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Better fat than fascist

~ Considerations into the failures of over goverance & the successes of freedom

Tag Archives: China

Coming China Bust is Pre-Ordained by History

18 Saturday Oct 2014

Posted by BetterFatThanFascist.com in aging, apogee, bears, bullish, bulls, bureaucracy, business cycle, China, Corruption, credit crisis, dot-com, Fannie, Freddie, Japan, Malthus, Malthusian, misallocation, mixed, One-Child Policy, one-party, reform, short-term, speculation, Stalin, yuan

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aging, apogee, bears, bullish, bulls, bureaucracy, business cycle, China, corruption, credit crisis, dot-com, Fannie, Freddie, Japan, Malthus, Malthusian, misallocation, mixed, One-Child Policy, one-party, reform, short-term, speculation, Stalin, yuan

“Them smokestacks reachin’ like the arms of God, into a beautiful sky of soot and clay;
Here in Youngstown, here in Youngstown;
Sweet Jenny I’m sinkin’ down, Here darlin’ in Youngstown.” – Bruce Springsteen, “Youngstown”

By Greg Smith

Prophesizing China’s economic future does not require an MBA, CPA, or a lifetime subscription to WSJ.com. A search of the web turns up economic predictions that cite every manner of economic indicators but usually ignore the most accurate set of statistics: history.

In 1999 Americans were making huge paper returns from Internet start-up companies that were hemorrhaging borrowed money. Dot-coms were forecasting enormous losses into the future with little or no concern for turning a profit, focusing instead on market share. Investment capital went into massive ad budgets and the trappings of success as twenty-somethings mocked profit warnings from middle-aged accountants and the notion there could be any problem with this new paradigm of business.

By 2002 over $5 trillion in paper wealth had been wiped out when these dot-coms failed en masse. For perspective, U.S. gross domestic product in 2002 was $10.5 trillion. Had the dot-coms been human, coroners would have assumed it was the work of a serial killer because the post mortems of each generally shared one attribute of the deceased: ‘They tried to do too much too soon.’ This will be the epitaph of the Chinese economic miracle.

The huge number of predictions on China’s economic future run the spectrum from bullish to downright Malthusian, but these cite recent financials, which shouldn’t even be needed. No, China’s economic future was set in jade when it its reformist leaders decided in the 1970s they wanted the advantages of a market economy while keeping control over the economy. You can have one, you can have the other. You can’t have both.

The history of the mixed economy, which China’s is because of government control of credit and lending, heavy corruption and PLA involvement, is too well documented for anyone to believe China has somehow found a way to manage its financial system better than the market. Government cannot manage a lending system without a bureaucracy. Bureaucracy is a very powerful tool for maintaining minimum management standards, but it cannot rise to the level of quality in a free market, government will always end up too concerned with short-term objectives and political goals will take precedence over innovation and best business practices, causing massive misallocation of resources. The top-down model cannot adequately follow and understand the enormous changes in technology that will change global commerce in the next three decades.

How do I square this opinion with China’s enormous growth? Easy. The growth of the last three decades is due to the free market reforms, the benefits of which always kick in quickly. Business faces fewer impediments in China than in the U.S. Coca-Cola CEO Muhtar Kent said in 2011 China has a better business climate than the U.S. With a constant drive for new regulations and to place more social responsibilities on businesses, it is no mystery why commerce in the U.S. is at a comparative disadvantage.

On the other hand, as Japan’s economy showed in the 1980s, problems caused by politicized lending practices do not rear their ugly head overnight. They often take decades to come to fruition, snowballing into a massive drag on the economy. China is now facing a serious real estate bubble because after 2008 government policy flooded China’s economy with cheap credit, fueling a boom in speculative building based on assumptions that buyers would eventually appear.

Someone may point to the mortgage crisis in the U.S. to say the market is itself quite fallible. While lending is a far more decentralized, private function in the U.S. economy, the U.S. credit crisis was also a product of politicized lending and social engineering. Since 1970 government-sponsored corporations Fannie Mae and Freddie Mac have bought up mortgages from private lenders, allowing the lenders to put the funds back into new mortgages. Lenders could make loans without regard to property value or ability to repay, take their profits and sell the loan to Fannie or Freddie. Why was anyone surprised they actually did so?

