James Blackwell

By this point, many Americans have become aware of the Death Train of Chinese Imports. For those of you that haven't, the US is having a problem with imported goods that pose dangers to both people and pets by cutting corners on food (both human and pets), toys (by using lead) and other consumer goods such as tires (which can fail catastrophically and kill entire groups of people at a time). I think I know why the U.S. government isn't doing more about these import problems: they can't afford a fight with China right now.

It doesn't take a major in economics to realize that the U.S. is disturbingly close to entering a depression of the scale of the 1930s. Firstly, the USA is in the beginning of a housing collapse. Secondly, the American dollar has weakened as oil producing countries have started trading oil against the Euro, rather than the U.S. dollar. Thirdly, consumer debt for citizens has become maxed out for sizable portion of the population. Fourthly, manufacturing jobs, which pay relatively well even without a good education, continue to leave the U.S. Lastly, has a whopping 1.33 trillion dollar financial reserve with the United States.

The good news is that these problems are independently survivable. The bad news is that all of these problems are closely tied to one another. A person is unlikely to pay back unsecured debt when their credit score has already been destroyed by a foreclosure. A person that has been laid off can afford neither his home payment nor his unsecured debt. Consumers, dealing with a weakened dollar, will need to cut back on spending for all goods, particularly imported goods such as off-season fruits and veggies.

By now, the American housing collapse is pretty well known. Realtytrac reports over 1/2 a million foreclosures in the first half of 2007. Typical predictions for 2007 foreclosures is around 2 million.. Some people, such as Jim Cramer of Mad Money, claim that by the time the housing market disaster is over, as many as seven million people could lose their homes.

Most people aren't surprised to hear that barrels of oil are usually traded against U.S. dollars. The primary effects of this relationship are that the U.S. dollar remains precious as it can be traded for oi with oil producing nations and that the U.S. benefits from a defacto tax as part of the trading. Many oil producers are considering a change that would result in oil being traded against the Euro. Doing so will reduce world need for the U.S. dollar, resulting in a weakening of the dollar. The issue is complicated, and not all agree, but you can read up on the issue here, here, and most usefully, here.

American consumers haven't helped any. U.S. Citizens owe an all-time record of over 4 trillion dollars, of which 2.4 trillion is revolving debt like credit cards. Creditors usually have the option to arbitrarily raise the interest rate for these debts if payments are not paid correctly. Many creditors also reserve the right to change the rates for debt without cause, leaving open the possibility that rates can be changed even if a user does not default. A bank, facing a high foreclosure rate, will certainly be tempted to save itself by raising those rates that it can on it's other types of loans.

The loss of U.S. manufacturing has been a well known problem since the 1970s. The problem has continued to continue. USA today reported in 2002 that manufacturing jobs, which used to be 1/3 of U.S. jobs, is now down to 1/10 of U.S. jobs. The article goes on to state that over 80% of the workforce is now performing service level jobs. Manufacturing, though improved since 2002, has started to decline again.. The continued loss of manufacturing not only means less well paying jobs for americans; it also means an even wider trade gap as America imports more and has less to export.

Most of these jobs have indirectly gone to China, which since 1986 has moved from our 18th largest partner to our fourth, at $121 billion., despite today having a trade imbalance of 43%. This imbalance has given China a powerful surplus of 1.33 trillion dollars. That is a lot of money; so much, in fact, that it's more than Walmart sells in 3 1/2 years.

In all fairness, an anonymous Chinese bureaucrat has gone off the record stating that they will not use this surplus as a club while trading with the U.S. It's doubtful though that China would really keep the "Nuclear (trade) option" off the table if the U.S. became too pushy about trade with China. That seems to be a case of the left hand not knowing what the right hand is doing, as China is threatening to collapse the U.S. dollar over fights of currency manipulation.

There is a slim glimmer of hope, though. Though China could only effectively destroy America's vulnerable economy at a high cost to itself. America is one of China's largest trading partners and a depression in the U.S. would hurt China almost as much as us. Additionally, any other economy that has a trading relationship with the U.S. (read: nearly everyone) would dip into recession or depression too, further restricting China's exports.

But only the most slim of glimmers, as the central banks are already trying to mitigate the collapse of banking that was triggered by the bad U.S. subprime mortgages. The central banks have already lent nearly $300 billion dollars to banks in the US, Europe, Australia, Canada and Japan. It remains to be seen how much more money will need to be injected to mitigate the ongoing disaster.