[Originally posted in 2017] To understand the China ‘One-Belt / ‘One-World‘ economic trade strategy it becomes necessary to understand how structurally weak the Chinese economy was when created.

People often talk about the ‘strength’ of China’s economic model; and indeed within a specific part of their economy -manufacturing- they do have economic strength.

However, the underlying critical architecture of the Chinese economic model is structurally flawed and President Trump with his current economic team understand the weakness better than all international adversaries.

Lets take a stroll and lightly discuss.

China is a central planning economy. Meaning it never was an outcropping of natural economic conditions. China was/is controlled as a communist style central-planning government; As such, it is important to reference the basic structural reality that China’s economy was created from the top down.

This construct of government creation is a key big picture distinction that sets the backdrop to understand how weak the economy really is.

Any nations’ economic model is only as stable (or strong) as the underlying architecture or infrastructure of the country’s economic balance.

Think about economic strength and stability this way: If a nation was economically walled off from all other nations, can it survive? …can it sustain itself? …can it grow?

In the big picture – economic strength is an outcome of the ability of a nation, any nation, to support itself first and foremost. If a nations’ economy is dependent on other nation to survive it is less strong than a nation whose economy is more independent.

Most Americans don’t realize it, but China is an extremely dependent nation.

When the central planning for the 21st century Chinese Economy was constructed, there were several critical cultural flaws, dynamics exclusive to China, that needed to be overcome in order to build their economic model. It took China several decades to map out a way to economic growth that could overcome the inherent critical flaws.

Critical Flaws To Exploit:

♦Because of the oppressive nature of the Chinese compliant culture, in the aggregate the citizens within China do not necessarily innovate well or create new innovation.  The “Compliance Mindset” is part of the intellectual DNA strain of a Chinese citizen.

Broadly speaking, the modern era Chinese are not able to think outside the box per se’ because the reference of all civil activity has been a history of box control by government, and compliance to stay (think) only within the approved box. The lack of intellectual thought mapping needed for innovation is why China relies on intellectual theft of innovation created by others.

Historically American culture is based around freedom of thought and severe disdain of government telling us what to do; THAT freedom is necessary for innovation. That freedom actually creates innovation.

Again, broadly speaking Chinese are better students in American schools and universities because the Chinese are culturally compliant. They work well with academics and established formulas, and within established systems, but they cannot create the formula or system themselves.  The modern Chinese strategy has been to compensate for this deficit by having Western universities train and educate their youth.

♦ The Chinese Planning Authority skipped the economic cornerstone. When China planned out their economic entry, they did so from a top-down perspective. They immediately wanted to be manufacturers of stuff. They saw their worker population as a strategic advantage, but they never put the source origination infrastructure into place in order to supply their manufacturing needs. China has no infrastructure for raw material extraction or exploitation.

China relies on: importing raw material, applying their economic skill set (manufacturing), and then exporting finished goods. This is the basic economic structure of the Chinese economy.

See the flaw?

Cut off the raw material, and the China economy slows, contracts, and if nations react severely enough with export material boycotts the entire Chinese economy implodes.

Insert big flashy sign for: “One-Belt / One-Road” HERE

Again, we reference the earlier point: Economic strength is the ability of a nation to sustain itself. [Think about an economy during conflict or war] China cannot independently sustain itself, therefore China is necessarily vulnerable.

China is dependent on Imports (raw materials) AND Exports (finished goods).

♦The 800lb Panda in the room is that China is arguably the least balanced economy in the modern world. Hence, China has to take extraordinary measures to secure their supply chain. This economic dependency is also why China has recently spent so much on military expansion etc., they must protect their vulnerable interests.

Everything important to the Chinese Economy surrounds their critical need to secure a strong global supply chain of raw material to import, and leveraged trade agreements for export.

China’s economy is deep (manufacturing), but China’s economy is also narrow.

China could have spent the time to create a broad-based economy, but the lack of early 1900’s foresight, in conjunction with their communist top-down totalitarian system and a massive population, led to central government decisions to subvert the bottom-up building-out and take short-cuts. Their population controls only worsened their long term ability to ever broaden their economic model.

It takes a population of young avg-skilled workers to do the hard work of building a raw material infrastructure. Mine workers, dredge builders, roads and railways, bridges and tunnels etc. All of these require young strong bodies. The Chinese cultural/population decisions amid the economic builders precluded this proactive outlook; now they have an aging population and are incapable of doing it.  They also rely on a labor workforce from North Korea that few people ever discuss.

This is why China has now positioned their economic system as dependent on them being an economic bully. They must retain their supply chain: import raw materials – export finished goods, at all costs.

