China currency devaluation & US response

Today’s post is all about Why was it done? And What will be the effect?. But first, let’s recap what just happened…

In the past year, the exchange rate between the Chinese Yuan Renminbi and the US dollar has drifted between 6.75 and 6.95 ¥/$. But this morning, it shifted. The Yuan was intentionally devalued by the Chinese government to punish (or perhaps to provoke) the Trump administration.

Let’s start with a little recent history—narrated with a big dose of editorial sarcasm…

Yuan-Dollar Exchange RateTrump is not happy with China’s economic growth, leadership in 5G infrastructure, success in launching satellites, building new airliners, and of course their construction of islands off their own coast. (Do you suppose that the Chinese would make a fuss over construction projects in the Gulf of Mexico, even if it served a military purpose?!)

And so, Trump held rallies and press conferences. This is what he does best. He mumbled some trumped up complaints about an uneven playing field, and he slapped a series of escalating tariffs on Chinese imports.

Naturally, the Chinese retaliated by limiting their purchases of soybeans and pork, and they asked their own companies to scale back the purchase of US food, materials and machine equipment.

This led to a tit-for-tat. That’s not a surprise. A negative outcome was virtually guaranteed by the US president. Eventually, Trump followed through with even higher tariffs on even more goods, because that’s exactly what he said he would do—And since the Chinese didn’t cave to his demands, he became worried about sounding tough and saving face.

Mr. Trump claims that the Chinese government pays these high tariffs, rather than US consumers. And he doesn’t seem to realize that when no one is willing to pay, it retards commerce. When no one is buying, it is no longer a debate about who pays. Import tariffs don’t protect workers or industry, they simply thwart trade.

Yesterday, in the wake of increasing tariffs by the Trump administration, China devalued its currency, announcing an exchange rate of 7 ¥/$. This is not too radical. In fact, it is in line with recent history. After all, even a communist regime is limited in how much they can bend the exchange rate against another major currency. If they try to manipulate more than a little (or for more than a short period), they risk three undesired results:

  1. It bounces back with a vengeance
  2. Citizens lose buying power and they become enraged. Eventually, they revolt or begin using other currencies. Governments hate losing control over currency.
  3. The government goes bankrupt. After all, you cannot really manipulate the results of massive capitalist forces.

But the devaluation irks Mr. Trump. Having a sparing partner who keeps getting up off the floor, is stronger than you, and who claims the high moral ground is really infuriating. It gets under Trump’s orange skin—especially since he likes to hug the American flag at rallies.

Of course, manipulating currency is not unique to the Chinese. Although Trump probably doesn’t recognize or acknowledge it, America regularly tweaks interest rates through an obscure and mysterious agency called the Federal Reserve. That same agency licenses banks to create imaginary money out of thin air and loan it to real businesses for a profit, under a system called Fractional Reserve lending.

Lately, I have cross-published some of my favorite answers as a Q&A writer for Quora. Here are two answers that were posted this afternoon. In the second answer, we’ll get into America’s unique and precarious position as bearer of the reserve.


Answer:   It’s not!

What is bad for the US is our continuing trade deficit and our willingness to print currency to continue massive consumption in view of our withering industrial base. That is, we export far less than than we import from China. And the only thing we give them in exchange is paper promises.

We love to consume Chinese products, and we give back few tangible goods beyond soybean & pork, Hollywood movies and jumbo jets (and to our allies: weapon systems). These are legitimate industries, but they do not match the economic power of clothes, toys, computers, car parts, mobile phones, TVs, 5G infrastructure, etc, etc, etc.

Even most of our high-tech chips (an industry that we still dominate) are manufactured in Asia, Israel and Europe.

The reason the US retaliates against Chinese currency controls or tariffs with panic and/or sanctions is because individuals who do not understand economics (or wish to placate nationalistic sentiment) fear that a weak Yuan will continue to promote cheap exports into the US and an inability for US companies to get a fair price for their exports.

What they fail to understand is that a ‘fair price’ ultimately tracks back to what a nation produces and ships out to balance its consumption. Currency manipulation is an illusion* and sanctions cannot fix this.

