Eric Sprott: A Busted Formula

Tyler Durden's picture

A Busted Formula, by Eric Sprott and David Franklin

There’s nothing wrong with throwing a little money at a problem to make it go away. There’s equally nothing wrong with throwing a little borrowed money at a problem to make it disappear, as long as you have the means to pay that borrowed money back.

But what happens if you throw a lot of borrowed money at a problem, and the problem doesn’t go away? If you’ve ever experienced a situation like that you can probably understand how Europe feels right now. It just unleashed a magnificent $1 trillion euro bailout and the market responded with a selloff by the end of the week! So what happened? That money was supposed to make the problem go away, after all. And it was a lot of money. Why did the market respond to it with such disdain?

We believe the market’s reaction is confirming what we have long suspected: that these bailouts provide next to no long-term value. They don’t produce real jobs. They don’t improve productivity. They just prolong the precarious leverage game played by the financial sector, and do so at tremendous cost to taxpayers. "Bailout and Stimulate" has been the rallying call for governments and central banks since the beginning of this financial crisis – and it has certainly had its impact over the last two years, but not the type of impact we need to propel real, sustainable growth. There are three recent, glaring examples of this busted "Bailout and Stimulate" formula in action:

Exhibit A: The United States

From the outset of this financial crisis, the US Government and Federal Reserve have spent prolific amounts of money to save its banks and stimulate its economy. According to Neil Barofsky, special investigator general for the Troubled Asset Relief Program, the United States has now spent approximately $3 trillion on various programs to stem the financial crisis.1 This figure is expected to be updated again in July.

This $3 trillion expenditure includes stimulus programs like ‘cash for clunkers’, the extension of unemployment benefits, infrastructure spending, the "Making Home Affordable" program, as well as the activities of the Federal Reserve. To measure what the fiscal stimulus has actually accomplished we looked to the US Federal budget outlays/receipts to gauge the impact of the stimulus on GDP.
Table A presents current dollar GDP increases year-over-year alongside current dollar budget deficits. Comparing the two in current dollars provides a sense of the hard dollar impact that stimulus spending has had on the economy. As the chart illustrates, the net impact of the stimulus contributions and promises made since 2008 have resulted in a combined budget deficit of close to $2.5 trillion dollars and an incremental net increase in GDP of $200 billion. A $200 billion return for a $2.5 trillion increase in debt represents a terrible return on investment. It implies that the net impact of the stimulus on GDP since 2008 has been a mere 9 cents for every deficit dollar spent. Buying dimes with dollars is bad business, government-funded or not.

Another troubling statistic relates to the cost of job creation for the American Recovery and Reinvestment Act (that’s the $787 billion program designed to produce real jobs in the United States). The White House estimates that it takes approximately $92,000 of government spending to create one job in the US. The White House justifies this exorbitant amount by stating that at the current employment level, each job in the US economy generates $105,000 in GDP, thus resulting in good "bang for the (taxpayer) buck".5 Spending $92,000 to generate $105,000 in GDP seems justifiable on the surface. But further digging reveals that the actual cost to save or create one job in the US was $117,933 per job from February to December 2009.6 That’s well over $92,000, and more than the $105,000 "return" each job is supposed to provide in GDP. If this metric is correct, it means the US government is actually suffering a negative return from its job stimulus.

To further convolute the issue, one must also consider that the supposed $105,000 GDP return for each new job doesn’t incorporate the fact that the $92,000 (or $117,933) spent to create it was BORROWED. Why does this aspect of government expenditure never make it into the analysis? Spending $92,000 for a $105,000 pop in GDP represents bad logic when that $92,000 isn’t yours to spend. If we incorporate the interest costs required to borrow the $92,000, are we really producing value or just digging a deeper hole?

