Things aren't looking good for the world as a whole. The American economy is certainly shot full of problems, but many of the other major countries have severe problems as well, both immediately obvious and underlying.
For my information on these, I'm using several of the economists/financial gurus cited in my last blog, however I think I also should mention how invaluable David Stockman has been in this.
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| David Stockman |
Stockman left to work on Wall Street, being one of the founding members of the investment and financial advisory firm "Blackstone Group". He ultimately left to start his own firm.
What I like about Stockman, is that he's not afraid to criticize either political party or Wall Street. And he has the advantage of having worked in both Washington AND Wall Street, so he understands what's really going on.
He wrote an excellent book called: "The Great Deformation: The Corruption of Capitalism in America", which does a great job explaining how the American economy has become increasingly corrupted over the last 50 or so years, and has put us in decline as a result. He walks through the various missteps politicians made (in both parties) in order to earn short time political gain, but ultimately damning everyone else. Since he was attacked by Wall Street and Washington after writing this, I think that's a good sign he's doing the right thing.
I highly recommend his website: http://davidstockmanscontracorner.com/ to everyone. He writes blogs just about daily, and posts lots of relevant articles and blogs that he enjoys himself.
Alright, I will begin. Again, much of what I'm saying is from memory, but I am happy to provide sources if anyone wants to know.
China:
The Chinese situation is very interesting. Many think of China as some major success story, some ideal model of a state run and managed economy. This is superficial: beneath the surface it has major problems.
China's economy is a sort of hybrid of capitalism and communism. I like the term "red capitalism" that some have used.
Some of China's success CAN be attributed to a departure from all out state planning. After Mao's death, the government lifted the price and wage controls (which allowed prices to reflect actual supply and demand in the market), privatized housing and farming, and opened up to foreign investment. For example, KFC did more sales in the last decade or so than in Western countries.
China faced the greatest starvation in history, yet today, 1 in 4 Chinese adults are overweight. A problem in of itself, but it's major improvement from a country where people were starving.
The issue with China is that they developed too rapidly through central planning and credit, rather than simply relaxing government control on the economy, and letting market forces work. China's credit from has expanded from (the equivalent) of $1 trillion in 2001 to $25 trillion today. No country has EVER expanded its credit supply 25 times!!!
A country cannot have a strong economy in the long run that is founded on borrowed and printed money.
Those who have followed this know what I'm talking about: China has built entire cities that nobody is living in, airports that nobody is flying from, high speed rail that is too dangerous to use, bridges to nowhere, highways that nobody is driving on, malls that nobody has set up shops in, etc.
Many of the owners of these houses, businesses, etc. are holding off waiting to get the ideal price for their investments. The problem is that the general population can't yet afford them, so they will either have to lower the price and take a major loss from their investment, or sell them and take a loss.
The central planners have tried to build a modern economy overnight from Beijing the quick and easy way.
What does this mean?
The Chinese government has admitted (and this is astounding, considering how much governments lie) that they believe that more than the equivalent of $7 trillion has been wasted in the last 10 or so years! Nothing like this in the history of mankind.
Using the Austrian economics school of thought, China's economy is essentially a massive credit bubble, that is going to come unwound anytime now. (Which to give you a very short layperson's explanation: This school of thought believes that true economic growth comes from saving and investment in the means of production, not spending money. Money's value is determined by what it can buy, once the goods are available. This school also believes that the "booms" are caused by an expansion of money and credit (printing money and lending it out, especially at low interest rates), and that the "busts" are the collapse of businesses that were "malinvested" in, meaning there was no sustained demand for them. This theory does a good job of explaining the 20's, the 90's etc.)
The Chinese government (like ours) is trying to hold things together in order to keep the population happy, in order to prevent civil unrest. Approximately 220 million Chinese (to put that into perspective, the current US population is around 320 million) were moved into these major cities and planned cities in order to build them. Many aren't even registered as citizens of these cities, and will most likely have to be herded back into the rural areas once this collapses. This is going to be a disaster.
China is most likely going to start liquidating (dismantling, and converting to cash) its malinvestments on a massive scale and exporting the materials. This might be good for the world, in the sense that more capital goods (Goods used in production, like iron, copper, nickel, etc.) will become available at a lower price. However, China will have wasted all that money, devalued their currency further, and most likely have to deal with major unemployment and civil unrest.
This will also hurt us and the rest of the world, since China produces much of what the rest of the world buys.
Japan:
Japan is a sad story. I really admire the people and their culture, but they have made many bad decisions, and are facing problems with their demographics.
Things are looking grim in Japan. Japan has been basically in recession for the last 20 years or so.
There is a term often thrown around regarding Japan during the Nineties: "The lost decade."
Coming out of World War 2, Japan was considered a "post war miracle". The economy grew so rapidly, it was in serious competition with ours.
However, they (like China today, and us) built a lot through credit expansion.. We thought that they were going to be the next great economic super power, but their real estate bubble burst in the late Eighties-early Nineties, and they tried to prop up their economy through major deficit spending for the next twenty years. Japan has been doing for the last two decades what we have done since 2008 or so.
Japan has the highest debt to GDP ratio in the entire world: 240% to 1.
Stockman talked about meeting with Japanese financial ministers in the Reagan White House in the early Eighties, and they were deficit hawks... their debt was only about 30% to GDP or so.
For those that don't know, GDP (Gross Domestic Product) is considered one way to measure economic output: It's the measure of consumption, investment, and government spending.
This is unreal. Ours is roughly 100% to 1, which in of itself is horrendous.
Another telling number is the "index of industrial output" figure. I'm not 100% sure about how it's measured, but I have a good idea based on the name. It reads at 96.8%.... what was it in 1990? 96.8%. They're exactly where they were about 25 years ago.
The other issue with Japan is that the country is aging out. Roughly one out of four Japanese are senior citizens, and their birth rate has declined rapidly. This will mean a diminishing labor force, and a large older population that is going to need to be supported by them.
China will face a very similar situation unless they repeal their one child rule and stop aborting their girls.
The Japanese government has its hands tied. They spend roughly $1.00 (remember, I'm converting just to put it in our terms) for every $.50 it takes in. No person in their right mind is going to loan Japan money, so they have printed a lot more to pay off their debt, which will debase their currency. They are also hesitating to raise taxes, since the economy is in such rough shape and this will hurt it even more.
I predict that there will be civil and financial unrest in Japan in the next decade or so.
In my view, Japan is proof that the Keynesian school (The school of economics that believes the economy is driven by spending which dictates employment and production) doesn't work. Keynesians have tried to argue that "they just haven't spent enough" which is pure insanity to me, considering they have spent over double what their economy is worth. (using the official GDP figures.)
Conclusion:
I wish I had a more optimistic outlook, but too many bad decisions have been made for too many years.
I just hope that we can learn from all of this, and not repeat these mistakes.
Thank you for reading! I will write about Europe next.
-STK