And don’t even get me started about Huawei… The US is demonizing an innovative value leader in the next generation of communications infrastructure and gadgets for the sole purpose of diverting attention from its own failings and to buy short term advantage. The argument that Huawei’s ties to a communist government would lead the company to spy on western users is not only a red herring, it flies in the face of economic reality.


2. Question #2:

Why did US designate China
as a “currency manipulator?”

Answer

The US took this meaningless step because some individuals in the US government are arrogant, whiny, little brats that do not truly understand the nature of free market economics. They are reacting to declining US productivity and exports—or, perhaps their advisers don’t understand the self-balancing nature of capital markets.

The relationship between two global currencies cannot be manipulated apart from very short intervals. This short term manipulation is driven by short-sighted motives—and it ultimately backfires when assessed against the original goals.

If you depress the value of something by creating an “official” exchange rate, you would quickly bankrupt the government that made such a goofy proclamation. That’s why these announcements rarely produce lasting results. Economists recognize that when you closely track the outcome (with other factors normalized), results are almost always in opposition to original goals.

Chinese currency doesn’t need to be devalued, because the Chinese have been so incredibly productive over the past 30 years. They are producing so many high quality shoes, toys, computers, car parts, underwear and construction materials, that other nations are becoming lazy. Their currency has a low value, because they continue to ship huge quantities of low-price products to us and are willing to continue accumulating dollars. That is, throughout an enormous trade imbalance, they trust our ability to repay.*

This is why China’s Yuan is ‘cheap’. It is not because of anything that the US government does as a reaction to transient political or economic issues.

Likewise, attempting to ban a country from selling products internationally below what it costs in the domestic market is a useless and counterproductive law, even from the perspective of the consumer nation.

There is rarely a justifiable and rational “manipulation”—or more accurately, action—imposed by consumer nations on its trading partners (other than figuring out how to reboot their own industries!)

For every rule of thumb, there is an exception. I can think of a few punitive actions that are justifiable, because they protect things that cannot protect themselves in a free market: The use of prison labor, child labor, slave labor or any production that poses a health hazard (for workers or buyers) or that harms the global environment.

The problem with these practices is not they create an unfair marketplace. Rather, they represent morally and universally condemned activities that kill or subjugate. And so, pressure and uniform restrictions from outside nations helps to quarantine a practice and ultimately make it unprofitable. But economic pressure applied by coalitions or trading blocks for any other reason is destined to fail. You just can’t fly against the headwind of widely disbursed, free market, capitalist economics.

With respect to currency “manipulation”, monopoly trading blocks or underpricing, sanctions are not only ineffective, they are unnecessary. If we allow the economic activity to play itself out in a free, fluid and unregulated manner, these things not only work themselves out, they actually backfire on the manipulator!


* When I refer to America’s “ability to repay” (i.e. for all the things that we have consumed without exchanging products of equal value), I am not referring to handing the Chinese more and more green pieces of paper with portraits of dead presidents. Dollars can be created out of thin air by transient politicians who continuously raise the debt ceiling. This can lead to a collapse in value and the Chinese know this.

Rather, I am referring to the confidence that our trading partners have demonstrated (at least until very recently), that we will eventually restore the vigor and volume of our manufacturing industries—and also be willing to use most of these newly restored resources to work for them and not just to generate products for consumers back home.

Will nations, institutions and large pension funds continue to prop up the dollar at a time when industry is dying, exports are scant, and legislators keep raising debt—kicking the can down the road?

This unfounded trust in the great nation that triumphed in world wars and the space race cannot last forever. What will signal the turning point?

The signal has already been lit. This year, it’s just a flicker, but in the next two years, it may well ignite the tinder that leads to a global forest fire.

The reason that the US can get away with kicking the can so far down the road, is because the US dollar has been the de facto reserve currency for most international deals, even when neither party to a transaction is in the US or serving US interests. The use is milking a convenient truth: He who controls the reserve currency needn’t balance his books—not for a long while!

Very large contracts for ships, airplanes, oil, wheat, weapons and pork bellies are typically quoted and guaranteed in US dollars or dollar equivalents. This is not required by law, of course, but it arises from the fact that buyers and sellers do not trust the forward inflation of each others’ currencies. Since the US dollar tends to inflate very slowly, they agree to use dollars to settle their affairs.

