China shows WHO is boss?

[GRG55]

Re: China shows WHO is boss?

An industrializing, creditor nation vs. an deindustrializing heavily indebted nation.
And the second needs to permanently sell huge amounts of debt so as to be able to buy its energy from wealth third parties.
Where are the strong parties here?
The first of nameda nations is China, who by the way is the main creditor to the second.
The second, USA is a very powerful military power stuck in two unwinnable wars.
Power equilibrium seems to be shifting fast. Because an all out war is not possible, it would destroy everyone on earth.
If USA impose segnificant trade tariffs on China, these shall not have dollars to buy treasuries. Furthermore, for quite some time prices shall go up in USA, no cheap goodies at Wal Mart. Problems for the Chinese? Certainly, buy I think, in nowadays state of affairs much bigger problems for USA.

Those that make these arguments need to take a basic macro-economics course, and pay more attention to EJ's writings. Your basic facts are correct...your conclusion is wrong. BOTH the USA and China have a big problem...and it is evidenced by the continued mutual policies of both that keep producing outsized current account imbalances. The idea that China holds some sort of unilateral advantage over the debtor nations that balance off China's massive current account surpluses is wrong...China cannot act unilaterally without doing severe damage to itself...that's why EJ called it economic M.A.D.

In very simple terms China cannot run surpluses unless someone else is running an equally large deficit. If China attempts to cut off the lending that allows continued current account deficits from the USA, poof goes China's coveted surplus...the surplus they work so hard to maintain with their now chronic currency exchange manipulations.

There's a lot of things about the present circumstances that defy conventional economic thinking. For example, there is still a constituency here, including raja, that remain convinced that a depression will reduce demand for commodities and cause a crash in their prices. As EJ says, it won't happen. In fact the only scenario that I can see that will bring the price of oil down temporarily at least, is an economic recovery. For that means that:

1. Private sector demand is sustainably increasing;
2. The FED's reflation policy worked;
3. The monetary and fiscal stimulus will start to be withdrawn;
4. The fiscal deficit will shrink, thus improving the finances of USA Inc;
5. The Dollar will strengthen;
6. The oil price will fall.

Perverse, eh...

[iyamwutiam]

Re: China shows WHO is boss?

You might want to try Henry CK Liu once in awhile to broaden your perspective.

[GRG55]

Re: China shows WHO is boss?

You might want to try Henry CK Liu once in awhile to broaden your perspective.

My parents are Asian, I was born in North America, schooled in both regions, done business on 5 continents, and lived abroad for nearly 8 of the years of this current decade. I stopped reading Henry CK Liu two years ago...I prefer my narrow perspective.

[ThePythonicCow]

Re: China shows WHO is boss?

I stopped reading Henry CK Liu two years ago.

I still read Liu with interest, though I have not been reading him for long and am not sure what to make of him.

Could you summarize (without having to re-invigorate two year old synapses that I presume you would rather leave inactive) what is wrong with Mr. Liu's work, in your view?

[touchring]

Re: China shows WHO is boss?

There's a lot of things about the present circumstances that defy conventional economic thinking. For example, there is still a constituency here, including raja, that remain convinced that a depression will reduce demand for commodities and cause a crash in their prices.

Why not? China has printed $1.5 trillion this year, a crazy amount in comparison to its GDP, much of it has gone into real estate, stocks and commodity bubble. It can't continue at this rate for much longer, and a reduction in lending next year will definitely cause a bubble crash.

Meanwhile, a crazy new bubble which shows how ridiculous the situation has become.

China sees huge rise in garlic prices

Speculators accused of cashing in on people's swine flu fears

By Robert Cookson and Patti Waldmeir
Washington Post Foreign Serivce
Thursday, November 26, 2009

HONG KONG -- Garlic prices are hitting record highs in China, the world's biggest producer of the pungent bulbs, amid reports of a speculative bubble in the market even as people rush to buy it as a putative cure for swine flu.

The China Daily reported last week that a high school in the eastern city of Hangzhou bought more than 400 pounds of garlic and made students eat it at lunch to stay healthy.

