Fortune Cookie
By Barry Ritholtz - November 17th, 2009, 5:30PM
I post this to NOT make any political statement whatsoever — George Bush’s face can be superimposed on Obama’s and the cartoon will still have the same impact.
Rather, it highlights that relying on foreigners to finance half of our debts can last without consequence until it doesn’t. It also highlights the importance of growing the savings rate in the US as this pool of savings can be used for investment so we can rely less on the kindness of strangers.
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Hat tip Peter B
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November 17th, 2009 at 5:42 pm
What would happen, a few years from now, if TPTB simply said, “Either you take 10 cents on the dollar, or we’ll default on the entire debt.”
November 17th, 2009 at 5:49 pm
Well, if you looked at another way,”they” are buying our armies. We are protecting sea lanes, propping up governments and such… all we ask for in exchange is preferential trade agreements.
November 17th, 2009 at 5:57 pm
and Jintao’s fortune cookie says-
“by letting your currency float- you will find whether strangers are interested in what you have to sell”
November 17th, 2009 at 6:03 pm
What would happen, a few years from now, if TPTB simply said, “Either you take 10 cents on the dollar, or we’ll default on the entire debt.”
———
They still have at least 180B to buy up resource companies (10% of 1.8T in reserves).
But that won’t really matter because the instant that happens, their currency goes zooming up which will make resources that much cheaper for them. And they won’t care about their appreciating currency because 10 cents on the dollar will mean the US can’t buy anymore of their crap anyway.
November 17th, 2009 at 6:09 pm
Perhaps people would save more if they were actually offered a fair, not-artifically lowered by the Fed rate of INTEREST on their savings.
November 17th, 2009 at 6:18 pm
I think most people do not understand the clout China has gained over the last decade.
The market cap of all materials companies in the TSX index = 250B. There are no that many mines worldwide.
The Chinese currently have 1.8 trillion in US$ reserves or something like that. They can do a lot of damage to the supply we need for our consumption.
All oil exporting countries are consuming oil like crazy. The middle east is building ski slopes in th middle of the desert for crying out loud. If it is not energy efficient, they will build iy. They are starting up desalinization plants which are huge energy consumers. It is in their interest to make oil get more expensive.
The US is net importer of oil and capital.
Ouch.
November 17th, 2009 at 6:19 pm
“But that won’t really matter because the instant that happens, their currency goes zooming up which will make resources that much cheaper for them. ”
with the assumption being that the commodities are priced in $.
November 17th, 2009 at 6:21 pm
Sounds just like Fox News in here.
1. What would the US do for its next trick after defaulting?
2.It’s actually not China’s fault that US Corporations want to dump US manufacturing jobs and use cheap labour in China? This is called globalisation, of which you may recall, the US has been the biggest proponent.
November 17th, 2009 at 6:22 pm
with the assumption being that the commodities are priced in $.
———
What will they be priced in?
Canadian dollar?
Euro?
Australian dollar?
All these countries will drop with the US.
If they are priced in yuan, then we in the western world will be screwed.
November 17th, 2009 at 6:25 pm
danm – The average Joe on the street has no clue about the power of China over the US. Of course, it goes both ways – if the US stopped importing from China (protectionism or buying from cheaper Asian countries, Mexico, etc.), China’s economy would be WIPED OUT (their banks are worse than ours). Capital controls could mitigate the (substantial) damage the US would also suffer. All I am saying is the destruction would be mutual, not one sided, if it were played right. Of course, President Barry is too busy making “friends” to carry a big stick……….
November 17th, 2009 at 6:32 pm
danm-
you made the blanket statement that the yuan would go zooming up- without any further elaboration that statement implies the yuan will appreciate against EVERYTHING-
just making it clear
November 17th, 2009 at 6:34 pm
if the US stopped importing from China (protectionism or buying from cheaper Asian countries, Mexico, etc.), China’s economy would be WIPED OUT (their banks are worse than ours).
———-
I wouldn’t be surprised if they already have it in their forecast and it’s already in their plan. Everybody knows the US consumer is broke and in a few quarters won’t be importing from them. I’m betting that they are waiting for this to let their currency pop up.
November 17th, 2009 at 6:38 pm
philipat-
eveytime i see your handle i want an ice cold Tiger Beer-
still making a trip or two to Singapore? Still living the good life in Bali (it think it was Bali?)?
November 17th, 2009 at 6:50 pm
… in bed!
November 17th, 2009 at 6:52 pm
Answer: You don’t have a damn choice! How else are you gonna maintain the peg?
November 17th, 2009 at 6:55 pm
ahab,
Yup. And the ice cold Bintang beer (Indonesia’s Heinekin part owned subsidiary. After 350 years of Dutch Colonisation) is pretty good too! Cheers!
November 17th, 2009 at 7:03 pm
Hey, BR, isnt more like, “Markets eat like a gigantic ox and shit like a godzilla?”- at least this market
November 17th, 2009 at 7:28 pm
Intro says: “Rather, it highlights that relying on foreigners to finance half of our debts can last without consequence until it doesn’t. It also highlights the importance of growing the savings rate in the US as this pool of savings can be used for investment so we can rely less on the kindness of strangers.”
Their kindness? I presume this statement is facitious!
It’s been like this: they take, take, take, because we give, give, give without prudent boundaries.
Who perpetually rely on the kindness of strangers? A lazy people. when you have too many lazy people there is no savings for investments.
November 17th, 2009 at 7:55 pm
China is doomed. They’re pouring billions of dollars to build the infrastructure to produce MORE cheap goods. Worldwide manufacturing capacity was already too high before this mess, it’s even higher now and they keep building more factories!
There are entire cities in China sitting empty, they’ve started tearing down new highways just to spend stimulus money. China’s future is grim, far more than ours.
November 17th, 2009 at 8:01 pm
Thor,
Have you ever been to China?
