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The response to
Mario Cavolo’s glowing take on China
and the global economy was eye-opening, to say the least. It’s not hard
to understand why someone who lives and works in China,
as Mario does, might believe that the country’s economic prospects are
so spectacular as to all but preclude the possibility of a deflationary
depression elsewhere in the world. We’re not so sure ourselves and have
a few things to say about it below. But we were nonetheless persuaded by
Mario’s argument, and by comments made by others in the Rick’s Picks forum, that
China
is doing the important things right, economically speaking. Westerners
don’t come naturally to this notion, since it requires us to put aside
very troubling concerns about China’s repressive, authoritarian
political regime; for it is both unfortunate and undeniable that dissidents
do indeed disappear in the middle of the night, never to return; and that
“troublemakers” such as the Falun Gong, a Taoist sect, have
indeed been tortured and expelled from civil life.
Even so, and
seemingly paradoxically, China’s
political leaders seem to have the long-term well-being of the Chinese people
foremost in mind when it comes to managing the economy. On this point, we
found the following comment in the forum, by “Adiehua,”
particularly illuminating: “Like most of the correspondents here, I
come from a background that prizes democracy and freedom,” he wrote.
“However, I consciously try to avoid the trap of believing that it is the
only system. The popular belief that China
is a somewhat totalitarian state is erroneous. It is authoritarian but the
Chinese have had various versions of authoritarianism for 2000 years. To ask
them to adopt Ben Franklin’s philosophies in a heartbeat is not
practical.
Chinese Solutions
“Nearly
everyone I know in China
is acutely aware of the various problems that China
faces. They are however, adamant that they are Chinese problems for which
they will find Chinese solutions. Many of my Chinese acquaintances indicate
that export trade continues to be quite strong but significantly more of it
is going to other emerging markets in the Middle East, Russia, South Africa,
South America and of course, Asia. There is a growing conviction that future
export growth will be generated by hi-tech and value added products.
“The
Chinese are moving out into the world. They are using their cash to acquire
assets everywhere, particularly oil and minerals. They are gaining export
markets in developing countries and are becoming major tourists. They
acknowledge the somewhat symbiotic relationship that they have with the US
and Europe and are sufficiently pragmatic
to take actions that support those economies.
“In the
final analysis, China
will do what it perceives is best for China.
If the West derives a benefit, then so be it.”
America’s
Suicide
Contrast this
with America’s
economically suicidal policy of fighting debt deflation with the creation of
yet more trillions in new debt. Clearly, America
has no long-term plan or even a goal. Instead, the nation’s economic
policies seem geared toward papering over problems rather than resolving
them. The result, in nearly each and every instance over the last several
years, has been that Government’s misguided efforts have failed miserably.
The costs have yet to be borne by taxpayers, but when the bills start coming
due next year, the tax burden that results will kill any remote chance the U.S.
economy had of recovering.
In his essay,
Mario asserted that America’s
fall will be softened by the countervailing pressure of Asian prosperity and
by growth elsewhere in the world. He also thinks the super-rich will escape
misfortune simply by moving their money out of the U.S.
We would argue that this gives the supposed “smart money” more
credit than it deserves. Consider, for one, that whenever some urgent change
in investor perceptions scares the allegedly smart money into fleeing one
supposed safe haven for another, the smart money will be subject to an
enormous haircut. Just asked Warren Buffett, who has been struggling to
unwind a $5B position in muni bonds before the music stops. And besides
Buffett, there have been many thousands of super-rich investors who have been
decimated because they jumped into private-equity deals that they thought
were bargains, only to discover that deflation has barely begun to mark down
the assets they'd acquired. (Newspaper publishing companies have become the
new Brooklyn Bridge
that someone would love to sell you.) There is no such thing as a
buy-and-hold investment anymore, and no asset class is safe from the ravages
of capital flight. For that reason, even George Soros can lose a big piece of
his net worth if he guesses wrong just once, or if he is just a few hours
late exiting a speculative position that has turned lethal.
Speaking of Soros…
Speaking of
Soros, he supposedly is in Petrobras up to his eyeballs. But does he hold
U.S. Treasurys as well, as many well-heeled investors undoubtedly do? If so,
how smart is that? The U.S.
is BANKRUPT and has been raising its current, $13 Trillion debt ceiling at
the rate of $1 Trillion per year. When the epiphany of U.S.
bankruptcy finally comes, as it one day must, and the Federal Reserve becomes
the only buyer of Treasury paper, where will the smart money (i.e., the
hedgies) migrate? And how much time will they have to do so? It
is hardly beyond conjecture that the inevitable collapse of the dollar
and Treasury debt will occur in mere hours, making it impossible for any of
the rats to escape the ship.
Arguably, the
smartest "smart money" is Chinese, as Mario would doubtless
agree. Whereas the Japanese bought Impressionist paintings, Pebble
Beach and Rockefeller
Center when they were
flush with cash, the Chinese have shunned trophy assets, choosing instead to
lock up supplies of natural gas, oil and mineral resources all over the
world. In stark contrast, a very significant portion of the West’s seed
capital remains hopelessly trapped in a derivatives-based Ponzi scheme whose
notional value totals many hundreds of trillions of dollars. There is no way
this money can find its way into Bolivian tin, Venezuelan oil and Iranian
natural gas in the way that China’s
money already has. The capital appears destined to be deflated to the
vanishing point in settlement of mostly public debts far too large to pay.
We’ll give
the last word to forum regular Martin Snell, who lived in Taiwan
in the late 1980s, when the stock market there collapsed. “I
thought for sure there would be a depression . Nope. It was a bit tough for a
bit but the resiliency propped up by a strong underlying growth curve held
the place together.” But America?
“To me [the country] is starting to look like what has happened to Britain
over time: a slow, non-stop decline, while they cling to long-obsolete
feelings of greatness. Yes, there are vestiges of the glorious past, but
visit any town in the northern half of the place and heaven help you -- a
disaster.”
Rick Ackerman
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Rick Ackerman is
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