The Chinese Communists to embrace Free Market Capitalism more than President Obama

Posted by PITHOCRATES - December 21st, 2013

Week in Review

During the Eighties Democrats said the Japanese economy was the smart way to go.  Government partnering with business.  With government helping to make that messy capitalism more ordered and manageable.  Improving economic efficiency.  And economic output.  But all that government intervention and cronyism brought on a deflationary spiral.  Japan’s Lost Decade.  Which they’re still trying to recover from.

Over the last decade Democrats said the Chinese economy was the smart way to go.  Government partnering with business.  With government helping to make that messy capitalism more ordered and manageable.  Improving economic efficiency.  And economic output.  But it doesn’t appear the Chinese agree with them (see China factories stuck in cruise control by Charles Riley posted 12/15/2013 on CNNMoney).

After a long period of steady progress and faster growth, China’s factories have lost some momentum in the final months of the year…

…analysts said that sluggishness in the manufacturing sector suggests economic growth has started to weaken, a trend that will continue into next year…

China’s party leaders have spent much of the year plotting a course for economic reform that aims to deliver results by 2020.

Beijing’s plan calls for opening its financial markets and promoting greater foreign investment. The leadership also hinted at changes in how companies file for stock market listings, the introduction of a bank deposit insurance scheme and an acceleration of interest rate liberalization.

The roadmap seeks to roll back government control of state-owned enterprises and allow for greater competition with private firms.

The Chinese export economy created economic activity.  But the key to that was their low labor costs.  With the power of the state keeping labor costs low.  Which helped to make their exports inexpensive.  But it did not help grow a middle class.  Which meant all of China’s economic growth relied on those exports.  And when nations were suffering anemic economic growth those export sales fell.  And without a prosperous middle class there was nothing to replace those sales.  Causing the Chinese economy to lose momentum.

And what is China doing to regain that momentum?  Reduce the role of government in the economy.  Unlike President Obama.  Which could forever change the balance of power in the world.  For if the Chinese privatize their economy while the Americans strangle theirs with more government involvement the Chinese economy will grow greater and overtake the American economy.  Allowing the Chinese communist do something the Soviets could never do.  Beat America economically.  Because the Chinese communists embraced free market capitalism more than President Obama.

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China running low on Factory Workers and Farmers as an Aging Population threatens Future Growth

Posted by PITHOCRATES - February 3rd, 2013

Week in Review

During the Eighties those in America who favored large government incursions into the private market liked to point to Japan.  Whose economy was booming during the Eighties.  Thanks to a lot of government partnering with business.  And low interest rates.  The Japanese were buying up landmark American properties.  Some feared that they would take a controlling interest in the United States.  And those on the Left said that we were fools for not doing what the Japanese were doing.  They still believe this.  Despite what happened in the Nineties in Japan.  It turned out that a lot of that economic growth wasn’t real.  It was a bubble.  And they blew that bubble up so much that it took a decade and more to deflate it.  Japan’s Lost Decade.  Which is closer to two decades.  And counting.

Now China is the new Japan.  Where government partners with business.  And keeps interest rates low.  Once again those on the Left point to this model.  Urging that the U.S. adopt it, too.  So the U.S. can have a strong manufacturing sector.  And a booming export market.  But there’s more to the economy than exports (see UPDATE 3-China to speed up rural land reform, ensure food supply by David Stanway and Kevin Yao posted 1/31/2013 on Reuters).

The central government said in its “number one document” for 2013, focusing on modernising agriculture, it would grant more subsidies to large-scale landholders, family farms and rural cooperatives as it tries to provide more incentives to bring economies of scale to the fragmented countryside…

It listed grain security and farm product supply as top priorities, with China seeking to boost production as it urbanises and industrialises. The relocation to the cities of more than 200 million migrant workers has slashed the rural workforce and boosted food demand, leading to a growing dependence on imports.

So the Chinese traded food for exports.  To get cheap workers to fill their export factories they just pulled people from agriculture.  Leading to food shortages that they have to make up with food imports.  A country no stranger to food shortages.  Or trying to bring economies of scale to agriculture.  The last time they tried it was during the Great Leap Forward.  With forced collectivization of their farms.  Which was such a failure that tens of millions starved to death in the famine this forced collectivization caused.  But famine is not the only way to cause a population decline (see China’s looming worker shortage threatens economy by AFP posted 1/30/2013 on France 24).