November 17th, 2009 at 8:03 pm
“China is doomed. ”
i am thinking the same thing thor-
everything appears precarious- but especially China
November 17th, 2009 at 8:04 pm
Philipat – No. Your point?
November 17th, 2009 at 8:07 pm
Philipat – to more fully answer your question. One only has to read beyond the headlines and the early 90′s Rising Sun blather to see what’s actually going on in China today.
The company I work for does quite a bit of manufacturing in China, quite a few of our sales and operations people spend quite a bit of time there. Things aren’t nearly as rosy as their communist government would have the rest of the world believe. Are you suggesting perhaps that the economic and unemployment numbers reported by the Chinese government is factual? If so why?
November 17th, 2009 at 8:10 pm
It’s not because China is worse off that it can’t cause us Westerners pain.
November 17th, 2009 at 8:14 pm
Damn – I think we’re causing enough of our own pain right now. I’m not saying China is worse off than we are. I’m saying that 1. their economic numbers are fantasy 2. the equity, real estate, and commodity bubbles being blown there now make ours in 2007 look like child’s play and 3. their demographic future is very similar to Japan’s.
November 17th, 2009 at 8:22 pm
China is building an infrastructure, just like the US once did in very similar circumstances (The Interstate Highway system) which will serve them well through the 21st century. The US at the time called this “Vision”. Even the second tier Cities (Population of only 20 Million or so) are clean, modern and safe with brand new airports, at least 2 ring roads plus multilane highways to the airport and beyond.
Although not widely understood, China’s economy RIGHT NOW comprises 70% domestic consumption and investment. It is not as dependent as some would have you believe on shipping stupid cr*p to the US.
Chinese Banks ARE regulated and are in much better shape than the US Banks, largely because the former did not fall for the s**t that the latter was selling. Their balance sheets are impecable.
Having lived in Hong Kong for 5 years and visited the Mainland on over 100 occasions during and since then, most recently twice so far this year, I have witnessed an almost miraculous transformation at first hand from “The great leap forward” to a great leap forward. IMHO the Chinese are the most hard working people on the planet and have an innate business acumen. You don’t need to empower a Chinese more than once to “Go forth and do business”.
My point? Underestimate China at your own peril.
November 17th, 2009 at 8:25 pm
jeffg Says: “of course, it goes both ways – if the US stopped importing from China …”
Two major transitions are occurring.
1) Americans are consuming less.
2) Emerging market domestic economies are developing rapidly.
Eventually other nations will consume the products once exported to the United States.
It is possible that at some point China may decide that their best interests are to fully value the Yuan against the Dollar so as to decrease the cost of imports. If this happens the United States will be competing against China for commodities and other imports with a weakened currency, and the relative cost of food, energy and other goods will rise in dollar terms regardless of the currency they are quoted in.
Our best years were the bubble years of the last two decades. In the future we will pay for our past profligate ways with higher costs and lower living standards. Pray for some outstanding productivity improvements and a few paradigm changing technologies along the way…..
November 17th, 2009 at 8:26 pm
Thor@If so why?
Hmm. Because they have over a half trillion of these funny green pieces of paper with a picture of grown man wearing a wig on the front?
November 17th, 2009 at 8:30 pm
OK. Let’s do some comparison….
1. The US defaults on its debts, closes its barriers and becomes autarkic what happens?
- US Economy falls drastically because needs oil but can’t get as much as it needs to preserve the status quo because it just defaulted
- Manufacturing base must be rebuilt but expensive because of the tight resources and a lack of talent which is retiring or skipped a generation
- Probably huge inflation
- Huge decline in living standards
2. US stops buying China crap because of default/autarky
- China negotiates with other countries with resources and trades with them since they already have sunk costs and loads of capacity
- Not much change in living standards because weren’t very high to start off.
November 17th, 2009 at 8:44 pm
Oh Good, Thor is back and the debate is about China. Is it real or is it a facade?
How can one discount the importance of an economy that consumes 55% of the world’s cement, 500 million tons of steel annually, went from nothing to 12 million vehicles in less than a decade, owns $1.8 trillion in Treasury Bonds, is on a global commodity acquisition spree, has integrated a ready made global financial center (Hong Kong), is integrating a ready made technology center (Taiwan), has economies of scale 4x the United States.
Do they have problems? Of course they do, so do we last time I checked. Hell they were running around in funny looking outfits and sending their smart people to prisons only 30 years ago. But they are obviously fast learners and are knocking the socks off of us in many areas.
China is equal in population to 26 South Koreas. 1.325 billion people on our planet, 26 Koreas, are rapidly gaining access to middle class lifestyles, better food, health care, quality of life. China’s development has truly been a miracle for them and a testament to the positive attributes of global trade. Their development also was good to us. Now, not so much.
My point? I’m with philipat. Underestimate China at your own peril.
November 17th, 2009 at 9:01 pm
bsneath-
so explain to me- if everything is so integrated in China- why you have to get your passport stamped to go from Hong Kong to China proper? and then again to go to Macau-
why- if you enter the mainland w/ a guidebook with Taiwan listed as a separate country it is confiscated-
why- if you type in Tienanmen Square it is blocked and monitored-
certainly not a sign of a confident country-
trust me- China is not integrated- look at Tibet- a whole region that considers itself a separate country- that when there is any dissent there is lock-down-
yeah- its integrated alright-
country controls w/ an iron fist- you know- tanks rolling into Tienanmen Square-
that anyone thinks so is a fool
November 17th, 2009 at 9:11 pm
“What will they be priced in?”
This is why we likely won’t have Zimbabwe inflation in dollars. What stable currency will the dollar hyper inflate against? The Weimar republic had the franc and pound etc. to hyper inflate against.
danm, i would like to get your view of universal health care since you’ve experienced it in Canada. why is the US the only industrialized country w/o it? i don’t have a stance on uni-care, just wondering if it’s as bad as it is being feared.