Over the years the two mortgage giants also faced increased requirements to invest in affordable housing, which forced lending institutions to lend to lower income people who were less financially able to handle home ownership. Lenders also faced new anti-discrimination laws that made it easy for them to get sued or fined if they didn’t give out enough mortgages to this or that minority group, resulting in even more bad loans.

Had Fannie and Freddie not been government backed, the U.S. housing crisis would have never happened. Mortgage lenders would have been on the hook for bad loans they made, forcing them to rely on quality analysis based on facts, not happy thoughts and good intentions. Lenin once predicted, “The capitalists will sell us the rope with which we will hang them.” As well, lenders would have gladly lent to minorities who were in a position to put down some money and make their mortgage payments.

There are ample signs of economic slowdown in China, which is a normal part of the business cycle. The question is whether Beijing’s economy will pick back up again and continue to outperform Western economies to become the world’s largest, or has heavy government involvement exchanged quick GDP growth for long-term economic vitality and China will soon be the new Japan.

When government is involved in an economy its first goal usually is to create jobs. Creating jobs is easy. Stalin created millions of them. Jobs created by government inducement or edict create less wealth than those created independently, as the latter must stand on economic usefulness while the former cause huge misallocation of resources. If the jobs were that important to the economy, they would have already existed. As with America’s housing crisis, government involvement is what caused China’s real estate bubble that now has markets worried.

If China’s economy was built on such strong foundations, it should not have needed such a massive infusion of liquidity since 2008. Beijing’s economic gurus want greater domestic consumption, and a drop in Western demand for goods would have been a perfect time to tempt consumers with lower-priced goods. China bulls often celebrate Beijing’s one-party-rule ability to implement policy ‘on a dime’ so it certainly could have guided investment toward domestic consumption. Instead, to ensure social stability money flowed into infrastructure projects – which functioned as jobs programs — that were not needed.

China’s only hope at sustained growth is increasing domestic consumption, difficult to achieve when government-provided social security exists largely just on paper, and the One-Child Policy has left a rapidly aging population — in 15 years China will have just two workers for every person over 60 — less willing to spend on non-necessities the yuan they will need in old age.

Without dependable investment options, another cause of China’s real estate bubble, what money they can save will be eaten into by China’s somewhat high inflation.

The Middle Kingdom cannot continue to grow economically without major political reforms, which the Communist Party is not going to allow. Developing economies under dictatorial regimes can easily increase economic output. They falter in transition to mature economies that require social and political freedoms which help drive innovation and progress. Today, China is at that critical juncture and shows no signs of democratizing in any meaningful way. China’s economy, and with it Beijing’s power, is nearing its apogee and will soon be in relative decline.

I do not claim to be an expert on China’s economy. Even if I were such an expert, if individuals could truly understand something as massive and complicated as a national economy, then command economies could work and have long-term advantages over messy free markets.

History on the other hand is much easier to understand. Past economic experiences unambiguously show statist economies hit a brick wall before they are able to mature. Over the long haul free-market economies always outperform mixed economies because government involvement introduces many more non-economic decisions. Just as dot-com investors discovered, China will learn when something seems too good to be true, it usually is.

So in conclusion the Chinese are, as are the rest of us, better fat than fascist.   ©

Greg Smith is a freelance writer and political consultant who lives in Bantam, CT. His blog is found at www.betterfatthanfascist.com.

 

 

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Vladimir Putin is No Richard Nixon

03 Wednesday Sep 2014

Posted by BetterFatThanFascist.com in China, Russia

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$400 billion gas deal, bubble, China, NATO, Russia

By Greg Smith

In 1972 President Richard Nixon taught the world the power of political strategy, greatly increasing U.S. leverage on the Soviet Union by opening relations with its bitter rival the Peoples Republic of China. Vladimir Putin recently tried a similar maneuver against the West, instantly proving he is no Richard Nixon.