China’s demographic timebomb is ticking much louder with the first fall in its labour pool for decades, analysts say, highlighting the risk that the country grows old before it grows rich.

The abundant supply of cheap workers in the world’s most populous nation has created unprecedented cost efficiencies that underpinned its blistering economic expansion over the past 35 years, propelling the global economy forward.

But now the inexorable consequences of the one-child policy imposed in the late 1970s are beginning to appear, and threaten to impact its future growth.

China’s working-age population, defined as 15-59, fell 3.45 million last year, official data showed earlier this month — the first decline since 1963, after tens of millions died in a famine caused by the Great Leap Forward…

“The population is aging so fast that we are running short of time to deal with it,” said Li Jun, also of CASS, adding the family planning policy had exacerbated the problem…

An ageing population not only means fewer people available to employ and higher labour costs, but investment — a key driver of China’s growth — will be harder to maintain as families spend their savings on health care, she said…

At the same time…the country was woefully underprepared to meet the burden of caring for the elderly…

By around 2060, every three Chinese workers will have to support two people above 60, compared with a ratio of five to one now…

Analysts said the medical services are increasingly expensive and hard to access, while the country’s flagship public pension plans are crippled by problems including insolvency risks, difficulties in expanding coverage and mismanagement.

Over a billion people in China and it’s not enough.  They’re short of both factory workers and farmers.  Because of an aging population.  The problem all advanced economies have.  Only China is having it before they are even an advanced economy.  And their problems of trying to take care of their aging population are going to make the problem of saving Social Security and Medicare seem like child’s play.  Because of that one-child policy.

In the advanced economies parents are having barely enough children to replace them.  While China’s one-child policy guarantees a shrinking population.  Which means fewer mouths to feed.  But it will also mean fewer people to farm their land and to work in their factories.  Just as more people leave the workforce.  Which means the future isn’t looking very good for China.  Who may soon experience their own Lost Decade.  A lesson for the U.S.  That having government partner with business and low interest rates does not make a sound economy.  It only creates bubbles.  Not real sustained economic activity.  Which all can come crashing down when overwhelmed by the crushing weight of an aging population.

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China has Severe Inequality and the Worst Public Toilets in all of Asia

Posted by PITHOCRATES - September 8th, 2012

Week in Review

The Left believes the government can make capitalism better.  And fairer.  In the Eighties they liked to point to Japan.  And the incredible economic growth they had thanks to government partnering with business.  Before their deflationary spiral and their Lost Decade.  Thanks to all that government partnering with business.  But that was yesterday’s news.  Today they like to point at the economic juggernaut that is China.  And say, “See?  That’s what strong government can do.”  For they believe China can get things done because they don’t have to deal with that pesky democracy.  All of those elections.   And being answerable to the people.  In China the government rules.  And the people quake in their boots.  Which lets China get things done.  And make a better society for all Chinese (see The forbidden public toilets of Beijing by Justin Rowlatt posted 9/8/2012 on BBC News Magazine).

Jeff Sun is the scion of one of China’s new rich and the founder of the “China Super Car Club”. He has got so many he cannot even remember them all…

We met Jeff while reporting on the yawning chasms of inequality that have opened up in Chinese society.

We filmed in some of the poorest communities I have ever visited – Chinese villages where no-one has ever owned a car and where they still till their fields using a single donkey, shared between dozens of farmers.

A better society for all Chinese?  Granted there are those on the Left who would love to see a world where no one owned a car.  But one donkey shared between dozens of farmers?  That doesn’t sound like a fairer society.  Not when there are rich people elsewhere who have so many cars that they can’t remember them all.  So apparently this state-capitalism (or as they say in China, communism) isn’t as egalitarian as the Left would like to believe.  For in America there is more capitalism than communism.  And yet American farmers don’t share donkeys.  No.  In America farmers own their own tractors.  Which seems to be a bit more egalitarian than communist China.  But it gets worse.

The journalists’ rule of thumb is that you cannot report the so-called three Ts – Tiananmen, Taiwan or Tibet.

