Peter Schiff Gets China

Supreme excellence consists in breaking the enemy’s resistance without fighting.

Sun Tzu

From Slate:

Slate: Your debate opponent Minxin Pei wrote in Foreign Policy last summer, “Although Asia today may have one of the world’s most dynamic economies, it does not seem to play an equally inspiring role as a thought leader.” Do you agree that China falls short on innovation?

Schiff: No. There’s a lot of creativity coming out of Asia, a lot of patents. The big problem for countries like China and India is that they still subsidize the U.S. They buy our Treasury bonds and lend us all this money so we can keep consuming. That’s a big subsidy and a heavy burden.

Slate: Doesn’t China need to lend us money so we’ll buy Chinese exports?

Schiff: No. They can use their money to develop their own economy, produce better and more abundant products for their own citizens. It’s a farce to think that the only thing China can do with its output and savings is lend it to the U.S. government, especially when we can’t pay it back.

Now I have not always seen eye to eye with Peter Schiff; I am still waiting for the hyperinflation that Schiff told us would hit sometime in 2010 (clue: hyperinflation is not coming without something like an oil shock, a war, a breakdown in the global trade infrastructure). But it’s nice to know that I am not just a lone voice in the wilderness.

It is sad and perplexing how many “serious thinkers” have not understood the fundamental fragility of the present arrangement.

As I wrote over the weekend (and as I have continually thrusted home over the past 6 months):

The truth is that there is no such thing as a service economy. Our economy today (other than in places like, say, North Korea) is truly global. All of those service workers — and every cent of “services” GDP — is supported by real-world productivity, much of which takes place outside the West — the productivity of the transport system, the productivity of manufacturers, the productivity of agriculture.

The continued prosperity of the West is dependent on the continued flow of goods and services into the West.

Schiff concludes the interview by describing what he believes will take place once Eurasia thrusts off America’s demands for a free lunch:

We’d have to immediately cut government spending dramatically. Diminish our consumption. We wouldn’t be going to the malls and buying stuff. The whole U.S. economy would have to restructure along the lines of Americans being frugal, saving their money, and working harder. A lot of government workers would have to lose their jobs. Those who didn’t would suffer big cuts in their pay. People who worked in the service sector — in banking, health care, or education — would also struggle if China stopped subsidizing us.

The first choice America will face is whether she will choose to continue to try to run her foreign military empire, or instead to maintain domestic infrastructure. The greater danger is that furious Western politicians might just go and start World War 3, in the name of trying to maintain American geostrategic primacy.

25 thoughts on “Peter Schiff Gets China

  1. While we wait, we grow older, if we prepare for it, we may just be wasting our time. Maybe we are heading towards a one world government, with one currency? The nation-state is a redundant unit of analysis, the financial elites who rule and operate above the nation-state are perhaps ‘breaking the economy’ so they can bring in their new world order. Too fantastic? They are not that smart or organized and even if they were there would be many setbacks and unintended consequences? Perhaps…but despite this we seem to be heading towards complete decentralization or centralization. The choice is stark. The university where I teach half of the campus is Chinese, here in the UK, all well dressed, with laptops and mobile phones. They bring much needed cash to get a sub-standard education.

    • Stay in China, study Confucius and Sun Tzu, get a better education.

      I don’t doubt we are heading toward a one-world government, and one world currency. But not now. Not soon. There are too many unresolved disputes between the continents.

      • “Stay in China, study Confucius and Sun Tzu, get a better education.”

        Firstly you won’t get a better education in China. Their education system is more corrupted than any education system in the Western world. At least currently speak. They won’t and can’t fix it soon. That’s why you see so many Chinese students want to study abroad when they can.

        Chinese have a saying “The aroma of flowers blooming inside the wall is only being appreciated by people outside the wall.” You can study Confucius and Sun Tsu better outside of China because of the better truth, lesser political pressure, and a more free objective environment. At least you won’t be forced fee lots of the history deceit by the CCP.

        Right now people in China can’t even trust the food they eat the medicine take for real on daily bases. Lots of the stuffs are fake and lies. The fact that many people still seem to satisfied with their current situation especially the older generation is because their horrible life experience existence of the past. It was the worst so now no matter what you compare the now with the past of the worst you find you prefer the Now than the past.

