China may Collapse in 2012 and Suffer Japanese Deflation, Perhaps Even the Collapse of the Communist Party

Posted by PITHOCRATES - January 1st, 2012

Week in Review

The Chinese aren’t invincible.  Just like the Japanese weren’t invincible.  Even though many in our government like to point to the heady days of their economic dominance and say that’s what we need to do.  Partner government with business.  Because Big Government people love central planning.  Because they love being in charge.  But central planning doesn’t work.  And government interference into the economy rarely ends well.  It put the Japanese into a deflationary spiral for a decade and change.  And there are some who think the Chinese are heading down that same road.  They believe that China will collapse.  Even give three reasons why (see The Coming Collapse of China: 2012 Edition by GORDON G. CHANG posted 12/29/2011 on Foreign Policy).

First, the Communist Party has turned its back on Deng’s progressive policies. Hu Jintao, the current leader, is presiding over an era marked by, on balance, the reversal of reform. There has been, especially since 2008, a partial renationalization of the economy and a marked narrowing of opportunities for foreign business…

Second, the global boom of the last two decades ended in 2008 when markets around the world crashed. The tumultuous events of that year brought to a close an unusually benign period during which countries attempted to integrate China into the international system and therefore tolerated its mercantilist policies. Now, however, every nation wants to export more and, in an era of protectionism or of managed trade, China will not be able to export its way to prosperity like it did during the Asian financial crisis in the late 1990s…

Third, China, which during its reform era had one of the best demographic profiles of any nation, will soon have one of the worst. The Chinese workforce will level off in about 2013, perhaps 2014, according to both Chinese and foreign demographers, but the effect is already being felt as wages rise, a trend that will eventually make the country’s factories uncompetitive. China, strangely enough, is running out of people to move to cities, work in factories, and power its economy.

China’s economic ascendance happened when the ruling communists backed off and let in some capitalism.  In their eastern cities.  Which erupted in economic activity.  People poured in from the country.  Where there was still the occasional famine.  And abject poverty.  These workers became wealthy beyond their wildest dreams.  They got a taste of the good life.  And they liked it.  Especially all of those Western toys.   And the Internet.  Next thing you know they started talking to each other.  Enjoying this new life.  And these new freedoms.  A little too much for the ruling communists.

As a result, we will witness either a crash or, more probably, a Japanese-style multi-decade decline. Either way, economic troubles are occurring just as Chinese society is becoming extremely restless. It is not only that protests have spiked upwards — there were 280,000 “mass incidents” last year according to one count — but that they are also increasingly violent as the recent wave of uprisings, insurrections, rampages and bombings suggest. The Communist Party, unable to mediate social discontent, has chosen to step-up repression to levels not seen in two decades. The authorities have, for instance, blanketed the country’s cities and villages with police and armed troops and stepped up monitoring of virtually all forms of communication and the media. It’s no wonder that, in online surveys, “control” and “restrict” were voted the country’s most popular words for 2011.

So the Chinese are reversing their policies that led to the great economic ascendancy.  Which can only reverse that economic progress.  And after years of explosive economic growth what can follow but deflation?  Just like the Japanese experienced during their lost decade.  It is inevitable.  Because Big Government central planning just doesn’t work.  It never has.  And it never will.  Even in China.

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The Yuan gaining Value against the Dollar as the Chinese try to Fight High Inflation

Posted by PITHOCRATES - January 1st, 2012

Week in Review

Currency manipulation is a hot topic.  In the era of central banking and fiat money, the laws of supply and demand determine the value of currencies.  If left to market forces.  But governments everywhere like to interfere with these market forces to give themselves an economic advantage.

A nation must sell their goods in their own currency.  Which means when you’re buying their goods you must first exchange your currency for theirs.  The cheaper their currency is the more of it you will get in exchange for your money.  And the more of their stuff you can buy.  This is why countries want weak currencies.  So they can increase their exports.  And boost their economic output.

The Americans (and others) have claimed the Chinese are a major currency manipulator.  Keeping their currency devalued to boost their exports.  But there’s another side to currency devaluation (see Yuan hits record vs dollar, on track for over-4-percent gain by Lu Jianxin and Kazunori Takada posted 12/26/2011 on Reuters).

The yuan has appreciated 4.27 percent so far this year, with most of the gain being recorded in the first 10 months of the year as China tries to rebalance trade and use the currency to help fight high inflation.

While the government has recently halted yuan appreciation amid slowing exports, it also seems to be wary of a weaker yuan that may lead to capital outflows.

