01/11/10 Bethesda, Maryland – The news this morning tells us that markets are rising. Investors are bullish because China’s exports are recovering, says the new analysis.
Meanwhile, celebrated short-seller Jim Chanos says China is going to blow up. It’s going to be “Dubai times 1,000,” he says.
Our old friend Jim Rogers disagrees. He thinks Chanos hasn’t looked long enough or deeply enough into the China story. He thinks China is a buy.
And what do we think?
We don’t think. We listen:
“Something like 50% of Chinese economic growth – if you can believe the numbers – is based on capital investment,” said a dinner companion last week. “You can’t invest that kind of money without making some pretty major mistakes.”
If we were forced to bet on it…we’d bet that Chanos is right. We don’t know anything about China or the Chinese economy. But you don’t go from third-world communist hellhole to the world’s second major economy without some serious bust-ups…especially when the communists are still in control.
Barely had we touched down in the USA than we were invited to a dinner party in Georgetown. In keeping with the Chatham House Rules, we won’t mention any names, but we were in distinguished company. These were America’s elite of movers and shakers, ambassadors, lawyers, policymakers, people who reflect and shape the opinions – and actions – of the US empire.
We were invited to answer questions; instead, we asked them.
We began by mentioning the failure of the economics profession. Never had an unarmed group done more damage to the wealth of a society, we suggested. Economists helped create a huge bubble, ignored it until it blew up, and then gave the wrong advice about how to fix it. Bailouts and boondoggles were all they had to offer.
But wait a minute, said a fellow diner: ‘I’m an economist…we couldn’t let the whole banking system collapse.’
“Why not?” we asked.
‘Because unemployment would go up to 14% or more…’
“How do you know what the proper rate of employment should be?” we wanted to know.
‘But you can’t just ignore people when they are out of work…and you can’t ignore an economy when it goes into a depression, can you?’
“Why not?” we repeated our first question.
What we notice in our brush with America’s intellectual and political elite is that they are very smart, very well informed, but too busy to stop and think.
They are thinkers. They are always thinking about what to do. But they cannot afford to think radically…about why they should do anything at all. If they did, they would be as marginalized as we are… How much more fun it must be to be at the center of power…pulling the levers…turning the knobs…making the world a better place!
The presumption of all elites is that they can do a better job of running things than people who are less well educated, less informed, or less intelligent. In a sense, this is obviously true. In the administration of commonly held assets, for example – such as a municipal sewage-treatment plant…or an art collection – a person with taste, culture and education is likely to do a better job than a numbskull. (We admit that even this is a dubious assertion…but we will presume it is true for the sake of this argument…)
But the elites go a major step further…they claim to be able to do a better job of administering privately held assets too…things that belong to other people.
Take the Cash for Clunker program. Auto sales went down. But so what? How many cars SHOULD be bought and sold? Nobody knows. And it’s really not for anyone to say…other than the buyers and sellers themselves. But the elite think they know better.
The fellow with an old pick-up truck may have judged his truck good for another six months of service. But with the lure of a federal bribe before him, he junked the truck six months early. Any sensible person can see that this is a waste. A valuable asset has been lost – six months of truck service.
But the elite economist thinks he has saved the auto industry. Because the “demand for trucks has been stimulated.” Jobs have been saved. Detroit has been given a boost.
What kind of nonsense is this? Not only have useful resources been sent to the scrap heap prematurely, but the auto industry has been given a bum steer, too. Resources from all over the economy – steel, oil, labor, electronics – have been diverted to the auto industry, on the basis of ‘demand’ that only exists because of federal money. The laid-off autoworker is a victim too. He might have been considering turning to another trade…instead, called back to work by the Cash for Clunkers program, he shelves his plans for retraining and relocation. He thinks Detroit is making a comeback. How disappointed he will be when the phony demand disappears!
And where did the federal money come from? It had to come from somewhere. In the event, it was borrowed from lenders who would otherwise have lent it to someone else. We don’t know what the other borrower would have done with it, but no matter what it was, it could be expected to produce a net benefit, one way or another, to the economy.
Regards,
Bill Bonner,
for The Daily Reckoning
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
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Mr. Bonner this post is so good I doubt that nothing better can be said. Keep up the good thinking.
CFC did exactly what it should have done – stimulate the manufacturing component of our economy. It created jobs and we are now seeing the demand for autos continues to be strong beyond the program. So obviously the program accomplished real lasting demand. That in turn is creating real jobs.
I’m with Rogers on this one, China is a major buy. Especially when one thinks long and hard about it.
So with the unemployment rate falling now and certainly peaked, it is clear that the Fed did exactly the correct move in pumping stimulus money. I don’t see how anyone could argue that.
very good post mr. bonner. The only hole I can see is one you yourself taught me. That is the money for cash4clunkers came from nowhere,it was created from thin air and will one day be worth exactly that much.
I’m certain the food was grand, but I would have had problems keeping it down when the glitterati began ‘teaching’ me how to see the world. There are none so blind who will not see.
and most of those folks are in charge of things, may god help us.
