China Hysteria

I’ve already gone over the problems with both the rabid Sinophile “China will bail out the world” view, and its rabid Sinophobe “hard landing will crush China” equivalent.

Both views are broadly wrong with a few small kernels of truth.

Here’s a reminder of the problem:

China does have a property bubble and a scary-sounding $1.6 trillion in local government debt. But $1.6 trillion of local government debt is still significantly less than China’s dollar and treasury hoard. The bottom line is if that China’s real estate market collapses, China can bail itself out with money it has saved from the prosperity years, not through new debt acquisition. This was the lesson of John Maynard Keynes — governments should save in the boom years, to spend in the bust years and even-out the business cycle — a lesson which seems lost on Western policy-makers, who seem to believe that you should borrow massive amounts every year.

So taking the absolute worst-case-scenario, China has plenty of leeway to bail itself out. Of course, this would mean China might decide to liquidate a significant amount of its treasury holdings — especially seeing as bonds are at all-time highs.

Could such a liquidation be the event that finally bursts the Treasury bubble, sending yields soaring and making it much more difficult for America to acquire new debt?

The “China as central-planning disaster” brigade got a leg-up today, with the announcement that China’s GDP had missed predictions of 9.3% growth, instead hitting 9.1%.

Representing the Sinophobe camp, Zero Hedge raised an interesting point:

Suddenly everyone is a China expert, yet doesn’t realize that 9.1% is effectively the equivalent of a 1.1% stall print in an economy where 8.0% growth is the minimum threshold for social order and stability

Now I’m not enough of a China-expert to pluck an arbitrary growth figure out of the air as a “minimum threshold for social order and stability”, but if we want to talk about “social order and stability”, perhaps we should look closer to home — at the #OccupyWallStreet protests that have spilled across America.

From Xinhua:

The distrust and resentment manifested by Occupy Wall Street protesters towards the U.S. financial system could bear precarious consequences on the future of the United States, experts have told Xinhua.

Although the protesters account for only a small percentage of the national population, their frustration with the current economy and some of the government’s policies are shared by many, they said, citing similar rallies in dozens of other U.S. cities as evidence.

“America is in the midst of a massive ideological debate about the future of the country — what its economy will look like, and the role of capitalism and big government in America,” Richard Wottrich, a senior managing director at the McLean Group, told Xinhua.

Though it is still too early to tell what would be the legacy of the protests, the ongoing social movement may prove influential in determining the future course of the country at this difficult hour in its history, Wottrich said.

Luigi Zingales, a professor of entrepreneurship and finance at the University of Chicago Booth School of Business, echoed that the protests are “an indication of all the underlying forces that lead to some form of popular revolt or popular dissatisfaction.”

To get the protestors off the street and quell the fury, Obama and corporate America need to create jobs. Here’s what is needed to get back to pre-Depression employment:

That’s 256,000 jobs a month. Now, I’m not foolish enough to pluck an arbitrary figure out of the air as a “minimum growth rate to maintain social order and stability”, but if I was I’d say 8% growth was a realistic figure.

Of course, this entire argument is blind to the fact that a little social disorder (creative destruction) might be a good thing, and a few riots and bankruptcies might well fire up the engines of creation on both sides of the pacific rim. Of course, this doesn’t change the fact that the means of production are squarely located on the Chinese side of the divide, and that China stands strongly to benefit from this whether or not the CIA can successfully stir up Arab-spring-style protests in Beijing, Shanghai and Guangzhou (probably not).

The likeliest outcome remains that China will have to bail out its real estate and local government securitisation messes; but at least the funds to do it are equity from its trade surpluses, and not new money printing. Of course, new money printing on the other side of the pacific will come as soon as China starts liquidating treasuries. After all — someone has got to keep demand for US Treasury paper artificially high to keep interest rates artificially low and keep America’s debt obligations affordable…

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War: The Quickest Way to Kill a Protest Movement?

