Long Production, Short Consumption

An excellent interview of The China Money Report‘s Dan Collins from Max Keiser, wherein Collins debunks much of the “China is a bubble” nonsense so popular in circles that should know better:

Some readers have had a hard time understanding my position on China and America.

In a nutshell: I am long production and short consumption. I am long creditors and short debtors. 

Or, in more depth:

China has a property bubble, resulting from excess supply. It is also the world’s greatest industrial behemoth, controlling the world’s supply chains in many key components, and is becoming an increasingly powerful player in energy markets thanks to its buy-out of Venezuela and its close ties to authoritarian Eurasian energy powers like Russia, Iran and Pakistan. This means that it’s probably not the best place for Westerners to park capital in the short term. But it has no bearing on China’s strategic standing in the medium to long term.

A comparison with America is inevitable. The United States destroyed its industrial productive capacity, has a zombified financial system (including a huge derivatives ponzi that is yet to collapse), a stagnating labour market, stagnating infrastructure, a clueless establishment, and its currency is about to lose global reserve currency status.

Every day, America becomes more dependent on foreign oil and resources.

America needs the global resource and trade infrastructureThat’s why America is in Iraq, Afghanistan, Yemen, Pakistan. That’s why there are hundreds of bases around the world and why America spends trillions policing the world.

The counter-argument I often hear is “but America has nukes, America can order other countries to do things and they will do it”. But, ever since mutually-assured destruction that hasn’t been true.

If you don’t control your supply chains, you have a geostrategic problem. China grasped the importance of supply chains, and through cunning use of long-term planning has made itself the spider at the centre of the web of global trade. America grasped they could get a free lunch with US treasuries and that free lunch destroyed their productive capacity.

6 thoughts on “Long Production, Short Consumption

  1. I really have trouble accepting such statements: “If you don’t control your supply chains, you have a geostrategic problem.”

    This may be true for Palestinians in the West Bank, who are completely surrounded by a military occupation, and could be true of places like Lesotho, completely surrounded by South Africa. But in a place like America, I find it meaningless to talk about controlling supply chains. America does not need any specific country or source exclusively. If all the Middle East goes up in flames next week, oil prices would rise (nothing compared to the rises engineered by monetary policy like the ones we’ve been seeing since 1971) and oil production would be increased everywhere in the world, and can more than make up for the entire Middle East in a few months. This is true for any resource. Prices can rise and American consumers can still get their things from other sources.

    I generally find arguments about the geostrategic importance of basic market commodities to be the self-serving piffle issued by companies that trade in these commodities. ‘Securing Iraqi oil for Americans’ means nothing, who still hardly consume any Iraqi oil. But it does mean something to American oil companies. All through America’s post-war history we’ve seen this broken geostrategic record played out whenever a big corporation wants to secure its enormously important sugar-cane, banana, oil, or eggplant fields. I find it precisely as convincing as the nonsense about America needing to keep GM running for geostrategic reasons of avoiding being given better cars by the Japanese for a cheaper price.

    I think this is a very dangerous corporatist verbal trick that people can fall for. It is good for American corporations to ‘control supply chains’ at the expense of the Chinese corporations, but to actual real-life Chinese and Americans, this entire corporatist state structure in China and America is very destructive.

    Would love to get a different viewpoint on this.

    • Okay, let’s ignore corporations for a second, because this principle applies to individuals.

      Human beings require food, water, and shelter to live. If they are dependent on others (e.g. government) for the supply of these, we ourselves have a big “geostrategic” problem, because that supply could easily be cut off. For example, most people in cities are dependent on government-run water treatment plants, they are dependent on oil-fuelled supply chains that bring food into the city from the countryside (or often from outside the country), they are dependent on electricity generation to keep supply chains running. So even in those basic requirements there is already a lot of inter-dependency — and most of this could be threatened by a very simple black swan, like an oil shock.

      Contrast this to someone who dwells in the countryside and controls their own food and water supply — their lives and liberty are not threatened so much by these systemic black swans.

      So how does this apply to nations?