Wholesale garlic prices in Beijing are now 15 times as high as in March, and still rising.

Jerry Lou, a Morgan Stanley China strategist who has researched the opaque market here, said speculators -- fueled by the abundant liquidity sloshing around China -- have moved into the small market and strategically driven up prices.

"You need a warehouse, a lot of cash and a few trucks. That's how it works," Lou said, describing garlic speculators' tools of the trade. "Basically, what you do is try to arrest as much supply as possible, then you bid up the price. Moving garlic from one warehouse to the other, you make millions of dollars."
ad_icon

Lou said garlic wholesalers told him that gangs that had amassed cash and credit from dealing property and stocks in other parts of the country had chosen the garlic market as their latest ruse.

http://www.washingtonpost.com/wp-dyn/content/article/2009/11/25/AR2009112503667.html

[GRG55]

Re: China shows WHO is boss?

Why not? China has printed $1.5 trillion this year, a crazy amount in comparison to its GDP, much of it has gone into real estate, stocks and commodity bubble. It can't continue at this rate for much longer, and a reduction in lending next year will definitely cause a bubble crash...

That is what I used to think too. But as we learned with the tech/internet bubble and the global property bubble, these things can often go on far longer than logic would suggest possible. As a first hand observer of the insanity that was going on in Dubai this decade, I've been waiting for years for that absurd property bubble to pop and crash that emirate's economy. I still don't really understand why it lasted as long as it did.

Although, as you point out, all the signs are there, I don't think anybody can reliably predict when China blows up...I'm not sure we can really tell whether that event is imminent. China and the USA just may be able to keep the game going longer than any of us believe should be possible...what the knee-jerk anti-USA, pro-China "thinkers" [and I put Henry CK Liu in that catagory] keep missing is that BOTH China and the USA continue to play their respective roles to maintain the symbiosis. China MUST HAVE external demand to keep its economy from falling off a cliff.* The US [and other] Government has stepped in to replace some of the aggregate demand lost from the private sector. In the same way that it was in China's mercantile policy interest to manipulate the currency exchange rate, pile up surpluses, expand export production capacity and then recycle those surpluses through the US financial system to fund private sector consumer demand to soak up that new export capacity, it remains in China's interest [for now*] to keep doing the same and support the demand-creator-of-last-resort...the US Federal Government.

The pro-China people here think that China is "in control" because it is the primary lender to the USA, and can allegedly pull the rug out at any moment it chooses. The truly rabid among that cohort think that it is only some sort of altruistic charitable urge that prevents China from doing exactly that right now...that the virtuous & humble Chinese are holding back delivering to the evil, profligate USA the lucky fortune cookie that contains the message "So sorry to inform all over for you now, Capitalist Pig".

I am of the opposite view...that China's biggest fear is that the US [and other] Government is going to scale back on demand stimulus, because it's under increasing internal political pressure to "do something" about the fiscal deficit without raising taxes [China would also like the US Government do something about the fiscal deficit...but it would prefer the USA raise taxes on the private sector to keep funding more public sector demand-creation-of-last-resort...not surprising coming from people who believe in centrally planned economies with huge state ownership].

Any reduction in US public stimulus today will reduce aggregate demand. Any further reduction in US aggregate demand will put more pressure on the already politically untenable domestic unemployment rate...and that sets the stage for the politicians in D.C. [& Europe too] to erect more protectionist trade barriers in an effort to be seen to be responding to the plight of their constituents. If this is allowed to happen, China will be the main target...and they know this is potentially devastating to an economy that is overdependent on exports.* This is what China fears most, and why China felt compelled to put trade and trade barriers front and center and help turn what was supposed to be a climate change conference in Copenhagen into a quasi-WTO meeting.


It appears to me that China is pursuing a path similar to Dubai. Basically the attitude [China characteristics inserted] seems to be "Let's keep spending ever grander sums of money building [more production capacity] and they [export demand] will come". It didn't work for Dubai [or any number of previous examples of the same strategy]. I doubt it'll work for China. At my advanced age even people like me who aren't all that bright learn a few life lessons. A few that I have learned that may apply here include:

• Action doesn't mean accomplishment;
• Don't confuse motion with progress;
• There is no new economy;
• Property is not an investment;
• Concentrating too much capital into one destination always results in too much allocation to stupid "investments".

