Tag Archives: China

The China Syndrome:

What an incredible spectacle. The world financial system apparently teetering on the abyss over the failure of China to live up to the economic expectations of the pundits; and all this during the dog days of summer when not much is supposed to be happening. 

Watching the stock markets collapsing around the globe, a spectator might be excused for asking who is in charge? Or has it really come down to an interconnected world where one spark can ignite the whole shebang.?  The answer depends on who you ask. 

The traders employed by the bankers will tell us that indeed it is an interconnected world where trillions of dollars in derivatives are sloshing around waiting for the hair-trigger fingers of algorithms designed by quants. This is the scary world that few understand even though it accounts for the majority of trading volume on the worlds exchanges.

A more rational explanation might be  that asset values (stocks) driven up by years of zero interest rates (easy money) were just looking for a return path to sanity. All that was needed was the excuse, that in this case, happened to be China.

I have written before about China’s need for continued growth as a way for the Communist Party to control the proletariat. I do not think this has changed. But I suspect that controlling the levers of power is proving to be easier said then done. The very thought of  a tightly controlled  economy with massive State  Owned Enterprises placed along side of rampant capitalism  boggles the mind. There is absolutely no precedent for such a hybrid and consequently it is very difficult to figure out what is going on. I doubt however, if the lofty growth rates thrown about by the Communist elite, bear much resemblance to the Gross Domestic Product numbers used by the rest of the World.

The Baltic Dry Index (a measure of what shippers are prepared to pay for shipping capacity) has been falling for two years, and is now near an all time low. The Commodity Index has also been in free fall leading to the inescapable conclusion that World Trade has been slowing for some time. If it were not for the hysteria over China, this might well be chalked up to more normal  long-term cyclical  patterns.

The flip side of the China Syndrome is why would the likes of India. Brazil and South East Asia not be subject to well established business cycles?  Have the bankers and rulers of these countries unlocked the secret of controlled growth? I think not.

As an old-timer I have to admit I have witnessed at least four commodity cycles and I fail to see the difference this time around. The players may be different but the cause is still the same. Too much cheap money pumped into increasing capacity ahead of the growth in demand.

The volatility of the correction had nothing to do with the planners or     the players and everything to do with technology and good old-fashioned greed.   

 

The New Banker:

There is a new banker in town, much to the chagrin of Christine Le Guard and the I.M.F. (International Monetary Fund) This is, of course China, who recently, acting alone, and without so much as a nod of approval, from the powers that be, executed giant currency swaps with Russia and Argentina.  These swaps were executed using US dollars  held by China as a result of a highly favorable balance of trade with the United States over the past ten years. The effect was to prop up the Ruble and the Peso by showing confidence that the exchange rates with the dollar would recover, or at least would not get any worse.

Even though the leaders of China have stated that there was no quid pro quo for the transactions we all know this is bunk. What China is doing is following the well trodden path of economic nationalism or enlightened self-interest, as first practiced by the Romans and later by the Spaniards, the British, and more recently the Americans. The only difference being is that US dollars are being used instead of Chinese Yuan, or gold and silver.

There are many other examples of the same policy. the largest being the new  ship canal, capable of floating supersize bulk carriers from the Pacific to the Caribbean through Nicaragua that is being built and financed by China. The size of this undertaking is similar to that undertaken by the British with the Suez Canal and the Americans with the Panama Canal and is being built for much the same purpose.

This burst of economic exuberance does not sit well with the established Western trading nations, especially when it flies in the face of economic sanctions, such as those now in place against Russia, for the transgression of the Crimea. But short of the suicide of outright military action, that no one in the west seems to have the stomach for, there does not appear to much that can be done about it. Perhaps it is time for the West to remember the”Golden Rule” namely he who has the gold makes the rules.

No one really knows the size of China’s War Chest in dollars or gold. Suffice it to say it is very large and China is now by way and far the largest creditor of America and Western Europe. Just like any banker the Chinese economist must always be concerned with the dangers of putting all the dollar eggs in one basket. So why not export capital in dollars? and bypass the IMF and other troublesome Western based institutions controlled by the United States.

As I have postulated before The Grand Pooh-bas of China have a king sized problem. The hegemony of the Communist Party depends in large part on the ability to maintain a rising standard of living for 1.36 billion inhabitants of the continent. This continuing  endeavor will require a whole heap of natural resources that China does not have and must therefore secure. The easiest way to do this is through outright ownership or other forms of economic nationalism. Even more enticing if the resources such as oil and natural gas are available  are available from a neighbor, such as Russia, who just happens to require financial assistance to overcome  a cyclical storm.