#OccupyWallStreet is the second incarnation of “mad as hell” since the 2008 corporatist bailouts that effectively killed American capitalism. The first incarnation — the Tea Party, initially a furious response to government bailouts of failed banks — was too easy to astroturf and transmute into right-wing ideologues spouting fire and brimstone on right-wing social issues. It was too easy to discredit for what Fox News, Judson Phillips and Glenn Beck made it into — a non-spontaneous anti-tax anti-Obama ranting brigade. The Tea Party, at least at the leadership level, ended up advocating Bush-Reagan military-industrial hegemony on steroids.

#OccupyWallStreet picks up where the original intentions of the Tea Party were strangled by Beck, Palin and Limbaugh. It’s anti-corporatist. Anti-bailout. Anti-corruption. Yes, many of the people there are old-school statist leftists who want to abolish and not restore capitalism. But there is no doubt that with the global economic apparatus largely failing to appease anyone but insiders and bankers, the hopey-changey sentiments (“we have to give Obama a chance!”) that have been keeping the revolution down can’t be silenced for long. People need jobs, prosperity, fulfilment, and (for better or worse) they’ll make mayhem until they get it.

With global youth-unemployment and underemployment soaring I only expect this movement to balloon and echo around the world. There is a danger — just like the Tea Party was co-opted into the Republican political apparatus — that #OWS will be co-opted into the establishment left. If Obama removed Geithner and hired Krugman and Elizabeth Warren, a significant chunk of the protestors might be placated — for now. But the problems sucking economies down can’t just be wished away. They can’t be solved by printing money and pumping it. They can’t be solved by digging ditches. And thanks to the creation of the internet, and the rise of Facebook and Twitter, until the system functions well enough to give the indignants what they want and need, they will keep causing a ruckus. As Reagan put it:

Information is the oxygen of the modern age. It seeps through the walls topped by barbed wire, it wafts across the electrified borders. … The Goliath of totalitarianism will be brought down by the David of the microchip.

And so it might seem this totalitarianism might be ended — and God’s workers furiously demanding as much liquidity and favours as is necessary to “save the system” (and their bonuses) with no consideration that the system might itself be the problem is surely a kind of financial totalitarianism.

Sadly, we know how that aphorism from Winston Churchill goes: that Americans will do the right thing — after they’ve tried everything else.

So a new war in the middle east may seem attractive to some elements of the Western establishment:

  1. Create a new post-9/11-style hard-to-question patriotism — “There’s a war on — we all need to rally together around the flag — the complainers and protestors must hate America”
  2. Put America back to work — in weapons factories, and on the front lines.
  3. Give the economy a large Keynesian injection — through war spending.
  4. Take out Iran, a powerful enemy of America — and send a threatening message to other uppity Eurasian autocracies like Russia and China.
  5. Curtail civil liberties & censor the internet — “There’s a war on — we all need to rally together around the flag — and those who don’t must be working to undermine America”
Let the war propaganda begin in 3…2…1…
The problem is, starting a new Eurasian war carries with it a whole host of risks — not least the possibility of an oil shock and a massive oil spike — and the real prospect of dragging Russia, China, India & Pakistan into the conflagration.

So would Obama authorise and support Netanyahu in instigating regime change in Iran?

Perhaps he might consider it — how else can he get a big stimulus bill through Congress, and divert attention from a failing American economy and growing civil unrest? But more worrying, I’m not even sure Obama matters.

From GulfNews:

In recent weeks, intense discussions have taken place in Israeli military and intelligence circles about whether or not to launch a military strike against Iran’s nuclear facilities. Apparently, the key question in the debate was how to ensure that the United States took part in the attack or, at the very least, intervened on Israel’s side if the initial strike triggered a wider war.

Reports of these discussions have caused considerable alarm in Washington and in a number of European capitals. Some western military experts have been quoted as saying that the window of opportunity for an Israeli air attack on Iran will close within two months, since the onset of winter would make such an assault more difficult.

Concern that Israel may decide to attack without giving the US prior warning is thought to be the main reason for the visit to Tel Aviv on October 3 of the US Defence Secretary Leon Panetta. His aim seems to have been to rein in the Israeli hawks.