November 17th, 2009 at 9:12 pm
Whatever. One area that I cannot see coming back to the United States is manufacturing. China will likely have a comparative advantage in this area for decades to come. Thus if we are to grow new jobs, it will need to be elsewhere. In fact, do not be surprised if that electric vehicle that you buy in 2015 wasn’t made in China.
I suspect as the dollar falls in value, we will see increasing numbers of foreign tourists, including from China, coming to our shores. In the future many Americans may be waiting on their tables and cleaning their rooms. Hey at least it will be work.
November 17th, 2009 at 9:17 pm
Chinese consumption is only 33% of its GDP, i think this came from Rosenberg at Gluskin. China will have trouble without the Western consumers. China needs Western consumption to keep its masses employed.
November 17th, 2009 at 9:21 pm
bsneath-
dude- this country has HUGE macro problems- so don’t get me wrong there-
but don’t be betting on an insular country that is controlled by a dictatorship-
i’ll bet against that every time
November 17th, 2009 at 9:28 pm
It’s not that manufacturing won’t come back to the US. It’s that China is investing heavily in h-tech manufacturing – Hue Wei (sp?) (Cisco).
They invite the Motorolas and Lucents and Apples in with the hopes of replacing American R&D with theirs. Pick their brains. Learn the tech and then compete on price. And close them out.
Watch.
But it is also true that China is a very troubled country. When roadblocks are set up to keep rurals out of the cities you know not everyone is benefiting. If you also look at the racial profiling, Mongolians for example, you know they are very racist.
November 17th, 2009 at 9:37 pm
“It also highlights the importance of growing the savings rate in the US as this pool of savings can be used for investment so we can rely less on the kindness of strangers.”
The housing market is back on its feet apparently, so no more savings people, back to the big house and equity money, that was the investment that crashed the economy and we’re back into it.
For China, it is a complicated situation, very entertaining though.
No real unity, but in todays world, who knows?
they might find some common ground.
I think the Tibet issue is about water ahab, can’t find the link I read months ago somehow.
Even at the height of the cold war, the relationship with Russia was never that great, so plenty of room to fuck around geopolitically if one is so inclined.
http://www.stratfor.com/analysis/geopolitics_china
November 17th, 2009 at 9:48 pm
And Jintoa receives a fortune cookie saying “You Ungrateful Bastard”. Does anyone think that China could have been able to grow its economy so fast by itself? No, it needed a lot of dollars to grow. And no other country in the world was going to risk losing jobs by running up a large trade deficit to provide China with the dollars it needed to grow. But, the US did. The US has been the only country to run large trade deficits to benefit foreign economies. It has done it twice. The first was with the Marshall Plan which strengthened the economies of Europe after WWII and now with China. With the Marshall Plan, the US helped Germany rebuild into the 3rd largest economy in the world. With China, what did the US get in return — the 4th largest economy in the world? And anyone who thinks that the Chinese don’t know this is living in a fool’s paradise. As the need for dollars in China declines, so will the US trade deficit and that is when the Chinese will realize that they are not the wealthy benefactors helping the US. As they will then struggle to build domestic demand they will realize that their economic existence was due to US philanthropy. As the US trade declines, the Chinese surplus will decline. They will get poorer every day. We should to not act as beggars asking China for help; instead we should be telling China that they owe us big time, the Ungrateful Bastards. I think they know it. So take all this rhetoric with a grain of salt.
November 17th, 2009 at 9:50 pm
alfred e (newman?) hue sounds like wei. i didn’t make a comment about manufacturing coming back to the US, i’ll take credit for it.
i have an chinese-american friend who gave her mom her old cell phone. so when i called her mom answered, “wei,” which is chinese for hello. i said, “what? it’s me.” she said, “wei.” i said, “what?” this went on for a few minutes.
November 17th, 2009 at 9:58 pm
Lovejoy
“The US has been the only country to run large trade deficits to benefit foreign economies.”
I think you’re mistaking offshoring jobs and industry with humanitarian work, the trade deficit was not all that intentional, more like a “smart” financial move from some corporate heads.
November 17th, 2009 at 10:05 pm
China’s growth over the last 20 years was the direct result of our debt bubble – look at the f*ing numbers, use your brains. We bought all that cheap crap they build on CREDIT, credit which is now gone and never coming back. We no longer have the money to buy all their cheap crap. Not just us, but the Japanese, the Europeans, and pretty much everyone except all the other cheap manufactures.
China is currently producing more cement than the rest of the world combined, they are creating 85% of the steal as well, are major drivers in the copper trade. Why? For who? For what? Well, for cities to start, they built and entire city for a million people that is currently sitting empty. They have torn down new freeways so they can spend stimulus money and build it again. Most of this, however, is being spent to build even more factories – more factories for who? We’re not going to be buying anytime soon, neither is anyone else, the europeans and japanese are just as screwed as we are. Building them for their own internal consumption? Yea right, do you people seriously believe that the Chinese people are going to suddenly move past generations of savings habits and start buying a bunch of shit they don’t need? Why would you even assume the Chinese consumer is going to be anything like the gluttonous western consumers. That in itself shows how little people like bsneath and philipat even know the culture. Hell, Asian Americans are notoriously good savers.
I digress.
Do yourselves a favor and move past Party Propaganda ( philipat, you are especially good at this, do you work for the Chinese government per chance?) and look at the facts. Someone else on this site said it the best “I love people who are bullish on China because they are bearish on the US”
November 17th, 2009 at 10:05 pm
Pretty simple really….
The question could be flipped:
“How do you expect us to keep buying all your plastic shit?”
The answer is we curb our spending and kill imports. We get our fiscal house in order and then just DK them….
“Who’s on the Phone?”
“It’s ‘Hu’…”
That’s what I asked: “Who’s on the phone?”
“It’s Hu Jintao…you owe me a Trillion Dollars and you defaulted on your interest payment.”
“Um…not sure what sure talking about. We don’t owe anybody, anything. Good bye.”