This clearing house effect leads to an enormous US advantage and it is fed even by nations that despise America.

A few years ago, it seemed that the Chinese Yuan might take the mantle from the US dollar as de facto reserve currency. Even currencies of UAE or Qatar seemed like they might supersede US influence, because of their status as a banking hub or massive energy exporter. But this left many nations uncomfortable, because the Chinese government—though capitalist—is still communist. Energy and banking economies have shown signs of instability, and of course, the middle-east is constantly a source and target of terrorist activity.

All of these factors lead commercial interests to wonder if currencies backed by these nations will last for the decades of a big trade deal and if they will be sufficiently protected from manipulation or inflation by future kings or monetary Czars?

Enter Bitcoin

Sure Bitcoin is new; it’s controversial and it is requires a very different way of understanding money. But it is unquestionably fair, democratic, trustworthy and immutable. Nothing else even comes close.

Gradually, economists, banks, enterprises and governments are coming to the conclusion that the choice of a reserve currency is an issue of trust. And what can be more trustworthy than math and crowd-sourced bookkeeping?

What about volatility?

In the end, it’s not about volatility. Even today, payment processors will protect any vendor who accepts bitcoin, but wishes to convert revenue into local currency.

As Bitcoin becomes ubiquitous (not as an investment—but as a payment instrument, and ultimately as the value itself— it will also become stable. Ten years from now, if you observe a massive spike or dip in the dollar exchange rate, you will not wonder “What happened to Bitcoin today”? Rather, you will wonder what happened to the US dollar. That’s because you will be using bitcoin to pay for a head of lettuce, a new car or a vacation cruise, and the vendors will honor their current prices in bitcoin.

Bad News is Good News for Bitcoin Investors

Bitcoin was hit by a double whammy this week. On Tuesday, Jamie Dimon of JP Morgan declared that Bitcoin is a fraud that will “blow up”. Then, just this morning, a Bitcoin exchange in China announced that it would shut its doors in response to verbal pressure from regulators and an uncertain regulatory environment.

Don’t ya just love it when bad news breaks on Bitcoin? I sure do! It creates a buying opportunity and allows more people to be able to buy bitcoin or to have access to any additional online currency. Investors who are interested in finding out more about the rates of cryptocurrency, how to convert btc to eth and other currencies. After all, just look at bitcoin historical statistics to see what happened after the last five bouts of bad news:
[chart updated at end of Oct 2017]

In each case, the Bitcoin exchange rate dropped-very briefly-and then climbed higher with renewed vigor. Heck it, doubled from $2400 to $4800 in just the past month! But here’s a the real question: Does either bad news events have legs? Does it spell the end of Bitcoin adoption and enthusiasm, at least for now?

After all, if it were discovered that the math behind Bitcoin were flawed, and that anyone could create forged coins, the empire would come tumbling down. In my book, this would constitute a crisis. But what about now? Do these two damning events-and a 35% correction in the past week-constitute a long-term crisis? To answer, we must first determine if public fears over these two events are credible…

China and JP Morgan: (a) A frightened authority (b) Simple Ignorance

Like most governments, the Chinese are concerned that the growing flight to Bitcoin is impacting liquidity of their national currency. [A superb presentation by Andreas Antonopoulos-Click it, after you read this article]. They are also concerned about the large number of Bitcoin exchanges that operate outside of a tight regulatory framework. They obscure the flow of money in and out of the country and they are a clear scapegoat for tax evasion or other criminal activity. Like any agency charged with financial regulation, the Chinese seek to reign in and regulate these maverick exchanges.

It is interesting to note that the Chinese government is not discouraging Bitcoin mining or even personal savings-only the proliferation of unlicensed exchanges and quasi-anonymous users. After all, More than 50% of all mining is done in China, and it helps to balance the loss of liquidity in the national currency.

