15   Following Tomorrow’s Leaders

China and India have the attention of the world for their massive economic advances in acquiring Western technology. They are even taking over Western firms, and keeping their interest rates relatively low, while the central banks of Europe, the US, and Canada arc relying on higher interest rates, to keep prices down and "cool" the economy. Instead of licking inflation, using interest rates as the only means of controlling their economies, prosperity has rewarded us with the subprime mortgages that threaten to cut the legs of our banks off at the knees.

The New York Times (03/08, "A Dragon Bowed: Feeling the Heat, Not Breathing Fire" by Keith Bradsher) gives us some of the very different Chinese figures: "With China running a trade surplus that hit $26.91 billion [US] for last June, the central bank is issuing torrents of yuan and frantically buying dollars and other currencies — to prevent the yuan from rising against the dollar [which would undermine its exports as our high dollar is doing with our trade]. But the huge purchases of foreign currency have created another problem: what to do with all the money?

"Beijing’s latest solution is to begin creating a so-called sovereign wealth fund: a government-owned investment company that will issue $200 billion of yuan-denominated bonds and use the proceeds to buy dollars for overseas acquisitions and other investments."

The Indians, similarly active in recent months, have made acquisitions in iron and steel production that makes that country the largest steel producer in the world. Undoubtedly India’s economic strategists have as model Japan’s systematic way of working its way out of the defeat in WWII. Their first step for rebuilding their economy on a sounder basis was to base it on exports that would involve maximum inputs of engineering skills and minimal spending of their gross export revenue to pay for the raw materials needed to produce it. Another feature of the Japanese reconstruction plan was keeping its currency low, withstanding the pressure from Washington to let it find its own high level that would kill its exports and reward imports.

And in the Toronto Globe and Mail (01/08, "India follows China in tightening reserve ratio" by Rajesh Mahapatra) is a dispatch from New Delhi that gives us some crucial particulars on this strategy, now being used by the Indians as well as the Chinese: "India’s central bank ordered lenders to hold a larger share of deposits in cash yesterday and took other measures to counter inflationary pressures arising from a surge in foreign money.

"The Reserve Bank of India increased the cash reserve ratio — the proportion of deposits that commercial banks must hold in cash from 6.5% to 10.7%, but kept the key interest rate unchanged.

– from Economic Reform, September 2007