My 6th grade teacher once gave me the best definition of a preposition I have ever heard. He was a WW II pilot, so maybe that’s where he got it, but here it is: “Anything an airplane can do to a cloud.” At any rate, the preposition “over” can be used in any number of ways. He or she is overweight, the plane flies over the clouds, the currency has collapsed and it is “all over,” may be a use we can postpone for a good many years, but no one knows. Then there is “over built,” which may happen soon to China, unless the laws of economics have failed, but they never have. Here is one synopsis of what could happen.
We all know the dollar is tanking, and that the Chinese yuan (renminbi) is locked into the dollar’s decline. Why? Because we are China’s best customers. It is virtually impossible to buy anything not made in part or whole in China. Chrysler is thinking seriously about having their entire “300” made in China, and that, currently, is a very popular car. Imagine that. An entire car, from bumper to bumper made in China. Would you buy one? I certainly wouldn’t, but maybe the sheeple will. It is said that Wal Mart owns close to 1,000 factories in China. The Chinese labor force, it is said, makes about $2 per day. The Chinese are far from stupid, and some say are the most intelligent race on earth. If China un-locked its currency from the dollar, and let it “float” against the rest of the world’s currencies, America would probably cease buying Chinese goods, as they would be too expensive.
The Chinese are in the midst of an industrial explosion, which has been unmatched since our own of a hundred years ago, or maybe post WW II. The Chinese are constructing the world’s largest dam, which will supply gobs of electricity. They are building more factories, consuming more oil, steel, concrete, and other raw materials, than anyone else on earth. The Chinese economy seems to be booming, even though their banks are in terrible shape, with state owned businesses defaulting on loans to state owned banks. Does that make sense? Maybe not, but that’s the way it is. The smallest items at Wal Mart, Home Depot, Hobby Lobby, etc, are made in China. Meanwhile, American factory workers are virtually a thing of the past, with hundreds and thousands of factories rusting away, or being burned by arsonists. Factory workers in America, used to make good wages. Fast food franchises don’t pay good wages. American factory workers have suffered mightily, as have office workers. When I pick up the phone to question American Express about a fallacious charge, and a gal answers in India, I get a little peeved. As the trade deficit approaches three quarters of a TRILLION dollars, this means that our capital is going overseas at an ever increasing rate. Ever more American workers are being laid off. This also means that Americans are ever more in debt, and getting more so every day. If a factory or office worker bought a home with a 30 year mortgage, and jobs are lost, there might be a lot of mortgages in foreclosure eventually, if not sooner. Actually, they already are in record numbers.
If the American economy really dumps, in spite of Sir Alan’s assurances that it won’t, Americans will be unable to buy that Chinese stuff from China Marts, Chinese Depots, and China Hobbys. Americans who cannot spend because of credit cards maxed, mortgages maxed, and credit availability exhausted, will stay home, if they still have one. This explains why Wal Mart, et al, will radically slow buying from China, because they aren’t selling much of anything, as witness another dreary Christmas shopping season so far. With business bad, and purchases from China decreased, China may find itself in an over-built situation. Factories which have huge production capacities, but no demand, will be idle. $2 per day workers, who can turn out the stuff, but with no demand, will be out of work. Factories will be shut, just like American ones, but not because of being unable to produce at a low cost, but because of no demand for the products, at any price.
In other words, American factories are out, because of Chinese cheap labor and having few bureaucrats such as OSHA bothering them, running up costs. With Americans being broke, how much longer can they continue buying cheap Chinese merchandise? The Chinese are holding on by a thread, keeping their currency tied to the dollar. If they let it float, there goes the American markets, which are keeping them on a prosperity binge.
As an aside, you have all heard of the dollar’s plunge, but do you know what that means? The dollar is measured in what is called a “basket” of currencies. That “basket” consists of the following currencies. Euro-57.6%, Yen 13.6%, Pound 11.9%, Canadian dollar 9.1%, Swiss Krona 4.2%, and French Franc 3.6%. The dollar is measured against these other world currencies, none of which are more than pieces of paper with ink on them, just like the dollar. When other currencies are measured against the dollar, the buck is inserted in the basket, and the currency being measured is removed.
Economics is pure logic. It is not complex, and only requires reason and common sense to understand. America is China’s largest customer by far, and China depends on America almost totally. If the American dream evaporates, this obviously makes China go with us, because we can no longer afford to buy their stuff. They will then be over built. If their business had continued on the current upswing, they would not be over-built, but this cannot exist forever, when their one huge customer is on the skids. We weren’t over-built, as long as there were no nations with cheap labor, but now they are in great abundance. Indians speak English, meaning they can answer phones and destroy American office workers’ jobs. The Chinese can’t speak English, but they can work machinery and load containers with their exports to America.
Why do any of the world’s currencies continue to be of any “value” at all? None of them are convertible into gold or silver, and all are merely pieces of paper, often with fancy engravings on them, but of no actual value. Why don’t they all go crashing down in a heap? I don’t know, but I do know that I want only enough of them to buy my daily needs, and the rest of my assets are in tangibles such as gold and silver. There is one more over-built item we must consider, and that is real estate. We spent a few days in California, home of fruits and nuts, as some like to say. The building boom has slowed, but still continues. When a three bedroom home in a good neighborhood, of 1500 square feet selling for a close to, or even more than a million dollars, who can afford it? To pay the monthly payments on a 90% mortgage for a thirty year period would be in excess of $600 per week, PITI. This means that a worker would have to make $25 per hour, to have enough left to make the payments after taxes and FICA were deducted. This does not include food, child care, or other expenses such as car repairs, or payments, clothing, medical, upkeep of the house, fuel, utilities, credit card payments etc. For this to even achieve a break even situation, both husband and wife would have to make about $25 per hour each, for 40 hours a week. How many can keep this up? If one gets laid off, a chain reaction of foreclosures begins, which can end up in a bankruptcy court and a home on the market. With thousands of homes in foreclosure, the market is flooded and prices plummet. People walk away from a home when more is owed than it is worth. Then, as in a China situation, the demand is no longer there for a product in this case homes and the whole thing crashes.
I know, China, and real estate seem impregnable as I write this. The Dow goes up a bit here and there, and the media continually spout off about how wonderful everything is. It is all just a sham, I think. It is a cosmetic façade, just like a movie set. People are struggling out there, and a lot of them are giving up or getting tired. Laws can keep a defaulting home buyer in the home for as long as a year after payments are missed, and hundreds of thousands are currently taking advantage of this, I read. Bankruptcies and foreclosures are at all time highs, and will grow higher till the bubble breaks, as all bubbles do eventually. The trade imbalance continues to grow. A nation which does not make what it consumes, is in deep, deep trouble. If the shoe fits, and you aren’t Cinderella, beware. Have the merriest of Christmases, and if you are Jewish, atheist, or other, still have a merry one! It’s a beautiful holiday with the decorations, music, toys under the tree for wide eyed tykes, and families getting together. Protect yourself.