November 17th, 2009 at 10:05 pm
steel – sorry, long day
November 17th, 2009 at 10:08 pm
I am having serious doubts about our style of economy and for that matter our government. It results in extreme concentrations of wealth, income and power that ultimately leads to its own collapse. It happened in 1929 and it is happening today. But this time we will not have a world war to devastate everyone else so our economy can recover on top.
No job growth at all over the last 20 years. Declining real wages. The middle class was living off of credit that now is gone. Our government is broke. Take away all of the props and our baseline economy is probably only 80% of its former self. No one has any money with which to buy anything. I find it quite perverse that the limousine liberal elite class is practicing trickle down economics on a personal level. Maybe employment will perk up in the Hamptons.
Our future does not look bright. The concentrators of wealth now control both political parties. Greed is pervasive. Stimulus dollars are handed out in a crony fashion that would have made the first Mayor Daley proud. Al Gore is on his way to billionaire status because he invests in a company and, eurika, it gets federal grant funding. We throw away our seed corn. We should be using every available resource to become a more productive and competitive economy, but instead we build up deficit-funded government programs and create deficit-funded bureaucratic jobs.
We are on course to becoming a second rate nation. Our educational system is tragic. Our labor force is coddled and unaccustomed to hard work. You cannot find an employ under the age of 30 who is self motivated, capable of independent thought or who would dedicate themselves first to work, second to play. Our financial markets are bona fide zombies who cannot loan and cannot be trusted. Our natural resource base is stifled by pollyannas who think we can advance our economy with a windmill in the backyard and a solar cell on the rooftop. Our business regulatory system is such that it is hopeless to even consider building a new factory without years of environmental studies, community impact statements, litigation threats. Our nation and our economy simply are becoming increasingly corrupt, clogged and dysfunctional.
The stock market is where bets are made. I have bet on China (FXI) and done quite well thank you. I have read much about China, their culture, values, motivations. My conclusion is that they are going to win. They will be the next superpower. When they decide the time is right, they will revalue their currency, display their true economic might and we will not know what hit us.
No. I am going to place my bets on that insular dictator controlled place.
November 17th, 2009 at 10:10 pm
Hahahah – Bsneath –
THANK YOU
You just proved the “bearish on the US” point i made earlier.
November 17th, 2009 at 10:10 pm
hmmm, I wonder if we can apply that article about strategic mortgage defaults here …
November 17th, 2009 at 10:13 pm
I really need to learn not to get sucked into these damn China debates :-/
November 17th, 2009 at 10:17 pm
Beau
I don’t know how much our political elite knew about, but K Street sure knew what they were doing. I think the pols knew that a trade deficit would arise, but I don’t think they realized how big it would get. They did not think that China would seek to devalue its currency by pegging it to the USD and then buying Treasuries with their trade surplus. All you have to remember is that the Chinese surplus is sitting at an account at the FED. It would traditionally be sitting in something akin to a checking account earning almost nothing. So to earn more they purchase Treasuries. I wonder what the Chinese would say if we told them that we would give them their money back if they took all the crap that they sold us back. I think they would prefer to be holding dollars. What the hell would they do with all the T-shirts and toys? There is no one else to buy it. They know it and that is why they need to hold USD. It is a pity our Governing Elite are clueless. Sometimes you wonder if they are so stupid, otherwise the only conclusion you could make is that are on the take.
November 17th, 2009 at 10:18 pm
Bsneat – “My conclusion is that they are going to win. – we will not know what hit us”
Ah, and therein lies the root of it. You see this as a game, or a war perhaps. I don’t think anyone get’s to “win” here. I would love for some other country to take over running the world, we’ve screwed it up. Unfortunately, I don’t think China is going to be that country. Not because I hate China, but because I’m trying hard to look at the facts and steer clear of the emotions, they have a LOT of problems, both current and in the future. To ignore this is delusional.
November 17th, 2009 at 10:18 pm
Well Thor, It is what it is. You cannot pretend it to be something that it is not.
November 17th, 2009 at 10:22 pm
bsneath-
dude- this country has issues- but ITS NOT THE END OF THE WORLD-
sure- everyone got fucked over- but- doesn’t mean we can’t set things right-
in China- you get fucked over- well- that’s the end of that-
don’t bet on China- bad move
November 17th, 2009 at 10:27 pm
Why is the US the only industrialized country w/o it?
Not sure. Something tells me it has to do with Americans going into an apoplectic shock as soon as you mention the word sociali*m (notice how I have to put * so it does not get blocked)
The problem with health care is that you can throw your entire GDP into it and people will still die and get sick so you have to cut somewhere. But when it’s sociali*ed you don’t have a good pricing mechanism.
Having said that, most developed countries are running their system at 3500$ per capita while the US is at 5500$. Obviously, with the financial state of the consumer and the economy, the forces will be strong to cut costs. So imagine the impact this will have on professionals’ earnings as well as the margins of pharmaceuticals, health care and insurance companies.
I think Americans are going to fight it but it will probably get sociali*ed when a large percentage of the population is on the public program. The private side will get squeezed out as insurance becomes too expensive for most.
I can’t understand why Americans would not want sociali*ed health care. IMO, the only ones who benefit from the private system are the top 5%. I’ve never had trouble finding quality doctors and specialists but then again I’ve always known how to get what I need and maybe others aren’t so resourceful. Anyway, when I hear the sad Canadian stories I can’t help but think that maybe there are jerks everywhere in the world, maybe there will always be bad luck or maybe the patients didn’t push as much as they should have.
Usually, doctors try to keep costs low but at the same time they don’t want to get sued so it keeps them honest. I love the fact that I can change jobs without having to worry about health issues and that my employer has zero link to my medical history. I also love the fact that if I, or a loved one, get sick, I don’t lose everything I’ve worked for.
Although I believe sociali*ed health care will come, there are strong forces against it in the short term. In a sociali*ed system, insurance companies would collapse. I’m sure government would not want that problem while they are propping up the banks. And that’s not even considering the collapse of other health care related equities.
