Snippets:
(1) The economy:
Initial jobless claims were back up above the critical 400,000 level in the week ending September 6, 2003 -- an indication that the labor market remains weak. Yet according to a recent survey, most economists expect payroll jobs to start to increase by the end of this year. They expect third quarter GDP to grow by 4.7%. Believe it or not, they expect the U.S. economy to produce 1.4 million new jobs by September 2004.
Recently, President Bush asked Congress to pass a US$87 billion spending bill in relation to Iraqi reconstruction. Many people take it as "bad news" for the economy. Yet for the most part, economists do not see higher federal deficits as an immediate problem for the economy. Rather, they believe higher deficit spending will stimulate economic growth and job creation in the near term.
Although federal deficits (if excessive) could lead to inflationary pressures and higher interest rates while stimulating economic growth and job creation, economists don’t see that as a problem, either, because they don’t expect interest rate increases (even if they materialize) to be large enough to derail the economic recovery.
The fact we remain in a disinflationary environment (where productivity growth is as high as 6.8%, where the industrial capacity utilization rate continues to meander around 74%, where there is an ample supply of surplus labor, where cheap Chinese imports flood the U.S. market keeping prices low, and where the Federal Reserve believes "risks are weighted toward inflation falling too low") means current federal deficits are far from excessive and so will not trigger inflationary pressures.
By the Congressional Budget Office’s estimates, the federal budget deficit for fiscal 2003 which ends on September 30, 2003, will be about $401 billion, accounting for only 4% of GDP, whereas fiscal 2004's federal budget deficit will be about $500 billion, accounting for only 5% of GDP.
Such deficits can be easily financed by the Federal Reserve’s money creation mechanism. Part of the money thus created, however, is likely to disappear from circulation through wear and tear as time goes by, allowing the federal government to spend even more on the War on Terror without causing inflation.
Given the fact America is in the middle of a global war (i.e the War on Terror) just as it was 60 years ago when the federal deficit accounted for 30% of GDP, much of the criticism of the so-called "mounting deficits" which account for only 4% or 5% of GDP may be unwarranted. If anything, Congress should give the president US$100 billion or more in order to fight terrorism in Iraq. War is business. He who has the deeper pocket is going to be the winner. It’s no time to play the Scrooge.
(2) Terrorism in Iraq:
Only people with ulterior motives would compare the Iraq War to the Vietnam War. In 1975, America lost the Vietnam War. In 1991, America won the Gulf War against Saddam Hussein. In 2003, America won the Iraq War destroying the Saddam Hussein regime.
History provides lessons as well as examples of success and failure. The differences between success and failure should be clear to an objective observer. The differences between the Vietnam War and the 2003 Iraq War should be clear to an objective observer too.
Those who compare Iraq to Vietnam are folks who were against the U.S. invasion of Iraq in the first place. Now, they refuse to see the end of major operations in Iraq as an American victory. They want the public to believe that Iraq will become a "quagmire" like Vietnam, despite the big differences between the circumstances in today’s Iraq and those in 1960s-1970s Vietnam.
In the 1960s and 1970s, the Viet Cong had a strong guerilla base in North Vietnam, through which it got unlimited material support from two big powers (Communist Russia and Communist China). Countless Viet Cong guerillas infiltrated South Vietnam with unlimited material support. The U.S. military did not destroy the guerilla base in the North and failed to cut off the Viet Cong’s supply routes. In consequence, the situation deteriorated.
Today, the insurgents in Iraq do not have a strong guerilla base with unlimited material support provided by big powers. Whereas U.S. troops can go anywhere they want and destroy any guerilla base the insurgents may want to establish. Besides, the insurgents cannot hit and run and then hide somewhere forever without leaving traces. Once U.S. troops get reliable intelligence, the game is up.
But there is a lot of ammunition left around by the toppled regime. The terrorist insurgents used such ammunition in their car bombs, one of which killed 23 people at the U.N. headquarters in Baghdad, including U.N. envoy Sergio de Mello. Another killed more than 100 shiites in Najaf.
Some believe al-Qaeda terrorists are responsible for the car bombings. If they are, they must have been associated with the Saddam loyalists who know where the left-over ammunition is hidden. If the Saddam loyalists are responsible for the car bombings, then, they must be Saddam-trained terrorists. Either way, the argument that "Saddam Hussein had nothing to do with terrorism" is not based on facts.
The political left wants the public to believe that the Bush administration is lying, that the CIA is lying, that the FBI is lying, and that these institutions have done nothing but destroying civil rights and citizen right. Fine, but since 9/11, no terrorist attack has taken place in America’s homeland on the watch of these "liars".
How could it be that these "good-for-nothing" "Lying Liars Who Tell Lies" have done such a terrific job at homeland security whereas those who claim to take "A Fair and Balanced Look" at these "Lying Liars" have done little more than spreading cynicism? Since when, has the political left acquired sufficient intelligence capabilities to verify intelligence information?
(3) North Korea:
Each time I hear some "expert" say, "Nobody knows what North Korean leader Kim Jong-il wants," I smile and say to myself, "Maybe, I do." That is because in the early 1980s when I was in Shanghai, China, I learned that North Korea had requested the Chinese government to support its effort to "re-unify the fatherland" and that the late Mr. Deng Xiaoping’s government turned it down.
At the time, that was actually no big secret in China. North Korea’s request was mentioned in China’s ruling party’s internal documents, and party members with access to such internal documents had apparently leaked the information. The CIA should have obtained such intelligence information a long time ago.
North Korea has always wanted to annex the South. That’s why it invaded the South in 1950, dug a tunnel beneath the DMZ to infiltrate the South in the 1970s, and planted a terrorist bomb on a South Korean airliner, killing all aboard, in the 1980s. That’s why it has developed a nuclear weapons program to blackmail the South into capitulation.