Bitcoin is experiencing increased adoption-not just as a payment mechanism-but as a new form of stored value. Is this is a bad thing for governments? Surprise! When a government loses control over its own reserve and monetary policy, it may present more of an opportunity than a threat-for both citizens and governments. Gradually, economists, treasury secretaries, reserve board governors and monetary tsars will are coming to the same conclusion. But regardless of your position on this point of debate, here is a fact that is less controversial…
When governments attempt to restrict an activity that cannot be economically monitored or enforced-or at least when they attempt to do it in a way that leaves no relief valve for hobbyists, business, commerce, research or NGOs-they ultimately fuel the activity that they set out to stifle. Ultimately, if the public cannot discern a reasonable basis for government censorship or excessive restrictions, it leads to interest, innovation, adoption and the emergence of hot new markets.

Consider, again, the graph of Bitcoin price -vs- Bad news events at the top of this page.

On each date highlighted above, there was a damning piece of information that should cause early adopters to reconsider their enthusiasm for Bitcoin. In fact, the Hearn Dump really should have ended the whole party. A core developer sold off his entire BTC savings and claimed that the experiment was a failure. He published an article with his reasons for believing that Bitcoin was dead. Likewise, the SEC decision to prohibit the creation of an exchange traded fund (the Winkelvoss ETF), it sent a clear signal that governments really didn’t consider cryptocurrencies to be an asset at all.

But the graph demonstrates that each piece of “bad news” fueled a miniature rally. That’s because Bitcoin has none of the elements of a pyramid scheme. It is not an MLM and it cannot be manufactured or controlled by any organization. Rather, it is an exercise in pure supply, demand and market recognition. It is pure adoption mechanism that leads to a two-sided network. It’s benefits multiply as more users join the party.

What about Jamie Dimon at JP Morgan? He says that Bitcoin will crash.

Bitcoin has had a rocky road these first 8 years. Major exchanges have been bankrupt or worse, enormous criminal conspiracies were among the early adopters, the SEC has prohibited the creation of an ETF based on cryptocurrency, rogue spin-off coins are driving a wedge among users, and there are serious problems related to scaling and governance. A casual observer might wonder who is in control and who can be held responsible? After all, the idea of an economic mechanism that is altered by democratic-but decentralized-factors is new and radical. How can Bitcoin evolve, adapt and grow in the absence of an authority at its heart?

This confusion arises from the newness and unfamiliarity of blockchain architecture. Skepticism is natural. Indeed, Bitcoin is guided by an authority, but it doesn’t reside at the center of the network. It resides at the edges. This is the concept behind Proof-of-Stake and Proof-of-Work. Unlike a classic authority, your will matters just as much as anyone else’s. It is exceptionally democratic, self-enforcing, and resistant to gaming.

This is a difficult concept to wrap our heads around, because it is so different than we were taught and it is different than we have experienced for centuries. For this reason, Jamie Dimon’s statement that there is nothing behind Bitcoin presents a buy opportunity for individuals who were late to the table. Jamie may not yet understand intrinsic value, but we can educate ourselves. Bitcoin has more standing behind it than the US dollar.

… But don’t take this as investment advice. Bitcoin should not be thought of as an investment. It is the future of money. Speculation (both day trading and long term buy-&-hold) act to retard the eventual adoption of Bitcoin as a serious monetary instrument. Although I have Bitcoin, I do not encourage people to think of it as an investment. It is more important that it be used for ordinary business and commerce:

  • Products and services
  • Loans and debt settlement
  • Stored value transfer (gift cads & prepaid services)
  • Escrow
  • Quotations and price guarantees
  • Interbank exchange
  • Smart contracts
  • Liens and letters of credit

When the fraction of Bitcoin transactions servicing these consumer and business activities exceeds the fraction driven by savers and speculators, the dominos will begin to fall rapidly.

Articles about Jamie Dimon and JP Morgan…

  1. Jamie Dimon: Bitcoin Is A Fraud
  2. John McAfee: I challenge Jamie Dimon’s bitcoin skepticism
  3. Crypto Is Here to Stay (Whatever Jamie Dimon Might Say)

Can we draw a conclusion? Certainly, we can. And, we can toss in a prediction. It’s not even a high risk prediction. The recent pullback has no fundamental basis. No legs at all. The two “bad news” are not just a red herring-they present a buying opportunity. If I were allowed to give investor advice (I am not; and I don’t), I would express my opinion with more verve and obvious conviction.