We can look for a lot more of this.

Stay Tuned.

CARBON 101:

This week’s rant, a truly scary subject, the economics of Carbon pricing.

Last week I dabbled into the science of Climate Change by questioning the statistics of calculating the speed of change, as opposed to the veracity of the science itself.  I gather from some of the comments of followers,that it still very dangerous to question the new elite on the dogma itself.

I feel far more confident in opining on the  economics of carbon pricing since, at best it is not science but an educated guess. Just like projecting the behavior of consumers who are supposed to be rational in their decisions. We all know where this has led.

The theory of the new elite, is, that if you increase the price of Carbon, the backbone of  most non-renewable energy sources, by artificial means (Taxation) consumption will fall and Climate Change will be slowed, or eliminated. The argument, as stipulated by the climate pundits, is apparently, based on a flat tax per ton of Carbon, that gives no effect to the elasticity of demand and supply  evident in the present drastic reduction in oil prices.

The facts, as opposed to the theory, point in a very different direction. We know from actual experience  that the price of energy is both cyclical and elastic. The demise  of dreaded coal-fired power plants in North America is being driven  by a drastic reduction in the price and an increase in the supply of Natural Gas. The glut in Natural Gas was caused by innovation (Fracking)  not by taxation. Same with Crude Oil where the re-emergence of The United States as the largest producer of oil by means of fracking shale deposits is wrecking havoc with here-to-for pricing and taxation models.

Then we have China, the largest user of energy in the World, and about to become the biggest single factor in determining likely future World energy demand. A two percent drop in the anticipated growth rate in China  has apparently  recently caused a fifty percent drop in the price of coal. Again this change had nothing to do with taxation, but rather a change in monetary policy by the State Poobahs of the Communist Party. Longer term, it is a  well-known certainty, that the Communist Party cannot afford to initiate any policy that will threaten the hegemony of single party rule, that is maintained by benign monetary policy and above normal growth rates in the economy.

So what we have right now, in North America and China, two hemispheres, that combined account for over fifty percent of World G.D.P, is falling carbon prices that will over time encourage consumption, and start the energy price cycle all over again.

So the hypothetical question for the new elite is would a carbon tax change any of this? This of course is a hypothesis only since there is zero chance of such a tax being instigated in the foreseeable future in the US or China.

I believe the answer is no.  Any change would be marginal at best and would likely have very little affect on total carbon emissions.The current oil and gas glut was caused by high oil prices during the last ten years and ridiculous interest rates that have spurred an enormous new investment in production facilities. (Oil Sands and Shale Oil)

There is also a very big elephant in the mix. Easy money, or no cost money, has spurred the automobile Industry to build 16 million new vehicles in 2014, a figure not seen 2006. These vehicles are chock full of gadgets to increase fuel efficiency but do little to decrease  emissions. They are also very expensive, but nobody seems to care.This might prompt the question as to how serious we are about reducing the carbon footprint, and how rational the decision-making process really is.

The problem with taxation for any purpose, other than funding government, is that it simply does not work. Just look at what has happened to income re-distribution by means of the graduated income tax, After years of futile effort the gap between the wealthy and the poor has grown rather than shrunk again because of easy money.

Would it not be far better to spur innovation that could be achieved  at a fraction of the cost in money and human misery? The answer could well lie with the Hydrogen Molecule. We already have the fuel cell, where the by-product is water rather than CO2. The immediate problem is that hydrogen is expensive and difficult to store and transport but these are small problems compared to the disruption caused  by punitive taxation.

In my mind innovation is the key to the survival of mankind. Time and again we have seen the profits of doom run out-of-town by innovation. The Peak oil Theory being one of the latest. It seems as though the elite make noise and grab attention by forecasting the continuation of a current trend way off into the future, without any regard to the science of innovation.

At various times the City of London has been forecast to be four feet deep in horse poop or blinded by perpetual coal inspired  fog. As we all know neither happened, because of, first, the invention of the automobile and second the discovery of Natural Gas under the North Sea. Despite this history the profits of doom are busy once more, although such dire forecasts have done nothing to bring down the most expensive real estate in the world.

History has shown us that Innovation is inspired by opportunity and  leadership rather than  taxation.

Stay tuned: