Mutually Exclusive Actions As One

The Prime Minister of Japan Shinzo Abe, who not to long ago engaged in one of the largest fiscal infusions in modern economic history with the hope of jump starting Japans economy that has been ailing for the last 20 years, has announced two mutually exclusive actions.  Japan is the most indebted nation in the world in terms of public debt and even many economists, the ones who argue that debt can create higher marginal growth rates, state that there is little good adding additional debt will do and that they have probably crossed the terminal point at where there is no way humanly possible that Japan could ever pay of it's debt.

College Graduates In China Facing Similar Future to Those In America

According to a post by Gordon Chang at Forbes, China is seeing record numbers of Chinese graduates, but at the same time a drop of college graduates who have employment contracts prior to graduating. According to the South China Morning Post, the average number of students with signed contracts for  mainland China is 52.4%, however, it is as low as 46% in Guangdong and 33% in Beijing.

Given that it is an open secret that China fudges their official numbers, the employment situation in China for recent graduates is starting to look very similar to those in the United States. For those who rely on China to supplant the United States as the economic hub of the world, this is bad news considering that China hasn't even come close to approaching the economic development standards that the United States has. China cannot be both the creditor, debtor, producer and consumer for the world; that would be the equivalent of the perpetual motion machine.

The cessation of economic growth in China, which I think will happen in the not to distant future, will be a black day for the global economy and unmitigated disaster for the PRC.  For the last two to three generations the Chinese government has stacked their entire legitimacy, and raison d'être, on economic growth. What happens to the Chinese government when that is removed? Only time will tell.

China's Long Term Local Currency Default Rating Downgraded

Fitch has downgraded China's long term local debt outlook from an AA- to A+. While the Foreign Currency Issuer Default rating has been affirmed as looking relatively strong, relatively strong meaning that it deserves it's A+ rating, due in large part to the vast foreign debt instruments it owns; I would disagree. China's long term local debt outlook doesn't look quiet as strong due to these items:

• China's stock of bank credit is 137% the size of of Private Sector GDP; this might be a new sovereign analysis metric to look at and I like how they use Private Sector GDP instead of just official GDP which I think is a better indicator of economic health.
• Shadow banking has shot up by 73 percentage points since 2008.
• China's local government debt, which even back in 2011 severely underestimated actual debt levels, which has increased the rest for local default.
• Decreased fiscal revenue.
• And the opaqueness in regards to debt from corporations that are linked to local governments.

One think I have stressed is that China didn't give up communism for capitalism, not by a long shot. All those 'private' corporations are often just shell companies where the largest investor is the local government. China didn't really dismantle it's state run industries so much as add many additional layers to give it the veneer of a private enterprise. In the end the government, often as a major stockholder of the company, still calls the shots.

What also needs to be remembered is that, while a downgrade from AA- to A+ doesn't seem like a major deal, the ratings agency also only downgraded the United States from AAA to AA+ back in 2011; and how many individuals think that a nation with debts in excess of its GDP is really a AA+ debt risk?  In my mind, knowing how reluctant ratings agencies are to actually list a countries actual debt rating according to sound judgement of the data, any sort of downgrade should be considered as a big deal.

Actual China Economic Growth

According to Gordon Chang at Forbes China's real economic growth isn't near the official 7.8% stated by the Chinese government, he thinks it is around 3.8% based off of other statistics.  Now the US would kill for 3.8% economic growth and it is nothing to sneeze at, even for a developing economy.  The United States averaged 3.7% growth over the course of its history, but an analysis of the rolling 10 year historic average of the United States should illustrate what is wrong with many developing economies today.

Even when America was developing average growth rates rarely exceeded 5% and hovered between 3% to 4% though there were years were growth was particularly high. Compare this to recent Chinese economic growth has averaged, at least officially, around 10%.  And this is what strikes me, though a case could be made about higher growth rates for newly developing countries due to technological advances, I still have a hard time believing that developing countries today could develop, sustainably, at a rate higher than 19th century America.