Caveat Emptor (Everything comes with a disclaimer)…

I am a Bitcoin educator, proponent, early adopter and blockchain consultant. But here is the contradiction: Although I am also a Bitcoin investor, I discourage others from treating Bitcoin as an investment. Use it, but please don’t save it!

Why do I discourage others from investing in Bitcoin?

It’s not that I don’t believe that Bitcoin will increase in exchange value. It will rise spectacularly, as adoption grows. But Bitcoin will not become ubiquitous and trusted until the majority of coins are recycled into the market for payments, settlement, loans, interbank transfers, escrow, contract settlement, etc. That is, its use for business and commerce must exceed the fraction of trades that are driven by savers and speculators. Until this happens, Bitcoin will remain volatile. It will be the subject of suspicion. It won’t be used for large settlements and it won’t become the money itself.

Speculation acts against fluidity. It won’t block the eventual acceptance of Bitcoin as a global currency. Hoarding is not a deal stopper. But It retards momentum and delays the inevitable.


Ellery Davies co-chairs CRYPSA, produces The Bitcoin Event, edits A Wild Duck and is moderator of LinkedIN Bitcoin P2P, the largest discussion group of it’s kind. He is keynote at this year’s Digital Currency Summit in Johannesburg and sits on the New Money Systems board at Lifeboat Foundation. Use the contact form to inquire about a live presentation or consulting engagement.

China creates a Bitcoin buy opportunity

When governments seek to inhibit, retard or ban a grassroots movement, it almost always has the opposite effect. Official acts of suppression tend to fuel publicity and growth by shining a light on the activity or venue that some wish to suppress.

The US government apparently knows this. Perhaps that is why a Justice Department official said on November 18 that Bitcoins can be a “legal means of exchange” at a U.S. Senate committee hearing.

  • Mythili Raman, acting assistant attorney general at the department’s criminal division, told the Committee on Homeland Security and Governmental Affairs “We all recognize that virtual currencies, in and of themselves, are not illegal”.
  • Federal Reserve Board Chairman, Ben Bernanke, told the Senate committee that the U.S. central bank has no plans to regulate the currency. He wrote to lawmakers: “Although the Federal Reserve generally monitors developments in virtual currencies and other payments system innovations, it does not necessarily have authority to directly supervise or regulate these innovations or the entities that provide them to the market”.

Of course, as with any monetary authority, the US government needs to preserve public faith in the dollar, and also avoid an exodus to digital currencies, even if used only for online transactions. But rather than attempting to ban individuals from investing in Bitcoin or using it as a currency, the US subtly discredits Bitcoin by placing fear and doubt in the minds of would be traders. For example, in this interview, former fed chairman, Alan Greenspan, explains with remarkable clarity why he believes it is foolish to accept Bitcoin as a currency.

Dr. Greenspan is smarter than me and I am certain that he believes what he says. But I respectfully disagree that trust comes only from the Aristotle doctrine of intrinsic value. Even without the backing of a trusted government or bank, investment value can arise from a combination of provable scarcity and widespread recognition.

Short term investment?  —  or
Long term exchange medium?

I prefer to study Bitcoin as an emerging global currency rather than as an investment vehicle. But even as an investment, its potential is inextricably linked to the likelihood that it will catch on as a currency—at least in some sectors or in some countries. So, let’s look at this possibility…

The long term viability of Bitcoin as a currency depends upon sustained trust by a large number of vendors and consumers. That is, buyers and sellers must feel that there will be broad or growing audience to accept the coins that they accrue, and that the value of their savings—or even of daily receipts—will not be eroded by inflation or a sudden lack of faith. (I am not too concerned with wild swings in exchange value during early adoption. These tend to be overlooked by “bleeding edge” adopters or at least the significant fraction of them that have a strong stomach).

Why is Bitcoin falling?

Bitcoin_pullbackThe short answer: it’s not falling for long. It is adjusting in response to politics, but it almost certainly will return to its historical trend.

