This page has been archived and commenting is disabled.
Musings on China and Japan
I have not written articles in a few months, except for the one I wrote for the July issue of Institutional Investor magazine, on Japan (I’ll post a link once the magazine comes out).. I am sure Freud, after spending a few minutes in my subconscious, would provide some disturbing explanations. But as Freud said, sometimes a cigar is just a cigar. I've just been enjoying summer with my family.
My nine-year-old son Jonah and I have been playing chess a few hours a day. I never thought I'd enjoy playing chess as much, but I do. In fact, over the past year I’ve probably played more chess than in my whole life. I win every game! When I win, I win. When I lose I win – seeing your son (your student) beat gives you an enormous satisfaction as a teacher. In fact, I never thought I'd enjoy losing so much. Jonah has this quality that I need to nurture in him – he never gives up. Even a game that is a clear loser for him, he plays till the end. What a great quality to have in life!
I am also enjoying seeing my four-year-old daughter Hannah grow up. We have yet to find an activity we both enjoy doing together (other than hugging to death), but we'll get there. She has almost learned how to ride a bike without training wheels; maybe we'll do cycling together. They’ve been going to a summer camp that is half a mile from my work and six miles from our house. A few times a week, while I tug Hannah in a bike-stroller, Jonah and I ride our bikes 30 minutes to the summer camp, through the park.
I envy my kids; they have the pleasure of spending time with their grandparents. My grandparents lived thousands of miles away from me – I saw them once a year for a few weeks and that was it. My wife's and my own parents live just a few miles from us. My father's house is a block away from my office; I stop by a few times a week for breakfast before I go to work.
My father gave Jonah a 50-state quarter collection for his birthday. Now, every day before Jonah goes to sleep, he and his grandfather spend half an hour on Skype learning about each state; and once they are done with a state, Jonah puts the coin at the proper place in the board. They also play a game of chess on Skype chat.
I gave a presentation last week at the Value Investment Seminar in Trani, Italy (here is a link to the PDF). I strongly suggest you visit their website in a few weeks, as it will have presentations and videos. It was a terrific event; I learned a lot.
I spoke about China, Japan, and our favorite stock idea: eBay. I changed the title of the China presentation to “China, the Mother of all Grey Swans” (instead of “Black Swans”). A while back, when I shared this presentation with my readers, I was corrected: China is not a black swan, because a black swan is a rare, significant, and unpredictable event. However, the consequences of what is transpiring in China and Japan are for the most part predictable (especially if I am writing about it). We don't know when they will play out, but they are predictable.
Nassim Taleb, one of my favorite thinkers, who brought the black Swan to life in his books Fooled by Randomness and The Black Swan (I like both books, but Fooled by Randomness is my favorite, plus, it is by far an easier read than Black Swan), solved my dilemma with China by creating a new swan: "grey"– a rare, significant, but predictable event (though the timing is still unknown, or perfectly known only with the benefit of hindsight.)
I spent a few days at the seminar discussing and debating China with some very smart folks, who stirred up some random thoughts.
What really amazes me is how people who would not trust the US or European governments to do their laundry, have unconditional faith in Chinese government involvement in its very complex economy.
The Chinese government brainwashes its people the same way the Russians and Soviets brainwashed theirs: by controlling and censuring media. So I understand when Chinese people who live in China speak highly of their leaders – they are brainwashed (I have experienced this first-hand). However, I am amazed that the Chinese government has been able to brainwash people who reside outside of China.
No, an economy in large part controlled by the state is not superior to ours. Greater control over their economy allows the Chinese government to pull the economy out of recession a lot faster than in the democratic countries, but there is no free lunch. Their actions will just lead to greater excesses and imbalances down the road.
It seems that as Westerners we have an inferiority complex when it comes to Asian cultures. Chinese uniqueness is praised today the same way Japanese superiority was in the 1980s. I even remember reading Russian newspapers in Russia, in 1989, praising the Japanese work ethic and their unique culture and spouting predictions of the continuance of Japanese dominance. I can only imagine how the mainstream press in the US was caressing Japanese uniqueness in the late ’80s, especially as the Japanese were invading (buying) Times Square and the State of California.