According to South Korean intelligence, up to 6000 North Korean secret agents have already infiltrated South Korea’s government agencies (including South Korea’s intelligence establishment), business organizations, trade unions, student organizations etc. Why? Because it wants to subvert South Korea’s capitalist system and then annex it.
Those "experts" who believe "nobody knows what Kim Jong-il wants" appear to be incapable of using logic and common sense to draw a rational conclusion. That said, intention is one thing; ability to turn intention into reality is another. Apparently, North Korea has evil intentions toward the South but is facing pressures.
According to media reports, North Korea has recently shut down its nuclear plant. Besides, this year’s parade in celebration of the 55th anniversary of the founding of North Korea did not display its long-range missiles as it did in the past.
So there may be two possibilities: (1) North Korea may have processed all the nuclear fuel it needs to make nuclear weapons and so has shut down the nuclear plant. (2) Despite its bellicose, anti-U.S. rhetoric, North Korea may have decided to back down from the nuclear standoff under strong pressures from the international community, especially from China.
If Possibility (2) turns out to be true, then, China must have provided some serious cooperation to the Bush administration’s policy toward North Korea, thereby handing a diplomatic victory to President Bush. At long last, Kim Jong-il may be beginning to crack under heavy pressure. But let’s wait and see. It’s not yet time to pop the champagne.
(4) China and its People’s Currency:
In dealing with Communist countries, it is important to watch what they do, rather than what they say. It is noteworthy that people in Communist countries say one thing but do another, as I learned during my long years in China. Why is this? Because they cannot afford to do what they say.
For example, China says it wants to "build Socialism" with state ownership of business enterprises. But state-owned enterprises are now broke, and China is moving down the Capitalist road with a fast-growing private sector. Economic reality does not permit Chinese leaders to "build Socialism".
My feeling is that "men we can do business with" are already emerging from the Chinese leadership and that today’s China smacks strongly of Mikhail Gorbachev’s Soviet Union, where Communism was actually quite dead though unburied, because, as a political ideology and socioeconomic philosophy, it had proven unworkable.
In other words, Communism in China is also quite dead by now though not yet buried -- just like Mao’s body is not yet buried. Mao died in September of 1976. At the time, the Communist Party decided to preserve Mao’s body and keep it on display in a mausoleum. Since then, Chinese leaders haven’t dared bury Mao’s dead body.
China keeps many of the trappings of Communism in order to make people believe it is still a Communist country. I guess the rationale behind this ridiculous practice is: If all the trappings of Communism (such as the big Mao picture at Tiananmen Square, Mao’s dead body, the Red national flag, the Communist brand name, etc.) are scrapped, unforeseeable instability might occur.
Believe it or not, Mao’s dead body continues to play a practical role for the living, that is, to help stabilize the political situation in China -- a country with a population of 1.3 billion. But such an abnormal phenomenon cannot last forever. The normal procedure for a normal person is to give him a proper burial when he is dead. Sooner or later, Mao’s dead body will have to be buried. By the same token, the dead body of Communism in China will have to be buried too.
Despite its Communist brand name, China seems to be infatuated with American Capitalism. It wants to be economically integrated with the U.S. economy. It sells large quantities of goods in the U.S. market. It happily receives billions of dollars in sales proceeds from the U.S. every month. It makes the English language a compulsory subject in all its schools, colleges and universities. Its leaders and officials send their children to U.S. schools and colleges. It even pegs its currency the Renminbi (the People’s Currency) to the U.S. dollar at US$1 = RMB 8.27.
In the 1980s, the official exchange rate between the dollar and the RMB was US$1 = RMB 2, but that was an artificially fixed rate. The RMB (otherwise known as the yuan) was not (and still is not) a convertible currency. At the time, commentators said the RMB was overvalued.
Then, in the early 1990s when former premier Zhu Rongji (otherwise known as China’s economic Czar) took charge of the economy, the RMB was sharply devalued. Why? Simply put, Chinese citizens have far more faith in America than in their own government. They thought the RMB had only one way to go, i.e., down. As they kept buying U.S. dollars, the dollar exchange rate kept moving up on the black market.
Finally, the Chinese government somehow figured out this peg of US$1 = RMB 8.27 as a reasonable exchange rate for the U.S. dollar. Now, U.S. manufacturers believe this U.S. dollar-RMB exchange rate is ludicrously high and the RMB (i.e. the People’s Currency) should be revalued.
The problem is: Chinese citizens have more faith in the credibility of the U.S. government and the U.S. currency and so are willing to pay a credibility premium for the dollar. If the RMB becomes fully convertible, many of the 1.3 billion people in China may want to convert their life’s savings into U.S. dollars, increasing the demand for U.S. dollars and driving the dollar exchange rate further northward.
Despite the strident anti-U.S. rhetoric during the leftist Mao era, there was a strong tradition of pro-U.S. sentiments in China, especially in major coastal cities like Shanghai, where middle-class folks in the 1930s and 1940s used to believe that America was a paradise where even the Moon was more beautiful and "more round", in part because of Hollywood’s success in depicting American life. I guess they still believe so. That means they are likely to continue to buy and hoard U.S. dollars -- definitely not good news for U.S. manufacturers.
Hopefully, Secretary of Treasury John Snow will find a way to persuade the Chinese to purchase more American products to help reduce America’s trade deficit with China. So far, China has demonstrated more interest in purchasing U.S. Treasury bonds than U.S. products. But this is not entirely bad news. At least, it shows the Chinese government (like its people) has faith in the credibility of the U.S. government.
Sincerely,
Robert M. Liu