And when I look at China I see lots of action, lots of motion, lots of talk that it will lead the creation of the new "green" economy, too much [continued] emphasis on property, and waaaay too much capital being thrown at it in a desperate attempt to generate returns in this ZIRP world.


* As we all know, prior to the global trade bust a whopping 40% of China's GDP came from exports. Regardless of what current Chinese government statistics imply, there is absolutely no possible way that China's economy escaped the severe effects of the trade collapse that has so obviously knocked the legs out from under export dependent Japan and Germany. A billion people who are still dragging themselves out of decades of poverty cannot quickly replace the external demand that drives China's economy...that will take years, decades. And while Chinese policy makers are taking legitimate steps to make this shift, they need to buy as much time as they can to achieve it. The "China good, America bad" cohort believes that somehow Beijing can magically transform the economy, do a 180-turn and promote the draw down of savings that it spent years conditioning its citizens to accumulate, and suddenly create huge internal demand. Not only is that impossible, I don't see any evidence that the Chinese want to achieve that quickly even if it was possible. And in the meantime this is why they cannot and will not stop manipulating the currency exchange rate, running trade and current account surpluses, expanding production capacity [the majority of which is to capture more global market share, NOT to promote and fill domestic demand] and supporting the debt issuance of the current account deficit trade partners that make all that possible. The problem China has is "Will [can?]those trade partners continue to support China?" My guess at the answer is "Not for much longer, unless China voluntarily begins to shift its policy". Stay tuned. This global soap opera has many more episodes to come...;)

Meanwhile, a crazy new bubble which shows how ridiculous the situation has become.

Why do I think these guys have Goldman as their advisor...:rolleyes:

[Crazyfingers]

Re: China shows WHO is boss?

Borrowing money from China? Why would we borrow our own money from China when we can just print it? Seems we are just giving them a place to deposit(with intereset) the dollars they recieved from selling us goodies. Isnt this exactly what we do at banks with our savings? Give the bank money to keep safe and collect some interest. I think what angers China is worrying that where they stored their dollars is not producing much interest and was squandered away. Just as the average Joe at the FDIC insured bank(that pissed our earnings away on bad investments) and recieves very little interest. Average Joe and China are in the same pickle. Lose our hard earned cash to inflation or a depression.

Am I missing something?

China could stop buying treasuries and earn no interest. Then take that money and buy something else.

Or they could stop selling us goodies and look for other customers. But most of the factories are producing goods for US companies. Couldnt the companies just move their factories back home or somewhere else and keep selling the goodies to US customers?

[Crazyfingers]

Re: China shows WHO is boss?

Or maybe China is just jawboning? They sale us goodies and invest their savings back into USA, inc. USA incorporated provides military services. The Chinese gain access to raw materials in Iraq. Maybe for the Chinese the USA is a good investment. Chinese average Joe stays busy making goodies, USA average Joe keeps busy fighting wars. Win/Win if you are a psychopath.

[GRG55]

Re: China shows WHO is boss?

I still read Liu with interest, though I have not been reading him for long and am not sure what to make of him.

Could you summarize (without having to re-invigorate two year old synapses that I presume you would rather leave inactive) what is wrong with Mr. Liu's work, in your view?

A perfectly reasonable question Cow...and one that I almost made the effort to answer in my original post, in anticipation that it might be asked. However this is my only downtime day on an extended and intense overseas business trip, and I simply don't have the energy at this very moment to go back and deconstruct a couple of his articles that I saved from a few of years ago to illustrate my point.

So instead let me provide this admittedly inadequate, but hopefully sufficient response:

I do not know if there is anything "wrong" with Henry CK Liu's work as I have not read any of it for some time, but when I was searching it out and reading it regularly a few years ago he consistently wrote from a foundation view of "China good, USA bad". For the most part one could work around that bias and extract the occasional nugget of useful insight. However after the first credit seize up in the summer of 2007 he became pedantic about this "good guy vs bad guy" sentiment in his writings, and I just found it tiresome to wade through it looking for useful new knowledge.