We inadvertently discovered a fourth T.

In an article in the country’s English language newspaper, China Daily, I came across an editorial featuring stinging criticism of China from the WTO. Not the World Trade Organisation, this was the less well-known World Toilet Organisation.

This WTO had ranked China as having the worst public toilets in all Asia. The paper explained how, in response, Beijing had introduced rigorous new hygiene standards – now no more than two flies are now allowed in any public toilet.

The paper was in no doubt about the importance of the issue. “Clean public toilets are the symbol of a civilized society,” it thundered. The controversy made me chuckle and I mentioned to our government minder that I wanted to cover this storm in a toilet bowl.

It was Mr Chen’s job to ensure we did not break any reporting rules. He had been a cheerful, relaxed companion throughout our three-week journey, but now his face darkened.

“I do not think that would be a good idea,” he said gravely…

Mr Chen vanished for a few moments. When he returned his manner was forbidding.

“I am sorry Justin but I have to tell you cannot report this story at all.”

The human rights issue of Tiananmen, Taiwan or Tibet may be a sore spot for China as well as the liberals who so admire their way of governing.  But the worst public toilets in all Asia?  That affects everyone.  At least those who have to drop trou in their busy day away from home.  Not to mention the tourists.  The Chinese government may not know a good, quality public toilet but people traveling to their country no doubt do.  Oh the shame.  Oh the humanity.  Oh the inequality.  No wonder the sensors will allow journalists to report about the severe inequality in Chinese society.  For what is a village of farmers having to share one donkey compared to embarrassing public toilets?  For we all know every country judges another by the quality of their public toilets.  For few things are so sacred, so personal, as copping a squat when out on the town.

And this is the governing style the Left would have the US follow.  For it is more egalitarian.  Even though the masses must use the worse public toilets in all of Asia while the new Chinese rich no doubt enjoy a squat on the finest porcelain known to mankind.  And probably follow that up with a refreshing bidet cleansing.  No.  This isn’t equality.  This is a toilet aristocracy.  Which simply doesn’t exist under laissez faire capitalism.  Where going to the toilet in public isn’t a privilege.  It’s just so expected in capitalist societies that it is taken for granted.

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LESSONS LEARNED #59: “When the Right partners with business the Left calls it crony capitalism. When they partner with business the Left calls that smart government.” -Old Pithy

Posted by PITHOCRATES - March 31st, 2011

Microsoft Learns the hard way to Lobby Congress

Microsoft was a rogue corporation.  A big, profitable, rogue corporation.  And it was in the government’s crosshairs.  With all of their going about their business.  Alone.  Without any federal assistance.  Who did these people think they were?  They didn’t spend a dime lobbying the federal government for anything.  As if they could just go on about their business competing in the free market.  Scoffing at the government’s business resources.  All those things they could bring to the table.  To make an unorganized market organized.  Make Microsoft better.  Make Microsoft’s products better.  All for a nominal fee.  Some campaign contributions.  A vacation junket or two.  A little monkey business with someone you’re not married to.  A Roman indulgence of intoxicating substances and flesh.  You know, lobbying stuff.  But no!  Not Microsoft.  Those holier than thou sons of bitches.  Who did they think they were?

Well, Microsoft went too far.  Pissed off the wrong people.  People with friends in Washington.  People with power.  And a justice department.  Empowered with antitrust legislation.  Big, nasty, legal teeth.  Their crime?  They gave away Internet Explorer free.  And that was unfair to their competitors.  But it was a sweet deal to the consumer.  None of them complained.  They were happy to get IE free.  It saved them money.  It was their competitors that were pissed.  Because they couldn’t sell something that Microsoft was giving away free.  So the Department of Justice (DOJ) sued Microsoft claiming they violated the Sherman Antitrust Act.  Which Congress passed in 1890 to protect consumers.  And here the DOJ was fighting a case.  And if the DOJ won, the consumer lost.  They would have to pay for IE or a web browser from one of Microsoft’s competitors.  Which just goes to prove that it is never a consumer that complains about ‘predatory’ pricing.  It’s always a competitor that can’t compete at the same price that runs to the DOJ crying for antitrust protection.