This is the trade off of a weak currency and inexpensive exports.  Inflation.  And high domestic prices.  If you manipulate your currency to increase economic activity (by increasing exports) you will create price inflation.  Making the cost of business more expensive throughout your economy.  Which will reduce economic activity.  It’s a double-edged sword.  And the price currency manipulators must pay.   Sooner or later.

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Bloated Public Sectors Responsible for the Eurozone Crisis

Posted by PITHOCRATES - January 1st, 2012

Week in Review

The Eurozone was Europe’s answer to the United States of America.  One large, single-currency, free-trade zone.  And it worked.  For awhile.  During good economic times.  Like most things work during economic times.  Like it does in business.  A business could have a lot of cost problems and inefficiencies.  But if sales are good people don’t tend to see them.  Because healthy sales revenue can fix any problem.  It’s when you don’t have healthy sales revenue that high costs and inefficiencies hurt a business.  And the cost cutting, nay, the cost slashing begins.  Which is what has happened in the Eurozone.  Only they haven’t started the cost slashing yet (see The Eurozone Crisis For Dummies by Simone Foxman posted 12/30/2011 on Business Insider).

Since joining the euro back in 1999, the governments of Greece and Portugal (among other offenders) have gotten used to spending a LOT of money. When times were good, it wasn’t a problem — banks and other investors were willing to lend them money on the cheap and their public sectors became bloated.

When the financial crisis hit, however, problems came to a head. Debt levels in Portugal, Italy, and Greece became unsustainable, and taxes in a contracting economy are no longer enough to pay the bills.

Greece, Portugal, and Ireland are still struggling to bring their public debt under control, after receiving billions of euros in bailout aid from the European Commission, the International Monetary Fund, and the European Central Bank (the so-called troika). Some of this aid was provided through a temporary Special Purpose Vehicle called the European Financial Stability Facility (EFSF).

For a complete summary of the Eurozone crisis follow the above link to the full article.

Some say Europe’s spending is the problem.  Others say it’s the austerity they’re pushing onto the high-debt states that has taken a non-problem and created a crisis.  Some blame outside economic factors such as the American subprime mortgage crisis that ruined a good thing.  To point the finger of blame you need to look at when the crisis became a crisis.  And when was that?  When these countries could no longer pay the bills for their bloated public sectors.  Regardless of what caused it.  It happened.  And when it did they showed us that they could only support their government spending during exceptional economic times.  Which can mean but one thing.  They were spending too much.

When a business finds itself in this predicament the long knives come out and they start slashing costs.  And the businesses that weren’t spending too irresponsibly usually survive.  Those who spent too much or don’t slash enough don’t.  And that’s where the Eurozone is right now.  But they have a peculiar problem.  They may have a currency union but they are still independent nations.  Rich with history and tradition.  And set in their welfare-state ways.  These great social democracies of Europe.  The Eurozone as a whole can only hope the problem states do the right thing and cut back their spending.  Which they haven’t yet.  And appear to be doing only with the utmost reluctance.  Which explains the ongoing crisis.

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The 70th Anniversary of Winston Churchill’s ‘Some Chicken! Some Neck!’ Speech

Posted by PITHOCRATES - January 1st, 2012

Week in Review

Winston Churchill was a great war time leader.  He led his people through the Battle of Britain.  When the Germans bombed the snot out of them.  But he never wavered.  And neither did the British people (see Winston Churchill 70 years ago: ‘Some chicken! Some neck!’ by Chris Cobb, Postmedia News, posted 12/30/2011 on the Ottawa Citizen).

“When I warned them that Britain would fight on alone whatever they did, their generals told their Prime Minister and his divided Cabinet, ‘In three weeks England will have her neck wrung like a chicken.’ Some chicken! Some neck!”

“Some chicken, some neck” was a reference to the sneering comment by French Marshal Philippe Petain, future leader of the collaborationist Vichy French government, who was convinced that Germany would successfully invade Britain as it had done France. He told Churchill that in three weeks Britain would “have its neck wrung like a chicken.”

“There is something about the phrase ‘some chicken, some neck’ that is utterly charming,” says Ottawa Churchill scholar Ronald Cohen. “Churchill was a superb orator and his oratory played such a major role in keeping spirits alive and keeping the British confident in the fact that they could withstand whatever it was they had to meet.

This speech was given after the Battle of Britain.  Where the British handed the Germans their first defeat in the war.  Which was a big defeat.  Because the Germans failed to knock out British airpower and their air defenses there would be no invasion of the British Isles.  For any German invasion force attempting to cross the English Channel would get the snot bombed out of them by the Royal Air Force.

