Never short a country with $2 trillion in reserves?
mpettis.com
mpettis.com
One way or another, China has borrowed from the future and will have to pay for this excess expansion. It could be a crash, or it could be years of stagnation as the nation attempts to use up the excess capacity it has built.
This is a good piece written by someone who understands the underlying economics.
Chanos has been criticized as just recently beginning to study the Chinese economy, but sometimes being fresh to a subject helps distance an analyst from recent past--which can be a good thing.
Even if you have a crash, a built road is still there and a built office still exists. Pudong is empty because the offices are expensive and it's not really in town - if a crash happens that forces the government to reconsider whom they want to target pudong at, then there will be enough people moving in there when the prices are right.
China is not developed, it's developing. It's not borrowing from the future - the U.S is borrowing from the future and giving it to china. China is taking the money and building infrastructure.
Property is not expensive in china. There is no excessive inflation or speculation. China has the typical bubble of any rapidly growing economy, but the huge internal market, massive infrastructure development, and large population of highly educated people, and the introduction of chinese businessmen to secondary markets in Africa and South America mean that the fundamentals of the chinese economy are fine. If there is any bubble, it will blow over and growth will continue.
Think about how strange it is that not just your macbook, but almost everything you can buy has been manufactured on the other side of the planet, can be transported, imported and still be sold cheaper than you could produce it locally.
It's a bit like selling your birthright.
Also, don't forget that those workers abroad are usually working in circumstances that local authorities would not tolerate.
A nice bit of backstory about moving production to China.
A few years ago, rubbermaid was forced to raise its prices because of the developments on the raw materials market.
Wall-mart refused to accept the rise, dropped the rubbermaid product line, rubbermaid filed for bankruptcy, and then the whole production was moved to China and wall-mart signed a distribution deal with the new owners of the moulds.
So the only reason why you can buy that stuff manufactured in China cheaper is because of a combination of lack of respect for human beings, sloppy environmental controls and unsafe work place practices.
If those were brought up to the same standards that are held in the developed countries the prices would be roughly the same after import duties and transportation costs are figured in.
It would be interesting to see some objective measurements about how much of the cost difference is explained by which differences in practice. For example, I think the "living wage" paid to manufacturing employees in the U.S. frequently exceeds the real living wage by a substantial margin, which they exact from their employers via a monopoly on labor (unions).
A friend of mine is an interesting character, something of a mechanical/electrical genius, he can literally fix any machinery.
One of his jobs involved flying to China to help with the repair of a machine that mass produced latex condoms.
While he was there the proud owner of the condom factory announced he had just finished the creation of a factory for car jacks that were sold in large numbers to the big three car manufacturers for inclusion with their vehicles.
He got a tour of the 'new' factory.
He described a scene straight out of the worst of the beginnings of the industrial age. Workers, mostly women and children stood at endless tables in very bad light operating hand operated machine tools and tool-and-die stamping machines.
Plenty of them were missing fingers or worse, and the pace was literally feverish, the noise deafening.
It was the most unsafe machine shop he has ever seen and he's been in quite a few of them. Now, arguably this is low tech stuff, not comparable with your macbook, and I'd hope that Apple held their suppliers to a higher standard.
But responsible waste management and safety cost a lot of money when you factor them in to the end price of a product, no matter whether it's a nike shoe, a macbook or a car jack.
I wonder if it is so easy, though. I don't like the bad conditions in factories and exploitation of labor. On the other hand, if the alternative is no factories and no work, perhaps the awful factory is the better option? It's not as if those workers would go home to their luxury weekend lofts if the factories would be shut down.
Just a thought to throw into the ring - I am not sure what is wrong or right in this case (unless you look at the bigger picture, political system or whatever is causing poverty).
This idea that people in developing countries can't compete with us in software or engineering or whatever is bizarre, slightly racist, and without a much basis in reality (since they already do).
You are really suggesting that violating countless human rights laws, more or less using slavery, etc. is how one can "manufacture cost-effectively"? I wish people who felt like that were apprehended and forced to work in such places...
My understanding is that most Chinese people working in factories have the option to go back to subsistence farming if they wish.
What is offensive about your post is the suggestion that the US is somehow "not good at" production because we don't have the option to utterly disregard human rights and abuse the employer power to give people an "offer they can't refuse".
We all buy, indeed rely on being able to buy, this cheap stuff, so I didn't intend to single you out as evil for also doing so. One just has to remember we have such low prices now because humans somewhere far away are being treated inhumanely. It is unlikely that this will continue indefinitely.
You could equally well say this of a house foreclosed on by a bank in the U.S. during the housing crisis. But do you really have any doubt that such houses lying fallow and the resources that go into reselling them are both economic losses? The same will be and is true of the empty offices and untravelled roads in China.
I think the issues with China are going to be much more practical. They remind me a lot of the Soviet Union. A closed society that is very effective at giving the appearance of prosperity, while under the covers things are very different. They'll be able to keep it up for a decade or two, but over time the whole thing crumbles as the base was never truly well built.
Our biggest advantage lies in the risk taking aspects of our culture. We're a people that celebrates the type of risk that leads to true innovation. The cool thing: It's not just the U.S. anymore. Europe has caught on as well.
I do think the United States is going to weaken (relatively) in the coming decade. We'll still be a world power, but I think we'll be sharing that with a re-awakened Europe.
Europe has taken on U.S. style risk taking? I have honestly not heard or read this elsewhere. Can you elaborate?
Except China (also a number of other countries)
Most of the American declinism supporters still cite WWII as the only reason for American economic ascendancy. I'm skeptical that markets take 65 years to correct.