19th century America had everything going when it comes to being able to sustain high levels of economic growth. The nation was expanding it's borders rapidly, had material wealth in great excess of it's needs, a rapidly growing population, little foreign involvement, technologies, such as railroads, telegraphs, telephones, electricity, and industrial advancements, that were increasing national productivity at mind boggling rates. And even then American economic growth rates were never consistently 10% per year.

Contrast this with many developing nations today. While there are amazing technological developments that would contribute to a higher nominal economic growth rate today the conditions for China today are no where near as favorable as it was for 19th century America.  China has to import materials and goods that it doesn't have, something 19th century Americas did not have to do. It has an extremely large impoverished population, something 19th century America never had.  It has a population whose workforce size has already reached peak, once again this was not the case in 19th America.

And somehow this nation of over a billion people have been able to have consistent economic growth without a single decrease in national GDP since 1987? That is over 20 years of consistent economic growth with out a single recession.  Even 19th century America saw periodic economic contractions during it's developing period. Keynesians will of course state that the contractions in 19th century America were the result of a lack of oversight to smooth out the economy and that the reason why China has been able to grow continuously is precisely because of that oversight.  Never mind that all Keynesian economic policy does is kick successive necessary business corrections down the road until there are too many cans to kick and a massive economic correction occurs.

Or another way to illustrate this issue. China has grown from a 1.19 trillion dollar economy at the turn of the millennium to an economy of over 7.3 trillion dollars 11 years later which means they have increased their economy by 7 fold.  Even Warren Buffet, arguably the greatest investor living to date, would only have increased your wealth by 6 fold assuming a 20% yearly return rate. I am somehow supposed to expect that an entire economy is able to perform as well as Berkshire Hathaway, a company that only fills it's portfolio with the most profit? 

I could be very wrong, but I just don't see how a nation, even a developing one with potential can somehow economically out grow the 19th century United States and have it not be an indicator of how flawed the metrics we are recieving out from China.

Economic Collapse: Japan

We've talked about the lost decade of Japan, but few realize that they suffered an economic collapse, yet I don't see how you can describe a sudden drop of 27% of your high water GDP, a series of oscillation ups and downs between growth and contraction, and not reaching economic parity to your high until 15years later anything other than a collapse. But that is exactly what happened, their economy collapsed in on itself.

This serves as a very useful reminder that an economic collapse doesn't necessarily entail a complete collapse of society. How the economic collapse plays out depends on a variety of factors, and the fact that Japan's culture is one of conformance, coupled with the fact that they were a close US ally, helped ameliorate the situation.  But this is something that we in the US need to think about, as far too often we think of economic collapses as something like we see with Argentina or Wiemar Germany.  That's not to say that an economic collapse of America would play out more like it did for Japan, far from it in my opinion, but it is something to consider.

The Economic Decline of a Nation: Argentina

 

 

 

The economic collapse of Argentina since the beginning of the new millennium gives us a glimpse of what could happen to the west in the future, thanks to warnings and illustrations by those who have lived through the crisis and its aftermath.  But Argentina also serves a useful example of how a country can stagnant economically, and slowly fall from it's perch. 

 

At the turn of the 20th century Argentina was one of the most dynamic and rich countries in the western hemisphere. In 1905 Argentinian wages were 80% per capita of the United States at the time, similar to nations like Germany, France and Canada.  Argentina was among the most economically affluent nations in the world, and some predicted that it would become the equivalent to the United States in South America.  This was all in spite of a major banking crisis prior to the turn of the century, which had seen Argentina default on its debt. By 1913 Argentina had over 3% of the worlds gold and produced 1% of the worlds economic output with an income per head equal to France and Germany. World War I brought the economic growth to a major halt.