November 17th, 2009 at 10:28 pm
“Hell, Asian Americans are notoriously good savers.”
yea, maybe the first generation. the second generation spends like good americans.
bsneath, what makes you so sure we will not have a world war (by accident or design) to devastate everyone else, or ourselves? a war will put a lot of those u-6s to work
November 17th, 2009 at 10:29 pm
and in reality-
China was only making the stuff requested of it- so it isn’t like they decided to send millions of private label knockoffs of nationally known brands- or to manufacture the personal electronic devices on its own and send them here-
our own companies- based right here in the USA decided on that-
so who can we blame really?
November 17th, 2009 at 10:29 pm
Hue:
I’ve tried to post a comment on health care but it keeps on getting blocked. Some words you know…
November 17th, 2009 at 10:30 pm
Thor@Do yourselves a favor and move past Party Propaganda ( philipat, you are especially good at this, do you work for the Chinese government per chance?) and look at the facts. Someone else on this site said it the best “I love people who are bullish on China because they are bearish on the US”
Actually, I don’t work for anyone, I retired early and now just invest. Regarding China I have informed opinions which are formed from firsthand knowledge not Fox news or USG propoganda.. And I invest accordingly. I urge you to short anything China. I repeat, you don’t take China seriously at your own peril.
You might like to take a trip (It’s on the other side of the Pacific-Take a right at Hong Kong) to have a look for yourself. And I repeat, it’s not China’s fault if US Corporations want to dump all their US manufacturing workers and move to China. Why not blame USG policy (Globalisation, under pressure from the usual lobbyist suspects, mainly in Financial services) and US MNC’s for the trade defecit?
November 17th, 2009 at 10:33 pm
The thing about the Chinese not selling their plastic stuff is that their elites don’t give a shit about who makes it at all.
Their last civil war makes the holocaust look like a garden party with 40 million dead, lives are not counted.
I’m pretty much with Andy on this line
“Um…not sure what you’re talking about. We don’t owe anybody, anything. Good bye.”
For the future though, cheap labor and quick easy money do not make a healthy society at home.
November 17th, 2009 at 10:36 pm
Philip – Actually, I don’t work for anyone, I retired early and now just invest.
And this is relevant to the discussion how? That’s a rhetorical question of course, I think the answer speaks for itself. Now I understand your position. You are heavily invested in China, why in god’s name would you think for even a minute that anything could be wrong?
Classic
Fox News? Are you joking? You actually think I’m some right wing red stater don’t you?
November 17th, 2009 at 10:37 pm
” it’s not China’s fault if US Corporations want to dump all their US manufacturing workers and move to China. Why not blame USG policy’
good point philipat- BUT-
i will never believe in a country where there is one party rule and no freedom of expression against that same party-
that is the end game in my mind- China will evolve w/ all freedoms becoming evident or it will implode
November 17th, 2009 at 10:38 pm
In place of Jintao say “U.S. Taxpayer” and in place of the Big O say “TBTF”.
November 17th, 2009 at 10:38 pm
’m trying hard to look at the facts and steer clear of the emotions, they have a LOT of problems, both current and in the future. To ignore this is delusional.
Sorry Thor, but “delusional” is an opinion not a fact.
I too am trying to look at China and the United States from an objective standpoint. Obviously I will put in an emotion-filled rant or two on the elements of our society that are in my opinion leading us astray. Trust me, I am not anti-American. I wish nothing other than for our nation to be back on track. I just do not see it happening. Too much credit, too much wasted resources, a hallowed out economy without the skills or money to rectify. This is something that was hidden until the crash. We were living an economic ponzi scheme if you will that now is exposed.
All nations have problems I think you would agree. But strictly from an economic sense, I perceive our economic problems to be monumentally greater than theirs. If I am wrong, so be it.
If we come to our senses and return to a less corrupt, more functional system of government and economy, then I would be more hopeful. But I will tell you now, it is not going to come from either the present day Republican or Democratic Parties with their increasingly polarized and extremist policies.
Perhaps some catalyst will result in the creation of a third party comprised of moderate and independent candidates who simply want a decent and functioning government, sound policies and a level playing field where everybody has an opportunity to strive to achieve.
November 17th, 2009 at 10:44 pm
bsneath – believe it or not I agree with absolutely everything you just said. I don’t see us getting our act together, certainly not with the political system we have in this country today.
Just don’t see an easy path for China, you have no faith in our government to get us out of this mess, what gives you confidence that the Chinese communist government is going to be able to navigate the troubled waters ahead?
November 17th, 2009 at 10:44 pm
some_guy-
no doubt
November 17th, 2009 at 10:52 pm
danm, that damn spam filter. i had a couple of comments on the tax thread that disappeared. Barry must only want Ayn Rand flame wars, not health care flam wars.
November 17th, 2009 at 10:52 pm
hue – no, he hates health care chat – trust me
November 17th, 2009 at 10:53 pm
Beaufou,
You miss the point. Right now, as evidenced by what is right in front of your very eyes, Globalisation is creating an increase in living standards throughout the developing world, and a commensurately offsetting reduction in living standards in the West. This trend is clearly in place and creates many investment opportunities for objective investors.
Who benefits from these trends apart from the BRIICS (The extra I being Indonesia)? The US “Elites” and US MNC’s.
Who loses? Workers in the West and all Households in the West who are being systematically ripped off by the system in place being run by Wall Street. You can hide in the flag but you won’t make much money. Incidentally, the flag was probably made in China.
My solution? Place a 10% duty on anything imported from China BUT use this money directly for investment in education and training plus other investments in the future.
Who pays? US MNC’s.
Does it change anything? Not really because although it raises COG’s slightly for MNC’s it doesn’t make any fundamental price differences. The Chinese worker only makes Cents an hour so the gap is so huge as to be insignificant. Indcidentally, the same applies to the Chinese Yuan, the pressure for the strenghtening of which is a Red Herring. Even if it DOUBLED in value today, Chinese namufactured products would STILL be far cheaper than US manufactured products.