Numerical discrepancies aside, the fact remains that GDP is a terrible metric to measure the return of a job program. GDP is technically the value of all finished goods and services produced in an economy. From a business perspective, GDP is akin to revenue, which isn’t an asset, and is different from ‘earnings’ or ‘profits’. Businesses don’t hire additional workers for their marginal increase to ‘revenue’ – they hire to increase their marginal ‘profit’. The White House approach to job stimulus will maximize spending, not profit. Rather than maximize spending, why not maximize actual employment by finding a way to produce a job for less than $92,000? Surely some of the fifteen million unemployed workers in the US would appreciate some help in that area.7

Exhibit B: The Latest Bailout Failure in Europe

In a show of force designed to impress the world markets, the European Union pieced together an unprecedented loan fund worth almost €1 trillion euros. The fund’s capital was made available to rescue euro zone countries in financial trouble. The European Central Bank announced it was ready to buy euro zone government and private bonds "to ensure depth and liquidity." The US Federal Reserve, the Bank of Canada, the Bank of England, the European Central Bank and the Swiss National Bank announced that temporary US dollar swap facilities would be opened to provide liquidity. Never have so many organizations coordinated and contributed so much to a single bailout effort!

So what was the ultimate effect of this shock and awe campaign? After enjoying a short-lived obligatory rally, the market for stocks, bonds, and the euro (in terms of USD) traded lower by the end of the week. Gold, a barometer of fear, appreciated almost 6% in euro terms over that same week.

Which brings us to the crux of the problem…

Exhibit C: Over-Levered Banks

Banks are at the epicenter of this financial crisis. The reason? Leverage. We outlined our measurement of bank leverage in our article Don’t bank on the Banks in November 2009. As equity investors we worry about the impact a change in assets will have on a banks’ tangible common equity. Readers will note that the German financial regulator recently banned naked credit-default swaps of euro-area government bonds and banned naked short selling in ten German banks and insurers. It shouldn’t surprise you to learn that, according to their most recent filings, German banks are some of the most levered in the world. Table B shows the leverage calculation for each of the four largest banking institutions in Germany as of March 2010.

Commerzbank has the highest leverage of the German banks at 124:1. This means that if their assets drop in value by a mere 0.8%, their tangible shareholders equity is effectively wiped out. How many asset classes do you think have dropped by 0.8% since Commerzbank’s last filing in March? We would guess almost all of them have (except gold of course). Hence the recent ban on naked short selling of German bank shares. They’re too vulnerable to handle the market’s wrath.

The German banks are not alone. Most large banks around the globe are operating with too much leverage. The governments can keep the "Bailout and Stimulate" game going, but it won’t amount to much in the long-term unless the leverage issue is wrung out of the banking system. Until that happens, bailing out the banks is akin to pouring money down a bottomless pit.

The key point to remember with bailouts and stimulus is that it’s ultimately your money that the government is spending – and your children’s money. The numbers strongly suggest that your money isn’t being spent wisely. We need real jobs and real growth, not bigger, more leveraged banks. The market isn’t oblivious – it can see what’s happening. Gold’s recent strength in lieu of seemingly ‘deflationary’ economic data confirms the market’s doubts over government intervention in the financial system.

Needless to say, we remain bearish.

 

 


 

1  Heflin, Jay (April 20, 2010). Government has spent $3 trillion (and counting) on financial crisis. The Hill. Retrieved on May 27, 2010 from:
http://thehill.com/blogs/on-the-money/banking-financial-institutions/93285-government-has-spent-3-trillion-and-counting-on-financial-crisis

2 We used current-dollar GDP numbers provided by the BEA to determine the marginal impact of deficit spending on GDP. There is no separate data set generated by the BEA, however the number is published in their news releases. It is also worth noting the divergence between reported numbers from the BEA. While the current dollar measurement of GDP decreased by $185.1 billion or 1.3% on 2009, real GDP was widely reported as increasing by 0.1%. This divergence is due to seasonality adjustments in real GDP and the percentage change reported is a blended increase over the 4 quarters in 2009.

3 Bureau of Economic Analysis (March 26, 2010) Gross Domestic Product: Fourth Quarter 2009 (Third Estimate) and Corporate Profits, 4th quarter 2009. Retrieved on May 25, 2010 from: http://www.bea.gov/newsreleases/national/gdp/2010/gdp4q09_3rd.htm.