 

A lot of this had to do with the curtailing of the global market. The major economies of Europe, which had bought Argentina's imports and invested heavily into Argentina. Britain had been a major investor around the globe, but the end of the war brought this investment to a halt. They were far too indebted to the United States.  And this was perhaps the greatest blow to Argentina.  While the US suffered no major economic set back, though they did suffer a recession, the nation showed no interest in investing or trading significantly with Argentina. It viewed the nation as a potential rival and the US did not want an economic rival in it's part of the world, so they ignored Argentina economically.  Lastly, perhaps the biggest set back of all, was the opening of the Panama canal, which decreased the economic importance of the Southern Cone.

 

Argentina saw a major decline in economic growth. Despite all the wealth that they had a acquired the nation had a major weakness. It wasn't as industrially developed as America or the European nations. With the decline of global purchasing of Argentinian exports, and not a large enough industrial base to support domestic production and consumption, their economy suffered.  As you can see in the chart the average income was lower from 1920 to 1930 than it had been from 1900 to 1920.

 

The outbreak Great Depression, which inflicted the developed economies of America and Europe, didn't hit the Argentinians that hard.  Economic expansion was halted, however, but the effects were relatively mild for the most part. But while the economy nominally looked like it was performing well the state of the average Argentinian had deteriorate d rapidly that lead to major internal political infighitng which lead to the rise of Peron. Peron, and Peronism, would dominate Argentina for the next thirty years.

 

Peronism was a form of economic socialism, also known as corporatism, that saw the state's roll on the economy and implementing certain policies such as halting foreign imports. In the long term Perons policies would be disastrous, but then socialist policies of any stripe always are, but with the increased demand in food, lack of war debt, and undamaged infrastructure at the end of World War II, Argentina saw a tremendous change of economic fortunes.  By 1950 Argentina saw its GPD per capita around 55% of the United States.

 

While the 1950s and 1960s were a golden era for America and Europe, Argentina once again saw a decline in economic growth now that the western European nations had fully recovered from the damage inflicted by war.The Argentinian, in an effort to spur growth, intervened many times during this period; all of these interventions were unsuccessful and only compounded the problems facing the nation.

 

As you can see, the period from the 1970s to the 1990s saw a major decline in the GDP per capita of the Argentinians relative to America.  A lot of items factor into this decline, the rise of other non-developing countries into developing countries, the inefficiencies of state supported industries finally becoming apparent, and a growing authoritarian government.  The 1980s saw the end of the military dictatorship that had run Argentina, but rather than fix their problems of government largess, the populists simply changed where the money was being funneled. Finally, in the 1990s the economic minister of Argentina implemented free market reforms, inflation was halted, unemployment decreased, and for the first time in decades the share of GDP per capita rose, however, this economic swell was short lived.

 

While free market policies had been tried to some degree, and to some success, the problems of extreme government largess and corruption were never adequately addressed. Also, privatisiation was being reversed during the later part of the 1990s. Coupled with a devaluation of the Brazilian Real and the American dollar were the final catalysts for Argentina. They could not pay their debt and so they defaulted which lead to the economic crisis that lasted from 1999 to 2002. and sent Argentinian GDP per capita as a percentage of US GDP per capita to the lowest point ever in a century.

 

While the Argentinian Economy has grown since their economic collapse, in per capita constant 2000 dollars it was around $ 6,400 whereas it is now around $ 12,000, the above chart shows how far Argentina has actuall fallen.  A hundred years ago Argetina, while not fully developed, would have been a country that was on the verge of becoming a developed nation.  The affects of their wealthy period can be seen today, since their decline has been rather drawn out, and they remain the second most developed nation in South America, having been surpassed by Chile and are considered a highly developed nation. Yet other metrics show that relatively Argentina is worse. 

 

Argentina's GDP per capita at the turn of the last century was a little over half that of America's but today their income per person is around a quater of America's. Moreover the economic collapse fostered in an administration that is arguably more corrupt than the one that was in power during the crisis. The dual Kirchner presidencies have not been good for the people of Argentina, and it looks like they are heading for another financial crisis.

