Smash Up! Economics: The Clash Between China and the United States

By Tracy G. Herrick

This is a book about an ordinary boy whose career took him to the highest levels of Jefferies & Company, Inc., which is now the nations largest securities firm, and who was then thrust into conflicting positions he never dreamed could happen. It is a book about a father who experienced vivid premonitions, one of which was a terrifying fatal automobile accident involving
his son, which occurred one week later, claiming the life of this young man. It is about a young scholar who earned professional degrees in economics from Columbia and Oxford Universities, and who became one the nations first champions of free markets. It is the story of what it meant to see the overwhelming destructive power of Soviet
tyranny on people, yet never to give up hope of freedom, and to be honored on this behalf by the President of Estonia.

• Language: English
• Publisher: Xlibris US
• Release date: Jul 30, 2016
• ISBN: 9781514452295

Tracy G. Herrick

Tracy Herrick retired from Jefferies and Co. following a quarter of a century with the firm. During the latter years he was a member of the Board of Directors and Chief Economist. He advised a select group of governments, pension funds, and individuals concerning investment plans. He is a leading spokesman for free markets. His book, “Smash Up Economics,” looks at these markets in light of a coming military struggle with communist China. He was a founder of the Private Bank of the Peninsula, and for several years served as a director as well as chairman of the board’s investment committee. He was vice President of Bank of America, initially in the Cashiers Division, which looked inward to the bank’s operations. Later, he was at the forefront of the bank’s World Banking Division, when the bank was the world’s largest. While at the bank he wrote “Bank Analyst’s Handbook,” which is still the authoritative reference on the subject. It describes the special characteristics of banks which can develop their strengths and endure. He is a co-correspondent to monthly surveys by the Wall Street Journal on the outlook for business and money market conditions, and twice was its most accurate contributor. He holds advanced degrees in economics from Oxford University and Columbia University.

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Copyright © 2016 by Tracy G. Herrick.

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Rev. date: 07/30/2016

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CONTENTS

Foreword by Ambassador J. William Middendorf II

Remarks by Edward Scanlon

Preface

Acknowledgments

Introduction

Chapter 1    China As The World’s Largest Economy 2016

Chapter 2    The Eclipse Of Socialism 2017

Chapter 3    The Debt Bubble 2023

Chapter 4    Leading To War 2024

Chapter 5    The Wars With China 2026, 2030

Chapter 6    The Dollar Crisis 2028

Chapter 7    The Petrodollar 2032

Chapter 8    Disguised Inflation 2036

Chapter 9    Realignment Of Political Parties 2040

Chapter 10    The Emerging Trade Surplus 2043

Chapter 11    Immigration 2044

Chapter 12    Uprising 2044

Chapter 13    The Federal Reserve 2045

Chapter 14    Capital 2048

Chapter 15    The Years Beyond

Concordance

To Maie

FOREWORD

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By Ambassador J. William Middendorf II

Formerly U.S. Secretary of the Navy

US Ambassador to the European Union, Organization of American States and the Netherlands

Chariman, Committee for Monetary Research and Education

"The twenty-first century opened with the United States as the world’s most powerful economy, as well as possessing the largest navy. The navy is particularly important since water and ports connect virtually all of the people of the world.

In this book, which is filled with many historical parallels, Mr. Herrick explains why he believes that China is now challenging that position of leadership of the seas. The takeover of island territories in the vast South China Sea raised the stakes. That was a flagrant violation of the ownership of the land, as well as the rights and privileges of what had been a sparse but peaceful life for these inhabitants.

In addition, plans for a much expanded Blue water fleet can only be part of broader military purposes. The grand design of what this will look like will emerge in the next few years. What is certain is that China is building a formidable capability to project power against the United States, not just with ICBM’s, but in Cyber, EMP, and anti-satellite capabilities.

China, in addition to assembling its own arsenal, is lining up with other Communist potential adversaries (Russia, North Korea, Iran).

As a consequence, the United States is more vulnerable than at any time during the past century. If the nation continues its direction, we could face the prospect of war in the next decade or so. Meanwhile, much of our own advanced weapon capabilities have been hollowed out by budget restrictions. We must rebuild now because of the long lead time weapons systems take."

COMMENTS

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By Edward Scanlon

The People’s Republic of China is growing in wealth and power and seeks to assert its interests to the detriment of its neighbors. The land and sea grabs and assertions of sovereignty are at the expense of such global trading countries as the United States and Japan, Taiwan and the Philippines, and involve other nations, including Vietnam, Indonesia, and Malaysia. But make no mistake. The antagonists are China and the United States.

The ultimate cause of this brewing conflict is China’s understandable desire to take its place among the leading world powers and to enjoy the rewards of that position. The prevailing wisdom is that China’s rise to eminence will be an entirely peaceful one. That is unlikely.

