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In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

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America is at China’s Mercy but our leaders do not know it – yet

Economic indicators show America is at China’s mercy. However, America’s thought leaders are ignorant of the new international pecking order.

For example, the “international relations experts” at Foreign Policy do not understand why the Trump Administration refuses to impose sanctions on the People’s Republic of China. In fact, Foreign Policy even ran the headline “The Mysterious Case of the Disappearing China Sanctions.”

However, Will Staton solves the mysterious case in a recent Data Driven Investor piece. Specifically, Staton writes “By Calling in US Debt at the Most (in)Opportune Moment, China Can End America’s Ability to Enforce International Sanctions.”

How China controls America with Debt

To explain, the United States has a national debt of $22.202 trillion, The US Debt Clock estimates. Meanwhile, the Chinese held $1.13 trillion or over 5% of US federal government debt. In fact, China is the largest holder of US government debt.

Thus, the Chinese can sell that debt anytime they want. Moreover, if Beijing suddenly dumps all its American debt it could destroy America’s credit rating and raise Uncle Sam’s borrowing costs.

In the worst-case scenario, the US could be incapable of borrowing money. Consequently, China could force Congress to raise taxes, which is political suicide in the United States.

Obviously, no President facing reelection wants to deal with that. Hence President Donald J. Trump (R-New York) shelves all plans for China sanctions.

China’s Economy Overtakes America

China’s power to push America around is growing; because the People’s Republic’s economy could overtake America’s as the world’s largest as early as next year. Specifically, analysts at Standard Chartered bank predict China’s Gross Domestic Product (GDP) will be the world’s largest in 2020, Marketwatch reports.

Furthermore, a Visual Capitalist projection shows that America will be the world’s largest third largest economy in 2030. Specifically, the Visual Capitalistpredicts China will have the largest GDP in 2030 with $64.2 trillion. Meanwhile, India will be number two with $46.3 trillion in GDP, and the USA will be number three with $31 trillion.

Hence, the United States could become a second-rate economic power within 11 years. Therefore, the President has no choice but to be very nice when somebody calls from the Forbidden City.

Finally, China’s trade surplus with the USA rose to a record $323.32 billion in 2018, Marketwatch calculates. In addition, the value of Chinese exports to America grew by 11.3% in 2018.

Under those circumstances, any disruption to Chinese trade could throw the US economy into depression. Consequently, Trump stops mentioning China on the stump, and redirects his Tweets at Mexican immigrants.

The Economic War is Over and China Won

The logical conclusion is the economic war is over and China won. However, most of America’s leaders in Washington and New York do not grasp the reality.

For example, extreme nationalist neoconservative intellectuals within the Trump administration want to “crush China,” Harry J. Kazianis alleges at The American Conservative. Fortunately, President Trump is ignoring such stupidity.

However, the neocons’ warmongering demonstrates the dangerous alternate reality that American thought leaders live in. To explain, America’s leaders act as if it is 1988, and the United States owns the globe.

For instance, the Russian menace obsess leftists like MSNBC entertainer Rachel Maddow; 30 years after the fall of the Berlin Wall. In fact, The American Conservative accuses of Maddow of spreading ridiculous conspiracy to justify her claims.

Meanwhile former Trump adviser Steve Bannon is organizing a think-tank to promote conflict with China, The American Conservative alleges. Thus, Bannon wants America to antagonize a nation with greater economic power. Hence, it is no surprise Trump threw Bannon out of his administration.

Sorry America, it’s China’s world

The sad truth fantasists like Bannon and Maddow will have to adjust to is that it is China’s world. Americans just live in that world and increasingly pay rent to China.

For instance, Fortnite; the addictive shooter game sensation dominating the lives and minds of younger Americans, is 40% owned by a Chinese company. To clarify, Fortnite’s creator Epic Games is 40% owned by Tencent Holdings (ADR: TCEHY) a Chinese tech and social media giant; with close connections to Beijing, Conviction Capital Research reveals.

Moreover, Tencent is the world’s largest gaming company with such megahits as League of Legends, Need for Speed, and FIFA Oneline 3 in its portfolio. Hence, younger Americans pay China rent each time they reach for the game controller.

Under these circumstances, Tencent could wreak havoc by blocking Americans’ access to their favorite entertainment. How will younger Americans vote if Tecent shuts Fortnite down the week before a presidential election?

America as Britain

One group that will get a big laugh out of America’s predicament is the British. The British will laugh because their country went through a similar fall from dominant power status in the 20th Century.

To explain, in 1900, the British Empire was the world’s top military power with the largest navy. Just like America is today. However, by 1900, the United States had the world’s largest Gross Domestic Product (GDP).

