Proving once again the best reporting is done anywhere but in the U.S., I read the latest article by Ambrose Evans-Pritchard of the Telegraph. According to Evans-Pritchard:
Far from taking over as the engine of growth from an exhausted West, China is making matters worse. Its “beggar-thy-neighbour” policies continue to play havoc with global trade and risk tipping the world into a second leg of the Great Recession.
And he’s right. Throughout the crisis, there has been talk of “rebalancing” the world economy. Specifically, it refers to the fact Western nations are net debtors in terms of trade, while Eastern nations are net exporters. One of the proposals calls for Western nations to re-start manufacturing while Eastern nations would consume more – and save less. But there are problems with that, just ask a 10 yr. old dog to learn a new trick:
By holding the yuan to 6.83 to the dollar to boost exports, Beijing is dumping its unemployment abroad – “stealing American jobs”, says Nobel laureate Paul Krugman. As long as China does it, other tigers must do it too.
Western capitalists are complicit, of course. They rent cheap workers and cheap plant in Guangdong, then lobby Capitol Hill to prevent Congress doing anything about it. This is labour arbitrage.
I don’t agree with Krugman because he’s an arrogant liberal. Getting Americans to re-start manufacturing the Chinese and other Asian countries have done cheaper than us is not the answer. Besides, in the long-run, it doesn’t help us. A lot of manufacturing work is not value-added work. Advanced economies advance by innovation; not by clinging to some days gone by notion of what their economy once was. Evans-Pritchard calls it labor arbitrage, I call it comparative advantage.
At any rate, Evans-Pritchard continues:
President Obama said before going to China this week that Asia can no longer live by shipping goods to Americans already in debt to their ears. “We have reached one of those rare inflection points in history where we have the opportunity to take a different path,” he said. Failure to take that path will “put enormous strains” on America’s ties to China. Is that a threat?
Sounds like it to me. This relationship is starting to get testy. We think they play dirty in terms of trade, they think we’re killing their investments in our Treasuries by constantly floating debt that pushes down the value of their holdings. Just look here, here, (this one shows how bipolar our adminstration is in handling China), and here for examples of just what’s happened since Obama took office.
But the bigger issue for global recovery is here:
The reality is that much of Beijing’s $600bn stimulus has been spent building yet more plant and infrastructure so that China can ship yet more goods, or has leaked into property and stocks.
Credit has exploded. Allocated by Maoist bosses for political purposes, it has become absurd. China is rolling as much steel as the next eight producers combined. It is churning more cement than the rest of the world. Fixed investment is up 53pc this year. Once you know that Hunan authorities have torn down two miles of modern flyway so that they can soak up stimulus by building it again, or that the newly-built city of Ordos is sitting empty in Inner Mongolia, you know what must come next.
I read earlier this weekend China’s finished steel prices today are below their production cost. Commodity inputs are higher now than at the beginning of the year, but the fact is they are also expanding production capacity which is still driving down average cost. But what if the extra capacity just sits idle? What will happen to finished steel prices then? They’ll drop, well, literally like a steel beam falling out of the sky. That’s not inflationary, that’s deflationary.
Mr. Evans-Pritchard ends on this cheery note:
The world economy is still skating on thin ice. The West is sated with debt, the East with plant. The crisis has been contained (or masked) by zero rates and a fiscal blast, trashing sovereign balance sheets. But the core problem remains. The Anglo-sphere and Club Med are tightening belts, yet Asia is not adding enough demand to compensate. It is adding supply.
My view is that markets are still in denial about the structural wreckage of the credit bubble. There are two more boils to lance: China’s investment bubble; and Europe’s banking cover-up. I fear that only then can we clear the rubble and, very slowly, start a fresh cycle.
He’s dead-on. The global ZIRP (zero interest rate policy) has basically put perma-freeze on markets because risk/return relationships have been distorted by cheap money that is just sitting around and sovereigns are loading up on debt trying to re-start consumption. I call this “falling on the grenade” by the government sector. What we need to do is purge the bad credit, write the debts off, have the wreckless banks and borrowers take their lumps, and rebuild.
But we’re not at that point yet. People are still trying to dodge the pain, trying to figure out how to flush out & sterlize wounds without the stinging and burning.
So it festers… and continues to infect us…