“I would rather betray the world, than let the world betray me.” 

—Cao Cao, Romance of the Three Kingdoms 

Many believe that the “Stagflation” crisis of the 1970s was caused by a line of irresponsible monetary politicians. The traditional capitalist economist David Stockman blames the policy of “nationalistic financial prolificacy” that was championed by Presidents LBJ and Richard Nixon (1963-1974) which meant more spending without more taxes and resulted in the soaring U.S. consumer prices and the trashing of the Bretton Woods gold standard that had been the anchor for global prices. Furthermore, there is a notion that the economic crisis was resolved by the economic “wizardry” of fiscally responsible conservatives beginning under the Reagan administration of Federal Reserve Chair Alan Greenspan (1987-2006). The reality is Greenspan committed the same mistakes as his predecessors that kept interest rates low. However, in his case the U.S. consumer was saved by China’s betrayal of orthodox socialism. 

Starting in 1964 and until 1980 the consumer price inflation (CPI) was steady, but at times dramatically rose to record highs of as much as 13.54920%. Economic and geopolitical change was on the horizon. On September 12, 1970, a secret presidential memorandum from then U.S. National Security Advisor Henry Kissinger, one of the most consequential geopoliticians of the 20th century, reported that “some new mobility in Peking’s conduct of foreign relations which may present opportunities for improving relations… an approach to a U.S. businessman regarding possible business travel to China… it is possible some Chinese officials are thinking in terms of eventual trade with U.S. firms.” This marked a complete shift in relations between the U.S. and China. Since their victory in 1949 over mainland China, the Communist Party of China had been ideologically opposed to the United States. In the two decades that followed the declaration of the People’s Republic of China (PRC), both the U.S. and the PRC had been on opposing sides in the Chinese Civil War (1927-1949), the Korean War (1950-1953), the Taiwan Strait (1954-1955, 1958), and the Vietnam War (1955-1975). 

In 1979, under the Carter administration, the U.S. diplomatically recognized the PRC and began lucrative commerce. Deng Xiaoping, the Premier of China starting in December 1978, wrote in January 1979, “We have wasted too much time, we now have to develop rapidly… we can utilize foreign funds and technology… absorb foreign capital, we should allow former capitalists and businessmen to play a role… as long as they no longer exploit others, we have no reason to continue to label them capitalists.” This marks a deformation of orthodox marxism that is vehemently opposed to capitalism and considers economic growth through capitalism as “a consequence of accumulation of capital, [that] only means, in fact, that the length and weight of the golden chain the wage-worker has already forged for himself, allow of a relaxation of the tension of it,” or a kind of improved slavery. However, Chinese Socialism as developed in the early years of the Communist Party of China has always seen itself as distinct from the orthodox socialism developed in the 19th century and tailored towards the industrial societies of Europe. The agrarian society of 20th century China required an agrarian peasant brand of Socialism. Mao Zedong wrote in 1955, “The masses have a potentially inexhaustible enthusiasm for socialism. Those who can only follow the old routine in a revolutionary period are utterly incapable of seeing this enthusiasm. They are blind and all is dark ahead of them. At times they go so far as to confound right and wrong and turn things upside down.” This revolutionary departure from Marxist tradition that prioritized the advancement of the Chinese peasantry is necessary to contextualize the even greater departure from traditional socialism that was begun by Deng Xiaoping after the tragic failure of the Great Leap Forward. The Communist Party of China has at its core an ability to adapt to their own material conditions and to act outside of orthodoxy. China’s willingness to change is what allowed for China’s meteoric growth since 1979. China has added nearly 500 million citizens to its population and has had its GDP grow by more than 40x in 45 years, all while the other champions of socialism stagnated and collapsed. But, who else was a beneficiary of China’s reforms? The United States. 

By 1980, just as China was opening up, U.S. consumer price inflation peaked at 13.54920%. The median annual consumer price inflation from 1960-1979 was 4.282285%. This means that $100 of value in 1960 inflated to $231.32, or a -131.32% devaluation for consumers in 20 years. After the start of trade with China (1980-2000) the median CPI was 3.37686%. This meant that the value of $100 in 1980 inflated to $194.30, a -94.30% devaluation for consumers. A difference of around 37.02%. This value, saved relative to the economic woes of the U.S. during the 1970s, only compounded after 2000 as interest rates remained low and relatively stable. This difference is the value of the Chinese market to U.S. retailers and the value of the dollar saved by Chinese workers and resources. This reformed Chinese socialism is saving the U.S. consumer. 

The immediate problem of U.S. inflation was counteracted in 1979 by the Chair of the Federal Reserve, Paul Volcker, who began raising interest rates. In June 1981, the Fed’s interest rates reached a peak of 19.10% which successfully halted inflation. But this kind of interest slows economic growth, something that U.S. presidents and bankers alike hate. Volcker’s successor, Greenspan, began undoing these high rates, especially in 1990 due to presidential pressure from George H.W. Bush. Greenspan was committing the same monetary blunders that had caused the inflationary crisis of the 1970s. Yet, despite this regression in monetary policy, CPI stayed down. The difference is China. 

China’s GDP had just hit $1 trillion and at the same time, in 1990, a massive American retailer, Wal-Mart, purchased “288 million pounds of goods from China.” They were not alone in dealing with China; larger corporations followed suit. American capitalists now had access to hundreds of millions of laborers, cheap resources, and the willingness of the Chinese government to subsidize their export economy for the United States market resulted in cheap Chinese goods sold in the U.S. that kept prices low. A Wal-Mart executive explained, “A lot of people were [in China] long before we were.” Indeed by the 1990s the connection between Chinese commerce and American fiscal policy was evident. When Federal Reserve interest rates doubled in 1994, Greenspan visited China to deliver a “carefully reasoned position on why China should open its markets faster” and on October 10, 2000, when interest rates were 6.51%, Congress passed a permanent normal trade relations act with China; by October 2001, rates were 2.49%. The People’s Republic of China is sponsoring the average American citizen’s lifestyle and guaranteeing that U.S. politicians can consistently tout economic growth while for the most part avoiding the harmful effects of consumer price inflation. Our economies are intimately linked and any efforts to sever this bond will result in great economic damage to both partners. It is the very nature of Chinese communists to adapt and for American capitalists to profit. These truths must be at the forefront of politician’s minds when posturing against China. Do we not destroy our enemies when we make them our friends?