What is very interesting about it is that today all those Japanese cultural advantages are looked upon as disadvantages. For instance, “saving face” did not allow Japan to deal sufficiently with failed companies; their economy was full of semi-dead, zombie companies, which did not allow the healthy ones to prosper. Their employment-for-life system that was praised to the heavens during the Japanese golden age is now killing productivity of the economy. I recently read that 17 million people in Japan are employed who should not be employed (for an economy of 120 million people, these are huge numbers). In other words 17 million Japanese show up for work every day and receive a paycheck, but add little or no value to their employers.
Back to China. Even if the Chinese are harder-working and more entrepreneurial than Americans and Europeans, that doesn't mean the laws of economics are somehow suspended in China – they are not. The Chinese economy was geared for high global growth, while now much lower growth is in the cards. The excesses created by 14% of GDP being “stimulated” into the economy through a fire hose have led to significant overcapacity. It will take time for these excesses to be dealt with, even in a country full of super-hard-working people.
A friend asked, “But what about Singapore; its government plays a significant role in the economy, and Singapore is thriving.” The clear answer: government can only succeed in running very small and relatively simple economies. Let me give you this example. I have a game on my iPad called Flight Controller – my kids love it. The point of the game is simple: you are an air-traffic controller and your job is to land planes. Planes come in three colors, red, yellow, and blue, and each plane has to be landed on the runway matching its color. The objective is not to have mid-air collisions. I can land ten planes no problem, twenty gets more difficult, and forty I cannot handle (Okay, I played the game a few times). The same is true for economies: the more complex the economy the more difficult it is to be centrally planned.
Government is not and never will be an efficient allocator of capital. It empowers bureaucrats, which in turn leads to corruption, which further misallocates capital. The size of the bribe or strength of the personal relationship decides the flows of capital instead of the invisible hand that funnels capital from low to high uses. (A side point: Singapore is one of the most uncorrupt countries in the world; this may explain in part the government’s success. China is not Singapore; it is infested with corruption).
I often hear that you have to go to China to understand it. But tourists who go to China don't see the real China, the same way that tourists who go to Moscow don't see the real Moscow. I was in Moscow a few years ago, and I was impressed by how clean and beautiful it looked; in fact it didn’t look much different from the center of Brussels. Of course, I was only in the center of the city, where you see fancy restaurants, gift shops, museums, theaters, etc.
I went to see my college friend who lives in the real Moscow – I saw a very different picture. The second you veer off the main road, it turns into pothole hell, and the streets are anything but clean. My friend lives in a nine-story apartment building that has not been painted in decades; paint is peeling both inside and outside. Interestingly, most of the sides of the buildings that face large streets in Moscow and in Murmansk (the city where I spent all my Russian life) are usually painted, but the sides that face small streets have not been painted in generations.
My friend – a lawyer – and his wife and kid have to live with his mother, as they cannot afford to live on their own. But you won't see this Russia if you are a tourist visiting Moscow. People who visit China even multiple times harbor an illusion that they understand it – they don’t. In fact they so overwhelmed by its grandness that they stop being rational in their analysis.
I keep thinking about the possible consequences of the Chinese overcapacity bubble pop. It is relatively easy to understand what will happen in Japan: deflation will quickly turn into hyperinflation as government is forced to print money to service its debt and social obligations. They'll announce and may even execute austerity measures, but those will be a decade or two too late. The Japanese yen will likely decline, though maybe not right away, as Japan owns a lot of US dollars and may be forced to sell them.
The Chinese situation is far more complex. China has tremendous overcapacity, but overcapacity is deflationary. It will drive prices for commodities down, and prices of Chinese-made goods will likely decline as well. Demand for industrial goods will collapse, pushing their prices down. But China will also have to deal with a lot of bad debt and will likely have to print money to do so – which is inflationary.
The popping of both the Chinese and Japanese bubble economies will lead to higher US, and likely global, interest rates.
Japan, as the title of my presentation suggests, is past the point of no return. Internal consumption of its debt will likely turn negative very soon. Its post office, which includes a postal savings system that was historically one of the largest buyers of government debt) announced recently that it will be a net seller this year. The situation is out of the Japanese government’s hands. It will probably not be able to intervene in the economy for much longer, so rates will rise and there will be little they will be able to do about it.
China is different from Japan. Its government is trying to slow down lending, but at the same time we have started seeing news of possibly another multi-hundred-billion-dollar stimulus over the next few months. The Chinese government’s actions are the wild card that will determine the duration and the magnitude of the bubble pop – the longer they intervene, the more dire the consequences will be.