 

What is most terrible about the economic history of Argentina is that there were numerous chances for this nation to break the cycle that has kept it from joining the ranks of the developed nations. But corruption and cronyism has prevented Argentina from doing so every single time. Argentina serves as a stark reminder of what can happen to the United States or any other developed crisis, not only because of their recent economic collapse, but because of their long and gradual economic decline.



Argentina: Socialist Style Government Ruining the Nation

The increasingly draconian policies of the president have driven the people of Argentina to protect themselves from inflation, too bad they are seeking that protection in the US dollar.

On a related note, I was listening to a Mises lecture a while a go when some very disturbing information crossed my ears. Anywhere from 60 to 80% of all US dollars are not held in the country. Now this 60 to 80% isn't counting the Central banks, they don't hold dollars themselves just dollar denominated assets such as treasury bills, that 60 to 80% of actual dollar bills are held by people and companies.  A very sobering thought, as unlike the central banks which have a vested interest to keep the system going as long as possible, foreign people will dump their dollars the moment they realize how devalued they really are. But considering that all the other major nations are racing to the bottom, we may still have some time, unless those people realize that gold and silver would be far smarter bests for protection from inflation.

Is America Waging Economic War on China?

While perusing my list of blogs I happpened onto our Swedish defender of markets, good sense western civalization, otherwise known as Savecapitalism, he posits a question about China and the fact they now have more trade than the US.  While I was responding, I started wondering something, is all that is going on right now with our currency, acquisition of insane amounts of debt and purchasing billions upon billions of cheaply made Chinese goods, some form of economic warefare?

I ask this because the US and China are intertwined in a mutually self destructive relationship. The US has exported jobs, money and debt to another nation to consume more than it produces. This is bad for us because our dollars are going overseas, or rather, more dollars are going overseas than euroes, yen, yuan, or pounds or coming into America. Frankly, a deficit with China wouldn't matter if on a whole we netted out. If our total exports and imports summed to zero then the US would  be treading water. Unfortunately for us, it doesn't sum out. This means our funds are going overseas, and with them, jobs.

China currently sits on trillions of dollars in reserves, ostensibly it looks like a good thing, but then you realize that even though China has decreased the amount of US securities they are buying, 53% of their reserves are still in US denominated securities. This is very bad news for China as this means that over half of their trillions of dollars in reserves are dependent on the promise of the US government to owner their obligations. If the US decides to not owner it's debt to China, or even if they pay back in dollars inflated too worthlessness, then much of China's reserves, in terms of absolute value, disappear. There is some historial precendene to this, as Russia selectively defaulted on some of it's creditors, or delayed payment to others, during the 1998 Financial Crisis.

The other issue we need to consider in regards to China is that China needs to grow, and their consumption levels cannot support their production levels. Only 50% of their GDP is consumed by their own people, which is down from 56% in 2002. Exports accounts for 30% of their GDP. In 2011 China exported 400 billion dollars to the United States, and while that seems like a small percentage of GDP, that is almost as much as the entire GDP of South Africa. The simple fact are that there are few markets large enough to purchase 400 billion dollars of goods, and China's consumers would have to grow by 11% to meet that demand. Not an insurmountable task, China is attempting to raise domestic consumption now, but here is the problem they face. Production precedes consumption, or in other words, production determines the wages the workers earn which then determines consumption. The fact that after decades of growth and that they still have consumption levels so low indicates that they are not there yet.

Which returns us back to the United States. The reason why I wonder if the US is waging economic war on China is because we have received trillions of dollars in loans from the Chinese to subsidize government spending. We have used those borrowed yuan to purchase real tangible goods, for example, tanks, aircraft, carriers, and submarines. If we suddenly say to China, no we aren't going to pay, then we essentially got those items for free. A gross simplification I know, but the fact is that China can't make the US pay.

