With the waves of destruction brought about by the Global Financial Meltdown there comes a defining moment of obligatory reflection. If such disaster has been visited upon the Globe, what lessons can be learned to dismantle the mechanism that brought it about in the first place? The remedies proposed by Governments the world over are not working as every real economic indicator confirms. The eternal corrupting influence of Money on Government policies and planning have all but guaranteed that whatever methods are employed to redeem the economy from the whale's mouth, they will be like drops of rain meeting a river. The one overwhelming factor that does not seem to be factored in to the equation is that to get oneself out of a financial mess one needs financial resources. Not the borrowed kind but the saved kind. This is where China holds an Ace.
The U.S. has a real financial shortfall of $53 Trillion which it can never pay back. The U.K. is on the way to destroying its currency and increase its debt as is France. China, on the other hand, is in a very unique position in that it has $1.9 Trillion in foreign currency reserves. This puts it in a very unique position with regards to the rest of the world. While the latter was absorbed in consuming everything that China produced, the Chinese were amassing an enormous cushion of real cash that they can now use to divert the focus away from an export driven economy to one that begins to focus on domestic demand. The economic fundamentals for a recovery in China are more evident than in the rest of the world because there has not been the same credit driven overconsumption that was the driving force for GDP in so many other countries. Even on an individual basis "Household savings climbed 382.7 billion Yuan from the previous month (October 2008).
The Central Economic Work Conference's $585 Billion stimulus plan addresses several areas that are essential to increasing domestic consumer demand and purchasing power. Housing projects for urban dwelling low-income families, subsidies for low-income rural families and funds for Medical care and education. China is also supporting the Steel, Automotive and telecommunications industries through lowering taxes and encouraging innovation through research and development subsidies. Imports of iron ore are increasing and the steel produced is being stored for future use. The latter point is notable as it presents China with an advantage in manufacturing baseline costs as the fall in shipping and commodity prices has meant that it has built its stockpile at bargain basement prices.
This is real investment with real available money. China saved up for the rainy day and, now it has arrived, can put their resources to work for them. It will take time for China to turn around its gigantic economy but at least they don't have to worry about paying off an unpayable debt to the rest of the world. While every other country is desperately trying to formulate a rescue plan fueled with an increase in the national debt, China does not have this worry and this will form its primary advantage.
The investment in the population's purchasing power and employment prospects through improving the country's infrastructure and providing tax breaks and subsidies will pay off much better than throwing money at financial institutions. The Chinese already knew this and how little use it would be in turning around a bad situation. The world's Policemen might be Occidental but the world's teacher, as it has for millennia, still resides in the Orient.©2008 Andrew Hughes, all rights reserved. You must have written permission from the author in order to republish this work.
Published: Wednesday, December 17, 2008
Last modified: Wednesday, December 17, 2008
The views expressed in this article are those of Andrew Hughes only and do not represent the views of Nolan Chart, LLC or its affiliates. Andrew Hughes is solely responsible for the contents of this article and is not an employee or otherwise affiliated with Nolan Chart, LLC in his/her role as a columnist.
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Reader Comments:
Posted By: Master C
Date: 2008-12-17 19:53:43
Dear Andrew,
Your analysis of the financial condition of these various countries is about as amateurish as Michelle Wie trying to make the cut in several PGA Men's tournaments. She never made it, and neither will you.
The rate of SAVING in the US is vastly understated because of how it is determined. If it's in a SAVINGS ACCOUNT, then it's considered savings. But, if it's in an INVESTMENT ACCOUNT it isn't considered savings. When you toss in the TRILLIONS of dollars of investment accounts that are used TO MAKE MORE MONEY WITH MONEY ~ which is really what SAVINGS are about ~ we dwarf the rest of the world, even with all the losses we've been experiencing. But, when you look at those people who are putting their money into SAVINGS ACCOUNTS, we look paltry.
If we even included money in BONDS or REAL ESTATE, or money market accounts, we would humble other nations with our savings. The numbers YOU'RE quoting are like saying that the number of FISH caught with cane poles is highest in CHINA or countries like THAILAND. But, when you look at who's really catching the FISH, it ain't them CANE POLES!
Not only that, but China is DEPENDENT upon the US and many other advanced nations to IMPORT goods from them because they have deficient INTERNAL demand. Many of their millions of people live in the mountains, and are self-sufficient. They aren't buying cars or homes, or whatever. If demand dries up from OUTSIDE of China, it will hurt the Chinese economy very severely.
I think you need someone to help you when you analyze world situations, Andrew. Because you seem to have as much insight into world politics as Larry the Cable Guy has into calculus.
Master C
Posted By: Andrew Hughes
Date: 2008-12-18 02:14:22
Investment accounts have been wiped out along with real estate. Even the wily investment community is heading for cash. The Chinese have the latter in abundance. If the U.S. is dwarfing the rest of the world with it's enormous savings, why is there a real deficit of $53 Trillion,( including Social Security and Medicare commitments) ? Has each man, woman and child in the U.S. got over $100,000 to pay it back ? If savings are in such abundance, could they have not been used to pay off mortgage payments and avoid foreclosure ?
Posted By: Jake, the champion of the constitution
Date: 2008-12-18 04:45:05
Dear Andrew Hughes,
Hey, welcome to the Chart!! Yes, in a way I hear what you are saying, China has a lot of cash, but I have been learning some things by inference about the Yuan monetary supply (M3-type) and its all not good news.
But what do they really have? Some paper and electrons. If you look at the Treasury markets and yields, you will see what I wrote up in an article entitled "The Next Bubble to Pop!" If the petrodollar has problems, do not forget to factor in the yellow metal.
PS I live in China. Its a real mess here in the exporting business... which is most of the GDP. I think the factories will remain, and what we might see is just a very painful supply line dislocation from predominantly the US to other customers.
FYI Axel Merk wrote a great note on China and the FED recently at merkfunds.com I think.
http://www.merkfund.com/merk-perspective/insights/2008-12-09.html
Posted By: Master C
Date: 2008-12-18 07:29:37
Dear Andrew, my boy,
I don't know where you get your information, but MY investment accounts are doing just fine. And, I know a whole lot of classmates who keep in touch through a website who are my age and doing just fine, too. You seem to confuse FALLING values with DEPLETED values.
Not only that but many of these LOSSES are probably only temporary. I have seen signs of opportunities in several areas so far, and expect others to develop as the market reshapes itself. These are PAPER LOSSES just as we experienced such tremendous and appreciable PAPER GAINS in earlier periods. Still, the refusal to see the difference between the way AMERICANS "save" their money and how the CHINESE and many other countries "save" their money only shows your basic ignorance of the situation.
You also seem to think that DEFICITS mean trouble ~ which they could if left unaddressed or if not properly budgeted. But, that's like saying that the DEFICIT you have with your MORTGAGE is trouble, or the DEFICIT you owe on your CAR is bad. It's all a matter of AMORTIZATION ~ which, I'm sure, is a word you don't seem to understand.
Study up a little before you begin writing these kinds of kiddy fairy tales, and you may find more support for your conclusions. Just hurling faulty accusations around like you know what's going on just ends up making YOU like a little rabbit scampering for the cover of the bushes when you face a HUNTER who knows where you're trying to hide.
Master C