Sunday, October 3, 2010

Citizen Kane on China

We are constantly bombarded with propaganda regarding the Chinese economic "miracle".  Just last week Bill Gates and Warren Buffett both went to China to tour the "miracle" in person.  Also, this week there was an interview in Barron's pleading the case for why the U.S. should NOT impose trade or currency sanctions.  If you read between the lines, this article in a nutshell, indicates why the China/U.S. "relationship" is a latent catastrophe, yet most of the "big boys" are too busy counting their millions and billions to notice.
I took the liberty of paraphrasing the interview, both to save time and to cut out all of the extraneous bullshit and get down to the key message.  If you want to read the obfuscated (actual) version, it's here.
What you read below is FICTIONAL (Kind of).  I changed the name of the interviewee to protect the "innocent"...
Barron's: Mr. CF Kane is an expert in Chinese affairs, having racked up 1.2 million frequent flyer miles  observing the economy from 80,000 feet and from the comfort of the First Class Lounge at Shanghai International.
He also teaches at Yale, so he has his head firmly planted up his ass and therefore wears night vision goggles at all times...
Barron's: What is your overall thesis regarding China?
Mr. Kane: China has sucked America dry and now needs to find a new source of demand for its cheap junk
Barron's: A lot of Americans think the U.S. should force China to revalue its currency and/or impose trade sanctions
Mr. Kane: That won't fix anything.  The problem for the U.S. is that consumers have too much debt and no jobs
Barron's: If the Yuan is raised and trade sanctions are imposed, won't that protect American jobs?
Mr. Kane:  No.  All of the jobs have already been outsourced, so that would be closing the barn door after the horses are out.  Besides that would hurt "consumers" and WalMart
Barron's: Don't consumers need jobs in order to consume?
Mr. Kane:  No.  They just need credit cards and a strong inclination towards delusion.  Listen, you are changing the subject.  The bottom line is that we need to find a new country to buy all of this useless junk from China.
Barron's: Can't the Chinese buy their own junk?
Mr. Kane: Get serious.  How stupid do you think they are anyway?  Besides, they don't have a Middle Class that can be milked dry
Barron's: But what about those 8% economic growth rates for the past decades, didn't that create a middle class?
Mr. Kane: Of course not.  That was 8% overall economic growth.  Employment has only grown a measly .5% per year.   China has 350 mega-billionaires and the rest live on 80 cents per day
The Chinese intentionally specialized in manufacturing so that they wouldn't have any labour issues and could swap out workers at will.

Barron's: So wouldn't raising the Yuan actually help the Chinese by increasing workers' purchasing power and helping to create a middle class?  At the same time, wouldn't that reduce their reliance on exports and redress the trade imbalances with the U.S.?

Mr. Kane:  Well, that's one way of doing it, but I don't endorse that method.  After all, that would increase costs for the jobless U.S. consumers I was mentioning earlier, but worse yet, it could lower returns on investment and hence stock market prices.  I prefer to hang my hat on this yet undefined and totally fantastical delusion that endogenous (internal) demand will appear out of nowhere.

Barron's:  So, if there is no middle class, then why is there so much investment in infrastructure?

Mr. Kane:  That's stimulus.  After the 2008 debacle, it became clear the U.S. could no longer support the Chinese economy on its own, so the Chinese Government invested its trillions of reserves gained by manipulating its currency, on infrastructure.

You know - bridges to nowhere.  repaving new roads.  Similar to the Obama stimulus.

Barron's: And what happens when investors realize that there is way too much capacity in commercial and residential property units?

Mr. Kane: As long as no one runs for the exits, everything will be just fine.  At the .5% growth in the labour market that I mentioned previously, it will only take about 25 years to work off the excess capacity, assuming the economy stays strong during that entire time..
Barron's:  So remind us again why the U.S. should continue to sponsor the Chinese "miracle"?
Mr. Kane: Obviously, because if sanctions are imposed or the currency is raised, that would lead to the "nuclear' scenario:
1) Everyone will realize that the Chinese economy and the trade relationship with the U.S. is (one of) the biggest Ponzi Schemes ever created
2) The Chinese will stop buying dollars and Treasuries, the dollar will tank, and U.S. markets will collapse
3) Chinese markets will collapse, there will be mass unemployment and China will revert from Fascism back to Communism, which is not one of the "isms" America endorses
The worst part of course is that Wall Street won't get its full 2010 bonus...
Barron's:  So basically China has a gun to America's head
Mr. Kane: No.  China and America have economic ICBMs pointed at one another with enough delay to ensure Mutual Assured Destruction
Barron's:  Is China an environmental catastrophe?
Mr. Kane:  It's not as bad as it's made out to be.  As long as you wear a fully enclosed gas mask with oxygen tank, a lead radiation shielding suit, eat only imported food, and sleep in a hyperbaric chamber, your chance of contracting severe carcinoma is roughly 45% over 5 years...
Barron's: What about all of these workers at manufacturing plants who are committing suicide.  Does that concern you at all?
Mr. Kane:  No, not at all.  We gave everyone a 20 cents per day raise - which is 25%!  Then we had trampolines installed around all of our manufacturing plants, so workers can no longer jump to their deaths.  The bonus is that they have something fun to do during their 10 minute lunch break
Barron's:  In all of your time in China, what surprised you the most?
Mr. Kane:  The thing that surprised me the most was the breadth of the progress...
Barron's:  But I thought they don't have a middle class and most people are wage slaves
Mr. Kane:  Right.  I meant the breadth of progress across the top .1% of wealthy University students

Barron's: So, to wrap up, in a nutshell what you are saying is that the politicians - Obama and company, should continue to ignore the trade and currency imbalances that have been accumulating for years, and pretend that everything will work itself out ok in the end?

Mr. Kane:  Well, at least until December 31st, bonus time.  I haven't really thought through what should happen after that...

Barron's:  Alrighty then.  Thanks for your time.