        CCP destroyed most of the Chinese cultural traditional value especially during the cultural revolution. It’s much more easier to just imitate the Western developed world then to rebuild the true Chinese tradition and values. More and more people don’t trust CCP government as time goes by. Beside lots of the Old smelly musty Chinese tradition are out of date. Modern people don’t want to live, dress like, speak like that. It’s embarrassing.

        In general, most of the young people don’t want to be like their parents, lesser their grandparents. So they try to make something of their own. Lots of people think that their are different and won’t lear not care to learn from history and that’s the reason why history repeats itself over and over and again. As the saying goes “One is allowed and entitle to make one’s mistakes.” regardless the mistakes are the same as that of all others made before. Guess that’s called the “fun” of life – to go out to make your own mistakes.

        So shall we expect more of the same?

        • The aroma of flowers blooming inside the wall is only being appreciated by people outside the wall.

          You’re probably right.

          Certainly the CPC are guilty of a lot of bad and awful policy decisions and injustices over the years, and certainly on social policy (e.g free speech) China is not a place where I would want to live, as I would probably be rotting in a Chinese jail for saying of the CPC half of the things I do of the Western leaders and elite.

          So I am not at all a supporter of the CPC, although I agree with Schiff that economically China is freer, and has a better business atmosphere (taxers are lower in China, entrepreneurialism is higher, savings rates are higher, a lower proportion of the Chinese economy is government spending, etc).

          I think, as Schiff does, that as China stops subsidising American prosperity and consumption that conditions will greatly improve for the average Chinese person.

          Whether it is better to study abroad or stay in China is another matter, and the real answer probably varies from university to university more than from nation to nation. Certainly though, I do think that a lot of Western universities are very poor, and certainly China are producing a lot of strong graduates in the right subjects (e.g. engineering, mathematics, life sciences, etc).

        • This “CCP” topic is a very interesting one to explore. I’m not sure how stable their whole socio-economical system is over the long run, but I do have some questions about this CCP-repression thing.

          It’s intriguing because I did hear a lot of voices inside China that are critical with regard to various policies implemented by the CCP and these voices don’t seem to be shy or afraid. The impression I got is that the CCP is more afraid of radicalism: voices saying and/or implying that the whole structure is rotten and needs an overhaul through some sort of revolution that would make China more like a Western democracy. And let’s not forget that in the US as well you could get in jail if you cross over some “sacrosanct” lines – even though crossing those lines would be interpreted by some as achieving more “freedom” (you’d certainly land in jail if you wanted revolution).

        • ahhh the power of Hollywood and product placement. The East wants to be just like the West. A boring monoculture.

          I love the dress sense of recent African refugees. They still wear traditional type clothing. It is refreshing.

          Don’t rush to immitate the West. Embrace your unique culture.

        • It’s not like that the Chinese are dying to imitate the Western modern culture. It’s because the Chinese traditional culture was dying on its own long long time ago. It went nowhere so it had to suck in some fresh blood. That fresh blood was the West at the time and even now. So the East met the West and vis versa. It will takes long long time for the East to digest the West well and then a new fresh child of the East-west will be born who will be out done both the parenting cultures.

          p.s. the good time for free capitalistic entrepreneur period in China is something of the past. The good time was from 80s – 90s. Now everyone’s complains that it’s impossible to do business on your own. The State big blood sucking corporations are taking over everything. Until CCP is willingly to change things only become more and more difficult. But change is en extraordinary hard thing to do because the interests groups and power structure involved called – Guanxi 关系 (the merge of political and money power connection. ) In China they say there is no white or blue collar now but the BLACK collar (the younger generation of corporation execs/bankers financiers / business who are born to the high power families who are connected to all the right power and have free assess to the state banks. Meaning, the CCP aristocratic hereditary connection that dominate the political and the money power structure – the Chinese Elites.

          A joke from the Chinese: Chinese government tell the U.S elite schools: “to schedule their parenting meeting only at the time we tell you so to avoid schedule conflict.” Because the whole Chinese government leadership will be relocated inside the U.S during the elite school parents meeting. (Almost all of them have kids grandkids studying in the United States.)

