A U.S.-CHINA TRADE WAR IS RAPIDLY brewing, as President Barack Obama pushes China to adopt a “market-oriented exchange-rate policy” and Premier Wen Jiabao sharply retorts that the yuan isn’t undervalued. Meanwhile, 130 members of the U.S. House of Representatives are pressing the Treasury Department to brand China a "currency manipulator" and to impose countervailing duties, while China promises swift retaliation.

China’s fixed exchange-rate policy isn’t harming just the U.S. It is also threatening the global economic recovery, even as an artificially weak yuan has given rise to what Premier Wen has branded Public Enemy No. 1 in China -- rapidly rising inflation.

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While Eric Margolis’ entire comment in the Toronto Sun is a must-read, the following two quotes really hit the nail on the head:

More empires have fallen because of reckless finances than invasion…

If Obama really were serious about restoring America’s economic health, he would demand military spending be slashed, quickly end the Iraq and Afghan wars and break up the nation’s giant Frankenbanks.

Margolis is right.

As I have repeatedly shown, war is bad for the economy. According to a Nobel prize-winning economist, the head of JP Morgan and others, the Iraq war and the war on terror in general were huge factors in destroying our economy.
America is a dying empire, destroying the last of its resources to fight unnecessary wars. Instead of rebuilding our economy so that we can once again be a strong nation, we are wasting trillions fighting those unnecessary wars, thus guaranteeing that we do not have the economic resources to defend ourselves in the future from real threats.

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The election of Republican Scott Brown to the U.S. Senate by Democratic voters in Massachusetts sends President Obama a message. Voters perceive that Obama’s administration has morphed into a Bush-Cheney government. Obama has reneged on every promise he made, from ending wars, to closing Gitmo, to providing health care for Americans, to curtailing the domestic police state, to putting the interests of dispossessed Americans ahead of the interests of the rich banksters who robbed Americans of their homes and pensions.

But what can Obama do other then spout more rhetoric?

The Democrats were destroyed as an independent party by jobs offshoring and so-called free trade agreements such as NAFTA. The effect of “globalism” has been to destroy the industrial and manufacturing unions, thus leaving the Democrats without a power base and source of funding.

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The United States economy has lost over $7 trillion to international commerce in the past four decades, the majority of those losses have come in the past 10 years alone.

We know where the money is going: overseas.

We know how much of it is leaving this country: roughly $700 billion annually.

We know why this country is losing such astounding sums: “free trade”.

It is time to fix the situation and get America back on a path toward growth and prosperity once again. The only way to do this is by pursuing fair trade policies which counteract the decades of unsustainable imbalances brought on through “free trade.” We need policies that can be adapted quickly and that meet the needs of this nation first and foremost.

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Last week, Ben Bernanke blamed lax regulation for the financial crisis. He was responding to those who claim low interest rate environment caused the crisis. Conservatives blame Fannie Mae and Freddie Mac. These all were contributing factors and not the real cause of the crisis. The depth of this crisis is too severe to blame one or several contributing factor.

It was economic policy that took root over 25 years ago and fostered since then that caused this economic crisis we know as the Great Recession. I am afraid we are failing to recognize the real cause of this crisis and instead focusing on treating the symptoms and not curing the disease. Failure to correct the defective economic policies will only welcome another economic crisis probably in the not too distant future and probably more severe.

There are two major macroeconomic arrangements that have existed for the past 25 years and that can explain this economic crisis. First, the U.S. economic growth model and the pattern of income inequality and demand generation (the driving force of economic growth) within the economy. Second, U.S. model for global engagement and U.S. participation in globalization. According to Dr. Palley:

The macroeconomic forces unleashed by these twin factors have accumulated gradually and made for an increasingly fragile and unstable macroeconomic environment. The brewing instability over the past two decades has been visible in successive asset bubbles, rising indebtedness, rising trade deficits, and business cycles marked by initial weakness (so-called jobless recovery) followed by febrile booms. However, investors, policymakers, and economists chose to ignore these danger signs, resolutely refusing to examine the flawed macroeconomic arrangements that have led us to the cliff’s edge. It is time to take a step back and look at how we got ourselves in this precarious position. Then perhaps we can figure out where to go next.

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Gross Domestic Product (GDP) is our main measuring stick to determine economic growth. The calculation of GDP shows why imports can be drag on economic growth particularly since consumer spending (a 70% factor of GDP) is in the tank. Today, the Census Bureau announced that our trade deficit (difference between exports and imports of goods and services) grew in November 2009 to $36.4 billion. Not good news.

The calculation:

GDP = Consumer Spending + Gross Investment + Government Spending + Net Exports

Net Exports = Exports – Imports

Focus on net exports – exports minus imports. Since we are running a TRADE DEFICIT then we are importing more goods and services then we are exporting to the world. Again, not a good thing for economic growth as calculated by GDP. This TRADE DEFICIT provides a drag economic growth or a leak of economic activity.

Why a drag or leak? Well, if we are buying imported goods that means that money to purchase that product ultimately goes to the country that imported that good. That money doesn’t stay here in the U.S – within our economy. This economic activity essentially ‘leaks out’.

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Those industrial companies not yet acquired face looming bankruptcy where subsidized foreign competitors are able to sustain losses in order to out-price and out-service American domestics. Twenty years ago the U.S. trade deficit came mostly from oil imports. Today, the bulk of U.S. exports are hides and skins, metal ores and scrap, pulp and waste paper, tobacco and cigarettes, rice, cotton, coal, meat, wheat, gold, animal feeds, soybeans and corn (very few value-added products, formerly created by our capital intensive industries). The only high-tech goods of which the United States is a net exporter are airplanes and airplane parts, military technology and specialized machine tools. In 2000, the United States was a net importer even of spacecraft. We are racing to replace our factories with state-of-the-art supply-chains, shopping malls, and warehouses overflowing with foreign goods.

In place, we are becoming wholly dependent on consumer spending on foreign goods to sustain what is left of our economy. 70 percent of our GDP is comprised of consumer spending largely on imports or goods made domestically by foreign owned corporations. Only 11 percent of jobs in this country are in manufacturing, falling down from 20 percent in 1981 and 25 percent in 1970. From 1993-2003 the U.S. has shed manufacturing jobs at an average rate of 3 percent per year. Recently wages for warehouse and distribution surpassed manufacturing for the first time. It now pays U.S. workers more to distribute imported goods than to manufacture them domestically.

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