Posted on 02/21/2009 6:09:17 AM PST by TigerLikesRooster
Inside China: A Sculptor's View
I have been exchanging emails with Bill Hopen, a sculptor who frequently travels to China, often for months at a time. Bill writes ....
I've been to China a lot Mish, spent many months at a time there for the last eight years. China is already in a massive overcapacity real estate bubble. They are building three apartments for everyone that is lived in. Most apartments are empty and those that are rented do not come close to paying the interest on the loan.
There are huge department stores with products loaded on the shelves and staff everywhere and no one is shopping! Staff outnumbers customers five to one. It's surreal. They are ready, waiting for a great wave of shopping to come, but no wave is coming.
Eventually this "borrow and build" economy will be a pop heard round the world. China runs on construction, build build build, but there is no reason for that many places and spaces and big mall businesses with no consumers.
I asked Bill to fill in some more details about the cities he visits. Bill writes ...
The Shanghai/Pudong/Hongchow area,(30 million population) is mostly where I go, work, live for months at a time. I correspond with my expat friends who live there even when I'm back stateside.
(Excerpt) Read more at globaleconomicanalysis.blogspot.com ...
Not your dream consumers who can take over astronomical consumer spending in U.S. which is now basically dead.
Ping!
And that pop will be felt here when they can’t buy our debt.
I heard another person on FR say if China doesn’t buy our debt, Japan will. Japan is officially in a Depression, how much can they buy?
This is about what I assumed would happen over there when our debt-bubble blew. Henry Ford understood that well-paid employees make the best consumers. I feel bad for them. They couldn’t to buy the stuff they were making.
The question is now whether their Gov’t is going to let all that capacity idle, and let the factories degrade, or convert it over to military production.
It's a catch-22.
I've read that US consumers aren't buying enough imports and consequently China doesn't have the money to buy any more US debt.
And, I've read that things are so bad in Japan that 'depression' may be too mild a word to describe it.
Fri Feb 20, 2009 9:26pm EST
NEW YORK (Reuters) - Renowned investor George Soros said on Friday the world financial system has effectively disintegrated, adding that there is yet no prospect of a near-term resolution to the crisis.
Soros said the turbulence is actually more severe than during the Great Depression, comparing the current situation to the demise of the Soviet Union.
He said the bankruptcy of Lehman Brothers in September marked a turning point in the functioning of the market system.
"We witnessed the collapse of the financial system," Soros said at a Columbia University dinner. "It was placed on life support, and it's still on life support. There's no sign that we are anywhere near a bottom."
[snip]
There are several reasons for this debt imbalance, and many of them are from the unbreakable law of unintended consequences. Here's what I think:
When Lyndon Johnson quit putting actual valuable metals in coins, he effectively untied the US dollar from any tethering point. Nixon officially took us off the gold standard, but LBJ cut the moorings. At that point, the only thing holding back government spending was their own self restraint, and the government has no self restraint.It's not one thing, it's a lot of things, but particularly with 0bama, Pelosi, and Reid, I think the system is headed for total collapse. A reset and reboot will become necessary, soon. The problem was too much artificially created money. Creating more artificial money will increase the problem, not solve it, and we've reached the point that we could create a gazillion dollars in fake money, and it wouldn't be enough to make banks solvent or restore confidence. I think 0bama and the cronies want this, as it will give them a pretext to nationalize the economy. I don't think they understand that nationalizing the economy will not produce the results they expect.Loose fiscal policy favors the lender, not the debtor, so indebtedness greatly increases in part of the population, while apparent wealth in the form of debt notes accrues in the accounts of the lenders.
401s, 403s and mutual funds also have contributed. Most millionaires DON'T use advisors. They do their own stock research. With the 401s and 403s, there was suddenly a steady rush of money into the stock market of money from people who don't really understand the companies in which they've invested, and because they're mostly in mutual funds, they often don't even know the names of the companies in which they've invested. This untied performance from the ability to attract investors. Most of these investors were told to "buy and hold." Additionally, because these funds were in retirement accounts, it was much more difficult to take money out. It also created the problem of too much money chasing too few products. Most of the stocks were not good values, but the money had to go somewhere, so people overpaid for stocks based on the traditional debt to earnings and growth potential formulas.
In the abstract, money is a representation of work or product. Government insiders simply added zeros to the database. Where the average person might work 15 years to make a million dollars, select individuals could do little more than add a zero to the database, and artificially generate the equivalent of that work. It devalued the work of everyone else, but as the system was so large, it seemed like a pinhole in a swimming pool.
Finally, left to it's own, inefficient systems die. The process is painful for some, but when there's no need for a product, it quits generating money and goes away. Government intervention props up inefficient systems to prevent this pain. Unfortunately, it only delays the correction, and when the correction occurs, it is much more dramatic and severe.
Wandering off and making this post so long nobody will read it, companies like GM, in the fifties and sixties, made debt commitments far into the future without funding them in the form of retirement accounts and medical plans for retirees. The MBA as the business CEO became the model, as opposed to the person who knew and loved the product. An example is AMF owning Harley-Davidson, or the entire management team at GM. They'd be just as happy selling corn flakes or soap suds. They have no love of their product, and simply see it as a balance sheet. AMF, instead of building a great motorcycle, concentrated entirely on cost reduction per unit, reducing product quality and nearly killing the brand.
Problem with the article is that it is extremely myopic. Shanghai is no more China writ large than Manhattan is the U.S. Reason those shops he went to were empty is that Chinese simply cannot afford to shop at the places Western tourists go to because they do not offer value. The Chinese are all shopping at the equivalent of Wal-Mart and Costco while the tourists are hitting up the equivalents of Armani and Louis Vutton, etc. Can’t go to a party and declare it did while sitting in the parlor while everyone is is outside on the patio cooking up barbecue.
What happens in Shanghai is the symptom. All massive amount of investment into those projects won't produce decent return to salvage original cost and generate profits.
Peasants in rural area won't shop much to offset loss of export revenues. Government could pump in money for a while, creating artificial bubble, which won't last.
It seems that China is following U.S. not only in terms of general banking/gov policy but PR spin as well such as "It is only in Shanghai." Sounds awfully like "It's only in New York and LA."
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