Financial Freedom

The High Price of American Naiveté

  • China is now pushing a new narrative about the origin of COVID-19. And we already know that we can’t trust the country’s data on the pandemic’s spread.
  • Today, Nicholas Vardy dives into three reasons why Americans need to stop being naïve and start paying attention to China.

Last week’s cover story in The Economist – “Is China winning?” – contemplates whether the COVID-19 pandemic has made China stronger than ever.

A widespread Chinese propaganda campaign hails the country’s control of the COVID-19 virus as a geopolitical triumph.

Its message?

China brought the epidemic under control thanks to the superiority of Chinese-style socialism and its unique ability to marshal people and resources.

The Chinese Communist Party (CCP) is now showing its benevolence by supplying the world with nearly 4 billion masks.

Huawei – the telecommunications firm banned from the U.S. as an agent of the Chinese government – has pledged 500,000 masks, 50,000 goggles, 30,000 gowns and 120,000 gloves to hospitals in New York.

All this is to deflect public criticism of the CCP gagging doctors who shared information about the virus online, failing to warn citizens despite evidence of human-to-human transmission and encouraging the spread of the virus by not banning the international travel of its citizens.

China’s chutzpah knows no bounds.

After all, the country spreads its propaganda on Western social media outlets like Twitter, which is banned in China itself.

Chinese officials are now pushing a conspiracy theory that says the virus originated in the U.S.

None of this surprises me.

Here’s why…

Reason No. 1: China is a communist country.

Stephen Kotkin is a professor of history at Princeton and a fellow at Stanford’s Hoover Institution.

He was recently asked what he learned about the Soviet Union after its collapse by studying government archives.

His answer? “They were communist!”

When pressed for an answer on today’s China, he said the same thing. “They are communist!”

Kotkin’s answer is far less glib than it seems.

I can’t tell you how many times I’ve heard the statement “Look at China’s economy! The Chinese are more capitalist than we are in the United States!”

What a bunch of bunk!

For the record…

The People’s Republic of China is run by the CCP.

Every CEO of a Chinese company is a member of the CCP. (Yes, that includes Jack Ma, co-founder and former executive chairman of Alibaba.)

Every CEO of a Chinese company has a red phone on his desk that connects him directly to the CCP.

Kotkin points out that China’s communist leadership studied the demise of the Soviet Union carefully – and was extremely eager not to repeat its mistakes.

Its conclusion?

The CCP has to retain absolute political control. At the same time, it has to harness market forces to grow China’s economy.

The CCP has a single objective. And it’s not to maximize shareholder value for American investors in Chinese companies.

The CCP’s only objective is to advance Chinese interests – and to do whatever it takes. Its sole goal is to promote the party’s interest.

To believe anything else is sheer folly.

Reason No. 2: China is a scorpion.

In 1996, Henry Rowen, then-Hoover senior fellow and former assistant secretary of defense for the Bush administration, made a fatefully wrong prediction about China: China would become a democracy by 2015.

This is just one example of American naiveté about communist dictatorships.

Basking in victory after the Cold War, policymakers in the U.S. suffered from the delusion that communist parties were just champing at the bit to transform themselves into Jeffersonian democracies.

This was astonishingly naïve.

I spent part of my childhood living behind the Iron Curtain. My family fled communism in Eastern Europe. Both of my wife’s grandfathers spent nearly a decade in a Soviet Gulag.

Here’s what I can tell you: Communist regimes play by a different set of rules.

China’s communists are perfectly willing to lie, cheat and steal to exploit the naiveté of the West.

Consider the results of China’s efforts: the evisceration of the American manufacturing sector… the United States’ reliance on China for crucial medicines and medical supply chains… the banishment of all leading American tech companies from the Chinese market.

All this reminds me of Aesop’s fable about the frog and the scorpion.

The scorpion, which cannot swim, asks the frog to carry it across a river on the frog’s back. The frog hesitates, afraid that the scorpion will sting it.

The scorpion points out that stinging the frog would make no sense. After all, if it did sting the frog, both would drown. The frog reluctantly agrees.

Midway across the river, the scorpion stings the frog. The drowning frog asks the scorpion why it stung him, knowing it would doom them both.

The scorpion replies, “Why are you surprised? I am a scorpion. That’s just what scorpions do.”

Alas, the Chinese scorpion is far more clever than the one in Aesop’s fable.

The Chinese scorpion stings, but it would never let itself drown.

Reason No. 3: The global COVID-19 pandemic is not (only) China’s fault.

I have written before how viruses escaping from China’s wet markets were responsible for the COVID-19 global pandemic.

I’ve since refined my view – and not just because the virus could have escaped from a Wuhan lab.

The world widely accepts that China’s statistics on its GDP growth rates are patently false. So for the United States to expect China to be forthcoming about its virus-related data to fight the pandemic is breathtakingly naïve.

I recently heard another metaphor that illustrates the consequences of this gullibility.

Say, knowing from experience, you expect to be cut off at least 10 times a day in Los Angeles traffic. Sure enough, one day you crash into the car ahead of you after it cuts you off.

Whose fault is it? The guy who cut you off, of course!

Well, maybe not. What if you also had a couple of drinks? What if you were texting while driving? What if you were screaming at your kids in the back seat to stop fighting?

Again, a guy cuts you off on the freeway and you slam into his car.

Whose fault is it now?

The answer just got more complicated. After all, you knew you were likely to be cut off in LA traffic. Yet you acted as if it could never happen.

The lesson?

China is the guy who cuts you off on the LA freeway. The United States is the drinking, texting, screaming driver who got cut off, woefully unprepared for what was inevitable.

Sure, on one level, COVID-19 is China’s “fault.”

But for a global superpower like the U.S., not being prepared for China’s behavior is astonishingly foolish.

Let’s hope the COVID-19 virus is a wake-up call for U.S. policymakers about the true nature of China.

The price of American naiveté just got too high.

Good investing,

Nicholas


Stay informed with the latest news from Nicholas, including video updates where he shares his views on the current state of the markets. Simply like his Facebook page and follow @NickVardy on Twitter.


About

An accomplished investment advisor and widely recognized expert on quantitative investing, global investing and exchange-traded funds, Nicholas has been a regular commentator on CNN International and Fox Business Network. He has also been cited in The Wall Street JournalFinancial TimesNewsweek, Fox Business News, CBS, MarketWatch, Yahoo Finance and MSN Money Central. Nicholas holds a bachelor’s and a master’s from Stanford University and a J.D. from Harvard Law School. It’s no wonder his groundbreaking content is published regularly in the free daily e-letter Liberty Through Wealth.

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