Putin’s gambit, brokering a long-term $400 billion natural gas deal between Russia and China, was taken after Western nations placed sanctions on Russia in response to the latter’s invasion of Ukraine. Europe has grown dependent on Russian gas, and Russia on European money. Putin wants NATO capitals to shiver at the thought of its source of heat going east instead of west. In the future this example of Russia’s use of energy to gain influence will likely be looked upon as a poorly timed snub of a dull but reliable customer in favor of a Lamborghini-driving, Rolex-wearing, faux Gucci-clad garment mogul who lives with his mother, steals cable and is two months in arrears to his manicurist.

European leaders cannot help but now realize they can either dance to the Kremlin’s tune, freeze in winter or diversify their energy supply. Considering the burgeoning world gas trade, the latter will become easier as time wears on. Since Russia’s economy is nearly as dependent on energy exports as a Persian Gulf monarchy, Russia driving customers to find other suppliers is possibly the most short-term thinking seen outside Washington, DC in decades.

Were China to become a reliable long-term customer the net effect on the Russian economy would be negated. That is a Siberian sized ‘if.’

The dominant opinion that China’s economy will continue to expand as it has for over three decades is flawed. For the past five years China’s expansion of GDP has relied on massive use of borrowed money, which is being called China’s debt crisis or credit bubble, similar to that which brought on the Great Recession in the West.

The problem for Beijing is less that is has a credit bubble on its hands and more that its economy can no longer, without massive state stimulus, expand at nearly the double-digit numbers that has given it the moxie to swagger around the Pacific as the supposed next hyperpower. China’s debt-to-GDP ratio has grown from 130% in 2008 to over 250%. A healthy economy doesn’t require borrowing at a rate that is as rapid as it is massive. According to The Times of India, six years ago in China a borrowed dollar created nearly a dollar in economic growth. It now takes four borrowed dollars to create a dollar of growth, an unsustainable level even given China’s currency reserves.

History shows that no economy that allows credit to flow at such a rate escapes unscathed. Brazil, so recently a darling of the emerging markets, faced its credit bubble in 2013 and is now in recession. China’s credit increase has been much larger both in real and percentage terms.

Add in China’s rapidly aging population brought on by the One Child Policy and Beijing’s economic future is dim. The emerging market slowdown may act like the waves that swamped the Edmund Fitzgerald in 1975, dragging China’s highly leveraged economy into a decades-long funk. Putin has now voluntarily made this his problem, too.

If geopolitical push comes to shove, with ease the U.S. could choke the life out of China’s export-driven economy. Chinese demand for Russian gas would plummet, putting a huge dent in the Kremlin’s ability to compete with the West economically or militarily. While such a conflict is unlikely, natural economic forces are going to do slowly what the U.S. military could do quickly.

In 1972 China and the Soviet Union were bitter ideological foes that had fought a brief border war. Nixon’s rapprochement with communist China opened a new Cold War front, forcing Russia to adopt a more cooperative tone toward both the U.S. and China. In contrast Russia’s gas deal with China will alienate Europe, freeing the next U.S. president to lead NATO aggressively against Russia. China, not known for respecting its obligations to fellow nations, knows any dependency on Russian oil will come at a steep price when, inevitably, there is another Sino-Russo tussle. Beijing is the likeliest candidate to run up huge debts to Russia and hold off paying them as leverage.

Vladimir Putin just went long on a Chinese economic expansion living on borrowed time and money. Russian economic, political and military well being now relies on the success or failure of a sovereign version of Pets.com.   ©

Greg Smith is a freelance writer and political consultant who lives in Bantam, CT. His blog is found at www.betterfatthanfascist.com.

http://timesofindia.indiatimes.com/edit-page/Chinas-debt-crisis-suggests-an-India-like-crash-round-the-corner/articleshow/29512055.cms

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Is Taiwan the Next Crimea?

20 Thursday Mar 2014

Posted by BetterFatThanFascist.com in China, Crimea, Foreign Policy

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blockade, China, Crimea, pivot, PLA Navy, Taiwan

By Greg Smith

For going on two decades Americans have viewed China as a serious military adversary. While the U.S. could defeat China without breaking a sweat, the global economic fallout of such a war would be severe, so the best strategy is to avoid it in the first place. The Obama administration’s response to Russia’s annexation of Crimea is not helping.

