Thursday, April 9, 2015

Is China Doomed to Fail?

Yesterday, David Goldman called out his conservative friends for continuing to predict that China’s collapse was imminent. He might have mentioned that good liberals have been predicting the same for well over a quarter-century now.

At the time of the government crackdown on Tiananmen Square protests New York Times reporter Nicholas Kristof insisted that the Chinese people would inevitably rebel against an autocratic government.

How did that one work out, Nick?

One must also mention that some people on the radical left are rooting for China to fail because they have never gotten over the fact that Communism lost the Cold War.

Why do so many people, on the right and on the left, believe that the Chinese model is doomed? Simply put, they do not believe that a capitalistic economy can exist for very long without liberal democracy.

If people do not have a voice in their affairs, if they do not have a vote, the government will lose legitimacy and will ultimately fail.

Of course, they fail to recognize that the Chinese people now enjoy a considerable amount of economic freedom... to say nothing of prosperity. Do you think that they would trade it in for Barack Obama?

Time will tell who is right or wrong. For now the belief in liberal democracy seems to be out of touch with reality.

Goldman offers his opinion:

China is not going to blow up politically. Its financial system isn’t going to collapse. China just scored the biggest diplomatic success in its history by persuading nearly 50 nations to join the new Asia Infrastructure Investment Bank despite US objections.

Goldman is not alone in emphasizing the importance of the China-led Asia Infrastructure Investment Bank. Note well that the "diplomatic success" spells a significant diplomatic failure for the Obama administration.

Read what Lawrence Summers wrote last week:

This past month may be remembered as the moment the United States lost its role as the underwriter of the global economic system. True, there have been any number of periods of frustration for the US before, and times when American behaviour was hardly multilateralist, such as the 1971 Nixon shock, ending the convertibility of the dollar into gold. But I can think of no event since Bretton Woods comparable to the combination of China’s effort to establish a major new institution and the failure of the US to persuade dozens of its traditional allies, starting with Britain, to stay out of it.

This failure of strategy and tactics was a long time coming, and it should lead to a comprehensive review of the US approach to global economics. With China’s economic size rivalling America’s and emerging markets accounting for at least half of world output, the global economic architecture needs substantial adjustment. Political pressures from all sides in the US have rendered it increasingly dysfunctional.

One hesitates to offer further commentary on the new bank and what it means for the international economic order. One hesitates because one does not understand it very well.

And yet, no media outlet has really covered the story. It is not as sexy as terrorism so it does not lead the news, anywhere.

One is inclined to take the words of Lawrence Summers seriously, especially since he has always been a staunch supporter of the Democratic Party. When Summers and Goldman agree, we should take heed.

Summers distributes blame even-handedly, but, truth be told this happened on Barack Obama’s watch. Isn’t the Obama presidency the ultimate proof of a dysfunctional political system?

Why, if you were in Beijing would you want to emulate a political system that made Barack Obama the president?

Americans like to think that they will prevail in economic competition because they are better at innovation. They believe that American capitalism is the best and more effective economic system in the world, despite the political constraints that hobble it.

And yet, when it comes to innovation in business, America has been falling behind. It’s not just Goldman’s view. Thomas Edsall wrote an important article about it in the New York Times.

Over the past three decades, the American economy has become less vigorous. An extensive body of evidence shows that the public focus on the success of high-tech companies like Apple and Google masks an overall downward trend in key measures of business vitality.

“Business deaths now exceed business births for the first time in the thirty-plus year history of our data,” note Ian Hathaway and Robert E. Litan, economists at the Brookings Institution, in a May 2014 essay, “Declining Business Dynamism in the United States.”

He continues:

The forces driving this trend include the increasing regulation of small businesses, corporate consolidation, more occupational licensing requirements and too few immigrants with high-tech skills. Ultimately, however, the political system itself appears to be making a significant contribution to the problem.

Federal and state officials, often under pressure from major corporations seeking to stifle competition, have adopted a regulatory regime that makes the creation of new businesses more difficult.

Many, if not most, of the reforms proposed by economists and other analysts require political action. At the federal level, this would require bipartisan support, an achievement often out of reach in a polarized system.

Contemporary American politics have become an economic hindrance. Daron Acemoglu, an economist at M.I.T., put it this way in an email to me:

It’s becoming more and more difficult to run a successful business in the United States without doing lobbying, campaign contributions and other deals with politicians. This I think is the most dangerous, I would even say nefarious, trend for the creativity of American business in general, and young and new businesses which we badly need in particular.

The drop in new business start-ups should be seen in the context of other key indicators — for example, a lack of labor liquidity, which is a measure of “the rate at which workers leave one firm to go to another,” according to Acemoglu.

Edsall, like Summers, bemoans our factional politics. Very little can get done when the parties occupy ideological extremes and refuse to work with each other.

One might muse about how we have arrived at this juncture, but the truth remains that, politically speaking, America is suffering from a leadership deficit. We have a president who is much better at polarizing the country than at forging compromises, a president who is better at lying for political advantage than conducting honest negotiations.

Admittedly, the problem pre-dates Barack Obama, but he bears the primary responsibility for its current state.


Ares Olympus said...

Such a confusing blog topic. China is a single-party republic with what seems to be called "state capitalism", which basically means centralized decision making, i.e. the Left's big-government dream, where power is delegated on the whims of a tiny minority, and insiders gain access to vast well, and the rest have to hope for the best, and try to protect themselves.

Like here's one 2010 article that expresses some of the struggles.

If capitalism simply means "concentrating wealth and power of the minority to exploit one-time resources for more wealth and power for the minority" then China is doing very well for the moment.