4 Financial Management Service, A Bureau of the United States Departement of the Treasury. Monthly Receipts, Outlays, and Deficit or Surplus, Fiscal Years 1981-2010. Retireved on May 25, 2010 from: http://www.fms.treas.gov/mts/index.html. We adjusted the cash flows to a calendar year period to match GDP reporting.

5 Executive Office of the President Council of Economic Advisers. (May 2009) Estimates of Job Creation from the American Recovery and Reinvestment Act of 2009. Council of Economic Advisers. Retrieved on May 27, 2010 from: http://www.whitehouse.gov/administration/eop/cea/estimate-of-job-creatio...

6 McPheters, Lee (February 3, 2010) What Is the Cost per Stimulus Job? Knowledge @ W.P. Carey. Retrieved on May 27, 2009 from:
http://knowledge.wpcarey.asu.edu/article.cfm?articleid=1857

7 Bureau of Labor Statistics, U.S. Department of Labor. (May 7, 2010) The Employment Situation-April 2010. Retrieved on May 27, 2010 from: http://www.bls.gov/news.release/pdf/empsit.pdf

8 Reported figures for each institution as of Q1 ended March 2010

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George the baby crusher's picture

There are a thousand ways to say we're fucked, this is a rather convincing one.

DoChenRollingBearing's picture

I think that Sprott is one of the brightest billionaires out there.

So many problems, so much pain coming soon.

jeff montanye's picture

for more evidence of the impotence of what could be termed the "japanese/u.s/euro model" of bailout/extend-pretend/zombie banks, see bill hester's comparative analysis of japanese banking results vs. nordic countries' banking results (latter using the old fdic type receivership/nationalization model) on john hussman's website (and meet aunt minnie).  also fairly convincing.

silvertrain's picture

They have it all under control, heres how there going to soak it up, too funny..

http://news.yahoo.com/s/ap/20100528/ap_on_bi_ge/us_fed_exit_strategy_1

huntergvl's picture

This is a little dated, but obviously still soooo relevant....

http://www.theonion.com/video/in-the-know-should-the-government-stop-dumping-mon,14289/

 

"I love the Money Fires!"

Priceless.

silvertrain's picture

 Thx hunter, I had not seen that..And ill see your bet and raise you this, just for you

 http://www.wnd.com/index.php?fa=PAGE.view&pageID=159485

 

Mr Lennon Hendrix's picture

These dates to open CDs coincide with the Hollywood Futures Index openings, if it is deemed appropriate by Congress.  Hoolywood is scheduled to go bubblistic on June 8th and June 28th I believe.

Hansel's picture

Yep, Fed thinks it's going to fix the problem by issuing short term debt, competing with all the other people issuing short term debt.

john milton's picture

pls can anyone illustrade me in chart when have the main indexis rose, when hundreds

of banks keep on falling firstly in us and secondly in europe except the last run??

 

robo..(with a nice girl

 

 

 

 

 

 

 

 

 

 

 

john milton's picture

frob will be spain fdic..

frob (fondo de reestructuracion ordenada bancaria)
The Fund for Orderly Bank Restructuring has been created by the Royal Decree - law 9/2009, of June 26, on credit institution restructuring processes and enhancement of their equity.

The Fund for Orderly Bank Restructuring was created to manage the restructuring processes of credit institutions and assist in the enhancement of their equity, on the terms laid down by this Royal Decree-Law.

The Fund for Orderly Bank Restructuring has mixed funding, 9 billion Euros, from the General State Budgets and from the contributions of the Deposit Guarantee Funds of banks, savings banks and credit cooperatives:

* The amount of funding charged to the General State Budgets will be 6.75 billion Euros
* The amount of the contribution from the Deposit Guarantee Funds will be 2.25 billion Euros. This amount will be distributed among the Bank Deposit Guarantee Fund, the Savings Bank Deposit Guarantee Fund and the Credit Cooperative Deposit Guarantee Fund according to the percentage of the total deposits in credit institutions at the end of the 2008 financial year represented by the deposits in the institutions attached to each of those Funds at that date.