The upward path of Bitcoin is already the stuff of legend. The exchange rate with the US dollar rose from nothing to $12 in the first 2 years of trading. This year, it peaked at $1240 on Thanksgiving Day in late November, but then pulled back as low as $650 over the next week. The fall was precipitated by a warning from the Chinese government to its citizens. Their announcement did not ban owning or trading Bitcoins, but it warned citizens that it was a very risky investment and also that it must not be used as currency in any transactions.

After pausing at around $700 for a day, it returned to a range of $850~1050 for most of December. But there was another sudden drop last night, on December 17. It pulled all the way into the high fours before settling between $550 and $600. (This posting was written on Dec 18).

But what happened last night? What caused the second nosedive in this graph?

China_effect_on_Bitcoin

Answer: China is at it again. It is using direct engagement rather than subtle persuasion in an attempt to block gradual adoption of a decentralized, uncontrollable phenomenon. Last night, China’s biggest Bitcoin exchange was barred from accepting new Yuan deposits. But it was not shut down. Citizens can continue to sell and trade Bitcoins that are already in their account and the exchange can still accept cash from outside the country.

Some would say that the downward pressure is a natural response to law and public policy. Wild Ducks augment this argument by pointing out that the fall is a temporary and technical effect. More to the point—we see it as a buying opportunity.

Of course, I acknowledge the short term risk and I continue to downplay the role of Bitcoin as an investment. But I can’t shake the notion that early adoption leads to appreciation over the course of a maturing commodity. I also can’t shake extreme excitement over a property of Bitcoin that places it head-and-shoulders above government and bank-backed currencies: The supply is capped. It simply cannot be printed, inflated, or used as a political tool. It also resists efforts of governments to attack personal wealth as the basis for mandatory redistribution, at least without full and wholehearted consent of the governed.

Given the choice of using it as currency later or owning it earlier, why not do both?

Further reading:

Ellery Davies is acting technology editor for AWildDuck. He dabbles in law, economics, and public policy and has been fascinated with Bitcoin for years.

Debt, Obamacare & Recurring Fiscal Crisis

Senator Ted Cruz leands an assault on Obamacare

Senator Cruz: Assault on Obamacare

There are a plethora of opinions about the latest fiscal crisis. Take your pick. Senator Ted Cruz certainly has an opinion, and he will toss America down a hole to prove it.

Actually, the senator and I share significant common ground. We are both deeply concerned about debt and uncontrolled spending. But, beyond these fundamentals, the senator’s foot-shooting tactics, including a quasi-filibuster, doesn’t inspire confidence.

How, do you suppose, that our creditors view these spams of democratic process? Do you think that they worry about default? Do they care if our economy recovers?  I suspect that – like consumer creditors – they attempt to influence behavior and policy to achieve both a payment stream and a long term outcome that is, foremost, favorable to the creditor? Just as with Greece, creditors are certainly entitled to call the shots.

Today, Forbes contributor, Eamonn Fingleton offered an analysis and explanation of the creditor decision process that I find refreshingly clear. It is, quite probably, an accurate prediction of cause and effect as applied to our current fiscal crisis.

Perhaps the reason that Americans lack the intestinal fortitude to ride out a long term investment is because, as a nation, we have been debtors for too long to recall what it is to be an investor!

Americans delude themselves with the fantasy that that a massive debtor has cards to play. They imagine that a creditors’ need for (the debtor’s) continued solvency and unabated consumption gives them strength. But those things aren’t as critical as Americans think. They can always find new customers elsewhere.

It’s a big world and trade barriers are coming down everywhere. The American dream can still be achieved—even with a roaring, world class economy. But to get there from here, we must recognize that we borrowed against our future while the Chinese produced and lent and while the Arabs sucked down our borrowed cash to satisfy our self-imposed oil addiction.

Those events have consequences. Like it or not, the Chinese have earned the upper hand. Today, they hold thousands of dollars of debt over every one of us. This turn of events is not “unfair”. In fact it is wholly fair. That debt is inherent in your TV, smart phone, shoes, toys, auto parts and underwear. Throughout the 90s and 00s, we moved our manufacturing, infrastructure and innovation off shore. All the while, we soaked up Chinese toys, clothes, gadgets, and raw materials and – of course – Mideast oil. We remained faithful to our post war credo:  Consume, consume, consume!