When a Chinese fighter aircraft collided with an American P-3 surveillance plane over international waters south of China in 2001, the U.S. response was surprisingly tame and muted. Since then angst has grown over our place in the world, or at least in Asia. In 2009 U.S. media outlets discovered the existence of China’s DF-21D “carrier-killer” anti-ship ballistic missile. The response in the media and Internet was somewhat hysterical, as if the Navy’s aircraft carriers had never faced a threat from other nations.

If war between the U.S. and China were to occur even in China’s best-case scenario it would be defeated by the U.S. In China’s best-case scenario it quickly defeats any other militaries before the U.S. Navy and Air Force could deploy, and also China’s missiles are able to keep U.S. naval surface forces 1,000 miles from China’s shore. Neither of these is close to certain.

China’s is an export-driven economy with a heavy dependence on imported oil from South America and the Middle East, iron ore and copper from Australia and many other raw materials. In turn, products are shipped by sea around the world. Considering routes from China’s coastline are largely hemmed in by Japan, the Philippines, Australia and the Straights of Malacca, the U.S. would not even need aircraft carriers to effectively blockade commercial shipping from China or petroleum bound for it.

The People’s Liberation Army Navy is not capable of projecting power beyond the range of land-based aircraft. U.S. submarines and aircraft alone would be able to sink any ship departed from China. American forces could asphyxiate the Chinese economy. The U.S. needn’t bomb China back to the Stone Age when it could instead blockade it back to 1999 in economic terms.

The downside is such a blockade would negatively affect much of the world economy – including the U.S. economy — and cause an unnecessary rift between two of the world’s most economically powerful nations. Both nations have too much to lose.

China’s economic maturity should act as a deterrent to recklessness, as her actions have the capacity to cause large drops in stock prices, and more importantly price increases on the raw materials on which her economy depends. Yet Beijing continues aggressive stances toward its maritime neighbors, claiming wide swaths of ocean and training for offensive military operations. Mutual prosperity doesn’t seem to be a certain road to peace.

If U.S. foreign policy makes it appear to Beijing it can act with impunity, China’s actions make it clear it will only be a matter of time before an actual war breaks out. The Obama administration’s “pivot” of a relative handful of military assets to the Pacific is not a replacement for decisive engagement by the U.S.

Considering how the Russian invasion of Crimea was handled the Obama administration should make it clear, in no uncertain terms, that U.S. response to an Asian conflict would be instantaneous and unflinching. To demur is to temp an outcome in which all sides lose.  ©

Greg Smith is a freelance writer and political consultant who lives in Bantam, CT. His blog is found at www.betterfatthanfascist.com

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American Failure to Act in Ukraine Likely to Have Global Consequences

02 Sunday Mar 2014

Posted by BetterFatThanFascist.com in Crimea, Foreign Policy, Soft Power

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China, Consequences, naval blockade, Obama, Putin, Saudi Arabia, softer power, U.S. Resurgence, Ukraine, Yanukovych

By Greg Smith

The Russian incursion into Ukraine is a good time for the U.S. to better explore the use of a softer power – strategy – to shape world events for the better. Washington needs to get this right quickly or it may soon have greater problems with China, Iran and North Korea – and even Saudi Arabia.

The time line of events indicates this was probably not a snap decision by Vladimir Putin. November 30, 2013 saw pro-Western demonstrations in Kiev met with violence by riot police, which has not abated in three months. Two days later Kiev’s city hall was overrun by protesters, and on Feb. 20 government forces began to murder protesters. Russia responded with only words through these events. Putin is well aware that President Carter cancelled American athletes participation in the 1980 Olympics held in Moscow; the last time Russia hosted the games.

Suddenly, Ukraine’s pro-Moscow President Viktor Yanukovych flees to Russia a day and a half before the Olympics end, at which time Putin has a free hand to act without tarnishing his pet project, the Sochi games. The day after the games end Putin’s pool boy Prime Minister Dmitry Medvedev begins the drumbeat of war by questioning the new government in Kiev. The rest is recent history. It may be coincidence, but who would question whether Putin is willing to orchestrate events to suit his purposes?

