Posts tagged ‘Communist Party’

Final Indicator, if You Needed One, of a Looming China Crash

Here is what I remember from the late 1980's - just about every technocratic pundit of the leftish bent, and a number on the right, all hailed Japan as the government economic planning model the US should follow.  One fawning essay after another lauded Japan's MITI and its top-down approach to economic investment.

Practically within hours of when these editorials peaked, the Japanese economy began to crumble.  We know now that MITI and other Japanese officials were creating gross distortions and misallocations in the economy, and inflating an economic bubble with gobs of cheap credit.  These distortions have still not been entirely cleared from the Japanese economy 20 years later, and the country experienced what was called "the lost decade" which may become the lost two decades.

For over a year, it has appeared to me (and many other observers more knowledgeable than I) that China was headed for a crash for many of the same reasons as Japan.  I am now sure this is true, as today Andy Stern (formerly of the SEIU) writes an essay lauding the Chinese top-down state-planned economic model.

The current debates about China's currency, the trade imbalance, our debt and China's excessive use of pirated American intellectual property are evidence that the Global Revolution—coupled with Deng Xiaoping's government-led, growth-oriented reforms—has created the planet's second-largest economy. It's on a clear trajectory to knock America off its perch by 2025....

There is no doubt that China will pass the US in total economic size -- it has three times more people than we do.  But their success is clearly due to the small dollops of free enterprise that are allowed in a statist society, and advances are made in spite of, not because of, the meddling state.

Exactly how much economic progress had China made before its leaders brought in the very free market ideas Stern says are dead?  None, of course.  To read China as a triumph of statism and as the death nell of capitalism, when in fact it is one of the greatest examples in history of the power of capitalist ideas and how fast they can turn around a starving and poverty-stricken country, is just willful blindness.

I will include just one other excerpt

While we debate, Team China rolls on. Our delegation witnessed China's people-oriented development in Chongqing, a city of 32 million in Western China, which is led by an aggressive and popular Communist Party leader—Bo Xilai. A skyline of cranes are building roughly 1.5 million square feet of usable floor space daily—including, our delegation was told, 700,000 units of public housing annually.

Meanwhile, the Chinese government can boast that it has established in Western China an economic zone for cloud computing and automotive and aerospace production resulting in 12.5% annual growth and 49% growth in annual tax revenue, with wages rising more than 10% a year.

My first thought on reading this was that Houston used to look exactly like this, with cranes all over the place building things, until we had an Administration that actively opposed expansion of domestic oil production.  My second thought is that this reads so much like the enthusiast essays written by leftists when they used to visit the Soviet Union and came back telling us Russia was so much superior to the US -- just look at the Moscow subway!

The emergence of hundreds of millions of people in China and India from poverty is exciting as hell, and at some level I don't blame Stern for his excitement.  But I fear that what he is seeing is the US housing bubble on steroids, a gross misallocation of capital and resources driven by a few technocrats who think they can manage a billion person economy from their office in Beijing.

Disclosure:  I seldom do anything but invest in generic bond funds and US stock funds, but right now I am out of US equities and I have a number of shorts on Chinese manufacturing and real estate.

Worst Law That I Can Remember

This is simply an awful law.  If you had asked me ten years ago if we would see the President (a Democrat yet) claiming the right to assasinate Americans and the Congress threatening to pass a bill requiring the indefinite detention, without trial, of people within our borders, I would never have believed it.  At first I was excited to see that Obama was threatening a veto, but then I read that he was not upset about indefinite detention, but only that Congress was threatening to tie his hands and proscribe certain options.  Obama wants to have the choice of whether to offer certain individuals due process or indefinite decision.

For more, see Rand Paul v. John McCain

Postscript:  As usual, I am left flat by the debate over whether certain injustices, like indefinite detention, apply to all humanity or just foreigners.  I have yet to parse anything in our founder's national rights arguments behind the Declaration of Independence and the Constitution that justify why folks born outside our borders have fewer rights than those born inside them.

Update:  More here, including a lot from the ACLU.  We are supposed to feel better because John McCain says that this only applied to Al Qaeda.  But how in the hell do we know with any confidence that the folks the President locks up are Al Qaeda?  Its bad enough to declare a whole new crime, that of being a member of a certain organization.  The US, through its history, has been much better than most nations in avoiding banning certain parties and organizations.  But even if we accept this law, doesn't there need to be some due process?

I suppose I understand that if I captured a guy in an SS uniform in WWII who 10 seconds ago was shooting at me, locking him up as a POW might not require a ton of due process.  Last I checked, the AQ folks didn't have a uniform or anything.  And most of them are not routinely shooting at us.

We didn't even pass this kind of horrible law at the height of Cold War anti-communist hysteria.  Can you see Johnson or Nixon (or Hoover) being able to indefinitely detain anyone they thought was a member of the Communist Party?

Bursting the Chinese Bubble

This is one of the more interesting things I have read this week, and confirms a hypothesis I have developed, which is that whenever the Left in this country begs that we emulate some fast growing government planned economy, we are probably looking at a bubble about to burst (e.g. the Left's desire to emulate Japan's MITI in the late 80's and their envy of China's authoritarian economic interventions today).

The Royal Bank of Scotland has advised clients to take out protection against the risk of a sovereign default by China as one of its top trade trades for 2011. This is a new twist.

It warns that the Communist Party will have to puncture the credit bubble before inflation reaches levels that threaten social stability. This in turn may open a can of worms.

"Many see China's monetary tightening as a pre-emptive tap on the brakes, a warning shot across the proverbial economic bows. We see it as a potentially more malevolent reactive day of reckoning," said Tim Ash, the bank's emerging markets chief.

At some level, the dynamic is not surprising and is one seen in every developing country -- early development is based on export markets taking advantage of low cost labor.  But as growth proceeds, demand for labor increases and bids up labor costs.  A transition has to occur from exporting low-cost merchandise to making a higher-value products and services for the domestic market.  Dislocations are nearly inevitable

On a recent visit to a chemical plant in Suzhou, I was told by the English manager that wage bonuses for staff will average nine months pay this year. This is what it costs to keep skilled workers. His own contract is fixed in sterling, which has crashed against the yuan over the last two years. "It is a sobering experience," he said.

China may have hit the "Lewis turning point", named after the Nobel economist Arthur Lewis from St Lucia. It is the moment for each catch-up economy when the supply of cheap labour from the countryside dries up, leading to a surge in industrial wages. That reserve army of 120m Chinese migrants everybody was so worried about four years ago has already dwindled to 25m.

This tends to be made worse in a heavily planned economy.  As any Austrian-schooler will tell you, government intervention in the economy and credit markets tend to distort investments, pushing investment capital from the most productive uses into less productive assets that are favored by the government distortions.  Thus the Japanese 80's and American 00's real estate bubbles.  And now the Chinese:

The froth is going into property. Experts argue heatedly over whether or not China has managed to outdo America's subprime bubble, or even match the Tokyo frenzy of late 1980s. The IMF straddles the two.

It concluded in a report last week that there was no nationwide bubble but that home prices in Shenzen, Shanghai, Beijing, and Nanjing seem "increasingly disconnected from fundamentals".

Prices are 22 times disposable income in Beijing, and 18 times in Shenzen, compared to eight in Tokyo. The US bubble peaked at 6.4 and has since dropped 4.7. The price-to-rent ratio in China's eastern cities has risen by over 200pc since 2004