The fact is there are no "good guys" in this story...nobody, including China, is anywhere near lily white or blameless, and every damn one of them continues to contribute to the perilous instability of the global economy [which they all need] because of the understandable motive of pursuing what one perceives to be in one's own immediate or long-term national self-interest. Back then Henry CK Liu would have you believe that China's behaviour in this regard was acceptable, intelligent and to be applauded, while the same from the USA deserved international condemnation.

The cheeky answer to your question is that after reading their writings, I sometimes wonder if Henry CK Liu and Nassim Nicholas Taleb were separated at birth...:p

[touchring]

Re: China shows WHO is boss?

Or they could stop selling us goodies and look for other customers. But most of the factories are producing goods for US companies. Couldnt the companies just move their factories back home or somewhere else and keep selling the goodies to US customers?

The US has very few factories in China, most of the Chinese factories are OEM and ODM manufacturers for US companies owned by the Chinese or Taiwanese.

Some of the ODM manufacturers evolve to market their own brands after a while. For example, HTC, which manufactured smartphones that are branded as Orange, T-Mobile, Verizon Wireless, Sprint Nextel, O2, Vodafone, AT&T, Alltel, Bell Mobility and Telus Mobility.
http://en.wikipedia.org/wiki/HTC_Corporation

[touchring]

Re: China shows WHO is boss?

That is what I used to think too. But as we learned with the tech/internet bubble and the global property bubble, these things can often go on far longer than logic would suggest possible. As a first hand observer of the insanity that was going on in Dubai this decade, I've been waiting for years for that absurd property bubble to pop and crash that emirate's economy.

Well, it turned out fine for Dubai, didn't it? I read an amusing article on China news on Dubai just yesterday.

Top 26 "crazy" structures in Dubai
http://english.people.com.cn/90001/90782/6837597.html

[GRG55]

Re: China shows WHO is boss?

Well, it turned out fine for Dubai, didn't it? I read an amusing article on China news on Dubai just yesterday.

Top 26 "crazy" structures in Dubai
http://english.people.com.cn/90001/90782/6837597.html

Thanks for sharing the chuckle.

At least the Metro serves a useful purpose.

And I always thought "The Cloud" was an interesting concept for a region that labours under day after day of relentless sunshine...

[Rajiv]

Re: China shows WHO is boss?

Interesting article from Ilargi today on this topic -- and quite relevant to what you say

Why China won't succeed America

Let's try a history of the world for simpletons. That should make everyone feel smarter.

Not too long after Colonel Drake struck black gold in 1859, oil started to be pumped up out of the earth at an energy ratio of 1 barrel worth of work for 100 barrels of product. It took a while to figure out what to do with the stuff, but 50 years of inventions and innovation later it all fell into place. Oil’s qualities like cost, abundance, transportability and energy density made it a far more interesting source of power than anything that had ever existed beforehand.

One could, for instance, with a few gallons of it, run an engine no bigger than a large suitcase, which provided power equal to 100 horses, to transport oneself over a hundred miles. Therein of course also lies the shadow side of this engine in a suitcase, built into what we came to label the automobile. 1 horsepower equals 8 "manpowers". It therefore takes 800 men to allow 1 man to move over a distance he could also have walked, just a little faster. No, efficiency would be the last thing that comes to mind when one wishes to describe the automobile.

Now, Britain in the preceding century had developed quite a leg up on all other nations through the large-scale and concentrated -industrial- use of coal and the steam engine. That, combined with its warships and the treasury trove it had acquired by plundering far-away nations, made Albion the number one force in the world. Important in all this was the fact that the Brits found massive amounts of coal beneath their own feet, instead of having to import the stuff.

Still, the Brits all through their ascent, carried one fatal flaw on their shoulders, and they never even noticed until it was too late. Britain was a society of classes, in their case an upper class and a very low lower lowest class. Their former colony, the United States of America, was more or less specifically founded on the idea that such a class system was evil. Today, of course, the US has al but forgotten that notion, but back in the day it was all the rage.