Vitaliy N. Katsenelson, CFA, is a portfolio manager/director of research at Investment Management Associates in Denver, Colo. He is the author of "Active Value Investing: Making Money in Range-Bound Markets" (Wiley 2007). To receive Vitaliy's future articles my email, click here.
»
- advertisements -
I think for me, from a CFA, I would like to see musings on the US. I like understanding China, but I like understanding the US even more.
Tell us what your research shows about the decline in the BDI. Was the latest stimulus GDP spurt due to a restocking cycle? Will the financials lead the market lower as before?
----------
Perhaps you could talk a little about the Colorado state budget?
http://sunshinereview.org/index.php/Colorado_state_budget
Mark Beck
Nixon shut down the war in Vietnam because it was not productive. He bought us some time by going strictly fiat. He forged a productive relationship with China. We have now squandered the 30+ years he gave us to get our financial house in order. Someone please destroy this thought so I can move on.
Updated DOW chart:
http://stockmarket618.wordpress.com
What I want to know is why people aren't talking about the real black swan in china...social unrest. One of the main reasons there is a housing bubble in China is that investors know that young men (or their parents) must purchase a house in order to get married. No apartment, no wife. No wife, no sex for the young men, and no grandkid for his parents. So investors essentially have the young generation by the nuts. With housing running at multiples higher than 30X income in cities (for an unfurnished concrete box), one has to wonder if the labor strikes signal social unrest in the migrant workers. Than there is the "ant tribe" of young college educated workers who can't find a job in big cities and live in slums. Also earlier this year, there were a string of incidents in which single deranged people went into KINDERGARTENS and started killing kids.
Yeah, everyone's optimistic here.
From what I read on NYT, those that can't afford local Chinese brides are importing Vietnamese ones. Chicom admits there are about 100 million or so city residents suffering from some forms of mental illness due to stress but most of them are in "stable" condition. Chicom's military are busy taking some of those recent college grads that can't find jobs. Plus, most of young generation are extremely brainwashed into firmly believing the lies told by Chicom and are extremely into nationalism, which is in some sort form of religion in China by now. Chicom's definition of Patriotism is to love the Communist Party and the State. I doubt they can possibly rock the boat.
Vitaliy. If you want to see how the U.S. media thought about Japan in the late 80's/early 90's, the raw xenophilia, check out Looking at the Sun by James Fallows. He also wrote articles in The Atlantic monthly predicting a nearly inevitable takeover of all spheres of economic endeavor by the japanese. Fallows is one of those guys who must go to all the right parties and know all the right people. He's been completely wrong in ways that would destroy the careers of unconnected people just relying on the quality of their work.
Bingo Fred! Fallows spouts the same crap we heard from him about Japan in the 80's. He has just moved his chair to China.
For those of us old enough to have gotten our MBAs in the 80's, we heard endless discourses on the superior planning methodology of Japanese business. The Japanese MBAs bubbled over with confidence bordering on arrogance. The virtues of government-led industrial policy (MITI, etc.) were espoused by pundits and even some professors. A few years later, it was all over for Japan!!
Vitaliy and others above have it right: China will bust. The rise of every mercantilist country (even Russia's rapid rise under Stalin got serious academic praise) is accompanied by paens to central planning. After the bust, people go back to the free market like drunks back to AA.
And Vitaliy and others above are spot on: the oligarchs everywhere love the idea of centralizing more power in response to the challenge from China. Does anyone really think the Central Cmte. of the PRC has smarter people than MITI did in Japan in the 80's?? If anything, Japan's bureaucrats were better. And it still ended badly....as central planning always does.
You're right to say that Japan believed it's own bullsh*t during the 80's.
And a N Am businessman visiting Japan probably found some of his Japanese counterparts insufferable.
However, the US believed it's own bullsh*t during the 00's.
And a Japanese businessman visiting the US probably found some of his American counterparts insufferable.
The Anglo-Saxon model of capitalism has recently spared no effort to discredit itself.
As for central planning and socialism, last I read over 90% of US mortgages are held by Fannie and Freddy.
Central planning, indeed.
I remember reading those articles on Japan by J. Fallows.
Being consistently wrong can apparently make for a good career. I think the trick is to be the wrong in the right way, writing what people want to read.
