The response to Mario Cavolo’s glowing take on China and the global economy was eye-opening, to say the least. It’s not hard to understand why someone who lives and works in China, as Mario does, might believe that the country’s economic prospects are so spectacular as to all but preclude the possibility of a deflationary depression elsewhere in the world. We’re not so sure ourselves and have a few things to say about it below. But we were nonetheless persuaded by Mario’s argument, and by comments made by others in the Rick’s Picks forum, that China is doing many important things right, economically speaking. Some Westerners don’t come easily to this notion, since it requires one to put aside very troubling concerns about China’s repressive, authoritarian political regime; for it is both unfortunate and undeniable that dissidents do indeed disappear in the middle of the night, never to return; and that “troublemakers” such as the Falun Gong, a Taoist sect, have indeed been tortured and expelled from civil life.
Even so, and seemingly paradoxically, China’s political leaders seem to have the long-term well-being of the Chinese people foremost in mind when it comes to managing the economy. On this point, we found the following comment in the forum, by “Adiehua,” particularly illuminating: “Like most of the correspondents here, I come from a background that prizes democracy and freedom,” he wrote. “However, I consciously try to avoid the trap of believing that it is the only system. The popular belief that China is a somewhat totalitarian state is erroneous. It is authoritarian but the Chinese have had various versions of authoritarianism for 2000 years. To ask them to adopt Ben Franklin’s philosophies in a heartbeat is not practical.
Chinese Solutions
“Nearly everyone I know in China is acutely aware of the various problems that China faces. They are however, adamant that they are Chinese problems for which they will find Chinese solutions. Many of my Chinese acquaintances indicate that export trade continues to be quite strong but significantly more of it is going to other emerging markets in the Middle East, Russia, South Africa, South America and of course, Asia. There is a growing conviction that future export growth will be generated by hi-tech and value added products.
“The Chinese are moving out into the world. They are using their cash to acquire assets everywhere, particularly oil and minerals. They are gaining export markets in developing countries and are becoming major tourists. They acknowledge the somewhat symbiotic relationship that they have with the US and Europe and are sufficiently pragmatic to take actions that support those economies.
“In the final analysis, China will do what it perceives is best for China. If the West derives a benefit, then so be it.”
America’s Suicide
Contrast this with America’s economically suicidal policy of fighting debt deflation with the creation of yet more trillions in new debt. Clearly, America has no long-term plan or even a goal. Instead, the nation’s economic policies seem geared toward papering over problems rather than resolving them. The result, in nearly each and every instance over the last several years, has been that Government’s misguided efforts have failed miserably. The costs have yet to be borne by taxpayers, but when the bills start coming due next year, the tax burden that results will kill any remote chance the U.S. economy had of recovering.
In his essay, Mario asserted that America’s fall will be softened by the countervailing pressure of Asian prosperity and by growth elsewhere in the world. He also thinks the super-rich will escape misfortune simply by moving their money out of the U.S. We would argue that this gives the supposed “smart money” more credit than it deserves. Consider, for one, that whenever some urgent change in investor perceptions scares the allegedly smart money into fleeing one supposed safe haven for another, the smart money will be subject to an enormous haircut. Just asked Warren Buffett, who has been struggling to unwind a $5B position in muni bonds before the music stops. And besides Buffett, there have been many thousands of super-rich investors who have been decimated because they jumped into private-equity deals that they thought were bargains, only to discover that deflation has barely begun to mark down the assets they’d acquired. (Newspaper publishing companies have become the new Brooklyn Bridge that someone would love to sell you.) There is no such thing as a buy-and-hold investment anymore, and no asset class is safe from the ravages of capital flight. For that reason, even George Soros can lose a big piece of his net worth if he guesses wrong just once, or if he is just a few hours late exiting a speculative position that has turned lethal.
Speaking of Soros…
Speaking of Soros, he supposedly is in Petrobras up to his eyeballs. But does he hold U.S. Treasurys as well, as many well-heeled investors undoubtedly do? If so, how smart is that? The U.S. is BANKRUPT and has been raising its current, $13 Trillion debt ceiling at the rate of $1 Trillion per year. When the epiphany of U.S. bankruptcy finally comes, as it one day must, and the Federal Reserve becomes the only buyer of Treasury paper, where will the smart money (i.e., the hedgies) migrate? And how much time will they have to do so? It is hardly beyond conjecture that the inevitable collapse of the dollar and Treasury debt will occur in mere hours, making it impossible for any of the rats to escape the ship.
Arguably, the smartest “smart money” is Chinese, as Mario would doubtless agree. Whereas the Japanese bought Impressionist paintings, Pebble Beach and Rockefeller Center when they were flush with cash, the Chinese have shunned trophy assets, choosing instead to lock up supplies of natural gas, oil and mineral resources all over the world. In stark contrast, a very significant portion of the West’s seed capital remains hopelessly trapped in a derivatives-based Ponzi scheme whose notional value totals many hundreds of trillions of dollars. There is no way this money can find its way into Bolivian tin, Venezuelan oil and Iranian natural gas in the way that China’s money already has. The capital appears destined to be deflated to the vanishing point in settlement of mostly public debts far too large to pay.
We’ll give the last word to forum regular Martin Snell, who lived in Taiwan in the late 1980s, when the stock market there collapsed. “I thought for sure there would be a depression . Nope. It was a bit tough for a bit but the resiliency propped up by a strong underlying growth curve held the place together.” But America? “To me [the country] is starting to look like what has happened to Britain over time: a slow, non-stop decline, while they cling to long-obsolete feelings of greatness. Yes, there are vestiges of the glorious past, but visit any town in the northern half of the place and heaven help you — a disaster.”
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I would like also to agree with anyone that mentioned the male desire for a young female, especially when there is a shortage… as in China of the one child policy. The government of China, probably knew that on a one child policy, nearly all families would want a male for obvious reasons. But when those males reach 18+ years of age, they will have to compete with a limited supply of young females. All cultures understand that the female loves money foremost(the security of her future children). This is why the country of China is growing so fast… males competing for the smaller total young Chinese female population to mate with.