Golly Gosh, I really am sounding like a communist now, perhaps Thor was correct all along!!
November 17th, 2009 at 10:57 pm
thor, o-tay, i believe you guys who have been here longer. debating health care will be like debating religion.
November 17th, 2009 at 11:03 pm
philpat a commie ???
say it ain’t so! :-)
in any event- regardless of the global perspective-
it will be hard for any country to keep itself together w/ totalitarian rule- people have to want to stay together-
look at the USSR- folks left when they could
November 17th, 2009 at 11:05 pm
hue-
key words you can’t use s o c i a l i s m and c o m m u n i s m -
stay away from those and you will probably be alright-
good luck
November 17th, 2009 at 11:08 pm
As an addendum, for those not familiar with how US MNC’s operate. Remeber that very little Value added on manufacturing accrues in China. Through transfer pricing arrangements (Materials cost 1, Invoice to Chinese outsourced manufacturer at 10 with an Invoice from Ireland or Cayman Islands, BVI etc.) and Trademark/Licensing Agreements, most of the profit is creamed off by the MNC’s into Offshore tax havens. Net result, US MNC’s dump US jobs, pay less US taxes because orfits are “Parked” in offshore tax havens, create record profit margins and create low paying jobs and very small manufacturing profits for third party manufacturers in China.
This is how the world works. The only weak link is that these same US MNC’s seem to have forgotten that this business model kind of breaks down when there is double digit unemployment at home because there is ultimately a need for a consumer. 90% profit margins are great unless sales=zero.
November 17th, 2009 at 11:10 pm
ahab@hue-
“key words you can’t use s o c i a l i s m and c o m m u n i s m -
stay away from those and you will probably be alright-
good luck”
Just like China?
November 17th, 2009 at 11:12 pm
Thor,
The Chinese government managed the economic bubble of 2007 and the economic stimulus of 2008/2009 far better then we did ours. They demonstrated that they could effectively use bank capital reserve requirements and loan regulations to avoid a financial meltdown like ours and they quickly and effectively deployed resources to stimulate their domestic economy after the crash. You will recall nearly everyone felt there was no way they could over come the loss of exports to the United States, Europe and the rest of the world and still maintain growth, but they did.
In a classic economic sense, China should be able to grow rapidly with a managed economy during the development stage where economies naturally grow more rapidly and this rapid growth literally provides cover for the variety of mistakes and inefficiencies that a centrally managed body politic is expected make. However, once their economy matures and natural growth slows, the mistakes of the central planners will become more pronounced and continued growth will be hampered. Never the less, China is so large, that I believe they will dominate the economic landscape far before they reach this level of maturity.
And with respect to our economy, economic theory would hold that free markets self correct and the hundreds of millions of individual economic decisions would collectively result in the most efficient and robust economic model. This all got thrown out the window with the financial engineering of Wall Street that created a false confidence with respect to risk management, leading to enormous expansion of credit and risk taking, and morphing onto a propensity to achieve financial gain through manipulation of markets rather than financial decisions based on sound economic principals. It will now take decades to unwind our excesses. And we will suffer greatly as a result.
November 17th, 2009 at 11:13 pm
BR is a Maoist-
you were unaware?
:D lol
November 17th, 2009 at 11:14 pm
haha, i had some form of those words, mocking someone who used Hugo and Fidel, in those disappeared comments. live and learn at TBP.
November 17th, 2009 at 11:17 pm
philipat
“You miss the point. Right now, as evidenced by what is right in front of your very eyes, Globalisation is creating an increase in living standards throughout the developing world, and a commensurately offsetting reduction in living standards in the West. This trend is clearly in place and creates many investment opportunities for objective investors.”
Are you Tom Friedman?
November 17th, 2009 at 11:18 pm
bsneath-
man dude-
you are all mesmerized by China-
years ago i use to hear the same thing about Japan-
it all make sense at the time but i never bought into it-
however- you make some good points about the allocation of capital in this country
November 17th, 2009 at 11:22 pm
ahab@philpat a commie ???
say it ain’t so!
No just a realist. But actually Chinese Tsing Tao beer is also pretty good.
Damn……………….there I go again!!
November 17th, 2009 at 11:23 pm
philipat
The only weak link is that these same US MNC’s seem to have forgotten that this business model kind of breaks down when there is double digit unemployment at home because there is ultimately a need for a consumer. 90% profit margins are great unless sales=zero.
Phil, I doubt US MNCs are doing anything differently then say European or Asian MNCs. What needs to be addressed is how do you maintain a functioning society and domestic economy given the migration of manufacturing jobs to low cost producers in a global economy. Obviously we have not done a very good job at this.
November 17th, 2009 at 11:23 pm
investing in china, you could have invested in US equities since March and made similar returns. reflate one, reflate all. how did Chinese equities perform relative to US equities in 2008?
November 17th, 2009 at 11:23 pm
beaufou@Are you Tom Friedman?
Whi is he?
November 17th, 2009 at 11:29 pm
philipat-
man you are killing me-
Tsing Tao beer-
love that stuff- in the big bottles in Beijing-
good times there!
November 17th, 2009 at 11:30 pm
bsneath@philipat
The only weak link is that these same US MNC’s seem to have forgotten that this business model kind of breaks down when there is double digit unemployment at home because there is ultimately a need for a consumer. 90% profit margins are great unless sales=zero.
Phil, I doubt US MNCs are doing anything differently then say European or Asian MNCs. What needs to be addressed is how do you maintain a functioning society and domestic economy given the migration of manufacturing jobs to low cost producers in a global economy. Obviously we have not done a very good job at this.
Sorry, yes I completely agree and I was not intending to single out US MNC’s. I agree it is the way the world works, incluing all MNC’s, not just US MNC’s. This is not a US bashing debate but I am tired of the intellectual dishonesty in the China bashing frenzy. I believe they are smart and hard working people looking after their own interest, as do all Nations, and being unfairly blamed for the ills of the world. Which largely resuly from manipulation, greed, debt, over-leverage and over-consumption. Politics is always about creating “Boogey-men”?