Finance

* In order to meet its objectives, the Fund for Orderly Bank Restructuring may secure funding on the securities markets by issuing fixed income securities, receive loans, apply to open credit facilities and undertake other borrowing transactions.
Outside resources obtained by the Fund for Orderly Bank Restructuring, whatever their form of instrumentation, may not exceed the sum of 3 times the funding available at any time. However, after January 1, 2010, the Minister for the Economy and Finance may give authority for this limit to be exceeded; nevertheless, outside funding for the Fund for Orderly Bank Restructuring may never exceed 10 times its funding.
* Unassigned property of the Fund must be materialized into public debt or into other high liquidity, low risk assets.
* Under Article 114 of General Budget Law 47/2003, of 26 November, the General State Administration is authorised to issue guarantees to secure the economic obligations enforceable against the Fund for Orderly Bank Restructuring, derived from issues of financial instruments, agreements for loan and credit transactions and realisation of any other borrowing transactions made by this Fund.
* Issuance of guarantees which will not earn any commission, must be agreed by the Minister for the Economy and Finance, in accordance with the provisions of General State Budget Law 47/2003, of 26 November.
* Issuance of guarantees, limits:
o Until December 31, 2009, the General State administration may provide guarantees for a maxium sum of 27 billion Euros.
o For subsequent financial periods, the maximum amounts for the issuance of guarantees will be as determined by the corresponding General State Budget

I think this entity will be in the main news the next couple of months when these spanish banks start falling...

Crab Cake's picture

But what happens if you throw a lot of borrowed money at a problem, and the problem doesn’t go away?

Apparently the answer to your question is Martingale system.  Lever up, and double down as many times as it takes. 

That is the smart thing to do right?

mikla's picture

It's fine if you sell each unit at a loss, as long as you make it up in volume.  ;-))

MarketTruth's picture

It is like telling a fat guy the best way to lose weight is to double up on the donuts.

faustian bargain's picture

Or only eat the holes, but you can eat as many as you want.

M.B. Drapier's picture

Yes, it's the Global Financial Martingale.

Fish Gone Bad's picture

If people were to step back from watching the stock market tick by tick, they would see that we are in the process of repeating history.  Yes, there will be days when all looks hopeless and the market still rallies 200-300 points, but that does not change the fact that bankers packaged up a bunch of very bad loans and sold them to institutions, just so they could make some commissions.  Maybe not today, maybe not next week, and maybe not for quite a while, but all this propping up of things that are not "real money", will eventually come apart.  How do I know this?  Bankers, the pillars of our society, and their political friends have done this exact same thing, over and over again. 

Borrowing money to throw it down a rat hole is never a productive use of money.

jailnotbail's picture

Maybe not today, maybe not next week, and maybe not for quite a while, but all this propping up of things that are not "real money", will eventually come apart.  How do I know this?  Bankers, the pillars of our society, and their political friends have done this exact same thing, over and over again.

Of course the bankers know that. But they're into the end game now, where they keep this thing going as long as possible and extract the last possible increment of payment on debt they know is going to be defaulted on.  The trick is to squeeze as much as possible out of their creditors, realize the highest possible 'bonuses', and convert it all to hard assets before the 'big reset' comes, and everybody starts over with a clean, if much smaller, slate.

Leo Kolivakis's picture

Seems like an offshoot of David Einhorn's op-ed article in the NYT, Easy Money, Hard Truths.

 

"So Leo, you want to know why the world is coming to an end?"

                                                                 - Eric Sprott, May 2003*

*(if I remember correctly)

Goods's picture

Hi Leo,

U suck... always.

Regards.

Leo Kolivakis's picture

Goods, is that why you love my pic so much? What a moron!

Howard_Beale's picture

I appreciate you Leo. Just keep using the STFU with these morons. I do worry about your financial position buying on dips because liquidity from QE 2 will not launch the market again. That was a bear market rally. With credit seized on a global level, no amount of QE will help the market. So Leo, please be careful and get out of the market. Or not, your choice.