Microsoft learned a very important lesson.  When you sit on big piles of money you don’t dis the federal government.  You show them the proper respect and give them some of that money. For your own protection.  For if you don’t they will go after you.  Like they did with Microsoft.  Who is smarter now.  Today, Microsoft spends millions on lobbyists.  To pay tribute for the pleasure of being left alone to operate in the free market.

Money Corrupts, Big Piles of Money Corrupt Absolutely

Microsoft is not alone.  There are a lot of honest companies out there.  But, sadly, there are a lot that aren’t.  Especially if they have a friend in Washington.  Because Washington sits on great big piles of money courtesy of the tax payers.  And a select few spend that money.   Put these two together and it’s a recipe for corruption.  Because one person can skim a little off the top of a huge transaction that is all but impossible to see.  Unless you start living like a Rockefeller on a government salary, that is.

The Teapot Dome scandal was the biggest government scandal of its time.  It involved leases to oil reserves transferred from the Navy to the Department of the Interior.  These were strategic reserves for our navy in case we went to war.  Important to have.  Because you don’t want to run out of oil during a war.  Albert Fall was the Secretary of the Interior.  And it was his job to lease those oil reserves.  Which he did.  But they didn’t go to the low bidder.  They went to the one that made it most worth his while.  Ultimately it was all that ‘making it worth his while’ that did him in.  He became a very rich man.  Which was impossible on his salary.  So they caught him.

Congressmen profit as Shareholders in Crédit Mobilier

The Teapot Dome was a big scandal perpetrated by a few players.  The Crédit Mobilier scandal, on the other hand, had far greater tentacles.  And is a good example of how government partnering with business goes wrong.  It involved the Union Pacific Railroad.  A sham company they created called Crédit Mobilier.  And some 30 Congressmen. 

The railroad to the pacific was a risky proposition.  It would take a very long time to build.  It would go through some very difficult terrain and hostile Indian country.  And there were few shippers on the proposed road.  In other words, it would take a long time to earn any revenue on this line.  And it was possible that they would never complete it.  Or ship enough freight to operate it profitably.  So the government stepped in and partnered with the Union Pacific.  And the fraud began.

The trick was how to make this loser a winner.  Railroad profits weren’t the answer.  So how can a railroad company make a profit without running any trains?  Why, from construction, of course.  That’s where Crédit Mobilier came in.  They built the railroad.  Billed Union Pacific.  Who then billed the government.  And, surprise, surprise, construction costs went way over budget.  Because they were overbilling Union Pacific.  Who then overbilled the government.  But the government just kept on paying.  Why?  Because they had shares in the very profitable Crédit Mobilier.  You see, when you share in the obscene profits of a government contractor you have little incentive to see or stop the fraud.

Government Steps into the Mortgage Business and Gives us the Subprime Mortgage Crisis

For years the federal government implemented policies to increase home ownership.  In their models, this was the driver of all economic activity.  A lot of material and labor builds a house.  And a lot of material and labor builds the things that furnish a house.  Ergo, the more people who bought houses the greater the economic activity.  And that meant everyone.  Even the people who couldn’t qualify for a mortgage.  A lot of which were minorities.  So if a bank denied anyone a mortgage, it just reeked of racism.  So lenders had to find a way to make the unqualified qualified before the DOJ charged them with discrimination in lending.  So, in the mid 1990s, they figured out how to make the unqualified qualified.  Along with a little help from the government.

The subprime mortgage was the vehicle.  Adjustable Rate Mortgages (ARMS).  And No Income No Asset (NINA, aka, Ninja) loans.  Of course, these by themselves didn’t solve any problem.  Because no respectable lender would ever approve such risky mortgages.  This is where government came in.  Or, rather, the Government Sponsored Enterprise (GSE).  Better known to you and me as Fannie Mae and Freddie Mac.  Here’s how it worked.  The GSEs bought those risky loans from the lenders.  Then sold them to Wall Street.  Where investment bankers packaged them into Mortgage-Backed Securities (MBS) and Collateralized Debt Obligations (CDO).  High risk loans became low-risk, high-yield securities.  The risk was transferred from the bank to the taxpayer and then to the investor.  And back to the taxpayers when they had to pay for the bailout of the subprime mortgage crisis.

