middle East!”

The 5: If the shoe fits.

   “You really did get to me on this one,” writes another. “You find the two movements similar?

“During all the Tea Party rallies that took place last year, there was one recorded arrest. There have been over 1,200 so far at the OWS riots. I even saw a photo of some a**hole attempting to take a crap on a police car.”

“As far as I can tell, these idiots have no message and no common denominator other than they do not have jobs. Many just do not want to work or will not work for minimum wage. I think it is just a copycat of the ’60s hippy, anti-everything movement.”

“At 70 years young, I can relate to the Tea Party desire of limited government and less spending. I do not relate to the OWS whining about not getting their share. As Herman Cain said, ‘It is your own damn fault. Get off your ass and get a job.’”

“Love The 5 otherwise.”

The 5: Thank you.

   “Well Addison,” writes another, “I suppose you expected a lot of responses on this. I am not ‘made uncomfortable’ by your comparison of Occupy Wall Street and the Tea Party, I simply feel you haven’t understood the core motivations of each group and have made a misdiagnosis.”

“You are wrong to think we Tea Partiers feel ‘left out’ by the ruling class. We would love to be left out of their unconstitutional plans, but they insist on exercising more power over us with national health care, gun control, forced unionism, minimum wage laws, ridiculous environmental laws (Co2 a pollutant?) and many other initiatives.”

“The American Dream isn’t beyond our reach (yet), because the American Dream is freedom, not materialism. We are content with the fruits of our own labors and don’t expect our lots to be made easier by the government. Mike Lofgren (whoever he is) doesn’t know what the Tea Party is.”

“Our ‘grievances’ are not with our standards of living, shrinking or otherwise, they are with the growth of government bureaucracies that are already Marxist in orientation. We seek to reduce the federal government back to its constitutional limitations a la Ron Paul, even phasing out Medicare.

“On the other hand, those who initiated OWS seek expanded government mandates and more limitations on free enterprise. Although we may share a dislike of the Federal Reserve Bank and Wall Street’s unhealthy relationship with the federal government, our principles are diametrically opposed.

“OWS has many paid protesters. Besides, the progenitors of OWS remain in the shadows, manipulating it for their own purposes.”

The 5: Of course, that could never happen with the ire expressed by the Tea Party. As if the Tea Party wasn’t immediately coopted by Washington insiders like Dick Armey.

   “The main difference between the Tea Party and OWS is this: The Tea Party is convinced the government is our greatest problem and must be eliminated, while the OWS protesters believe that corporations are our greatest problem, because they have effectively taken over the government, as well as much of the media, and have rigged the game in their favor.”

The 5: Again… what’s the difference? Solutions, definitely. But cause? No. Think about it.

We left out part of our idea yesterday. Mostly, because we thought it was preposterous. Given today’s response, we’re not so sure. This all could end with OWS crowds shouting down, then battling Tea Party protesters in the streets.


Addison Wiggin
The 5 Min. Forecast

P.S. One by one, our editors are flying into Baltimore for our Safety and Survival Summit on Friday.

With markets that are going nowhere right now, and with a host of crises on the horizon, we’re putting every editor on the spot for their best investment ideas in commodities, precious metals, biotech, options and more.

Among the questions they’ll tackle…

  • As the dollar diminishes in value, what are the best ways to protect your wealth?
  • Can technological breakthroughs revive U.S. prosperity?
  • What impact will Greece’s demise have on America’s fragile economy?
  • Is America headed for a depression or hyperinflation?
  • How can investors play the volatility in the resource markets?
  • And Byron King… what on earth is “54-North”?

This is an Agora Financial Reserve event… but we’ll be making an audio recording of the session available next week. We’ll email you the MP3 file as soon as it’s ready. And if you move on it before the Summit begins, you’ll lock in the best-available price.

P.P.S. One of those editors, our managing editor Chris Mayer, is already in town… and will hold forth on the radio tomorrow. He’ll be Ron Smith’s guest on WBAL-AM here in Baltimore from 11-Noon EDT. If you’ve never heard Chris before, you’re in for a treat. Here’s where to listen live.


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