This inherent economic structure is a weakness China must continually address through policies toward other nations. Hence, “One-Belt / One-Road” is essentially their ‘bully plan’ to ensure their supply chain and long-term economic viability.

This economic structure, and the reality of China as a dependent economic model, also puts China at risk from the effects of global economic contraction. But more importantly it puts them at risk from President Trump’s strategic use of geopolitical economic leverage to weaken their economy.

Nuance and subtlety is everything in China. Culturally harsh tones are seen as a sign of weakness and considered intensely impolite in public displays between officials; especially within approved and released statements by officials representing the government.

Historic Chinese cultural policy, the totalitarian control over expressed political sentiment and diplomacy through silence, is evident in the strategic use of the space between carefully chosen words, not just the words themselves.

China has no cultural or political space between peace and war; they are a historic nation based on two points of polarity. They see peace and war as coexisting with each other. China accepts and believes opposite or contrary forces may actually be complementary, interconnected, and interdependent in the natural world, and they may give rise to each other as they interrelate to one another. Flowing between these polar states is a natural dynamic to be used -with serious contemplation- in advancing objectives as needed.

The Chinese objective is to win, to dominate, using economic power.

Peace or war. Win or lose. Yin and Yang. Culturally there is no middle position in dealings with China; they are not constitutionally capable of understanding or valuing the western philosophy of mutual benefit where concession of terms gains a larger outcome. If it does not benefit China, it is not done. The outlook is simply, a polarity of peace or war. In politics or economics the same perspective is true. It is a zero-sum outlook.

Therefore, when you see China publicly use strong language – it indicates a level of internal disposition within Beijing beyond the defined western angst. Big Panda becomes Red Dragon; there is no mid-status or evolutionary phase.

♦U.S. President Donald Trump and the U.S. economic team fully understand this dynamic and fully understand the inherent needs of China. When you are economically dependent, the ‘bully plan’ only works until you encounter a ‘stronger opponent’. A stronger opponent is an economic opponent with a more broad-based stable economy, that’s US.

President Trump, Commerce Secretary Ross, Treasury Secretary Mnuchin and U.S. Trade Representative Lighthizer, represent the first broad-based national team of economic negotiators who know how to leverage the inherent Chinese economic vulnerability.

Every American associated with investment, economics and China would be well advised to put their interconnected business affairs in order according to their exposure.

President Trump will not back down from his position; the U.S. holds all of the leverage and the geopolitical economics must be addressed. President Donald Trump and his team are entirely prepared for this.

Donald Trump has been discussing this for more than two decades. We are going into economic combat with China!

China’s objective is conquest. China’s tool for conquest is economics. President Trump’s entire geopolitical strategy, using economics in a similar way, is an existential threat to China’s endeavor. Communist Beijing calls the proverbial DPRK shots.

President Trump is putting on a MASSIVE economic squeeze.

♦Squeeze #1. Trump and Mnuchin sanctioned Venezuela and cut off their access to expanded state owned oil revenue. Venezuela now needs more money. China and Russia are already leveraged to the gills in Venezuela and hold 49% of Citgo as collateral for loans outstanding. Now China and Russia will need to loan more, directly.

♦Squeeze #2. China’s geopolitical ally, Russia, is already squeezed with losses in energy revenue because of President Trump’s approach toward oil, LNG and coal. Trump, through allies including Saudi Arabia, EU, France (North Africa energy), and domestic production has driven down energy prices. Meanwhile Russia was bleeding out financially in Syria. Iran is the financial reserve, but they too are energy price dependent.

♦Squeeze #3. Trump, Tillerson and now Pompeo put Pakistan on notice they need to get involved in bringing their enabled tribal “extremists” (Taliban) to the table in Afghanistan. Pakistan’s primary investor and economic partner is China. If U.S. pulls or reduces financial support to pressure Pakistan toward a political solution in Afghanistan, China has to fill void.

♦Squeeze #4. China’s primary economic threat (competition) is next door in India. President Trump has just embraced India as leverage over China in trade and pledged ongoing favorable trade deals. The play is MFN (Most Favored Nation) trade status might flip from China to India. That’s a big play.

♦Squeeze #5. President Trump launched a USTR Section 301 Trade Investigation into China’s theft of intellectual property. This encompasses every U.S. entity that does manufacturing business with China, particularly aeronautics and technology, and also reaches into the financial services sector.