The enabler for this great financial crisis was the government.  First ‘encouraging’ banks to loan to the unqualified.  And then by their partnership with the GSEs.  Encouraging more and more risky behavior because they were getting a piece of the action.  So they turned a blind eye.  Even when some warned the committees responsible for their oversight.  They laughed.  Said they were just mean racists trying to deny fair and affordable housing to minorities.  And they insisted that these GSEs were financially strong and healthy.  Up until the world learned they weren’t.

Crony Capitalism can be Smart Government if it Saves the Environment

There’s one reason why government partners with business.  Corruption.  Crony capitalism.  Either an unscrupulous business trying to buy favors for personal gain.  Or an unscrupulous politician trying to sell favors for personal gain.  And good luck if you run an honest business.  Because the buying and selling of favors simply becomes paying tribute to be left alone.

Both sides are guilty of this.  Though the Left says it’s the Right that is in the pocket of the corporations.  Which is funny.  Because the Left is just as guilty.  But when they do it, it serves a higher purpose. So it’s smart government.  Such as when one of the world’s largest corporations, GE, doesn’t pay any income taxes.  By using some creative accounting practices.  But they’re very cozy with the current administration.  So they get a pass.  And they’re eager to cash in on all that green legislation.  To help them sell their green products.  You see, that’s good for the environment.  So it’s okay that they don’t pay income taxes.  And, more importantly, they have lobbyists.  They know how to play the game.  And they play it well.

But when the Right wants to cut the corporate income tax to stimulate the economy to create jobs, that’s just corporate welfare.  They’ll fight that every day of the week.  But if a corporation’s lobbyists treat them well, they’ll make the incandescent light bulb illegal.  So that corporation can sell more of their compact fluorescent lamps.  But that’s not crony capitalism.  That’s just smart government.  Because it saves the environment.

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Asset Bubbles and Deflationary Spirals in Japan, the United States and China

Posted by PITHOCRATES - December 25th, 2010

The Japanese Asset Bubble and their Lost Decade

During the eighties the Japanese government worked with Japanese business.  And the eighties in Japan were booming.  The Japanese went on an American buying spree.  They gobbled up American landmark buildings and business.  It was an economic Pearl Harbor.  Some people wringed their hands in distress, fearing the Japanese ascendancy.  Presidential candidates said we were fools for not following the Japanese model.

Easy money created excess liquidity.  Which created inflationary pressure on prices.  Real estate values soared.  And irrational exuberance bid up prices further, creating an asset bubble.  Times were good while they lasted.  But the bubble popped.  Real estate values tumbled.  And the Japanese suffered a deflationary spiral that would last a decade.  They call their 1990s the ‘lost decade’.  They still haven’t fully recovered.  And this was a direct consequence of government working with business.

The Subprime Mortgage Crisis and the Beginning of our Lost Decade

Totally ignoring the lessons of the Japanese, the Americans went down the same road.  Easy money created excess liquidity.  And like in Japan, this created inflationary pressure on prices.  And like the Japanese, real estate values soared.  Alan Greenspan warned us about our irrational exuberance.  But we didn’t listen.  We bid prices higher still.  Created the mother of all asset bubbles.  Times were good in the 1990s.  But the bubble popped.  As history has shown bubbles to do.  And real estate values tumbled.  But with a twist.

In America, government pressured bankers to approve mortgages for people who couldn’t qualify for a mortgage.  So bankers had to come up with some creative ways to make the unqualified qualified.  The weapon of choice was the subprime mortgage.  And everything worked as plan.  Until interest rates went up.  And then the whole deck of cards came crashing down. 

Fannie Mae and Freddie Mac (government sponsored enterprises) guaranteed those risky loans.  Then, to encourage bankers to make more of these risky loans, they bought them from the banks.  They chopped them up and created investment instruments.  We called them derivatives.  High yield (because of the ‘subprime’ in subprime mortgage).  And safe (because of the ‘mortgage’ in subprime mortgage).  So when interest rates rose and the unqualified couldn’t pay their mortgage payments anymore, we got the subprime mortgage crisis that reverberated throughout the world thanks to those derivatives.  All because government worked with business.