Chinese elites see the last 200 years as a period of humiliation at the hands of Europeans, Americans, and Japanese in an otherwise glorious history spanning nearly four millennia of cultural and military preeminence. They intend to get even.

With her enormous population short on liquid energy resources, China is not content just to trade for these. She intends to own them. Thus territorial claims against neighbors for control of the Senkaku, Paracel, and Spratly Islands, among others, accompanies her absurd claim of sovereignty over the entire South China Sea.

China will trade for resources with Russia, the Middle East, and Africa, and she intends to control the sea lanes through which these vital cargoes must pass. She will not be content for the United States Navy to continue its current role as guarantor of the right to innocent passage, which is freedom of the seas.

Accordingly, China is constructing a navy specifically to challenge the United States navy and is not being coy about it. This navy will seek to dominate the Western Pacific and it’s energy-rich shores, and it will project Chinese naval power across the Indian Ocean to the east coast of Africa. It will also, from time to time, cross the Pacific to make its presence and power known. Naturally, the United States and its navy have other thoughts about these matters. So as China’s navy grows into its new power, the seeds of conflict will be sown further.

There is another theater of conflict, and it is primarily economic. China’s self-seeking flirtation with certain elements of capitalism and rough handling of American trade practices has created its own rift. The Western world and its principal trading partners are ill equipped by temperament and legal structure to fight this kind of economic war. But fight it they will before accepting subservience to China or any other country.

PREFACE

Both China and the United States will continue to produce more than any other nation for as far ahead as can be remotely foreseen. This competition will heat up and probably lead to a naval war, in 2026, where China will come away with an upper edge. Then there will be a time of agitated peace and semiwarfare.

However, afterward, critical conditions will change, and by midcentury, each of these two countries will take a different direction. One will look more toward the full capture and control of its internal labor pool, while the other will promote freedom and equitable trade.

This will likely lead to a second war, where the United States will fare better.

In the meantime, the forces of freedom have never been challenged by such vast counterforces, nor will have weapons of such overwhelming power been brought to bear as during this period. Yet these will also be fulfilling times. Much will be accomplished in reaching for the goal of freedom. Immense capital for investment will be created along the way. There will be difficult times for many, and there will be deep-seated differences in beliefs. Nevertheless, countless numbers of poor people will hold their heads high. Many will become wealthy. It will also be a time of flowering for the arts.

ACKNOWLEDGMENTS

This book could not have been written without the advice and knowledge from experts in a large number of fields. In addition, these individuals have been overwhelmingly generous in their time and thought. I am very grateful to them. There are many other names that should be here. They know who they are.

Bill Philips is at the head of the list. He was helpful beyond measure and, importantly, was enthusiastic about working with the future. Robert Geis used his keen mind to cut through official obfuscation. Claude Rust who could take on any task. Chris Croft was ever ready to discuss fine points in interpretation, Nancy Rossen could evaluate the media and detect even tiny shifts in opinion, and Elizabeth Currier always looked far ahead and kept the flame of freedom burning brightly. Daniel Oliver kept the implications of economic theory in view, and Loren Walden faithfully read through the original draft, made sense of it, and gave me a foundation to build on. Thanks go to Carol Acker, whose buoyant spirit never let me down, Admiral James Ellis, for fine points, Gordon Harper, who was the elder statesman and always kept the vision of the task in view, Bruce van Alstyne, whose personal experiences were invaluable, and George Leylegian, whose family has seen the best and the worst of the examples that are described. Thanks also go to Larry Latta for his precision, and to David Rahn, who carried the ideas into waves and cycles, William Dawson who kept me relevant and alert, Kent Kaiser, whose experience prevented me from making a number of mistakes, John Sullivan, who instilled commando drive into the language. John Albright, who knows the bond market, Marjo Lachman, whose sharp eyes make connections which are often overlooked, Dick Albright, who knows the intricacies of the stock market, Derek Anderson, with trading, and James Maletis, who is a wise and ever-faithful friend.

INTRODUCTION

The United States is currently the most powerful economy in the world.

This position has many advantages. It can support larger armed forces more than any other nation. It can make more advantageous demands in trade. It can absorb an immigrant population with less difficulty than others. It can successfully promote its currency as a reserve currency, the supreme currency of the world. There are other advantages as well. China would like to acquire these advantages.

Now, that position of the United States is being challenged. The People’s Republic of China will approach the number one position in the world in the coming decade and a half. That is because the economic growth rate of China is significantly higher than that of the United States, and has been for many years. China is catching up.

The gross domestic product of China in 2013 was nine trillion 200 billion dollars. That of the United