Do you have ANY understanding of the state of Europe's economy following WW2? We were heading for WW3 after the US pulled the mat on the debt repayments. Luckily Marshal understood this and hence the Marshal Plan prevented WW3 in Europe.
Chevron had a 10 BILLION dollar profit last year. This was a disaster- it earned 24 billion in 2008.
Empire building was Europe's "sense of mission and purpose in the world" we made the natives "civilised". It was our belief of divine right and our ridiculous optimism in regards to war and "glory" (it will be over by Christmas) that led (in part) to our downfall.
EDIT: i do agree with him though that the US should invest in sustainable energy.
In that context, I was able to get past his obeisance to the corporate superpowers of America and his other inaccuracies, and see points that may be valuable. Even though I frequently disagree with their opinions, Friedman and another conservative, George Will, are two of my favorite editorialists. Maybe the fact that I'm neither liberal nor conservative contributes to my enjoyment of their writing.
We don't speak their language (at least I don't), so we cannot watch their version of Hollywood movies or read their version of Hacker News. Therefore I wouldn't be too confident in my beliefs. They might turn out to be cliches.
I think we need to know much more than official grandstanding and parades in order to judge wether enough individuals in a particular country are driven by a will to innovate and succeed and are willing to take some risks as well.
Really, you believe that stuff? That sounds like some kind of propaganda or something you would tell a child. Do you think the Chinese tell each other "We have no purpose in the world, we are a silly nation, we'll never amount to anything."? On the contrary!
Yes, we are what we are because of culture, but mostly because we won WWII, and happened to have lots of nukes, tanks, ships.
The USA still has the superior military, yes. But even now, it would be a very nasty fight indeed. In ten years' time, when China has handsomely exceeded the ship numbers of the US Navy, it's anyone's guess who would win, and let's hope we never have to find out.
And of course, because of Western countries' tradition of federation and democracy, the US and Canada can slowly merge with the EU, treaty by treaty, just as fast as it needs to to counterbalance China. NATO is just the beginning of this. I'd imagine Russia will eventually, perhaps in 20 or 30 yrs, join the EU, Euro, and even the Schengen zone one day. Such a combined US/Canada & EU/Russia would have well over a billion people, with most people probably speaking English, and be centred around the Arctic Ocean, which by then would be the best land on the planet because of climate change.
But who's China going to federate with? They've had trouble keeping their Western provinces in check, and keeping their own people inside the country. They'll probably get Mongolia, maybe even Burma, within 50 yrs, but none of their other neighbors will trust them enough to let them too close. Russia will look to Europe to help defend its Siberian resources before it lets China in. Perhaps their immigrants to the West will stay loyal as part-time spies, but their children certainly won't.
In 50 yrs, a combined US/EU/Russia will be top dog, with China lagging in 2nd place, and Japan, India, Brazil, in the third tier.
Whether that's true now is debatable in my opinion. I think the American dream has been perverted into a lust for enhanced mediocrity. People where I live seem to want to get a job with good benefits, a decent house, and a nice TV, so they can just get through their lives by watching sports and reality shows. Everyone wants to be the best middle-class, Prozac-popping average Joe they can be.
What seems to be different about America is that we provide the opportunities and to a degree the encouragement for those who do not want to be like that to succeed, or at least make valiant efforts and often make some progress in those efforts.
Pardon?
Seriously, do you actually believe that?
Definitely not everyone 'wants to be an American'.
The only people that 'want to be American' in very large numbers are those that currently are below the standard of life that America offers, and plenty of those people would still be quite happy to be European, Japanese or even Australian.
As for your sense of mission and purpose in the world, that might be more of a problem than a part of the solution.
I agree with you otherwise, though I'd remove Japanese from that list. The streets of Tokyo are not exactly paved with gold these days.
No offense meant, I know quite a few people from Australia and without exception they're really nice.
No offence taken, of course!
I should come one day to visit Australia.
Let me know when you do make it down under - beers are on me!
Also plenty of my domain names are still registered to the Toronto office.
So that's really not your fault :)
I live in the South of the Netherlands right now.
America is the current yardstick, not to be confused with adulation.
I grew up in the US and I live in western Europe now. I don't see myself ever going back long term. I feel like my standard of living here is much better.
Professor Pettis is also correct in asserting that the role of central bank reserves is one of the most misunderstood concepts in economics. In fact, nowadays, almost any economic concept as it relates to governments or sovereign states are routinely misunderstood. Probably because that is precisely the part of the economy that the average person feels they understand so well.
For instance, many people worry, rightly by the way, about our USD1.4 Trillion deficit. They feel qualified to comment on its implications authoritatively since we can SORT OF understand the concept. Yet you see no publicly expressed concern at all over the USD500 Trillion house of cards that is the derivatives market. Very few people understand derivatives markets well enough to know the implications of this situation. I think this causes us not to think about it and to hope that someone else will deal with it before the bottom falls out.
Now understand that these guys are not average at all. I have attended Pettis' talks and he is definitely not average. But I think the same sort of intellectual dynamic goes on even in their circle.
not understanding the basics of sovereign accounting is understandable. could you make heads or tails of a companies finance if they did all their accounting in their own stock?
At some point growing investments gain a momentum all their own. I.E. everyone invests in China because of their double digit growth; and China has double digit growth because everyone invests in them.
The problem with a compounding growth curve is that it gets so steep that it shoots past the place where it should have found equilibrium.
Economic success or failure is due to many factors.
He should have chose to argue with Jim Rogers, who has much more credibility, than Friedman.
In the article he states explicitly that large reserves do not necessarily cause economic problems.
For example, it could help you to increase your level of military technology, but it doesn't provide markets for all those factories who's export markets are drying up.
Haven't we learned that central planning doesn't work (for long) for this sort of thing? See Japan, Inc.