Changing China

Reports of China’s progress and economic success vary widely, ranging from the views of perennial bears who foresee at least a bubble in real estate expanding with extreme rapidity, to wary hawks keeping an eye on the old guard’s attempt to increase economic output without actually loosening control over the populace, to the ballyhoo over expanding Chinese consumption and imports. China is certainly changing, but are the changes beneficial, to whom, sustainable, and relevent to America?

With the size of China’s ever-growing population and apparently a few more pot stickers in their bowls of noodles to egg them on, we can probably agree that imports by China will continue to increase so long as jobs and wages increase. There are certainly continuing reports of increasing wages, but we should not overlook that the average job there doesn’t approach $18.50/hour, as it does in America, although one can only suppose that bureaucrats, bankers, and Party members enjoy at least the same 50% advantage in remuneration which government employees and other connected parties have in the USA today.

Increased Chinese trade will be of significance to South African governments, but what are we selling that millions of Chinese want other than chicken feet? The Chinese had a superb idea of what sort of gaudy trinkets Americans would buy, but do we understand what Chinese in general and rural Chinese, in particular, want enough to make it good business to manufacture or export such commodities or products? Our primary resource China covets is surely coal, which we do not value as we ought, our country being in thrall to the greens. A reader commented, “The last time we exported scrap metal to a country it was returned to us as projectiles.” Our steel industry is in such poor state that we cannot afford to sell metals that can be recycled even if it does not return to us as munitions, the last point I will cover today. China is doing quite well buying and inventing technology, our last real export other than services. The mad quest for cheaper labor and far fewer regulations has left America very poorly situated to benefit from rising markets.

All politics are partisan, and economic growth is a matter of whose ox is getting the grain.

The concensus at present appears to be “China, Ho!” China is seen as an increasing source of investment opportunities and new markets, but I’ll be more inclined to believe it when I see more products marked “Made in the USA.” There are interesting tremors, including the (to me) amusing fact that Whammo has brought the Frisbee back to the land that invented it. Have we truly reached the point where the jobless rate induces Americans to work for less than coolies do? It is difficult to posit that fewer regulations and lower energy costs precipitated this reverse flight. Perhaps Chinese-made Frisbees were so full of deleterious chemicals that they injured frolicking children and dogs as the flip-flops Wal*Mart was selling did? I didn’t bother to look farther than the headline because I was entranced by the idea of flight TO America for a change. (Now that I have looked, there is a recall for safety reasons.)

I cannot help eying the aggressive expansion of “infrastructure,” and I have commented before that China must have better things to do with all those export dollars than build thousands of miles of roads, high speed rail, and empty cities in a vast country where for the preponderance the big news is that the Chang family got a bicycle. A bicycle in China or India is still a very big deal, as would be a treadle sewing machine. (They still make those in America; the firm has been working on their backlogged orders–primarily from India–for months, as I discovered when I looked into buying one. The price is higher than many electric machines.) How long will it take to amortize the cost of the gorges dam project? How many empty model cities and malls does any nation need? What did the gaudy Olympics cost? Sure, the Chinese are holding an enormous amount of our paper, but in its present condition that “capital” is not free to pay for dams, shopping malls, ballistic missiles, or other things governments tend to like. In a twinkling those promissory notes could be as valueless as the paper Fannie and Freddie offloaded on the Fed.

There is another danger in the amount of American debt China holds: conflicting twin urges to smack down the dollar and the need to preserve their “investment.” I was probably born a Bear and have yet to see any reason to change my view of the world, so I expect China to take it in the shorts (those of the bond market and dollar) when the time arrives, and estimate at least a 30% chance that China will destroy the dollar deliberately. They’ve done well already devaluing to about 12% of the previous exchange rate.

True, China is busy accumulating natural resources like any sensible country with views of conquest economic or political (purchases, investments, and contracts all over Africa and Afghanistan, for example, denuding Australia of its mineral wealth, and scrap steel from America) but it will find that the more there is on hand the higher consumption goes. A simple test of that theory is to work out what your normal expenditures for a month are and purchase two months’ worth of everything. Your family will be exceptional, indeed, if there are still at least chips, soft drinks, and other “treats” the last half of the second month, and in all probability the meat supply will be low, too. It is human nature to use what we think we have plenty of. Like credit.

If I were going to get excited over an emerging nation–possible, but not likely–it would be India. True, India is full of what seem to us odd beliefs, habits, and food preferences, but the Indians appear to be taking to the notions of productions and consumption. India is turning out some very good cars and is cutting edge in reduced expenses for superior surgical care.

As for BRC, I’m very pragmatic. South America is full of jungles, Communists, terrorist, and manana, and Indonesia is largely Muslim. China and Russia belong to the Communists and are accustomed to dictatorship, lack, and fear. This old Cold Warrior said twenty years ago that “freedom” would last in the former USSR only until the first old-time hardliner saw his chance, and the KGB (whatever it was to be called in the new iteration) and Army would be back in control in less than three weeks. Thus it proved, although it took longer than expected for the right man to surface. Never mind the ceremonial president, Vladimir is the guy in charge. Anyone shocked by Soviet sleeper cells shouldn’t be allowed in a voting booth or turned loose with a check book talking to a stock broker.

South America and Russians are famous for “nationalizing” the assets of foreign investors, and I cannot think that China will have any difficulty grasping the concept, particularly if they are enraged by the coming crash of the dollar. Even if they caused it, they won’t care. Perhaps I am merely the product of my age, but I favor keeping a very close eye on large nations with long histories of “civil rights” abuses who still invade other countries and employ spies.