The United States has the largest navy in the world, it controls the seas, the very seas that China depends on for international trade. There is no way the Chinese could force us to pay if we said no. This doesn't mean the US wouldn't suffer for it's actions, it would, but given the east Asians nations unease with China as of late, who would they side with when the chips fell? Also, is it so totally out of the question to think that America may be intentionally running the international system in the ground to prevent a potential challenger?

You then have to consider that America's material wealth, timber, grain, gold, and oil are far greater than China's, in relative terms. We have more than enough resources for domestic use if we choose to do so, China doesn't. And in the end, it is who has the most stuff that is the wealthiest right?It seems that it is a question of who is the biggest sucker, America for exporting it's jobs, or China for trading it's hard earned money for promises of repayment, or who is the savviest, China for using the American consumer to allow for excess production, or America for taking China's loaned money and buying real tangible goods like nukes.  You decide for yourself, but if you look at our own financial crisis, who was hurt the most, the person/company who made the shitty loans, or the person who was foolish enough to believe their AAA promises?

Argentina and Price Controls: History Never Learned.

Well it turns out that Argentina is instituting price freezes on some of their items, found via savecapitalism, and there is nothing that can go wrong with that idea, is there?  This is why I named my blog the way I did, History Predicts the Future, because so many individuals fail to actually learn and apply historical lessons to what is going around us.  These efforts are doomed to failure, Nixon's wage and price freeze failed, FDR's New Deal policies prolonged the depression, and if you have even bothered to read my posts on Tiberius Gracchus, you will realized that the Roman republic instituted similar measures. All of them failed, and simply prolonged what it tried to stop, or brought about something worse.

You would think that our politicians would know these lessons, after all, it isn't like there is a secret society of librarians that are colluding to keep such knowledge hidden from the public. It makes me wonder how congress can be so full of idiots, but then I realize, that while some occupying our hallowed hauls deserve that mark, others simply don't care. They know full well that these policies eventually fail, but they are also banking on the fact that their will either, be out of office by that time, or that enough time has passed that the public will forget that they put the bill forward. 

The latter has to be the case for Argentinian president Cristina Kirchner, since her husband instituted such policies and only accomplished widespread meat and milk shortages. And what the fuck is wrong with Argentina? You have a president who proves that he knows nothing about economics and you go and elect his wife right after him? I am sure that her presidency will be a model of clean and sound government, oh wait, no it won't. Argentina seems to be the 20th century example of a national going from the top of the first world to utter self inflicted implosion; and it looks like Argentina will go through another round of wealth destruction thanks to her incompetent leaders. If only our own politicians would take note.

Sometimes I toy with the idea of  championing a law that stipulates that upon the end of congressional tenure that the person automatically is sent to prison for a time equal to the number of years they served in office.

Geopolitics: Mississippi Drought

Earlier I posted about how the Mississippi was the fountain head of American power.  We have fought several wars to ensure the security of the river; the War of 1812, Mexican, Civil, and Spanish American War were all fought to some degree to ensure America's access and security to this vital arterial system. It also happens to be a lifeline which connects America to over a hundred of other countries that import our agricultural products; well it also happens to having one of the worst droughts in 50 years. This will affect global trade and economies heavily.

Is Michigan A Future Glimps of China?

Gordon Chang, an an article in Forbes, notes some of the changes that are happening to China's manufacturing economy.  According to him six cities, including Shenyang a city I once visited, are now allowing defunct and abandoned industrial sites to turn into farmland. Now this doesn't necessarily indicate a larger trend, though I do find it interesting that a city I had visited less than two years ago, and was growing at an exorbitant pace, is allowing land to return to nature.

What is even more interesting is that the rising costs of manufacturing on the east coast of China have forced manufacturers to either move inland or overseas. This is nothing new, and has been documented for some time now, China is getting more expensive and losing it's competitive advantage. This is interesting because China has always had issues with regionalism. The wealthier coasts will probably do everything they can to try and keep industry where it is while the interior will do everything it can to take industry away.