We must stop thinking of ourselves as entitled to anything other than our freedoms, the separation of powers, Hollywood, the Internet and our past glory as historical capitalists (up through the first ⅔ of the 20th century). We are also entitled to our pretty, foreign-made gadgets adorned with American logos. We got these things, because we handed a pawn broker our marker. He trusts us, because he respects the family name. But he is surprised that we keep bowering to pay the bill. In fact, we aren’t really paying the bill. We are simply racking up debt and ignoring the principal.

Now, it’s time to pay our bills. President Obama wants to begin this process while also ensuring that we include universal access to heath insurance. Well, O.K. it’s not really universal access it’s mandatory buy in. Does Obamacare represent socialiaztion of health care? Probably, Yes! Is it the right move in a down economy? Who knows? Do most people support it? I don’t think that we can get a clear answer to that last question, but it certainly seems split across party lines.

But here’s the deal, Congress. Obamacare is a fact! The act was passed and the law was upheld by the highest court. Since then, it has survived dozens of attempts to overturn it. It’s time to apply your remarkable energy to the people’s business!

The US Congress behaves like a whiny child who wants to grab the soccer ball, furlough the players and shut down the stadium. It’s time to accept defeat without using terrorist tactics to make a point. Few Americans want a socialist economy, but through due process, we have chosen to socialize health insurance. Let’s review the logic:

  • I feel that the time for due process is over.
  • You are determined to spend all of your time and resources trying to overturn a done deal.
  • I think that you are crazy.

And it’s very unsettling to lose confidence in our elected officials.

Ellery on ObamacareListen up, Congress! We, the people, don’t like debt. We get your point of digging in. The constant debt increase is not a merry-go-round. It is more like a falling roller coaster with no tracks ahead. We must apply the brakes, and very soon. We get it! But there are two things that we cannot avoid: Paying creditors and accepting political defeat on just how a reduced budget is put together.

Get over it! Accept that you cannot defund a program that was passed and approved. One way or another, we must still deal with the spiraling cost of health care. Now get to work, dammit! Tell us where we must cut the fat and get the job done!

After years of buying from China, time to pay the bill

I wrote this in April 2011 as feedback to this article in PC World.
__________________________________________________________

After decades of buying from China, it’s time we paid the bill.

Step back from rhetoric & ideology. What, exactly, do we expect the Chinese to buy with all the dollars that they’ve amassed? What happens if we try to dictate their options? –Making available just a few items at the bazaar?

Most Americans want balanced trade. Trade is balanced by encouraging foreigners to return dollars to America. That means purchasing goods & services or investing (purchasing equity or debt). But purchasing debt isn’t real balance. It postpones and magnifies a trade imbalance.

The Chinese have built vast quantities of products that we consumed for more than 30 years. For whatever reasons, they have built them cheaper and responded quickly to consumer demand, and with sufficient quality and style that we loved acquiring them.

Now China has pockets stuffed with dollars. There are so few places that want those dollars, the logical recourse it to spend before it depreciates. That’s logical. Getting them to use those dollars is what we want.

The US exports movies, airplanes, weapons & software, and we charge foreigners to attend our Universities. On the international stage, that about sums our brag sheet. But when we consume trillions from foreigners, do the promissory notes that we issue (“dollars”) limit them to these few commodities? What else can the Chinese purchase that isn’t manufactured closer to home, better, and in larger quantities? They export the really big ticket items themselves–like skyscraper contracting, oil drilling, nuclear technology!

When a foreign corporation or government wants to purchase something significant from the US, suddenly we stop yelling “Buy American” and we start yelling “Security Threat!”. Poppycock! If we create such enormous red tape that international telecom players cannot acquire or invest in one another, we reduce liquidity and further weaken our dollar. Face it: Our start up companies are commodities as certainly as a retail copy of Windows, a Boeing jet or a patent portfolio. When we turn up our nose at healthy interest in intellectual trade or infrastructure acquisition, we are not protecting our interests. We are simply informing trading partners that they were fools to trust us, and that the dollars they stockpiled can be redeemed only in Hollywood films.