Brazil? Not only do the inhabitants speak Portugese, but they’re having trouble working out how to grow crops in a vast land overrun with jungles. (Don’t give me that sentimental greenie “rain forest” nonsense. Those are jungles.) The soil under those jungles remains thin despite millenia of composting vegetation, but with good management practices it could be developed. The chances are higher that projects will be started and come to grief thinking to flog production via potash instead of traditional agricultural strategies which are slower but effective. The spread of settlers early in America’s history was fueled in large by the fact that a given amount of land, even treated well, can support only so many people. In far too many instances three years of growing cotton left the soil practically worthless. Congress noted in the late Thirties that most of America’s cropland contained very few nutrients, and the “solution” has been petrochemicals. This lead to lower yields providing lesser nutrition. This lead to adding synthesized vitamins to many products, a topic for at least another article. I question the wisdom of Argentina attempting to turn the Pampas into crop land. Land that grows beautiful grass can support livestock for centuries if handled properly, but it becomes dustbowls if abused. Agribiz likes quick, easy “fixes,” the demands of making profits outweighing long term preservation of assets. The best land left in America is tied up under government control or in the last two-point-one million family farms and ranches.

Rising energy, labor, and supply costs, allied with increasing taxation, regulation, and land “values,” do not bode well for retention of family agriculture, down from 5.1 million during the Great Depression. My measly “twice by nothing” operation is valued at over a million dollars, and unless I get serious about transferring the limit (worth less every year) to my future heirs the ranch will have to be sold to cover onerous taxes, or else they will have to purchase their inheritance from the government if they have the funds. Who knows what valuation the taxing authorities will put on it when I die? NOT counting livestock, equipment, machinery, vehicles, repairs, and improvements the local assessor collector has basically doubled his opinion of the value of the land, house, barns, and outbuildings in the last five years.

We ain’t a lousy “one horse outfit.” Laughter…we’re a lousy little six horse, six or eight truck outfit and dear Charles may be over-hatted at three custom felt “Stetsons” (handmade Catalenas, produced locally for several generations, which we think better, actually) and a couple of summer Resistol straws. The ROI is apalling as we rebuild and expand, but the real point is that I expect food production in the USA to decline, ventures in Brazil and Argentina to be unsuccessful, and Malthusian principles to proceed inexorably. As our population grows and we produce less there will be less to export. I do not put “food wars” out of the equation.

I do not always see only the gloomy side of an equation, you know. I’m positively beaming over the consternation there must have been when submarines popped up suddenly on “courtesy visits” to the Phillipines’ Subic Bay, Diego Garcia (a tiny dot in the Indian ocean), and, ho ho, Pusan, South Korea–all on the same day recently. We just thought we’d drop in while preparing for several weeks of war games in the Pacific, you see…War games in which China, pointedly, was not invited to participate. Apparently I’m not the only one feeling that Formosa (Taiwan to you youngsters) is feeling more insecure, or to note that Tibet certainly feels invaded, Kim Jong Il is misbehaving and the general signs of aggression in the South China Sea. Rattling boomers occasionally cheers up our dwindling allies as well as me.

In a world where North Korea can sink South Korean vessals without any significant protest from either the world or our State Department it is surely rather comforting to see a sub loaded with 156 (possibly, but not assuredly, non-nuclear but beautifully destructive in either event) Tomahawk cruise missiles which could hit anything for a thousand miles easily. This is a start, since China has over a thousand missiles near the Taiwan Strait. The Michigan, Florida, and Ohio also carry sixty-man contingents of special ops troops, a useful upgrade. Oh, and there are subs carrying nuclear Tridents in some ocean, somewhere, should anyone decide that flinging nukes around has become profitable in the current political climate in the US. The Tomahawks have been used frequently in Afghanistan, Bosnia, Iraq, and the Sudan, and the Eastern world knows what they can do. We know what theirs are capable of, too.

“U.S. officials deny that any message is being directed at Beijing, saying the Tomahawk triple play was a coincidence,” one government source reports, surprising those of us who thought the Obama Nation had no sense of humor. There’s a sobering thought; I don’t think it does; those without military experience and good math skills may well not be able to work out a TOT. “Time On Target” refers technically to firing a series of guns of different velocities and/or from different distances so that all of the rounds impact at the same time. I am using it loosely as an algebra word problem for “when will two trains collide if…?” or, to be precise, “How do you cut orders for three submarines such that all three will surface smartly at 0800 in widely dispersed locations?” SUBPAC knew exactly what it was doing even if politicians didn’t.

The Chinese response is just as amusing–and frightening–to those of us who recall Kruschev pounding his shoe: “At present, common aspirations of countries in the Asian and Pacific regions are seeking for peace, stability and regional security,” Wang Baodong, spokesman for the Chinese embassy in Washington…”We hope the relevant U.S. military activities will serve for the regional peace, stability and security, and not the contrary.” Spoken like a good little Communist, and very indicative of how the world never really changes. Work out all the waffles and paranoia in Baodong’s response. It does not convey a great deal of trust and mutual goals. I have started a lively discussion among my resident military think tank including references to the Pueblo, Kissenger, the E-21, the Liberty, and so forth. “Everybody does stuff to us and we never do anything. Why do we always give in to world opinion?” Asia asked passionately. THERE goes dinner, which he was scheduled to prepare. Looks like we’re going out. They are really in high gear, with mutters of “P 2V” and why practicing against the foe isn’t practicable, and that the Eastern Axis will “observe” our war games and interrupt them as possible.

China in this century is glitzy, glossy, and making incessant noises like a “modern” “Western” “free market” nation, but there is a lot of history that urges caution, particularly as we tremble on the brink of the second dip of the recession as companies and nations slide downward like a pack of damaged Slinkies. I know not what course others may take, but as for me, my investment in Chinese is going to be dinner at Pei Wei’s tonight.

Linda Brady Traynham
Whiskey & Gunpowder

July 13, 2010

The Daily Reckoning