Bay of Pigs's picture

Eric Sprott is one plain talking Gold Bitch....

MarketTruth's picture

Yes he is. Sprott also has one of the very few ever made Royal Canadian Mint (RCM) 2007 $1,000,000 (Canadian) Maple Leaf. This 220.5 pound (3,215 troy ounces) coin contains 99.999% gold, making it the purest coin of its size in the world. It has a face value of $1,000,000 yet is obviously worth far more.

www.mint.ca/store/mint/learn/million-dollar-coin-1600006

 

pan-the-ist's picture

If I touched that coin I would "toss one out" right there.

KevinB's picture

A buddy of mine works at the Mint, and he was the driving force behind that coin.

He says right now, he could sell twice as much bullion as he is, if he could only get his hands on it.

DoChenRollingBearing's picture

Here's another one (possibly front-running dumpster, but, hey life is unfair):

 

Jim Sinclair’s Commentary

The East will lead. The West has given away their inheritance from the founding fathers.

Gold is your only insurance as all fiat currency, if even in an index, have but only one way to go as storehouses of value – down.

An SDR or whatever finally becomes the virtual reserve currency, if not tied to gold in the manner I have outlined many times, will in a short time fail.

Segestan's picture

Mr. Sinclair is a smart guy, but like Faber and Rogers and many others he is wrong on the east. China has 100,000 spies in Germany alone. Chinese copy not innovate. When push come to shove the West will retake the lead in every way. If ever the western mind stops with the ideas of humanity to man and brotherhood of man the west will take the throne. Don't get me wrong I respect Chinese hard work but no race or culture can beat Western ability. It comes down to people not numbers.

pan-the-ist's picture

I am afraid you are mistaken.  There are too many Chinese and too much competition in China for that to be true.

AccreditedEYE's picture

He's right Pan. They have a saying over there: "The nail that sticks up gets hammered down" Unique thought is not encouraged. Part government, part thousands of years of the same.

DoChenRollingBearing's picture

Also, please note that through China's very long history you can see that just when China gets strong, strong enough to be Numero Uno, they always find a way to mess things up.  Every dynasty was like this.

The Communist Dynasty will be similar.

China also has LOTS of problems: demography, horrible pollution, totalitarianism, etc.

Long as we stay cool (via good diplomacy) with them and avoid a war, we will do better than they will.  Though things here don't look so hot right now...

Howard_Beale's picture

The Mongolian Empire, i.e. the Khans took over China for over 100 years and took over every country/nation known at the time but Annam--Vietnam in present day terms.

China is a disaster waiting to happen. It won't be the Mongols this time but their own doing.

Eally Ucked's picture

It's just plain false, if you remember junk japanese were mass producing in 60-thies and you look at their technological might now you would understand how fast everything changes, and at present is much faster than you think.

You have to understand that if your manufacturing capabilities are gone so is your research and engineering, whatever is left for you is to invent some financial tricks, and it works for some time to mask your inability to generate real income.

So good luck if you believe in western ability to produce some great ideas in the future. For now we are leaders in military technology (but not for long), shitty music videos, Hollywood products (maybe Bollywood will get better soon), genetically altered agriculture and ...... I don't know. I'm sorry, we know how to build 700 thousand $ houses from 2x4.

 

 

Howard_Beale's picture

Oh here we go again. Why I even bother with you is beyond me. But Eally Ucked, I will try to be kind.

Japan in the 60's was indeed crap. I'm old enough to remember that it was a stamp that told you it was junk.

Made in China is basically junk now, although major corporations have had their production there for years, until of course it became cheaper to produce elsewhere.

The problem is, there is now a toxicity level that is monitored by consumer groups finding lead and other toxic crap going into children's jewelry from China, not to mention Ebay jewelry for women. Furthmore, if you order an item from China directly in the electronics department forget about support, an answer, or a warranty. My son is a Locksmith and bought a product straight from China. He will never do it again. It all comes back to haunt them. 