It’s natural to be skeptical. China is controlled by an authoritarian dictatorship. Citizens lack social & political freedom. But don’t be misguided about their economy – both within and abroad. It is lubricated by capitalism and is more adaptive and free-wheeling than our own. Whatever their shortcomings, we accepted these when they were selling. We must also allow them to buy. Our technology plays are the only thing on our menu.

Conclusions:

  • A) If we refuse to allow the Chinese to repatriate dollars or offer them only the local goods of our choosing – typical of a Banana Republic – then they will dump our dollars and also stop buying our debt. It would crush our economy in a heartbeat.
  • B) If we allow those with large stockpiles of our dollars to use them as they see fit, the dollars will return to build factories, create jobs, and produce good, old fashioned innovation. But this won’t happen with newly printed dollars. It doesn’t work that way, because that weakens both parties and makes our factories unattractive. It must be the dollars that we willingly handed over for TVs, computers, shoes, toys and even building materials. We must accept that we owe China—big time! For decades, we passed off pictures of George & Ben in exchange for tangible goods. We knew the Chinese crafted high tech goods for less and that the political system was repressive. But we looked the other way. We really wanted those things! Whether you like their government or not, we promised to expend future time and resources supplying their children with commensurate goods.


Why does China say “America works for us”
Click image to learn why (video = 1min)

This video was commissioned in an effort to defeat Obama’s 2010 universal health care bill. It has terrific shock value. It depicts what China believes to be our economic weakness. I won’t comment here about health care or stimulus economics. It’s unrelated to my point. But the video also depicts what Chinese believe to be their imminent destiny, perhaps at America’s expense.

They deserve all of the positive things they have earned. Although it’s natural to whine and complain about an uneven playing field, and our past glory (Automobile assembly, television, the moon landing and the Internet), China is winning in the global economy and any trade in which we engage is, by definition, fair. In fact, the only uneveness in the playing field of international trade is just the opposite of popular perception: It has been tipped in our favor for the entire 20th century!

We must get it through our heads that capitalism is not a contest! This simple truth is often overlooked. The emergence of China as an economic superpower is a good thing. Not just for the Chinese, but for every American. If we keep our own ship in order, the result will be an abundance of goods and services from both sides because we will have affluent trading partners, broader access to labor and markets, and eventually, democratic trading partners.

– Ellery Davies|
Ellery clarifies law and public policy. He is a frequent columnist and TV commentator.

Beijing to Impose Encryption Disclosure Rules

I originally wrote this piece in April 2010 as feedback to this article in The Wall Street Journal.
__________________________________________________________

Another reader, Felix Wyss, correctly points out that this WSJ article is unclear on the information demanded by Chinese authorities. Every open or public key encryption standard is based on a disclosed algorithm. That’s the whole point. It is the complexity of reversing that algorithm that makes the encryption secure…

If the Chinese government wants more information about the algorithm used to encode data for transmission or archival – For example, to ensure that it is secure – then I say, “Absolutely! Get all the information you like”. But if they want a key escrow or back door, they are barking up a dead tree stump. Been there. Done that. Our own government tried this. In the words of Dana Carvy: “Not Gonna Happen.

Even under communist rule, that wouldn’t be encryption at all. And with the growing clout of economic success, Chinese companies won’t stand for it. The Party would do better by demanding that routers or firewalls force users to create two keys: One for the end user and one for the network admin. That would promote good business practice. Of course, turning over the 2nd key to anyone outside of the immediate work group  or family would require active user consent and compliance.

Hey China! Let’s face it: The days of suppressing free speech or forcing products to snitch on their users is coming to an ignoble end. The secret police of Romania, East Germany, the Soviet Union and Iraq have all disbanded – or at least redirected to classic gum shoe detective work and intelligence gathering. Terrorism is the new enemy and not the private business and political activities of your own citizens. You have shown a remarkable ability to emerge as an economic superpower, making things that people like, exporting quality products, all while raising the standard of living for your population. Ultimately, this helps all countries. But now you have some very ugly skeletons to sweep out of your closet. Modern 1st world countries cannot forever suppress political and religious freedom.

Grow up. We really do want you to enter the community of nations some day.

– Ellery Davies
Ellery Davies clarifies law and public policy. Feedback is always welcome.