      Well, very simply some nations are more dependent than others. Nations require both food and water, but also a certain level of energy generation (to satisfy needs for food and water). Certainly more “advanced” nations have even greater needs for energy generation, because their base-line economic activity involves significantly more travel and shipping than in less “advanced” nations.

      America — for ideological reasons — has become the most energy-dependent nation on Earth. This is because Nixon and Kissinger and every President since then has pursued the lie that America can ship its industry overseas and become a “knowledge” economy. This means that America is highly dependent on the structures of global trade and shipping — not just for its unnecessary addiction to consumer goods and Chinese trinkets, but also for its basic energy supply needs. Even goods supposedly “made in America” are constructed using Chinese components, components which very often are no-longer made in America at all.

      The outcome of this is that America spends trillions of dollars maintaining a global military presence to effectively safeguard the trade networks on which it depends for energy. The hidden problem here is that subsidising these trade networks has a huge distorting effect on America’s internal markets. Manufacturing in America is supposedly uncompetitive because of labour prices, but this ignores the fact that a huge amount of military subsidy has gone to “flattening” the world so that Chinese labour can compete directly against American labour. Simply, without America’s military acting as global policeman, shipping and insurance costs would mean that non-American goods would be significantly more expensive than they are at present, which would make American manufacturing (and also resource extraction) significantly more competitive.

      So, by following the bullshit doctrine of “comparative advantage” and using its military might to rig global markets, America has undermined its internal industries and made itself greatly dependent on international supply not just for the basic necessity of energy (and oil for agriculture), but for economic stability. A cutoff of supplies from China would crash the American economy as much or more than a cutoff of oil from Venezuela.

      In reality, the corporatists have been on the side of globalisation, because they do not consider much beyond profit, because of the American obsession with money and monetary factors. More globalisation has meant more profit, both from Chinese factories, and American “knowledge” workers (NASDAQ bubble, etc) — but also much, much more systemic fragility.

  2. I still don’t buy this, because your argument is simply to expound on the concept of dependence without actually justifying it. I am not dependent on you if I buy something from you; I am dependent on you if I have no alternatives to you. In all of these examples you mention, you are right that the US needs these goods, but that is very different from saying it can only get them from any specific source.

    Example: I am dependent on Idriss supermarket here in Beirut for most my food. It’s my food-source of choice because of a combination of factors (price, quality, proximity, etc) that make it the most suited for me, subjectively. If Idriss were to shut down tomorrow, however, my life would still go on. There are many other places where I can shop and get similar goods. The real effect on me would be small. I use it today, but I am not dependent on it for my survival.

    So, yes, food, energy and water are all important, but that does not mean that the US is dependent on anyone or anything in this regard. In particular, I find ridiculous this excessive focus on energy as some magic elan vital of civilization (and assorted nonsense like Peak Oil and other charlatan science). It’s just a good like all others. It’s an input good into a lot of modern industries, but that doesn’t change anything. If the US wanted to really ‘secure its oil supply’ the best policy possible is to do absolutely nothing: The entire world would be lining up at America’s doorstep politely asking to sell oil, with everyone competing with everyone else to provide the cheapest and best quality oil.

    If, on the other hand, the US was more interested in securing the oil for specific corporations, then yes, it makes sense to carry out all the policies you mention. The existence of these policies does not prove dependence.

    It makes no sense to talk about a following a ‘doctrine of “comparative advantage”’ any more than it makes sense to talk about following a ‘doctrine of gravity’. Comparative advantage isn’t an article of faith or a belief system, it’s a theory that explains why free trade happens–because both sides can benefit from it. It’s a positive theory, not a normative theory. It doesn’t tell you you have to trade; let alone telling you that American needs to de-industrialize and concentrate on producing bullshit financial derivatives. It doesn’t tell you trade is always good, of course; it tells you that when there are gains to be had from trade, people can capitalize on them by trading. Blaming the “doctrine of comparative advantage” for America’s economic troubles is a bit like blaming gravity for an airplane crash.