♦Squeeze #6. President Trump, Secretary Ross, Secretary Mnuchin and USTR Robert Lighthizer renegotiated NAFTA to create the USMCA. One of the primary objectives of team U.S.A. was to close the 3rd party loopholes, including dumping and origination, that China uses to gain backdoor access to the U.S. market and avoid trade/tariff restrictions. [China sends parts to Mexico and Canada for assembly and then back-door entry into the U.S. via NAFTA.]

♦Squeeze #7. President Trump has been open, visible and vocal about his intention to shift to bilateral trade renegotiation with China and Southeast Asia immediately after Team U.S.A. concluded with NAFTA renegotiation.  Those negotiations are now ongoing.

♦Squeeze #8. President Trump positioned ASEAN (Association of Southeast Asian Nations) as trade benefactors for assistance with North Korea. The relationship between ASEAN nations and the Trump administration is very strong, and getting stronger. Which leads to…

♦Squeeze #9. President Trump has formed an economic and national security alliance with Shinzo Abe of Japan. It is not accidental that North Korea’s Kim Jong-un fired his last missile over the Northern part of Japan. Quite simply, Beijing told him to.

♦Squeeze #10. Tariffs.

Add all of this up and you can see the cumulative impact of President Trump’s geopolitical economic strategy toward China. The best part of all of it – is the likelihood China never saw it, meaning the sum totality of “all of it”, coming… until 2018.

The Olive branch and arrows denote the power of peace and war. The symbol in any figure’s right hand has more significance than one in its left hand. Also important is the direction faced by the symbols central figure. The emphasis on the eagles stare signifies the preferred disposition. An eagle holding an arrow also symbolizes the war for freedom, and its use is commonly referred to the liberation fight of righteous people from abusive influence. The eagle on the original seal created for the Office of the President showed the gaze upon the arrows.

The Eagle and the Arrow – An Aesop’s Fable

An Eagle was soaring through the air. Suddenly it heard the whizz of an Arrow, and felt the dart pierce its breast. Slowly it fluttered down to earth. Its lifeblood pouring out. Looking at the Arrow with which it had been shot, the Eagle realized that the deadly shaft had been feathered with one of its own plumes.

Moral: We often give our enemies the means for our own destruction.

CTH is finding it difficult to dismiss the likelihood that both Democrat and Republican corporate club members are intentionally working to make the border crisis worse in an effort to fracture the base of support for President Trump… That purchased approachseems in line with Tom Donohue’s Big Club strategy.

Earlier today President Trump tweeted about the growing crisis at the U.S-Mexico border. Additionally this follows after he answered a press question yesterday about closing some of the border entry points:

Q Mr. President, if you close the border, would it be to all trade? Would you close the border to trade?

THE PRESIDENT: It could be to all trade. Mexico is making absolutely a fortune with the United States. They have a trade surplus of over $100 billion, which is far bigger than anybody understands. They’ve had it for many years. And either they’re going to stop — they have the strongest immigration laws anywhere in the world. And we have the weakest, the most pathetic laws. Number one, Congress has to act. And number two, Mexico — they make so much money from the United States and so many other things, so many other assets, they have to grab it and they have to stop it.

We have, right now, two big caravans coming up from Guatemala. Massive caravans walking right through Mexico. So, Mexico is tough. They can stop them, but they chose not to. Now they’re going to stop them. And if they don’t stop them, we’re closing the border. They’ll close it. And we’ll keep it closed for a long time. I’m not playing games. Mexico has to stop it. They have people coming right through Mexico. It’s a long, very dangerous journey. Mexico sends busses, they send trucks, they do absolutely — they started, at one point, a little bit — stopping. They don’t do anything to stop it right now.

So the caravan has formed. I’ve ended payments to Guatemala, to Honduras, and to El Salvador. No money goes there anymore. We were giving them $500 million. We were giving them tremendous aid. We stopped payment to Honduras, to Guatemala, and to El Salvador. We were paying them tremendous amounts of money, and we’re not paying them anymore because they haven’t done a thing for us.

They set up these caravans. In many cases, they put their worst people in the caravan; they’re not going to put their best in. They get rid of their problems. And they march up here, and then they’re coming into their country; we’re not letting them in our country.

Our Border Patrol, the job they’ve done, is incredible. The job that ICE is doing is incredible. And we have run out of space. We can’t hold people anymore. And Mexico can stop it so easily. They don’t go through a court system every time somebody steps on our land. You step on our land: “Welcome to the United States.” It’s ridiculous.

So Congress — and I know you guys are going to work hard on it — but Congress has to fix our broken immigration laws. We’re the laughing stock all over the world. People pour into this country and we stop them because Border Patrol is so incredible. But there’s a point at which you can’t stop them anymore. We have no detention space, no nothing.