November 17th, 2009 at 11:35 pm
Ahab, I am far more disgusted with ourselves than am I mesmerized with China. If China were the size of Japan they would be just another also ran centrally managed, low value added economy. But China is huge. They are 26 South Koreas in one. 4 United States in one. They are the 800lb Gorilla in the room. And I do believe their government has generally made good choices on behalf of their citizens.
We are the reckless gambler who lost it all at the craps table and now has to ask China to wire us money for a ticket back home.
November 17th, 2009 at 11:42 pm
ahab@Tsing Tao beer-
love that stuff- in the big bottles in Beijing-
good times there!
My love for this beverage goes deep. Two days (actaully nights) before the Tiananman Square creckdown) I was partying in the Square drinking copious amounts of the stuff with a bunch of Chinese kids who worked for US Companies. I flew out the next day to Singapore. I hope they are all still alive.
To avoid further confusion, I was in Beijing for a Joint venture legal review meeting!!
November 17th, 2009 at 11:50 pm
hue@investing in china, you could have invested in US equities since March and made similar returns. reflate one, reflate all. how did Chinese equities perform relative to US equities in 2008?
Might we return to this debate in, say, 18 months from now?
November 17th, 2009 at 11:50 pm
philipat – Meant to mention earlier that I have agreed with you and your posts. We see eye to eye. I wonder if there is some type of anti-consumerism bias, anti-globalism bias at work that makes certain people want China to fail or at least want to not see where China has succeeded.
I consider myself a free market rational but also a humanist and one who has observed that globalism has successfully lifted billions around the world out of poverty and moving in various degrees towards middle class lifestyles. Yes this comes with adjustments due to wage differentials and job dislocations, but we shouldn’t lose sight of the fact that so many people on this planet have benefited – as did we with lower cost goods, lessened inflation and economic growth targeted to higher value added goods and services.
And yes, our problems are self-induced. A connection can be made to the undervalued Yuan/recycling of dollars process as being one of the precursors, but the meltdown didn’t have to happen. We can only blame ourselves and our own irresponsibility.
November 17th, 2009 at 11:54 pm
You Guys are up late during a working week. Fun debate, thanks Anyway, it’s 32 degrees (Sorry that’s 84F) here. I’m off out for a snapper and a bottle of New Zealand Sauvignon Blanc for lunch then a sail.
Sigh……………………..Who said retirement is boring?
November 17th, 2009 at 11:56 pm
“We are the reckless gambler who lost it all at the craps table and now has to ask China to wire us money for a ticket back home.”
ask yourself- would it have mattered if it was US companies manufacturing in the US or US companies manufacturing in China?
America was sold down the river by it’s own companies trying to reduce costs-
transplanting whole manufacturing processes to another country-
is Apple an American company? IBM? Hewlett Packard? When everything is made by other countries? Is it not almost just branding at that point?
companies have zero allegiance
November 17th, 2009 at 11:57 pm
Who said I wanted China to fail? Far from it. Anti globalism? Wrong again. Neither of you have answered one single question I’ve raised.
Why is property prices going through the roof all over china? What is the rationale for having an empty city? Who are all of these factories in China being built for? Why is there so much rampant land and property speculation going on in China? What is the real unemployment rate in China today? Can either of you tell me how this is calculated by the government? I’m wait for one, just ONE answer to any of these questions. If both of you know as much as you say you do about China, then prove it.
November 17th, 2009 at 11:58 pm
Here’s an easy one – what is the vacancy rate in all those gleaming skyscrapers on the Shanghai and Beijing skyline. Surely one of you can at least come up with this.
November 18th, 2009 at 12:11 am
alright-
done in for the night-
ciao for now
November 18th, 2009 at 12:18 am
Night Ahab
November 18th, 2009 at 12:25 am
http://www.prlog.org/10339209-shanghai-markets-prepare-for-recovery.html
Average vacancy rate stood at 16 percent, similar to its quarter one value.
U.S. Office Vacancy Rate Rises to 12.5% in First Quarter Reaching Highest Level in Three Years
16 Apr, 2009, New York, NY
Cushman & Wakefield today released first quarter 2009 statistics for the U.S. office property market that show an increase in the central business district (CBD) vacancy rate to 12.5 percent from 11.2 percent at the end of 2008. The vacancy rate is at its highest level since the first quarter of 2006, when it was 12.6 percent, but is still below its decade high of 15.5 percent in the second and third quarters of 2003.
Thor bear in mind that a higher vacancy rate is not particularly problematic in a rapidly growing market. It is much better to have a 16% vacancy rate coupled with a 4% absorption rate then a 12.5% vacancy rate coupled with declining employment.
I’m done for the day as well.
November 18th, 2009 at 12:29 am
yes, this blog (and the internet) is a clocksucker.
Philipat, i’ll check back with you sooner than 18 months. when the worm turns here, we will see how the Chinese markets hold up. as i recall, China’s market down turn was more severe than ours last year. we will see about this decoupling theory.
i got this from Hugh Hendry, but China is in the similar position as the US back after World War I when we were the manufacturers for Europe. we also did vendor financing like China is now. back then, when Europe’s economy tanked, it pulled us down with it. a producer is only as good as his customer. Hendry calls China a deep call option on the US. China is Santa Claus bestowing all of us gifts of the great escape. Hendry even argues that the Asian surplus countries are the most vulnerable, the most exposed if our economy doesn’t bounce back. the markets will be the final arbiter of this debate.
November 18th, 2009 at 12:34 am
bsneath – not quite.
http://www.chinadaily.com.cn/bizchina/2009-10/09/content_8775596.htm
Listed here at 30-40%
Other sources put it as high as 50%. But who’s reports are most accurate? And why? Why are there NO good sources?