How many billionaires do they have? 103 in 2015 by Wikipedia, but wait, it was 128 in 2010? Oh, but only 15 in 2006!

Anyway, "doomed to fail" is a bizare question, at least we're all doomed to fail in the long run.

The open question for me is how China sustains its impressive (or crazy) growth. Engineering companies like the one I work for have benefitted greatly by high commodity prices for natural resources, bid way up by China's demand, but how far does construction get China?

And now metal prices are down with a slowing China, and perhaps ready for a crash as those who have hoarded resources on bubble prices and debt have to sell in a buyers market, and then my engineering company won't get as much consulting work, and mining companies lay off who knows how many?

And all those Chinese middle class who have invested their retirement savings in empty cities will continue to sell as these shoddy constructions that will be abandoned.

But a more interesting question is to see how China handles falling prices when their bubbles pop. Will they "let" capitalism's excesses crash in the next crisis, and let the cash-holding billionaires buy up all the smart investments on the cheap? Or will they act like we do, and bail out the markets to keep everything running, and make the next crash guaranteed to be worse than the one just avoided.

We live in interesting times at least, and its all beyond me how it ends well, for any of us.

Meanwhile Obama can be blamed for everything, whatever has happened, is happening, and will happen, we can be sure President Romney would have done better.

But America couldn't see the truth of Muslim-loving Obama who wants America to fail, and now all we have is a scapegoat to call names, while we wait for our day of destiny.

Ares Olympus said...

Speaking of Larry Summers, here's an interesting blog by Steve Keen, looking to challenge the standard economic models of Summers, Krugma and all, and noting that all the primary participants are working from the same model, just debating nuances between them.

Here's another recent interview: Steve Keen: The Deliberate Blindness Of Our Central Planners

I'm not in a position to judge any of it, but I also don't clearly see how we can differentiate Chinese centralized planning to ours, except they're trying much harder than we are to keep their growth model running no matter how much misallocation of resources comes out of their policies.

Okay, here's one more article from Keen from December, if we're making bets, and he seems to be rooting for a "soft landing".
China – the world’s largest economy - is an example where the rise of private sector debt is bringing the country dangerously close to a crisis, he says.

Its central bank made a surprise cut in interest rate in November amid weakening economic data.

Growth in the third quarter slackened to 7.3 per cent, which is already its lowest since 2009.

Prof Keen, who accurately predicted the last financial crisis before the 2008 crash, warns that another even bigger bubble is brewing in China.

Chinese private sector debt, he points out, has risen from roughly 100 per cent of its gross domestic product in 2008 to about 180 per cent now, as the government encouraged lending to stimulate demand and make up for the shortfall in exports.

“That’s an enormous increase,” he says. “The Chinese private sector debt… is higher now than America's at its peak.

And the acceleration of debt was faster… “The bubble in China is bigger and faster than the sub-prime bubble was in America.”

He notes that each time the Chinese economy has shown signs of slowing down, Beijing has responded by pressing on banks to lend more.

“This is one area where China has an advantage but also danger. Given the political power of the communist party in China, if the banks are told to do something they will do it, because the consequences of not doing it are worse for your health than what doing it is for your balance sheet.”

As a result, the costs of a potential fallout are mounting.

Can the Chinese government engineer a soft landing?

Yes, he says, immediately. For one thing, it has enormous power over the central and private banks.

“If they decided the central bank had to let private banks effectively operate while insolvent, or had to recapitalise private banks and take them over into public ownership, they could do it. And they could also potentially write down people’s private debts.”

The Chinese government has the financial muscle to deflate this bubble in a measured way, without having to face “protests of the right wing protest groups or power blocs in the congress that won’t let them do it because they have violated the principles of free enterprise”, like in the United States.

“That sort of garbage that gets into Americans’ way won’t get in China’s way,” he says.

But the magnitude of China’s bubble means that it “won’t be a comfortable soft landing”.

“It will be a soft landing after you put a hole in the tarmac,” he says. “But the plane doesn’t have to explode on impact.”


Ares Olympus said...

Concidentally Charles Hugh Smith's "Of Two Minds" blog today talks of "doomed to failure" for all modern currencies.

It's not a strong argument in the short run, or for any specific modern fiat currency, nor clarity of alternatives, although economics like Steve Keen would suggest there's better ways to get fait money into the economy than zero interest loans to billionaires.

It's a useful perspective to see, our money can be "doomed to failure" yet extremely powerful in directing economies before that failure, and something different will exist on the other side of the chaos that must come. But who wants to live through that chaos?

My guess we're going to enter an economy with a lot less cheap energy, so those of us who can learn to use less energy sooner than later will at least not feel slapped in the face by reality when our current cheap energy glut disappears into a puff of ponzi financing.

Hopefully China's version can find a way to salvage all its massive new construction projects, and at least they have lots of cheap labor to exploit, and maybe the smog will clear for better air, and some smart labor may go back to subsistence farming, where there's water at least.

And maybe America will have a future in smaller scale subsistence farming too? At least its a credible transition strategy for a fraction of the population who find a way to avoid becoming debt slaves. Today's Money Regimes Are Doomed To Failure
The problem isn’t fiat money—currency that isn’t backed by scarce commodities; it’s centrally issued money that is distributed to the few at the expense of the many.

This centrally created money is issued not to facilitate the production of goods and services and the demand that naturally arises from the expansion of the real economy, but to serve the state and its cronies.

Centrally issued money centralizes wealth and generates systemic inequality. This is equally true of all centrally issued currencies.

But the inequity that is intrinsic to this system is politically, socially and financially destabilizing, and so this system is unsustainable.

Sam L. said...

I suppose every nation is doomed to fail, eventually.