In 1991's comedy movie Other People's Money, Danny DeVito even speaks Japanese in a NYC Japanese restaurant. By then it was confirmation that the Japan Story is over.
Fast forward to 2010, its height of China Story. But I bet it's soon to be over.
This is what I believe:
Printing capital in a deflationary environment only stalls deflation, it doesn't create inflation.
Deflation is an inevitable part of a business cycle. Boom times have inflation that surpasses people's ability to pay asset prices. When asset prices peak, deflation occurs to bring asset prices back into equilibrium with the money supply.
During this time, the printing of money just slows the level of deflation, but inflation doesn't occur because asset prices never get past their peak.
If oil was 147, and it drops to 35 before going back to seventy, you still have net DEFLATION of 50%. No inflation occurred, even if the oil price doubled in the short term. It is still down 50% from its peak, and there was no inflation from the peak.
You can't fight deflation. It MUST occur. The only way to get inflation is to print much larger amounts of dollars than the previous asset prices, and this rarely happens *which is why Weimar is so talked about... it was the EXCEPTION, and not the rule.)
You just can't fight deflation, and until the proper amount of deflation occurs, the economy will never return to equilibrium.
I met with the executives of a multi-billion dollar NYSE traded REIT yesterday. There is plenty of money to invest in commercial real estate right now. People will not invest until banks are forced to liquidate their non-performing assets and market prices for commercial real estate comes down to levels where it makes sense for other companies to invest over the long term. Until people are forced to liquidate their assets, recovery will not occur.
Until deflation occurs, recovery will not occur. Deflation is a natural mode of capitalism that should be embraced instead of fought. Fighting the deflation just postpones equilibrium and a new period of investment.
Printing money to fight deflation only prolongs the period that deflation will occur in. It does not necessarily cause inflation past previous asset prices.
The world economy needs to have its training wheels taken off and go splat before it can get back on the bike again. We will not see recovery until this happens.
Bravo! You get an A in econ 101. I don't know why so many people forget this fact when they are appointed to positions of power.
Just a brief 2 cents that thie above is one of the most informative exchanges of fact and opinion anywhere. Beats the MSM hands down. Am most appreciative . . .
I have been to China on biz and your perspective strikes me as the perspective of the academic or the tourist.
Central govt is not as you describe. To put it into western perspective think feudal system. You have the king at the top (Party) then you have the the whole country broken down into smaller kingdoms where the local political boss can make or break you. You don't do business there without an introduction and you won't find it through linkedin. Power is everything and politics and money are power. I met up with a couple of local guys who were plugged in to the local juice via money and they could drive around shit faced and basically do anything they wanted to do. I went to night clubs with them where I was the only round eye and ate the local food and talked to the local people. Well the girls anyway :) They were uncomfortable at first with my very direct line of questioning until they realized it wan't a critical line of questioning more of a genuine interest in how things work over there and what they thought. Ask anyone their opinion and they will talk all day.
Central govt. does have the advantage of being able to turn on a dime without debate. The Chinese people are very careful in what they say about politics because there are consequences.
I saw the potholes when I strayed from the beaten path. I saw heart breaking poverty. I also saw a country and a people who were buying into the struggle to be middle class and better. For most there is only one direction and that is up. For most of us there is only one direction and that is down.
I saw the empty factories with busted windows etc. but was informed they were slated to be bulldozed to make room for apartments or more modern facilities.
I saw the housing bubble and what struck me was it is nothing like we experienced. There is no mad scramble to buy up any old place and change sinks and add tile. It all seems to be localized and concentrated in the cities and it's building new not rehabbing. As soon as you leave the cities there is a complete change in scenery. Houses are maintained or run down a little but not being turned into cream puffs.
The govt is doing it's best to promote commerce locally and abroad. I ran into ex pats from all over the world and got their perspective on how things have changed in the last 10 years. They were enthusiastic. I saw little negativity anywhere.
In short they are a people with a bright future and it's probably just their turn.
>>
The govt is doing it's best to promote commerce locally and abroad. I ran into ex pats from all over the world and got their perspective on how things have changed in the last 10 years. They were enthusiastic. I saw little negativity anywhere.
In short they are a people with a bright future and it's probably just their turn.>>
I was wondering whether or not you would have drawn almost the same conclusion if you had visited Japan in 1989.