In all fairness to France, the French did not have the chance to learn the folly of fixed fortifications in the age of mobile warfare until after the Germans went around the Maginot Line and conquered them.  They did learn the folly of fixed fortifications rather quickly after that.  And the humiliation of sitting across the table from their Nazi conquerors as they signed the documents of surrender.

The English Channel let the British avoid that fate.  Well, that, and Winston Churchill.  Who refused to give up in their darkest hours.  They held on.  Until the Americans joined the war.  Who helped the Allies turn back the Nazi onslaught.

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Japanese Government Spending so High that they are going to Double the National Sales Tax

Posted by PITHOCRATES - January 1st, 2012

Week in Review

And we thought our government debt was high (see Japan PM’s Sales Tax Plan Hits Another Snag by George Nishiyama, Dow Jones Newswires, posted 12/27/2011 on NASDAQ).

Japanese Prime Minister Yoshihiko Noda’s plan to double the sales tax by the middle of the decade suffered another setback Tuesday as lawmakers bolted from his ruling party in protest over the proposed tax hike to 10%.

In addition to opposition from lawmakers, sliding public support is making it difficult for Noda to push ahead with the politically precarious task, but one that is badly needed to address Japan’s debt load, the largest among the world’s rich nations at more than twice economic output…

Noda’s DPJ, which came to power in the summer of 2009, has so far failed to meet many of its promises to slash unnecessary spending, such as cutting the number of lawmakers and the wages of government officials.

Instead, Noda’s Cabinet last week approved funding for the resumption of a dam project, which had come to symbolize unwanted public works and which the DPJ had initially put on hold…

“But we need to watch the issue going forward as if the administration backs down from hiking the consumption tax further, non-Japanese investors may start selling the bonds.”

With domestic investors holding almost all of its government debt, a Greek- style debt crisis is unlikely in Japan. But Tokyo is under increased scrutiny to lessen its debt, and credit rating agencies have threatened to downgrade its rating if Japan fails to proceed with the sales tax hike.

Japan’s debt as a percentage of GDP is over 200%.  America’s is about 100%.  So some think that American debt is not a problem.  However, domestic investors don’t hold almost all of America’s government debt.  The Chinese hold a big chunk of U.S. debt.  So a Greek- style debt crisis is more likely in the United States.  I mean, Standard and Poor’s has already downgraded U.S. sovereign debt.  So we’ve already started down that road.

Worse, those in government have been talking about a consumption tax for years.  Such as the Value Added Tax (VAT).  Which will become a reality if debt approaches Japan’s levels as a percentage of GDP.  And without entitlement reform, it will.

So this is our future.  A 5-10% national sales tax.  Which will hit rich and poor alike.  On top of all our other taxes.  This is the consequence of too much federal spending.  Which answers the question “are there consequences to too much federal spending?”  And the answer is, of course, yes.  Taxes.  More and more taxes.  That is the consequence of too much federal spending.  Because the federal government can only spend what it takes from us.

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The European Central Bank Policymaker says the Euro will be Leading Currency in 10 Years

Posted by PITHOCRATES - January 1st, 2012

Week in Review

Problem solved.  The Euro is saved.  And then some (see Euro could become world’s leading currency: Noyer by Vicky Buffery posted 12/31/2011 on Reuters).

The euro could become the world’s leading currency in the next decade if leaders of the single-currency bloc succeed in tightening fiscal integration, European Central Bank policymaker Christian Noyer said in an article to be published in the Journal du Dimanche…

Contrasting with Noyer’s nostalgia, an opinion poll also due to be published in Sunday’s Journal du Dimanche showed 50 percent of French people thought the single currency had been a bad idea, compared with 35 percent who approved.

A separate article in Saturday’s Le Parisien showed the price of an average shopping basket had risen 22 percent since the euro first came into circulation, with certain basic goods such as the baguette rising up to 30 percent.

I don’t know.  Without a political union the odds are not very good.  The Germans are anti-inflation while the French are all for printing more Euros.  And then you have the spendthrift nations of Greece and Italy.  That will require more taxes by the other member states to bail out them out.  As well as the Euro.

For the Eurozone to really work you may have to do more than get rid of national currencies.  You may have to get rid of nations.  Sort of like the Americans did when they drafted their Constitution.  Once currency.  Once government.  One nation.  And that’s not likely to happen when you have 50% of the French saying the single-currency was a mistake.

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