Economists think America’s GDP outstripped Britain’s in the early 1890s, the BBC reports. Yet the reality did not dawn on British elites until the Boer War, which began in 1899. To explain, Her Majesty’s government realized it had to be nice to America; because economic realities forced Britain to borrow the money to finance the Boer War on Wall Street.

How China could dominate America

Strangely, one result of Britain’s fall is the present map of North America. In his interesting book Destined for War, Graham Allison notes that the British gave the United States most of British Colombia’s northern coastline during the Boer War.

The British abandoned strong historic claims to territory; that includes Juneau, because they needed American money. To clarify, President Theodore Roosevelt (R-New York) asked for a strip of Canada’s Pacific Coast to ensure American access to the Klondike Goldfields. Teddy got his way because the British needed to pay for their empire.

Given that history, America could abandon its military bases and allies in the Philippines, the Middle East, Central Asia, and South Korea for access to Chinese money and markets. In conclusion, a U.S. President who needs Chinese money is likely to make some incredible concessions to Beijing.

How America can Protect itself from China

There is a strategy that could let America use its economic power to blunt China’s rise. However, that strategy does not involve tariffs, sanctions, or trade warfare.

Instead, the United States could use the cash Silicon Valley, Wall Street, and Hollywood are generating to strengthen America’s economic position. To explain, the United States can increase taxes on corporations and the rich and invest part of the proceeds in a Sovereign Wealth Fund.

A Sovereign Wealth Fund is an institution that reinvests part of a country’s wealth for the national good. In particular, a Sovereign Wealth Fund operates like a hedge fund; or a venture capitalist, investing the country’s money in financial markets and businesses. In addition, a Sovereign Wealth Fund (SWF) invests in infrastructure, research and development, social programs, education, and other national needs.

How China Dominates the Financial Markets

Not surprisingly, China is winning the Sovereign Wealth Fund race too. The China Investment Corporation, the People’s Republic’s SWF, is the world’s second largest with $941.417 billion in investments, The SWF Institute calculates.

However, there is a second SWF on Chinese territory, the Hong Kong Monetary Authority Investment Portfolio worth $509.353 billion. Consequently, China has $1.45 trillion invested in two SWFs.

Thus, China has the largest amount of money invested in SWFs; worth nearly $500 million more than Norway’s. To explain the $989.934 billion Norway Government Pension Fund is the largest single SWF. However, China’s SWF stash easily exceeds Norway’s – when you add Hong Kong’s.

To elaborate, Beijing appoints Hong Kong’s government; which controls the Hong Kong Monetary Authority Investment Portfolio. Thus, the Chinese Communist Party theoretically controls $1.45 trillion in investments.

Hence, China could disrupt the world’s markets by pulling that money out. In fact, the Chinese could cause a worldwide market crash by withdrawing all their SWF money from the securities and equities markets. Thus, tens of millions of Americans’ 401ks could become worthless overnight.

A Sovereign Wealth Fund could Protect America from China

Meanwhile, the United States has no sovereign wealth fund which puts America at a serious disadvantage in competition with China. For instance, China can buy US national debt through its two SWFs.

Hence, the United States must create a sovereign wealth fund to protect itself from China. For example, a US Sovereign Wealth Fund could buy up US national debt to counter’s Chinese stake.

Importantly, a US Sovereign Wealth Fund could buy up Chinese government debt and neutralize China’s ownership of American debt. To elaborate, the Chinese will be afraid to sell US debt because Uncle Sam could sell their debt.

Plus, a Sovereign Wealth Fund allows a country to flex its economic muscle by investing in foreign stocks or corporations. For example, a United States SWF can buy stakes in publicly traded Chinese companies; like Tencent Holdings, to give Uncle Sam some influence over those enterprises.

How the Rich weaken America and Strengthen China

Creating a United States SWF will be difficult; because building one will require America’s wealthy to pay more taxes.

For instance, Americans worth $2 million or more pay an effective tax rate of 27.5%, Pew Research calculates. Meanwhile, French citizens worth over €152,260 ($172,046.19) pay a 45% tax rate, Trading Economics calculates. Interestingly, France’s current individual income tax rate is at a record low.

However, American politicians are prone to cutting taxes on the rich and corporations. For instance, the Republicans cut the corporate tax rate from 35% to 21% in 2017. In addition, the number of US companies paying no income tax doubled from 30 in 2017 to 60 in 2018, The Center for Public Integrity claims.

Hence, America’s lack of fiscal discipline could doom the United States to second, or third, rate power status soon. Thus, America’s leaders had better get used to living in China’s world. The United States is at China’s mercy because our leaders refuse to harness America’s economic power for the national good.