Everyone wants to point ot the collapse of the Japanese economy for just about every soveriegn economic crisis in the world. There is a big difference between Japan of the 80s and the Chinese today. That being the different relationships with the US.
Japan was set up by US influence for a collapse in order to save the US economy from a currency crisis, something the US are trying to get China to do even now. But the Chinese owe the US nothing and are only willing to strengthen its currency so much to appease the US. Not to say that China's economy will not collapse, but not for the same reasons as the Japanese economy.
There is another significant difference between Japan of the 80's and China today. As reader2010's quote by Charles Huge Smith and my implied "cozy US-China relationship", China's industry is almost entirely JV with foreign corporations (US having largest stake) who have a large say in the operations and share as much IP as is required to keep the factories moving. Japan on the other hand was almost entirely comprised of Japanese corporations cementing their foundations domestically. Having said that;
, then i can't agree with your statement. It's absolutely too incredulous to think there is no cohesion between China and the US in all economic matters. The finger pointing and pistol drawing are charades to disguise this coziness. I strongly believe the US can collapse China within months if it so chooses to. US government answers to US corporations and these corporations are happy with China until they're not.
No doubt there is a balance between the US and China. But it extends both ways. China could just as easily collpase the US economy, especially in its weakened state. Again, Japan capitulated to the US on the yen. China's move on the yuan is more of a face-saver with little real effect.
WSJ, CNBC, Bloomberg, along with the rest of financial MSM have vested interests in selling you a grand picture of China story, so that the US investment banks can harvest billion of dollars from their Chinese IPO offerings of those bad debt-ridden state-controlled banks and enterprises .
But, in the end, retail will learn to be wiser. Like Marc Faber likes to say, "It's always the same everytime. In the beginning, the promoters have the vision and the investors have the money. In the end, the promoters have the money and the investors vision. You have to be early." IMHO, the basis of China story is fading away rapidly. Of course, they want you to believe China has huge domestic consumption market in the making. It's purely BS. I tend agree with CHS that the Chinese people will end up holding the bag in three to five years' time.
I understand that. With all due respect, I don't listen to the media and I'm looking at the situation more from a political perspective than an economic one. I'm not sold on the Chinese economy...it most likely will collapse. I am sold on the idea that the communists will not roll over for the US.
In my understanding communism has been tried and it failed big time. The next leg will be a move from neoliberal capitalism into some form of facism on a worldwide scale ,so that the debt-based (fin-based) foundation can be kept going on.
here is the primer on fin-based cap:
http://www.youtube.com/watch?v=UHiuaGJ46zo
No disrespect but I've heard this too many times. China knew the risks and accepted the terms and I believe the conditions are in favor of the US as it has always been. ie. Germany of the 30's, USSR of the 50's, Japan of the 80's, Mid East of the 90's and now China. All collapsed and strengthen the US in it's aftermath. It's almost like the US needs to create these situations and cycles for it's own existence.
Whether we can agree on anything else, I certainly agree with you on the last statement. And I hope I'm reading the Chinese correctly. I have no affinity for the communists, but I always thought that China was the last big hurdle for the globalists.
The US financial oligarchy has already successfully occupied the heart and mind of the Chinese ruling elite.
I hear that. But I also hear that there are still some hard-line ideologues in the military that the elite have to appease. The political game in China is not that simple, IMO.
Holding on to the power is the Number One priority for China's ruling elite, Chicom. Chicom will bet the farm on it if you really push the envelop. Recent example is Chicom's 1989 Tienanmen Square Massacre.
On the other hand, there are certain sects within Chicom. Those hard-liners only have some infrequent rants without any real substance. The more practical sects understand that China doesn't have any advanced technological know-how or innovations to supply its military with smart weaponry, thanks to its oppressive and free-thinking-killing brainwashing educational system. China has been constantly purchasing crucial military technologies from Russia and Israel in the past. And this is not the formula for creating even regional superpower if you search history.China still pays protection fees (via nonstop purchases of the T-bonds) to the US so that it can get its oil from the US Navy controlled sealane.
So in the end, China is nothing but a western colony for providing cheap labor, providing cheap funds (cycle via Foreign Reserves), and providing marketplace for the forced consumption.
To maintain its status quo, China has to provide the cheapest labor, cheapest capital/funds to the west, the environment-insensitive policies, and the highest return for the foreign investment. For return, Chicom's got pad on the back from the west so that it can continue to rule legitimately at home.