It was thus more or less inevitable that an American -of Irish descent, no less, lovely detail-, by the name of Henry Ford, who was an industrialist as well as a prolific inventor, came up with idea to not only streamline the way his products were made -the assembly line-, but also to find a whole new target-group of buyers, namely his own workers. Whereas in Britain workers were considered inherently filthy, dumb, barely better than animals -though way above negroes- and fit to live and die only in the worst squalor that could be provided for them, Ford's new ideas about who his customers were seemed tailor-made for America.

America, by the way, had the advantage in oil that Britain had in coal (though it had that too): huge domestic finds of the preferred energy source, in this case oil. America didn’t just have to not import oil, in also didn't need to export its products. At least not in the early stages. The enormous advantage of having a large domestic client base in the earlier days of its build-up lifted the US above all other -European and formerly feudal- important nations. And it never looked back.

It did get into trouble, but that was of its own making. When people get free gifts, they always screw them up, after all. Remember the 800 men needed to transport the 1 man. In the case of the US, problems started in the 1960’s. Domestic oil was reaching its limits, and imports started; domestic production peaked around 1970. In finance, the dollar got a divorce from gold. Building empires has always been a risky business.

These days, one barrel of oil no longer produces 100 barrels, but maybe 10 or 5 or even just 2. Still, automobiles use the stuff just about as inefficiently as they always have. And there are many more of them. Bad idea. Which has been combined with another bad idea, and possibly even worse, namely that if you CAN transport a man 100 miles a day from home to work using the energy of 100 men, you apparently MUST do so. Super bad idea. But what a fantastical screw-up, when you get to think about it. Brilliant.

And also, wouldn't you know it, America has become the class society it once shed oceans of blood not to be, with upper echelons and filthy poor, and with ever more money and energy devoted towards maintaining the empire that in reality has long since been lost. Empires all travel the same road.

I wanted to do this little history overview in order to look at the future. There are many voices out there who claim that China will be the next world power, as a kind of natural successor to America. I think not.

China has no domestic energy sources it can readily and swiftly put to use. It has to import all of its energy except for coal and a small amount of uranium. That's not a recipe for developing an empire. China has no domestic customer base. Its annual per capita nominal GDP is $3,300 vs $47,000 for the US. Its per capita consumption is $1,150 vs $32,900 for the US. Even if it would try, it would take decades to develop a viable domestic customer base.

Meanwhile, its foreign customer base is rapidly shrinking. China has risen over the past decades to where it is today because it could export its industrial output to relatively affluent societies in Europe and North America. These export targets are now dwindling and may well soon practically disappear altogether. The human talent to screw up fantastically in the face of free gifts has led them to implode simply and only due to the fact that not even the power of 800 men is forever satisfactory for one man, we always want more, and it was too tempting to borrow from the future. That's our present credit crisis in a nutshell. And China will dwindle right along with them, left with a hundred thousand factories designed to produce articles its own citizens don't want or need or can't afford.
.
.
.
.
.
.
.
.

[raja]

Re: China shows WHO is boss?

. . . . there is still a constituency here, including raja, that remain convinced that a depression will reduce demand for commodities and cause a crash in their prices.

I'll stand by what I said . . . .
But my thinking on it is a bit more complex than you may have represented, broadened over time, in part thanks to your helpful explanations of how the oil industry works.

Commodity prices are affected by opposing forces:

Demand Destruction = Commodities Down.
Initially, massive unemployment means reduced demand, which results in lower prices.

Inflation and Supply Destruction = Commodities Up.
In response to Demand Destruction, industries adjust and some go out of business. Also, the government relentlessly prints money. These two factors will cause prices to rise again.

So . . . I'm holding off on commodities for now, but plan to jump in later . . . after The Big One :eek:

As EJ says, it won't happen.

I'm not sure this is correct.
Perhaps this is one of the reasons EJ's still 70% Treasuries and has not jumped into commodities.

[ThePythonicCow]

Re: China shows WHO is boss?

So instead let me provide this admittedly inadequate, but hopefully sufficient response:

Quite sufficient - thank-you.