The Chinese are Working on an Asset Bubble of their Own

In the 2000s, it’s the Chinese that everyone fears.  Economically speaking.  (For now at least.)  Over the past decade or two, China has become more capitalistic than communist.  It’s not pure capitalism.  It’s more government partnering with business.  Sort of a throwback to mercantilism.  They have tariffs and monetary policies to protect their domestic industries.  And they subsidize their export industries in an export-driven economy.  And it’s been working.  So far.

It worked in Japan for awhile.  But we saw what happened there.  It worked in the United States for awhile.  But we saw what happened there.  Government partnering with business has, historically, been a train wreck.  Now China is trying her hand.  Will history repeat itself there?  Perhaps (see China Raises Interest Rates Again to Cool Inflation by Edward Wong posted 12/25/2010 on The New York Times).

China’s central bank announced on Saturday that it was raising interest rates for the second time in about two months in what appears to be a long-term campaign to suppress inflation as many ordinary Chinese express discontent with rising consumer prices.

Oh my.  Inflationary pressures are raising prices.  And to tamp those prices back down, they raised interest rates.  This is giving me a strange feeling of déjà vu.    

The Chinese economy has been awash in liquidity due to government stimulus money and generous lending by state banks. Chinese officials are now concerned about an overheated economy and the inflationary pressures that come with that.

Awash in liquidity?  Government stimulus money?  Generous state bank lending?  It feels like we went through this before.  Odd.  This feeling of déjà vu.

But investment in large capital-intensive projects has also been fueling the economic engine and driving up prices.

Capital-intensive projects?  That requires financing.  Lots of it.  Lots of bank loans.  Lots of liquidity.  And a lot of liability on bank’s balance sheets.  Shouldn’t be a problem.  As long as those are safe loans.  Backed by safe assets.  Just like in the United States.  Before we started putting people into houses who couldn’t afford to buy a house.

Officials have signaled throughout the month that moves will be taken to better control spending across the country. China announced on Dec. 3 that it would tighten monetary policy next year, shifting it from “relatively loose to prudent.” That was a clear sign that Chinese officials were intensely concerned about inflation.

The Chinese get a little Alan Greenspan.  They’re getting a little nervous about their irrational exuberance.

The property market in China has been booming. Rising property prices, along with the government stimulus money and loose bank lending, have spurred new developments across the country. Even long-term residents on the tropical southern island of Hainan have had to grapple with soaring real estate prices from outsiders coming in to buy up land.

Some analysts say this growth has resulted in a gargantuan bubble in the real estate market, while others argue that the capacity will be put to good use.

And for good reason.  Real estate bubbles aren’t good.  Things can get really ugly when they burst.  If you doubt me, ask the Japanese.  Or the Americans.

Until now, low wages have helped to hold down inflation and keep China’s export industry competitive. But those wages in the context of soaring real estate prices mean that migrant workers from the interior of China are becoming less tolerant of poor work conditions on the coasts, where many of China’s export manufacturing factories are located. Many workers are now choosing to stay closer to home in the interior provinces, and some companies are moving their manufacturing centers inland.

They took our jobs.  But now they don’t want them.  Those people who worked dirt cheap (by our standards, not theirs) have learned from the West.  They want more.  And, in a booming economy, they probably have choices out there.  It could add huge inflationary pressures on wages.  Or force a government crackdown on individual liberty.  Neither will probably be good for the economy.  Or those balance sheets.  At the banks financing those capital-intensive projects.

History Repeats – Ignore her at your Own Risk

One thing history shows us over and over is that free markets work.  Managed markets don’t.  Government partnering with business doesn’t work.  It didn’t work for the Japanese.  And it didn’t work for the United States.  When you intervene into market forces you disrupt market forces.  And often have unintended consequences.  Such as runaway inflation.  Asset bubbles.  And deflationary spirals.

The Japanese lost a decade.  The United States is looking like they will lose a decade.  Will the Chinese be next?  If history repeats, as history has a penchant for doing, they may be the next to lose a decade.  Of course, that could be a bit of a problem for us.  They hold a lot of our debt.  And if they want their money back to save themselves, guess what that will do to us.  Suffice it to say that the historians will then be able to write about the rise and fall of the United States.

History can be such a bitch when we ignore her.

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