"The more practical sects understand that China doesn't have any advanced technological know"
Really? I spend about 1/4 my time there, 1/4 in the west and the rest in Japan.
I build the prototype in Japan (with my team)
Design the production model in China (takes no time at all, with someone else's excellent and totally random, Chinese engineers)
And... sell it to a stupid and all consuming western society.
Japanese engineers are as thorough as they are ingenious.
Chinese engineers can make anything produceable.
Westerners buy shit. Western engineers, frankly, are declining in quality.
This is important to the discussion because you can't run a society on retail. A good engineer can use what he knows to build anything that uses the same technology. What prevents Chinese engineers from using what they learn building all our high tech shit to make "crucial military... smart weapons"? What will help the West's Facebook generation figure out how to build weapons to counter that threat?
"The more practical sects understand that China doesn't have any advanced technological know"
This is the same conceit that many in the US had towards Japan . . . until Japan decimated US car and esp consumer electronics manufacturing. Wintel, to it's credit, gave the US a much needed temporary reprieve.
As for the Chinese response to the earthquake, given the US response to Katrina and the ongoing oil spill in the Gulf, it seems odd to be pointing fingers.
_____
http://www.huawei.com/
Why the Chicom still beg the Russians and Israelis to sell them their downstream military technologies? They tried to lobby the EU to do so back in 2005-08 but the EU refused for number of reasons.
Back in 2008 China's earthquake rescue effort, one of their military blackhawks crashed in some mountain area. The PLA mobilized more than 20,000 people and took more than four weeks trying to locate the wrecakge.
In 2001, one of China's fighter jets went down in the South China Sea after its collision with the US spy plane. The PLAN used ten vessels and spent more than four weeks searching on the open sea but to this date they still can't locate the wrecakge.
Those facts confirmed that their pilots or planes weren't equipped with GPS-enabled rescue beacon devices. Are those beacon devices high-tech? I really don't know but my 2001 car even has it so that it can be centrally located if it gets stolen.
My understanding is that the Japanese went into a massive credit binge between 1986 and 1990, and leverage got into the stock market and RE speculations. Just Like every massive credit binge in the history of finance, the Japanese credit boom evenutally ended up in tears without exception. I would bet the so-called peaceful rising , which has been built up in massive credit binge, will also end up in tears, just like all massive credit binges before in the history of finance.
The US convinced Japan to strengthen the yen against the USD via the Plaza Accord which did, indeed, lead to a massive credit binge. I'm not suggesting that Japan acted responsibly. However, I do believe that China will see to its own best interests as regards the US, something that Japan failed to do.
Perceptive comments about Japan being persuaded [forced] by the US to allow it's currency to over-appreciate and Chinese resistance to following the same ruinous path.
The comparisons between Russia and China seems odd. I don't recall the last time I've bought something labelled "Made in Russia".
The Potemkin village, after all is a Russian, rather than a Chinese, invention.
China will certainly has it's share of major problems, but then the history of the industrializing US, by comparison, is not exactly trouble free.
Thanks, Colonel. I get tired of people looking at the Japanese collapse like it occurred in a vacuum. Worse, I've seen some US apologists insist that it was done for Japan's benefit and was hurtful to the US, without mentioning that the Yen wasn't the only currency strengthened. Germany also went along with the US demand.
Funny how the US can manipulate its WWII opponents (Japan and Germany) yet can do little with its "allies", Russia and China. In Japan, it is widely known that the US allowed bureaurcrats and industrialists to retain their power after the war in order to help the US occupation and maintain its influence.
The US did two things to radicalize Japan at the end of the war. The much ballyhooed Constitution modeled (supposedly) after the US Constitution forbade the Shinto religion, going much further then the US Constitution as regards religion, and it set up a parlimentary government rather than the representative republic style in the US. This removes the checks and balances of a three headed government and allows exactly the situation today, an ineffective government, easily manipulated by US and (now) globalists.
Excellent. To add some anecdotal evidence to your comment, I have numerous friends who have joined the Communist Party, not from an ideological POV, but because it opens up business opportunities. But even that is subject to legacy rules (unwritten) as there are several who would like to join and have not been able.
Thanks Vitaliy, always enjoy your posts but then again I share your opinion on China.
