China's new Clothes

Marshall Auerback is a blogger contributor to NewEconomicPerspectives.org  I totally admire and respect the comments of all the other blogger contributors listed at the site.  He also writes for Huffington Post.  Whatever he says I would pay attention to and probably learn something of value.

Marshall made comments in a video interview at this site.  The lead line on the interview is "The Grand Bargain And Other Issues".  It is his comments about China that started me thinking about what China is doing with its money and the future implications.  He began his comments about China at 2 minutes and 30 seconds into the interview in response to the interviewer's statement of fact that 50% of China's GDP is going into investment and that Auerback said that no country had ever done that and pulled it off without having a crash.  In reply Auerback said that capital expenditures to GDP is  55%.   The closest in history to that was Japan and they were not even close at 25% when he lived in Japan in the 80's.

Auerback said that China wants to shift to become a consumption driven society like ours with consumption at 60% to 70% of GDP.  He added that at 55% capital expenditure there will be a severe adjustment somewhere down the road and it will be a hard landing because historically speaking, soft landings cannot be engineered in situations like this.  He concluded that the result might be a bearish future for commodity markets supplying China.

For example he chose the cotton market as reported here by Bloomberg:  "Cotton stockpiles in China, the world’s biggest importer, are set to climb to about 9 million metric tons this season, enough to cover the country’s deficit for the next six years, according to Allenberg Cotton Co." 

Auerback said that the current stockpile of cotton is six times global demand (per year I presume).  Corrected by the interviewer to be 6 years worth of cotton not 6 times global demand, Auerback shrugged like it was....whatever!  Big difference!

In any event Auerback went on to say China has a whole lot of cotton just like a large inventory of other commodities.

The Bloomberg report talks about stocks and flows of cotton with many metrics for each.  The report has to be read carefully to sort out stocks and flows to get a good picture of the market.  Money is, of course, is the financial association with these stocks and flows.  Investment and consumption money.

What aspect of an inevitable hard landing do I not understand because money was disproportionately invested by China in buying an extremely large amount of goods.  Not just some kind of a futures contract lock on delivery but real tons of stuff with weight currently occupying space or will occupy space when the shipment that has been bought arrives.

I could understand it if China is playing our kind of game with our rules and our kind of ball the way we play the game.  We are so self centered.  If they are playing our game then there would be a hard landing.  

Is China playing our game?  What kind of game are they playing.

Our game is that debts have to be paid back.  The moral imperative that justifies breaking legs or going to war.  Just make it legal by putting a person or nation in debt first then extracting resources. China is extracting resources from its farmers....but they are paying them for it.  Therefore putting the nation in debt.  The nation gets more into debt (poorer) as the farmers get richer.  Debts must be paid!  Well, that is one form of settlement.  Kind of a binary form of settlement.  Pay or you suffer.  On the installment plan it is called "Suffer As You Go".  In just one word: Austerity the cure for borrowing and spending too much. 

Perhaps ironic that the lead line of the interview had to do with the Great Cliff.

Ironic as well that China once took a "Great Leap Forward".  

What is China planning here.  Do they think that they can put money in the hands of its people to "prime the pump" for future consumer spending and somehow not have to pay the debt price or suffer the consequences? Have their cake and eat it too as well as our lunch?

How could they do that?  That is not the way money works for the EU or the USA.

Do they have some top super secret plan for how money works that we do not know about, not like the way the game is supposed to be played?

I absolutely think they certainly do!  

What is that plan?

Might China be buying cotton today for its new clothes tomorrow so everyone in the country can buy what they would otherwise sell to foreign countries?  What will foreign countries be left with?

Rags?  

At least we will still be able to feed ourselves but that is what austerity cannot touch at the maximum application level.  If it does then the fattest live the longest.

Invest in personal fat.....does that sound like a game plan to play our kind of money game with our rules with our ball?  

Hunger Games.  Not a spectator sport.   

China is very smart to pick and choose the Western Games they want to play.  Probably smart enough to also beat us as the games we play. 

Pro Football is Headed to China.

Is it conceivable that debt created by China for capital investment can simply be wiped off the books and not somehow paid back to the People's Bank?

No Fair....That is cheating!

The Chinese will be sitting in the stands watching NFL football in their new clothes eating hot dogs while we are in rags dining on bread and water in order to pay back our debt.

What is Smart Money anyhow?