The few always rule the many. When the elite descend into tyranny it’s time to find our pitch forks and storm the castles. This is what the elite fear most…Mobilization of the mob.
Right on Scott!!! Hey BB betting against JR is a tough call,but i’m in favor of watt JC is saying. I’m keeping and i on the floor looking 4 signs of a trap door opening in this “Suckers Rally” Cuz the Short S of the S&P is such a great side 2 b on when things fall of a cliff! LLAPA… *S*
a fence has three sides. hope you enjoyed the festivities.
Harry?
Sales are up from last month, but way down from their peak.
http://www.washingtonpost.com/wp-dyn/content/article/2010/01/05/AR2010010503859.html
But wait a minute, said a fellow diner: ‘I’m an economist…we couldn’t let the whole banking system collapse.’
“Why not?” we asked.
‘Because unemployment would go up to 14% or more…’
“How do you know what the proper rate of employment should be?” we wanted to know.
‘But you can’t just ignore people when they are out of work…and you can’t ignore an economy when it goes into a depression, can you?’
“Why not?” we repeated our first question.
This sounds like a dialog from “Atlas Shrugged”.
I mean that in a good way.
Harry needs to go to his room and “stimulate” and “pump” something.
Then, note how long the good effect lasts.
Only buyers and sellers, acting without influence, can determine the proper level of auto demand. People aren’t going to magically demand more autos in the future because of some ridiculous stimulus in the past.
CashForClunkers was a great program — for congressmen. Why should they spend their own money campaigning for the UAW vote in 2010 when they can use ours.
i appreciate the hope and trust that harry has, infortunately it will be clear it was misplaced soon enough.
You can’t fake real demand. its as simple as that. Through all my reading, debating. and research, That is the one point that I give the most weight.
Hey, Harry. This is how you argue it…
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/6962632/America-slides-deeper-into-depression-as-Wall-Street-revels.html
I would wager Mr. Pritchard would make a welcome contributor to The DR!!!!
Ok the cash for clunkers program may have been a flop but the same thing was done in France – as you know – and it looks like it was a success because the big 3 car companies really needed demand brought forward – demand smoothing if you will – in order to avoid laying off workers. If these jobs had gone they’d have gone forever. Of course the French bought mainly French cars too.
I’ve been wondering what would happen if the big banks collapsed. Clearly they aren’t giving loans to budding entrepreneurs and they don’t give any interest on savings so what the heck use are they?
Look how far we’ve come. Last depression Wall Streeter’s jumped off of tall buildings and Main Streeter’s starved. This time around Wall Streeter’s get to reline their pocket’s and only the Main Streeter’s starve.
What a country we live in.
Harry, the answer is to stop lying about the economy.
Unemployment falling? The U-3 rate went up by ~80,000 and the U-6 rate went up by over 600,000 in December of all months.
And have you taken a look at the rate of inflation at Shadowstats.com? Whether you trust the government’s number or shadowstat’s number (calculated using the government’s original formulation for the CPI) the trajectory of the curve should make you sweat.
Ah, but what a world we live in!! Up is down, right is left, dyslexics are not, out of work with no income is not “inflation” to the family….etc, etc……
I’m inclined to be with the medium term that China has a huge bubble building (no pun intended)…they are building huge complexes hoping that the rurals will move to the “suburbs” and fill the empty (so far) housing units…..
Somewhere in the near future we will have to stop the “stimulation” of the economy and the fat will be in the fire.
I also agree that we should have let the “too big to fail” to FAIL……
Lessons not learned from past mistakes will hover over the future and propel more false wealth…..
In the past more so than in the Great Depression, the House of Morgan stepped in to organize other private monies to rescue themselves….not so this time…we have too many corrupt politicians and a corrupt legal system that coddles financial crimes……
Oh Woe, What would Stalin have done????
Harry is losing me money. After betting the farm on Google and Apple, they keep dropping.
Go away Harry!
inflation WILL BE the last thing to happen…
PEOPLE, WE ARE IN DEFLATION TIME! and it will last for a quite time; all excess has to purge out, but with gov. interference will last even longer
Indeed it is a good suggestion to let the whole banking system collapse. As Karl Marx said, “without destruction there is no construction”. But, do not be mistaken, I mean destruction of the bad things or the evil one and reconstruction of the good one. Leave the good one intact. I think, the modern Carlberg will also agree.
Amen, CommonC!
p.s. @ others, no need to feed Mr. Troll.
Roadside Observers
All this while, commenters have been giving all sorts of views, opinions and feedback. Though some are big jokers and some are over sarcastic, but, the essence is participation. Nonetheless, those are
at least feelings stemmed out of something or somewhere, worthy of being noted. A truly free world and we make it a healthy one.
Well, an imbalance world would not be fair to all. Especially, those in the opposite camp; they are always being victimised in any scenario. I don’t think anyone would like to be in such circumstances. So, create a balance society for all regardless of religious background.