So, Guatemala, Honduras, El Salvador have done nothing. Mexico has done nothing. And I’ll tell you something: Colombia — you have your new President of Colombia. Really good guy. I’ve met him. We had him at the White House. He said how he’s going to stop drugs. More drugs are coming out of Colombia right now than before he was President. So he has done nothing for us.

Okay. Thank you very much.

Q Will you put DACA back on the table to speed up deportations?

THE PRESIDENT: It’s in the Supreme Court right now. After the Supreme Court.

(press conference link)

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Steve Bannon appears on CNBC to discuss the economic objectives of China and how President Trump and USTR Lighthizer are confronting three very important convergences.

Bannon does a good job outlining the three Chinese priorities: ¹One-belt, one road; ²Made in China 2025; and ³Huawei 5G rollout; and how those efforts conflict with U.S. interests.

White House economic advisor Larry Kudlow made some news yesterday when he said he would like to see the Fed cut interest rates by half a point (.50%).  Director Kudlow then appeared on CNBC for a discussion of the economy and the United States’ ongoing trade discussions with China and Mexico.

The larger story is actually about the current state of the U.S. economy as Trump’s policies influence direct investment and re-establish a middle-class durable goods manufacturing sector. WATCH:

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In essence we are in that economic space where Trump has de-emphasized the Wall Street economy (multinational corps, investments and financials) and re-emphasized the Main Street economy (manufacturing, blue collar jobs).  The new trade deals represent an unusual economic paradox for Wall St.  National corporations thrive; however multinational corporations and their investment instruments can simultaneously suffer.

We can tell we are in the space between both of these economies, because actions by the Fed are having no impact on inflation.  Consumer prices are returning back to their natural dynamic.  I’m reposting an article below from December 2016, right after the 2016 election, because this odd economic landscape -while new- was entirely predictable.  I called it the “Third Dimension in American Economics“.

Keep in mind this was written in December 2016, before President Trump took office.  Our current location is now over two years into the shift from favoring a Wall Street engine, to favoring a Main Street engine.   I hope you find this helpful…

[December 2016] Traditional economic principles have revolved around the Macro and Micro with interventionist influences driven by GDP (Gross Domestic Product, or total economic output), interest rates, inflation rates and federally controlled monetary policy designed to steer the broad economic outcomes.

Additionally, in large measure, the various data points which underline Macro principles are two dimensional. As the X-Axis goes thus, the Y-Axis responds accordingly… and so it goes…. and so it has historically gone.

Traditional monetary policy has centered upon a belief of cause and effect: (ex.1) If inflation grows, it can be reduced by rising interest rates. Or, (ex.2) as GDP shrinks, it too can be affected by decreases in interest rates to stimulate investment/production etc.

However, against the backdrop of economic Globalism -vs- economic Americanism, CTH is noting the two dimensional economic approach is no longer a relevant model. There is another economic dimension, a third dimension. An undiscovered depth or distance between the “X” and the “Y”.

I believe it is critical to understand this new dimension in order to understand Trump economic principles, and the subsequent “America-First” economy he’s building.

As the distance between the X and Y increases over time, the affect detaches – slowly and almost invisibly. I believe understanding this hidden distance perspective will reconcile many of the current economic contractions. I also predict this third dimension will soon be discovered and will be extremely consequential in the coming decade.

To understand the basic theory, allow me to introduce a visual image to assist comprehension. Think about the two economies, Wall Street (paper or false economy) and Main Street (real or traditional economy) as two parallel roads or tracks. Think of Wall Street as one train engine and Main Street as another.

The Metaphor – Several decades ago, 1980-ish, our two economic engines started out in South Florida with the Wall Street economy on I-95 the East Coast, and the Main Street economy on I-75 the West Coast. The distance between them less than 100 miles.

As each economy heads North, over time the distance between them grows. As they cross the Florida State line Wall Street’s engine (I-95) is now 200 miles from Main Street’s engine (traveling I-75).

As we have discussed – the legislative outcomes, along with the monetary policy therein, follows the economic engine carrying the greatest political influence. Our historic result is monetary policy followed the Wall Street engine.

[…] there had to be a point where the value of the second economy (Wall Street) surpassed the value of the first economy (Main Street).

Investments, and the bets therein, needed to expand outside of the USA. hence, globalist investing.

However, a second more consequential aspect happened simultaneously. The politicians became more valuable to the Wall Street team than the Main Street team; and Wall Street had deeper pockets because their economy was now larger.

