Friday, January 15, 2016

The China-Bubble

The other day, I noted an article "The China Bubble" by Walter Russell Mead at The American Interest, where he explained the difference between China's recession and the world-wide "Chinese Bubble." He wrote:
The China Bubble on the other hand is an international phenomenon. All over the world, the producers of commodities and manufactured goods have bought into the idea that Chinese demand is a perpetual growth machine. Producers of everything from cotton to copper to soybeans to silicon chips have assumed that double digit growth in China’s appetite for the components of its industrial machine will continue indefinitely—and they have invested to create the capacity to match this inexorably growing demand. From the jungles of Africa and the backwoods of Brazil to the rice paddies of Thailand and the Australian Outback there have been massive investments in mining, agriculture, energy production and infrastructure that assume continuing and even accelerating growth in Chinese demand. 
These investments, the excess capacity they represent, and the stocks and bonds dependent on these investments (both inside and outside China) are what the China Bubble is about.
It is the collapse of the value in these investments, both in China and in industries that support China's factories, that we are seeing the current collapse in prices for oil and other commodities, and the concomitant decline in stock prices, which some financial experts are saying may result in a recession worse than in 2008. (But expect the Fed to step in to try and save our 401(k)s with another round of "quantitative easing").

However, we should not be blinded to the reality behind the current economic malaise. China is merely the world's factory, not the source of demand. Yes, it has severe internal economic problems, including a real estate bubble. But it was not the decline of consumer spending in China that slowed China's industrial consumption and output. It was the decline of consumer spending elsewhere--particularly in the United States. Consumer spending is driven by the middle-class. And the middle-class has been gouged and sold out for a very long time in the United States, with wages stagnant for decades, and significant increases in expenses over the same time period. (I believe that it is not coincidence that American wages began to stagnate at the same time as OPEC imposed its oil embargo--Saudi Arabia has long been deserving of a sound thrashing). This has been topped off with a reduced number of middle-class jobs--the jobs either outsourced oversees or "insourced" to cheap foreign labor brought to the United States for the express purpose of undercutting Americans' wages. This is a systemic problem that is not going to be solved by the Fed pushing more money into the stock market, or presidential candidates that confuse the printing and distribution of Federal Reserve Notes with the creation of wealth.

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