What I think plays a major hand in supporting China's industry is it's cozy relationship with the US under the pretext of opposing economic mindsets and the all too familiar UST and USD dump bluff. More precisely, the stella relationship China has with American corporations, helped with US government coercion, that keeps it humming another day. Why not? Cheap labor, no unions, low import tariffs etc. they wish these conditions existed here.
Once the US corp. no longer considers it a great idea to manufacture in China either by falling demand, shrinking profit margins or just the cost of oil in shipping, it's the best clue you have that their days are numbered. Personally, I look for signs like pleas by the US to the Chinese to consume (check), strikes (check), pay demands (check), talks of Chinese government takeovers (hostile or not) and company relocations. Other signs may include pleas by the US for Americans to consume knowing very well all consumables will be imported from China (similar to the stimulus checks sent out just weeks before Beijing Olympics).
What I don't agree with you on is the US interest rates rising. If China experiences a deflationary bust similar to Japans, then they will simply follow Japans lead by buying UST's, in part, to sterilize the Yuan after they exercise the nuclear (inflation) option.
What's with the strikes and suicides and all that at some big name companies in China?
How does all that fit into the decline scenario?
Some of the suicides aren't really suicides.
A man "jumped" from a window after an iphone prototype was missing and corporate security at Foxconn broke into his apartment and beat him severely during the interrogation.
Do you really think he jumped? Maybe he did, but I bet he was pushed.
Also, another 28 year old worker at Apple's Foxconn plant recently died after being forced to work 34 hours with no breaks or nourishment.
This is what buying iPhones does for the Chinese worker. Maybe people should boycott Apple, but I'm sure the problem isn't exclusive to them.
Still, a lot of the suicides are under suspect circumstances and occur under the watch of corporate security at Chinese manufacturers.
The ones that are legit occur because people work in terrible conditions and are beaten if they take breaks or refuse to work.
This is the effect of American consumerism and the demand for low prices. The sad thing is that we don't even save very much money because of this. The money simply goes into the pockets of corporations and doesn't benefit the consumer all that much. (margins on an iPhone are well over 40%, despite the Chinese worker being paid jack shit.)
These two quotes should go together
The suicides are probably the result of too much repetition without mental stimulation. I don't know. The strikes over wage increases however are the real concern. With falling profit margins (2-3%) and collapsing demand, there is no way they can absorb the cost increase without hurting. Raise prices?? No way. To keep the factories rolling, they're just have to run at a loss. This will be common practice just like Japan of the 80's until it becomes too overbearing. Similar to the big 3 starting with 0% interest and ending in 2/3 bankruptcies.
The other option would be to depreciate the Yuan. That's my bet but they won't tell you that of course.
Thank you. I'll be reading those stories with more attention in the future.
In other words 17 million Japanese show up for work every day and receive a pay check, but add little or no value to their employers.
We have the same problem in the US.
China is the birthplace of Taoism &, dare I say, libertarianism. One of my favorite Taoist quotes is
"There have, in the past, been instances in which humankind has been successfully left to its own devices. Never, however, has there been an instance in which humankind has been successfully governed."
Central government planning has NEVER worked in the longterm. That is why America was so successful in the past & that is why she will fail if she continues this course.
In China, throughout centuries, Taoism has long been considered a set of psychological remedies for those who have suffered failures. For centuries, the Chinese dynasties had only allowed studies and worshipped Confucius and his teachings, which were required in their civil service exams.
China story is also built on massive credit binge that you don't hear at all from CNBC.
Here is what Charles Huge Smith thinks about,
"Of the many misconceptions about China's spectacular economic growth, perhaps none is more misleading than the assumption that the capital and surplus profits being made in China will stay in China. Despite the much-touted public ownership of joint-venture companies, much of the profitable production in China is owned by non-PRC (People's Republic of China) companies based in Taiwan, Japan, Korea and the West.
From a more clear-eyed perspective, China has been colonized by advanced economies to lower the cost of production and to establish a dumping ground for environmentally unsound production which their domestic citizenry will no longer tolerate. As with all colonies, the profits are extracted and sent elsewhere while apologists are hired to tout the glories of employment for China's teeming millions.
Until, of course, Marx's overcapacity cycle kicks in. Now that China's stupendous production capacity exceeds the potential demand of the entire world, including its own mostly impoverished domestic populace, then capital is fleeing China in its usual pursuit of higher returns, leaving behind tens of millions of unemployed workers and a toxic landscape.