Japan wasn't trying to poison the world with their cheap shit (including the first Honda toaster that cost $1500 in 1971 that was as safe as the 2009 India $2500 car).

China actually produced a way to stop the manufacturing of baby cribs with a drop down side because they shipped out DYI products that killed children. It's insane. Those type of cribs worked for 50 years, until stupid Chinese instructions like put C into A with #8 screw just took away easy lifting or changing of a baby away from the West.

So Eally, while you can say China can do it cheaper and that they will become the Japan of the mid-70's in the car department, and more, I think not. They are an early industrial nation that will fuck up big time and the best yet to come is a long ways into the future.

GoinFawr's picture

"Oh the west, the west, the west is so best! Oh the west, the west..." (rubes' mantra)

Haha, good luck with that mindset!  Eally Ucked has made an excellent point about the all important 'means of production'; I notice you avoided that one with the whole 'its all poison from China, Japan, wherever (as long as it's not 'Merika), schmeeee..' ten foot pole.  Pah, as if all the 'innovations' the US has come up with in the last twenty years have been 100% certified pristine and safe (other than by the industry owned FDA, I mean). "Just because a US company tells you what's good for you, it must be." Stupid stupid, real dumb.

 eg.Last time I checked even dogs won't eat GMO foods when given the choice between them and unaltered products. American people on the other hand can't tell the diff as long as you add enough fat and salt.

Americans have great memories: they are apparently just really really short, and focussed on their own 'wins'  whether real, imagined, or hyped. A lot of them remind me of the Dentist character in K. Vonnegut's "Mother Night":  Absolutely skilled in many ways, until they get to that driving cog in their brains that has had a tooth knocked out by the constant barrage of 'Rah rah rah, shish boom ba: Am-er-I-ca!" they've heard from birth. Then even the most intelligent of them get violently defensive at even the faintest hint of a slight and start ranting and raving incoherently like lunatics despite all evidenciary support of the opposite of their point.

Yes, China is copying, but only insomuch as to steal your tools. So its highly likely that they keep the best for domestic consumption. Eg. You just might be able to comprehend: do you really think the French export the best of their wines?

I believe the incredibly valid (and IMHO obvious) point that Eally was trying to make, and you either totally missed, or just skipped over to avoid having to face, is that the US has moved most of their production to the East, which leaves the East in a much better position when pulling out of a recession than a state that only makes CDO's, CDS's, Viagra, very very fat people (FTR Insulin came from Canada, is that an innovation the US finds useful, you think?), etc. etc. Also, once the YUAN is depegged from the USD, and repegged to something of actual value, like PM's (which the Gov't there has been encouraging their citizenry to load up on), then every Chinese person will have a little bit of money to buy the locally produced goods that the West will no longer be able to afford, and no longer has the means to manufacture.

Sorry if it is diffcult for you...

Regards

 

 

 

Howard_Beale's picture

I have posted several times that the shift of power from the West to the East will occur in the next decade, however, China is not going to escape the global calamity that ensues when credit seizes 10 times worse than 2008 in every developed nation.

China does not have organic growth. They need the rest of the world to consume their poorly made junk. There will be no consumers. They will need skills like these to pass the time:

http://www.youtube.com/watch?v=-ptYTGTNiyQ

 

GoinFawr's picture

"China does not have organic growth. They need the rest of the world to consume their poorly made junk. There will be no consumers."

Uh, 1.5 billion + people is a vast untapped potential market, especially compared to the US' broke 300 mill or so; not to mention the other countries with responsible gov'ts who will still be lending to their peers following a new international credit crunk. Unless of course, as I suspect, you consider the US to be the only entity comprising 'the rest of the world'. Also, any country that expands its manufacturing capacity at the rate the Chinese have is bound to produce some 'junk'. eg. If it was 1974, would you buy a Vega? It certainly doesn't mean they export the best to you who have always expected to pay the least.

 

Regards

 

 

velobabe's picture

beale, you are one old fart crack up.

you get it said, though†

Bazza McKenzie's picture

"Chinese copy not innovate".