  2. Depends on how you define hyperinflation. Doesn’t necessarily have to be money flying in the streets. Some define it as low as 26% inflation per year. This is not far from some truer accounts like those from Shadow Stats (which are merely reproducing the way the govt. computed inflation not long ago).

    As Gerald Celente put it: “we won’t see inflation as much as devaluation” – which for me is just a way of saying “we’ll have unacknowledged inflation”. How else would you define the fact that over the course of a few years (past and future) the average American was/will be able to buy much less of anything? Just for consistency’s sake, I wouldn’t count out the part with money flying in the streets. My personal opinion is that hyperinflation has much more to do with trust in the currency (which can affect the velocity of money) than with Keynesian theories. I can tell from the recent history of my country that if our politicians would have such crazy ideas as QE (no matter how depressed the country would be economically), the currency would blow up in short order (we’re not the US or the UK).

      • I tend to believe Aziz’s view that hyperinflation requires a breakdown in productivity and the availability of goods.

        • The equation of exchange expressed in terms of the ratios of the variables of two different times.

          (P2/P1) = (M1/M2) * (V2/V1)/(Q2/Q1)

          So, say that amount of money in circulation doubles (M2/M1) = 2. In theory, this should lead to an increase of money (Lets say 50%), so V2/V1 = 1.5. Also, as a result from the above shocks, the level of output drops 50%, Q2/Q1 =.5.

          P2/P1 = 2(1.5)/(.5) = 6

          So the above equation shows how a doubling the money supply could lead six fold increase in the price level. Hyperinflation explained with math. Fun with numbers!

          M = money in circulation
          V = Velocity of money
          P = Price
          Q = level of gross domestic product

        • Our ability to forecast suffers due to this complexity and the occurrence of the occasional extreme event, or “black swan”. Such degradation in predictability should have made companies more conservative in their capital structure, not more aggressive – yet private equity, homeowners and others have been recklessly amassing debt. Such non-linearity makes the mathematics used by economists rather useless. Our research shows that economic papers that rely on mathematics are not scientifically valid. Not only do they underestimate the possibility of “black swans” but they are unaware that we do not have any ability to deal with the mathematics of extreme events.

          Nassim Taleb (2009)

        • Yeah, the formula is fine. It’s just reality of hyperinflation — particularly in terms of the key quality of the public losing faith in the fiat money — is not fully captured by that particular selection of data.

        • From what I read, the Weimar hyperinflation was stopped almost in an instant with new policies being implemented (Rentenmark and then others) without a miraculous growth in productivity. Hyperinflation is a complex phenomenon and I would certainly never say that it is always and only caused by a dwindling productivity base (in Weimar, again from what I read and my interpretations, it was caused by their own misguided polices that they were then too afraid to get out from; otherwise, Germany left the first World War with most of its industrial base intact).

        • It actually does. The common mistake monetary authorities make is that they compare the amount of money in circulation to the price level and their equations (always) show their is relativaley little money in circulation. A shown below throught the equation of exchange:

          M/P =Q/V

          Now, we know that money velocity (V) increases during hyperinflation while production (Q) stays constant or (Almost always) declines. So, the ratio Q/V becomes very small. The equation for the real value of the money supplty compared to the level output can be expressed as:

          (M/P)/Q =1/V

          Summed up, in noninflationary times, the money supply might be the equivalent to three months of output, but in hyperinflationary times, it can drop to a couple of weeks worth of output. The people on the ground live this equation in real time. Their response is to hoard the necessities of life at the expense of everything else. Which leads to the drop in output. Hyperinflation ends when the people no longer have the ability to hoard.

          But, after all that, I can see your point. The economic data doesn’t mean diddly squat, if the people interpretating the data can’t move from theory to the REAL WORLD.

        • Yes, most of this is roughly correct. The issue with the equation is that it is descriptive; there’s a lot more depth and texture to each of the figures (e.g. production in particular, but also velocity) than can be expressed in a single number, and black swans tend to appear from misreading the depth and texture of reality. For example, what is driving velocity? (e.g. geopolitics) Is productivity high because central planning is producing a large variety of things nobody wants?

  3. Prediction Resource stocks will surprise on the upside. China is running a current account deficit, as it is still buying every hard commodity it can buy. Lets us hope and pray it is not uber strategic!

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