November 18th, 2009 at 12:43 am
Nobody has mentioned the sheer enormity of foreign direct investment as a percentage of Chinese GDP (running close to $100 billion annually by my calculation). A lot of people are trying to ride the gravy train. There is probably a lot of misallocated capital that has yet to be recognized in China.
The current Chinese environment reminds me of the US railroad expansion in the 19th century — lots of investment, lots of corruption and graft. High vacancies in China coupled with a slowing rate of urbanization and population growth don’t bode well either.
Nevertheless, China’s emergence as a superpower is a lock. Capitalizing on it is probably out of the reach of typical investors.
November 18th, 2009 at 4:40 am
Not that it will help that much in the end, but Foreign holdings of US Treasuries are overstated in general by the media. Foreigners hold 30% of US Treasury Securities.
http://www.treas.gov/tic/mfh.txt
November 18th, 2009 at 7:44 am
It does not matter who’s better or not. What matters is that China and emerging markets have grown and gained clout. They already have manufacturing capacity and talent and we’re short on that.
They are using up resources and will be using an increasing percentage of the world’s resources that we are going to need to maintain 1. growth 2. what we have not maintained.
There is going to be a fight. China has 1.8 trillion of US $ reserves and it can jerk the West around.
Yes, the US can default. But I can guarantee China would not sit back if that happened.
They can hurt us and we have willingly put ourselves at their mercy because we thought they were not a threat.
November 18th, 2009 at 8:56 am
The US cannot default unless we are at the end game point and we do not have any choice but to fall into obscurity.
Thor, I will concede that whether of not China is presently on a path to achieve long term structural growth is at question. Risks are an excessive real estate bubble and insufficient domestic demand to take up the slack once this bubble is pricked. China’s Govt is aware of this and is taking actions to tamp down on real estate as well as to encourage domestic demand (appliance vouchers, etc.) On the positive front China does have additional weapons at their disposal through their banking system and capacity to add stimulus and they have the political system that allows rapid response (no need for “job summits” etc.).
The fragility of their recovery does explain why they are adamant about not revaluing the Yuan anytime soon. Too risky to do so until the domestic economy takes hold.
So we run the global gamut of scenarios. Anything from continued rapid growth in emerging markets pulling the global economy out of a deep recession to a collapse in new emerging market bubbles in places such as Chinese real estate leading to a global double dip with the second dip worse than the first, or something in between. Maybe I should put my money in my mattress…..
November 18th, 2009 at 10:05 am
Currency depreciation has been the choice throughout history. You know that’s what’s going to happen.
In the case of China, we have a case of mutually assured financial destruction. China has some culpability in this, too. They could have dropped that peg any time they wanted. Now, a failed treasury auction here would be an ELE. A de facto default on our bonds would be an ELE for China’s economy.
They should wise up and start buying real resources with those dollars while they still can.
November 18th, 2009 at 10:48 am
They should wise up and start buying real resources with those dollars while they still can.
They have been. Loans to Russian firms to be repaid with oil. Investments in a variety of commodity based companies through out the world. Stockpiling metals. They are not dummies over there.
November 18th, 2009 at 11:06 am
bsneath – your greatest logical error is assuming that China will overtake the US because it has been growing at 8.5% a year for the last couple of decades. Do the math – at what percentage will China have to grow it’s GDP per year and for how LONG until it catches up with us? Do not assume China is going to average 8.5% for the NEXT 20 years, do not also assume that the growth rate for the US will be below 2% every year over the next 20.
Last, enough of this hogwash about the US having no manufacturing capacity. Again, do yourself a favor and go find the statistics. See if you can find the numbers on who manufactures more goods per years. I’ll give you a hint, it’s not China.
November 18th, 2009 at 11:09 am
Stock piling metals for WHAT? Why does China have well over a years worth of inventory for copper, tin, steel etc? You think it’s hedging against inflation or future scarcity. Many more people think it’s nothing more than rampant commodities speculation. What is going to happen to the price of those commodities once China tries to dump it back onto the market? They can’t go on building idle factories and empty cities forever you know.
November 18th, 2009 at 11:41 am
Thor, points to consider.
1) A good bit of our manufacturing capacity has been geared towards construction. Construction is for all intents gone for a quite a while. The losses in manufacturing jobs have been staggering.
2) We cannot compete with lower cost mfg labor in a global market place. Eventually many of our autos will be made in China or Vietnam or India or who knows, it may eventually be Bangladesh.
3) At 8.5%, China’s economy will double every 8 1/2 years (rule of 72). Therefore in 17 years (assuming 8.5%), their economy will be 4 times larger than today.
4) Today China’s economy is actually about 2 times larger (PPP) than the reported dollar-based GDP because China’s currency in under valued. Once China revalues (yes it maybe many years from now) their GDP will double.
Thus if China grows at 8.5% and China revalues its currency to fair value some time forward, then the Chinese economy, in dollar terms,will be 8 times larger than it is today in less than 20 years.
With respect to “They can’t go on building idle factories and empty cities forever you know.”, as I wrote earlier this morning, I conceded to you that the risk that China’s economy is on fragile grounds is very high but also that China is taking steps to tamp down on their real estate bubble and they have options available to further stimulate their domestic economy.
I do not think any of us, or for that matter the Chinese themselves, know for certain whether or not China can maintain sustained economic growth at this point, or if a bubble collapse(s) in emerging market asset classes will lead to a global double dip recession/depression. Time will tell.
November 18th, 2009 at 6:08 pm
They can’t go on building idle factories and empty cities forever you know.
————
Says who? The USSR did it for 67 years and then they retired.
November 18th, 2009 at 8:34 pm
Barry
You’re the guy who introduced me to Warren Mosler but based on this cartoon you don’t think much of his economics.
“Don’t vote for anyone who wants to balance the Federal Budget”
“Fact: Imports are real benefit, and exports
are real costs. Foreigners are dependent on
U.S. domestic credit expansion to fund their
desires to accumulate $US financial assets.”
http://www.moslereconomics.com/