China or Greece: Whose Economy Should We Fear?

Much has been written about Greece’s financial doom and the domino effect it will have on Europe’s and possibly America’s economy. I’ve never liked playing dominos. I prefer to find solutions to problems before there are consequences.

Having traded and borrowed off their historical culture for years, Greece over spent and their Doric columns couldn’t sustain them. So on their application to join the European Union, they underplayed their level of debt to meet Euro guidelines. If, or rather when, Greece defaults, other over-indebted nations, such as Portugal or Ireland, will follow. Europe will be in a financial crisis, and governments will take over the banks. In the long run, Europe will recover, and a more constructive era will follow.

But a domino effect on our economy? I don’t think so. American banks don’t own much European debt, and our banks are stronger than they were before 2008. We wouldn’t be unscathed, however. The most evident effect of the European crisis would be a decrease in the demand for American goods. But we will survive.

The real threat to our economy, and possibly our existence, is China. On March 10, 2011, James Clapper, the Director of National Intelligence, reported to the Senate Armed Services Committee that China has a larger nuclear arsenal than Russia, but unlike Russia, we do not have an arms treaty with China. Not the best scenario.

Secondly, China has become an international economic power. It has risen from a poor, agrarian nation to the world’s second largest economy. China is now one of America’s largest export markets and import providers, and its growth has come at the expense of American manufacturing. In January 2011, President Obama attended a dinner where Apple’s Steve Jobs was speaking. In a question and answer format, President Obama asked Jobs when iPhones, manufactured in China, would be made in the United States. Jobs replied that there were no plans to move the manufacturing of this huge industry to America.

The problem is not that China has a cheaper work force. The difference in pay scale will diminish in a few years as Chinese industry is forced to accept labor demanded unions. The problem is the entire system. At Apple’s facilities in China, workers are sometimes roused from their on-campus dormitories to meet deadlines. There is a different mindset. American workers don’t live in dormitories, nor should they. On a larger scale is the ease of management that a Chinese factory provides. Most of the iPhone’s components are manufactured in Asia. Memory comes from Samsung in Korea, hard drive from Toshiba in China, display drives from Japan, video and multimedia processors from Taiwan and Singapore, semiconductors from Taiwan and Germany. With the cost efficient proximity of its supply chain, the final product is then assembled and tested in China.

But this shouldn’t alarm us. Apple’s story is an aberration to what economists see as a new trend. Industry is slowly returning to the United States. In the non union state of Alabama, Honda andToyota have all opened plants. If unions in other states wake up, we’ll be OK.

What should alarm us, however, what really makes the Chinese economy a threat, is its present economic slowdown. Because China’s economy was skyrocketing so fast, the Chinese government stepped in to orchestrate a slowdown and avoid double digit inflation. They have been raising interest rates to curb growth, and it’s working. If China’s economic slowdown is soft, the world will be fine. But if it drops too quickly, the world will be in crisis. Now we start playing dominoes. If the Chinese economy cuts its growth in half (4.5 percent) or more, the world will plummet into a recession. China is the growth engine of the world now, not the United States. If they stop buying our debt (they now own a large portion of our debt), we will have zero buying power. Considering that our debt has doubled in the last five years, “Houston, we have a problem.”

My educated guess is that this won’t happen. China recognized its upward spiral in time, and with foresight, they began their slowdown. We will know within six months if it is a soft landing. I’m confident it will be.

And don’t worry about America. We’re still number one. We just share the stage, now.

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