Those of us who have lived long enough to have observed and not yet forgotten some history remember this was precisely the path followed by Japan and South Korea.  In the 50s, Japan copied and Japanese product was synonymous with low quality. They reverse engineered products developed elsewhere, built up scale, then invested in their own R&D and innovated.  Same with South Korea.

But as a society, Japan became burdened with its own version of social welfare, that has had over-employment in service industries and agriculture propped up at the expense of its manufacturing industries.

China, has its own problems, but right now they are probably less than those of the US and Europe.  Yes it has been copying.  Of course Western companies and governments fell over themselves to hand technology over to China (hello Bill Clinton, hello Steve Jobs) in a way that never occurred for Japan and South Korea, so they have got a hell of a good start.

But Chinese will innovate and invest in R&D.  In most of Asia, local Chinese are resented by indigenes for their entrepreneurism and business success. In a number of areas (eg mobile phone and internet use), China now has a larger internal market than the US or Europe, and potential for further rapid increase.  That will happen in auto and domestic goods and many other areas. So China's potential for economies of scale actually exceeds that of the US and Europe.  At the moment their economy depends heavily on exporting but ultimately the balance will shift to expanding and serving internal markets. There will be pain in doing so but it will be pain with an upside.

China is now communist in name only.  It is certainly statist, but so are Europe (think of the unelected EU Commission that actually runs the EU and the complete unwillingness to have referenda on increasing EU powers and ignoring the results in the few countries where it happened). The US is becoming increasing statist. Yes there is plenty of corruption in China but Washington and Congress are enormously corrupt. The difference in this regard between China and the US is that corruption is widespread throughout the whole of Chinese society but not yet in the US, though there are clearly strong and expanding pockets in the US (hello NJ, and all power to Christie to reverse it).

But China's big advantage is that it has not developed the nanny state that is sinking the US and Europe, the enormous social welfare system and enormous system of business regulation that both taxes and frustrates production and requires a huge army of bureaucrats to create and enforce the regulations.

As things currently stand I would, with sorrow, put my money on China rather than the US for success in future decades.

The US can reverse this situation but only if it undertakes a revolution as sweeping as the one that founded it.  Unless it can sweep away all the political and bureaucratic class that exist as parasites on the productive class, and put to work the existing class of welfare dependents, remove the federal power to levy income tax and create money out of the breath of politicians, both of which were prohibited by the founding fathers, then it will inevitably become a second rate power to China.

If it can reinvigorate the basis of personal liberty and personal responsibility upon which it was founded then, and only then, can it remain the pre-eminent economy and society in the world. Very few of the current crop in Washington (and most state capitals) and in Wall Street will support this. In fact, every one of their efforts is in the contrary direction.

 

M.B. Drapier's picture

Back in the day, the low quality of cheap gerry-built goods was a commonplace. IIRC the Prussians played fast and loose with UK patents during their industrial buildup too. Unfortunately the comparison of China to pre-war Germany is much less encouraging in other respects.

M.B. Drapier's picture

In the C19. Prussian industrialisation began around the 1830s, apparently. However it seems that actually the phrase 'jerry-built' had nothing to do with Germans (at least originally), so scratch that: apologies for the misinformation.

Kayman's picture

I stand to be corrected, but I think the term is "Gerry-rigged" not Gerry built. And it referred to the ingenious ways the Germans hay-wired and patched up damaged equipment in the field during WWII.

I have never seen poorly engineered or built products from Germany, past or present.

Gully Foyle's picture

Kayman

http://www.merriam-webster.com/dictionary/jerry-rigged
Etymology: probably blend of jerry-built and jury-rigged
Date: 1959

: organized or constructed in a crude or improvised manner

jury-rigged

[From jury-rig, jury-rigging, improvised rigging on a ship, modeled on jury-mast, temporary mast, perhaps ultimately from Old French ajurie, help, from aider, to help; see aid.]

http://www.urbandictionary.com/define.php?term=nigger-rigged

nigger-rigged

to rig something up half assed so that it works well enough, but doesn't work the way it is supposed to.
I had to nigger rig up my cd player in my car.