President Obama’s response to watching Russian troops rolling into a Central European country is being heavily scrutinized in Beijing, Pyongyang, and Tehran. But the most peril lies in the impression it leaves in Riyadh, Tokyo, Manila, Taipai, Canberra, Paris and London — indeed inside every government that relies on the U.S. — and on whom the U.S. rely — for some level of security cooperation.

As you read there must be arguments in Beijing that there will be no better time to cross the Taiwan Straight, which would back Washington into a choice between a major war or irrelevance.

The best example is the Saudi Arabians, who according to BBC News may have nuclear weapons on order from Pakistan. The Saudis were disappointed to say the least at the Obama administration’s response to and handling of the civil war in Syria and openly questioned whether they could count on the U.S. having the willingness to prevent Iran, the Kingdom’s arch enemy, from acquiring nuclear weapons.

If Saudi leaders had been on the fence, what must they be thinking now, and if they acquire nuclear weapons, will they think twice about using them because they have faith in the U.S.?  ©

Greg Smith is a freelance writer and political strategist who lives in Bantam, CT. His blog is found at www.betterfatthanfascist.com.

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China and the New American Century

22 Saturday Feb 2014

Posted by BetterFatThanFascist.com in Global Economics

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bubble, China, history, U.S. Resurgence

By Greg Smith

The tea leaves of history – 1956 to be specific — tell us the Asian Century will in the near future be downgraded to the Asian decade, and the 21st Century will be a continuation of the last American Century if only the United States can recognize its inherent strengths and step up to the plate.

Since the turn of this century, fear has been focused on China’s rapid industrialization and commensurate rise in military spending. History has covered this ground before.

While still dealing with the legacy of Stalinism, Soviet Premier Nikita Khrushchev in November 1956 boldly said, “We will bury you!” in a speech to Western ambassadors. His prediction seemed unsettling accurate, as annual economic growth of the Soviet Union in the 1950s averaged about 8%, far in excess of the 3.3% annual average in the U.S. In the 1960s it was about 7% for the Soviets, 3.9% for the U.S.

Serious predictions the Soviet Union would overtake the U.S. as the world’s largest economy in the 1980s were down right preposterous by the time they were supposed to come to pass. Why?

By the 1980s we had a new economic bogeyman to fear, as Americans fretted Japan Inc. would succeed economically where it had failed militarily. But in 1990 the supposed juggernaut of Japan went into recession and never came out. China’s economic growth will soon be severely curtailed by a combination of the reasons that caused the Soviet Union and Japan to falter.

Economies of the Soviet Union, Japan and China share one component: Heavy government involvement. These top-down models placed great power in the hands of bureaucrats to make decisions that had and will have long-term consequences. The greatest problem with involving bureaucrats and politicians in economies is they are most concerned with short-term performance. Their interference is akin to putting out every small forest fire as quickly as possible. You just wind up with a forest full of dry tinder and, in the future when conditions are right massive, uncontrollable forest fires instead.

Japan’s economic bubble in the late 1980s was created largely by its Ministry of Finance, which had a considerable say over capital allocation. Bureaucrats do not risk their own money and receive no greater compensation for wise decision-making. Their greatest stake is in keeping their job, which causes them to postpone tough decisions as long as possible, regardless of economic consequences. In Japan this led the MIF to allow banks and corporations to engage in all manner of paper transactions that propped up the books without providing long-term economic benefit. In effect Japan became a sovereign equivalent of Enron.

In the 1980s Japan’s Ministry of International Trade and Industry made big decisions on the future technologies of computers and television. Because of the incestuous centralization of Japanese industry, when these decisions — a fifth generation computer project and analog high definition television — turned out to be wrong Japanese industry was already far down dead-end paths.