The Chinese State is now attempting to counter this cycle by spending its own capital on stimulus, but State spending is not a replacement for capital or organic demand. Even worse, the Chinese State saddled its own banks with hundreds of billions of dollars in uncollectible debt in a vain attempt to prop up thousands of State-owned enterprises which racked up gigantic losses even during the boom.
The Chinese State attempted to staunch this open wound by closing thousands of its factories but the uncollectible debts remain, buried by accounting tricks within the books of its four major banks and government finance ministries.
The bloom is off the rose now that the overcapacity in China is no longer profitable to global capital and in essence the Chinese State is left holding the bag: stupendous losses in its own financial system, horrendously costly environmental damage and an industrial infrastructure which is losing value as capital shifts elsewhere."
"Until, of course, Marx's overcapacity cycle kicks in."
Thank you...imo, you have put your finger on the real problem. The problem that caused governments everywhere to intervene in markets and misdirect capital investment. The problem that Adam Smith did not see coming. Smith understood the great advantage of division of labor but not when the labor was usurped, to a large degree, by robotic machinery...making much human labor redundent.
Marx understood very well that capitalists economies would run into the problem of excess capacity but, like Smith, Marx did not see the robot revolution on the horizon. Marx had not a clue that overcapacity could become so large a problem due to digital robotic machines.
Capitalist theory suggested that supply and demand would always be equal at some price point. Few economists or government leaders thought that supply could absolutely overwhelm demand...driving prices below costs and keeping them there for long periods. Theory predicted that production would fall until prices rose to a level that allowed some small margin of profit for the factories...but what if the country contains billions of people that will riot and destabilize the government if factories close and worker's wages stop? Governments do not want that to happen...then they will be out of work (I use the word loosely). Can markets be found elsewhere for all those widgets the automated factories are cranking out? Can Chinese factories find buyers in Africa, or anywhere, for widgets being produced for 2% over cost? Some African countries can offer oil for widgets which the Chinese turn into more widgets. Does this cycle make any sense? I don't know...it makes me dizzy thinking about it.
Capitalism requires constant expansion or it dies. Billions of workers need employment or they die.
Captialism has been so successful at devising complex machinery to reduce labor costs that billions of workers are no longer needed.
200 years ago 97% of all employment in the US was farm labor. Now, because of very efficient machinery, 3% of all US workers are employed on farms.
The shift to efficient machinery in agriculture has been replicated in almost all industrial production.
No current economic doctrine has an answer to the current problem; too many workers chasing too few jobs...even though many of the jobs being chased offer wages that provide only for basic human sustenance.
The old capitalist solution to the business cycle, let the weak be liquidated, is exactly the wrong prescription for what ails us. If the weaker, less efficient companies that employ more people are liquidated those companies are replaced by more efficient companies with more robots and less human employment. Is this a paradox? Does someone have a practical solution to this problem? If so, I have not heard it.
Large wars used to disrupt the loser's, and sometimes the winners, production capacity and entire economy. Factory overcapacity, and excess labor, were eliminated. imo, wars are no longer an option because nuclear war would destroy our home, the earth...there would be no winner.
The real problem for governments everywhere is what to do with billions of people that have been replaced by machines in ever more efficient factories. Misallocation of capital into excess housing and exotic financial instruments are symptoms and were caused, primarily, by governments experimenting with economies while seeking a solution to excess labor. Of course a lot of frauds and thieves rushed in to offer ludicrous, but expensive, advice on how to cure the excess labor problem...no crisis is wasted.
You have crystalized a lot of vague thoughts floating around in my head for some time. The part about the classic role of war shows a possible reason war no longer provides even a wasteful and inefficient economic boost, as it once did: Since wars began to be fought for ideological rather than nationalistic reasons, they no longer target economic production.
Excellent analysis. Do you have a link to the original? Thanks!
Survivial+ written by Charles Huge Smith. You can order it from Amazon.
The Chinese have factories which are weighing down the government, and we have huge financial institutions doing the same thing. Widgets or dollars, pick your poison.
Bingo. You've just described the future of the world economic system. And now China's buying up Euro and Japanese debt to support their import markets there. It ain't gonna be pretty once the bag-holder is standing there in the middle of the street all alone when financial reality comes a-calling.