    This all comes back to the point I keep making about monetary policy. What you view here as industrial and geostrategic problems I view as simply symptoms of the real underlying monetary problem. It is the Keynesian debauching of the dollar that destroyed American industry, not a conscious decision to destroy industry. It is also responsible for the mushrooming of the housing and finance bubbles. It is also, arguably, a major driver in all America’s oil protection policies around the world. America cares about the oil of meaningless little countries not because of the oil, which Americans can get anywhere; it’s to ensure that the oil continues to be traded in dollars. I find the tall-tales about oil dependence, Peak Oil, geostrategic importance and the likes to be more of the ‘Bootlggers & Baptists’ sort of justifications for these policies.

    • All the evidence suggests to me that this imperialist policy is conscious, and is about guaranteeing America (and, yes, certain American corporations) access to certain resources at a certain (very, very low) price. You say that America’s policy is about trading oil in dollars. Well why would that matter if America were not a desperate oil junkie?

      Is it any coincidence that Qaddafi and Saddam — the two Arab leaders who committed to trading oil in non-dollar currencies — were swiftly deposed? Retaining the dollar-oil standard — i.e maintaining america’s ability to “print oil” (i.e. print money at no cost and exchange it for oil) is American foreign policy because the Generals in the Pentagon have a more solid grasp of economics than most economists, and understand that America without oil is like a junkie without heroin. The 800 foreign military bases, the multi-trillion dollar military expenditures, in my eyes are all America attempting to control the web of global trade, and symptomatic of the fact America (and the West in general) is not energy independent, and cannot become oso at short notice.

      While you may have many alternatives if one particular supermarket were to close, American energy policy is much, much less independent, because it is much bigger and clumsier than you or me. It’s not a case of driving to a different supermarket, but a case of physical infrastructure, which takes years and billions of dollars to build. Other readers have pointed out that if China stems the flow of goods to America, factories can just relocate to Nicaragua, Brazil, Honduras, taking advantage of similarly-priced labour without any trade restrictions. But it’s not that simple — it would take years to build factories, build roads, train workers, source certain resources (e.g. rare earths). At the very least, major oil or goods shocks would cause the American economy a painful transition (supply shocks) in a way that a supermarket closing would not. In the short term, America has no real alternatives.

      I do not consider any of America’s policies in that regard to be justified. The answer is in the free market: without all the trillions of dollars spent on war and “global security” oil price to Americans (their own fields are either very depleted or require heavy and expensive refining) would spike, and alternatives would become much more viable. That is actually what I support — a market-led transition to alternatives that do not require the global warfare apparatus to support, e.g. solar, thorium, synthetic oil.

      This goes toward a bigger point. The “doctrine” of comparative advantage I am talking about is actually more like expecting that an aeroplane can always safely land “because gravity exists”. Yes — both sides can (in the immediate term) benefit from producing different goods and trading. The problems occur when nations believe that these types of transactions, and the systems they crystallise into are necessarily beneficial in the long run. There was a comparative advantage to Rome producing ever-more-debauched metal currency and trading it to the Barbarians for their productive output. In the short term, both sides benefited — Barbarians got denarii, and Rome got trade goods. In the long run the barbarians sacked Rome. Precisely the same thing has happened today between America and China. The concept of comparative advantage (not in itself a completely bad idea, but certainly quite a linear one) in this case merely gave intellectual credibility to fragile trade policies that damaged the West’s self-sufficiency, and played into the hands of the Eurasian autocracies.

      I suppose the question that the Austrian monetarists have to answer is: “why, has there been no huge post-QE inflation in Japan and America?”. Both nations have massively increased their monetary base (Switzerland is another interesting case — they have recently committed to a huge M0 spike), and adopted zero interest rate policies. Many Austrians like Peter Schiff were very clear — that kind of monetary expansion, without any commensurate expansion of productivity would lead to “hyperinflation in 2010”. It is nearly 2012 and total inflation is still low — consumables have been running high inflation, but non-consumables have been deflating. This biflationary picture is one of the things that has made me highly suspicious of both the Keynesian-Monetarist view (the economy will recover with more money) and the Austrian view (the economy will recover with sounder money), and has forced me to develop my own view.

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