At about the same time the U.S. government was looking to set a standard for HDTV. A competition was set up for private sector companies to develop and enter a system that was digital, analog or a combination. General Instruments, a company that had little association with television put together a small team of engineers who managed to build a working prototype for a fully digital HDTV system. This last minute, dark horse entry led to the adoption of a fully digital format, providing American companies with the most advanced HDTV system and a lead on related technology. U.S. companies also went on to lead the world’s computer industry because of the marketplace wasn’t led down a single path for the sake of uniformity.

In economies such as Japan’s and China’s, the U.S. HDTV competition would have been by invitation only and General Instruments would not have been on the guest list. Needless to say the outcome would have been as mediocre as Japan’s economy post-1990.

Recent news headlines shouted the Chinese Ministry of Industry and Information Technology has handed a “death sentence” to three quarters of Chinese firms that produce solar power components. The MIIT decided there are too many firms in that particular industry, decided on criteria to choose winners and losers, and to the latter is denying access to financing and other benefits critical to survival in a largely state-run economy. This veritable ‘venture capitalism by the DMV’ goes on all over the world’s second largest economy. Its affects are accumulating.

Apparently Chinese bureaucrats are head and shoulders above Soviet bureaucrats at picking winners and losers. They must have a crystal ball which allows them to avoid choking the life out of the few companies that will produce the important advances that move mankind forward.

Economics is considered a soft science, but its basic laws are as iron as any of the hard sciences. Immature economies like the Soviet economy in 1945, Japanese economy in 1960, and Chinese economy in 1980 are very easy to ‘goose’ with government intervention. The basics are generally easy. As economies grow and mature they become far too complicated for any level of central planning to be effective. That is when economic law catches up.

The rapid rise in China’s economy was had through artificial means: Preferential treatment for the well-connected, considerable subsidies, a rapidly accumulating public debt load, little intellectual property protection, currency manipulation, unnaturally low interest rates and extraordinarily low wages. These macroeconomic equivalents of diet pills have long-term negative consequences. China’s economy cannot permanently exist as it is and has not shown it can highly function as a mature economy.

China’s annual economic growth rates largely mirror those of the post-war Soviet Union, but its economy more closely resembles that of an export-driven Japan 30 years ago. Barring a massive shift toward a free market, China’s next recession will drive her to ever more government intervention in an attempt to continue the post-1980 miracle. The ensuing vicious Keynesian catch-22 will fail, as it did in Japan and is in the U.S. The subsequent period may be the most dangerous time for Taiwan, though China’s military build up will taper off, leaving the Middle Kingdom a regional military and economic power hemmed in by weary neighbors.

Business has flocked to China for cheap manufacturing, which has fostered the growth of a middle class. This has permanently raised China’s economy above where it humbly sat in 1980, but Chinese exceptionalism is better explained by the Easter Bunny. Oh wait, he can’t because he doesn’t exist either.

In contrast, America’s economic growth was made possible by personal and economic freedom. When the U.S. Constitution was written in 1787, it was not intended to create an economic superpower. The intent of the framers was to create a workable government that ensured individual liberty and prevented tyranny. There was a basic assumption that economy would follow as citizens were able to pursue it; there was no thought of creating an economic colossus. No Department of Commerce, yet economic growth was considerable and sustained. No Department of Education, but fine colleges flourished; primary and secondary education became more common and advanced. Growth and development were organic so the firmest of foundations were established.

American commerce was dominant in the 20th Century precisely because individual actors were quite free to invest in divergent ideas, products and technologies. If the U.S. simplifies its tax code, and stops attempting to make the world a perfect place through the constant additions and alterations of rules and regulations with which businesses must comply, American commerce will once again offer us its greatest advantage: Employment and opportunity for anyone willing to work. That is the foundation of the American Dream, and it can be done!

Leave people be and they will produce long-term economic growth. Another reason why we are better fat than fascist. ©

Greg Smith is a freelance writer and political consultant who lives in Bantam, CT. His blog is found at http://www.betterfatthanfascist.com

Note from the author: There is no intent to disparage China. The intent is to encourage fellow Americans to abandon the big government that is steadily eroding freedom as well as economic opportunity. GS

http://asia.nikkei.com/Politics-Economy/International-Relations/Has-China-s-military-expansion-peaked

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