As a consequence Wall Street started funding political candidates and asking for legislation that benefited their interests.

When Main Street was purchasing the legislative influence the outcomes were beneficial to Main Street, and by direct attachment those outcomes also benefited the average American inside the real economy.

When Wall Street began purchasing the legislative influence, the outcomes therein became beneficial to Wall Street. Those benefits are detached from improving the livelihoods of main street Americans because the benefits are “global” needs. Global financial interests, investment interests, are now the primary filter through which the DC legislative outcomes are considered.

There is a natural disconnect. (more)

Here is an example of the resulting impact as felt by consumers:

♦ TWO ECONOMIES – Time continues to pass as each economy heads North.

Economic Globalism expands. Wall Street’s false (paper) economy becomes the far greater economy. Federal fiscal policy follows and fuels the larger economy. In turn the Wall Street benefactors pay back the politicians.

Economic Nationalism shrinks. Main Street’s real (traditional) economy shrinks. Domestic manufacturing drops. Jobs are off-shored. Main Street companies try to offset the shrinking economy with increased productivity (the fuel). Wages stagnate.

Now it’s 1990 – The Wall Street economic engine (traveling I-95) reaches Northern North Carolina. However, it’s now 500 miles away from Main Street’s engine (traveling I-75). The Appalachian range is the geographic wedge creating the natural divide (a metaphor for ‘trickle down’).

By the time the decade of 2000 arrives – Wall Street’s well fueled engine, and the accompanying DC legislative attention, influence and monetary policy, has reached Philadelphia.

However, Main Street’s engine is in Ohio (they’re now 700 miles apart) and almost out of fuel; there simply is no more productivity to squeeze.

From that moment in time, and from that geographic location, all forward travel is now only going to push the two economies further apart. I-95 now heads North East, and I-75 heads due North through Michigan. The distance between these engines is going to grow much more significantly now with each passing mile/month….

However, and this is a key reference point, if you are judging their advancing progress from a globalist vessel (filled with traditional academic economists) in the mid-Atlantic, both economies (both engines) would seem to be essentially in the same place based on their latitude.

From a two-dimensional linear perspective you cannot tell the distance between them.

It is within this distance between the two economies, which grew over time, where a new economic dimension has been created and is not getting attention. It is critical to understand the detachment.

Within this three dimensional detachment you understand why Near-Zero interest rates no longer drive an expansion of the GDP. The Main Street economic engine is just too far away to gain any substantive benefit.

Despite their domestic origin in NY/DC, traditional fiscal policies (over time) have focused exclusively on the Wall Street, Globalist economy. The Wall Street Economic engine was simply seen as the only economy that would survive. The Main Street engine was viewed by DC, and those who assemble the legislative priorities therein, as a dying engine, lacking fuel, and destined to be service driven only….

Within the new 3rd economic dimension, the distance between Wall Street and Main Street economic engines, you will find the data to reconcile years of odd economic detachment.

Here’s where it gets really interesting. Understanding the distance between the real Main Street economic engine and the false Wall Street economic engine will help all of us to understand the scope of an upcoming economic lag; which, rather remarkably I would add, is a very interesting dynamic.

Think about these engines doing a turn about and beginning a rapid reverse. GDP can, and in my opinion, will, expand quickly. However, any interest rate hikes (fiscal policy) intended to cool down that expansion -fearful of inflation- will take a long time to traverse the divide.

Additionally, inflation on durable goods will be insignificant – even as international trade agreements are renegotiated. Why? Simply because the originating nations of those products are going to go through the same type of economic detachment described above.

Those global manufacturing economies will first respond to any increases in export costs (tariffs etc.), by driving their own productivity higher as an initial offset, in the same manner American workers went through in the past two decades. The manufacturing enterprise and the financial sector remain focused on the pricing.

♦ Inflation on imported durable goods sold in America, while necessary, will ultimately be minimal during this initial period; and expand more significantly as time progresses and off-shored manufacturing finds less and less ways to be productive. Over time, durable good prices will increase – but it will come much later.

♦ Inflation on domestic consumable goods ‘may‘ indeed rise at a faster pace. However, it can be expected that U.S. wage rates will respond faster, naturally faster, than any fiscal policy because inflation on fast-turn consumable goods become re-coupled to the ability of wage rates to afford them.

The fiscal policy impact lag, caused by the distance between federal fiscal action and the domestic Main Street economy, will now work in our favor. That is, in favor of the middle-class.

Within the aforementioned distance between “X” and “Y”, a result of three decades traveled by two divergent economic engines, is our new economic dimension….