The Reality Is That America Owns China, And China Is Only Just Now Realizing It

People are always saying that China owns the United States. Here at Business Insider, we've gone over all the ways that that's not true.
Now a new book goes even farther, it says that the United States owns China. And because of that, the United States will rise up and dominate in the coming decade.

The book is called “The American Phoenix,” and it was written by Hong Kong based economist Diana Choyleva, and Charles Dumas.

Via Bloomberg:

“When you look at the problems facing the world, the bubbles and imbalances, America’s are easier to fix than most,” 

Choyleva said. “It says a lot about the state of things globally.”

Choyleva and Dumas think about it like this: Foreign investment in China has only created the illusion of wealth. Once investors go away, that money will be gone because most of it actually is wasted by the people and the government. That, combined with inflation and social unrest, means it's only a matter of time before China defeats itself.

And then there's the fact that China has bought a lot of U.S. Treasuries. That doesn't mean that they own America. Quite the contrary. It means that China is subject to the decisions of the Federal Reserve. When Bernanke lowers interest rates, Chinese inflation worsens.

The authors of American Phoenix say that China would've been better off just letting the yuan appreciate. But they won't, and that means their on the road to regret — a road that Europe has been on for the past two years.

The United States, though, has top Universities, and a great fertility rate. The country need only re-establish the strengths that have weakened over the past fifteen years to reclaim its place at the top.

Basically, this sounds like the opposite of everything we've heard over the past few years. So it could be a good read  whether you like economics, or Sci-Fi fantasy.

Economists were probably too busy watching markets gyrate to contemplate last month’s big news in science. Physicists detected particles travelling faster than light, which, if the reading was accurate, means time travel is possible.

Now, let’s play a quick mind experiment that would surely captivate the deans of the dismal science: Pretend you have just been transported 10 years into the future to see how this incipient global crisis pans out. It would be hard to find anyone who isn’t desperate to know.

What if, a decade from now, the U.S. comes out the winner of today’s market chaos at the expense of Europe and China?

This intriguing contrarian view is the subject of “The American Phoenix,” a new book by Hong Kong-based economist Diana Choyleva and her Lombard Street Research colleague Charles Dumas. Bargain bins are loaded with China-crash titles. What’s different about this book is that it turns all we think we know about the interplay between the Group of Two on its head.

If the last few years taught us anything, it’s that the unthinkable has an uncanny knack of happening. From Arab Spring protests to China bailing out Europe’s markets to a U.S. presidential candidate suggesting it’s treasonous for the Federal Reserve to do its job, the world really is upside down.

So it’s worth considering an alternative trajectory for the U.S. and China as another meltdown seems to be unfolding. It’s hard to be optimistic for 2012 as Europe dithers, Washington bickers, Japan’s paralysis deepens and China experiments with ways to avoid overheating.
G-2 World

If there is an accepted narrative about the G-2 in Asia, it goes something like this: China will grow 8 percent or 9 percent a year indefinitely, grabbing global market share as it moves from sweatshops to a knowledge-based, innovation-driven model. Hiccups may happen, but China will surpass the U.S. economy 10 or 20 years from now.

The U.S., meanwhile, experiences a slow, steady slide as the magnitude of its challenges overwhelms a political system ridden with gridlock, an excessive debt load and chronic joblessness. The reason Occupy Wall Street went global in ways the Tea Party didn’t is that the former reflects the reasons for America’s decline, while the latter is mere handwringing over it.

The question is whether the U.S. recovers relative to Europe and China as global markets swoon anew. The operative word is “relative.” No one should expect the U.S. to prosper in some great way from a 2012 crisis. It’s that Europe and China will be far worse off as contagion whips around the globe.
Bubbles, Imbalances

“When you look at the problems facing the world, the bubbles and imbalances, America’s are easier to fix than most,” Choyleva told me in Hong Kong yesterday. “It says a lot about the state of things globally.”

It would surprise few to imagine Europe having a harder decade than the U.S. A Greek default is a given and may drag down Portugal, Spain and, in the worst case, even Italy. Europe may be lucky to get away with just one lost decade.

Many would be taken aback to think that China, too, might experience its share of setbacks compared with the U.S. Some are well-known, including inflation that fans social unrest and a financial crisis erupting as the massive stimulus of 2009 comes back to haunt Beijing. All that investment created the illusion of economic vitality. Too much of it was funneled into unproductive sectors of the economy, setting up China for a banking meltdown.
Inflation China

Choyleva adds a less obvious twist to the critique: how China’s financial proximity to the U.S. is a bigger problem than many people appreciate. By tying itself to the dollar and amassing more than $3 trillion of currency reserves, China essentially merged with the U.S. financial system. When the Fed pumps money into the economy, it inflates China more than America.

There are rumblings in Washington about punishing China for its undervalued currency. Yet China is only now realizing the extent to which it surrendered sovereignty to the U.S. As the Fed adds more cash to markets, China’s inflation becomes more entrenched and Beijing loses even more control. Over time, this dynamic will harm China’s competiveness more than if Beijing had allowed the yuan to strengthen, as per the U.S.’s demands.

China could increase interest rates to temper rising prices, but that would devastate growth. The thing about the G-2 is that pundits often view China as being in the stronger position -- its massive reserve holdings are both leverage and a fortification. Yet China is trapped. It’s addicted to cheap U.S. financing and is increasingly feeling the side effects.

For all its troubles, the U.S. has inherent strengths: It’s home to many of the world’s top 20 universities; it has institutions that may still get their act together in ways Europe can’t; a fertility rate that exceeds deaths, meaning America can ultimately outgrow its debt -- unlike, say, Japan and Europe.

If Japanese and European officials could travel in time, it wouldn’t be to fix mistakes of the past. If Chinese officials don’t act more assertively to tweak their model, they’ll have similar regrets a decade from now.