My new piece is up over at Mises.org that discusses Asian savings and its purported role in the housing bubble. Bob Murphy has also written a good piece about the topic.
I’ve received some interesting feedback regarding the role currency exchanges played in this. One long-time contributor to Mises.org wrote me (it’s 3 paragraphs for those using an RSS reader):
the argument that is being made by the mainstream comes from people who believe in the paradox of thrift or some variety of underconsumption theories and other such nonsense, and who do not adopt austrian capital theory
we know that any amount of savings can be used to expand the capital structure, and that there can never be any such thing as a savings glut. the asian individuals and business firms that saved may at worst have wasted a lot of their savings but cannot be blamed for the crisis
however, I think that, if within the category of “Asians”, you include government in Asia that adopted mercantilist policies of fixing their currencies at below market levels, this put them in the position of running a permanent capital account deficit, which they chose to “invest” in the debt instruments of the US govt. without the mercantilist program, the US government (by which I include the GSEs) would not have found a buyer for its paper at such low rates of interest, interest rates would have gone much higher, much sooner, and the artificial boom would have been over maybe before it even started.
A number of other people commented about this as well in the blog section (Terry, DS, and Houseward).
While I agree with the bulk of the content stated in the email, I will quibble over the role Asian currencies played in the most recent bubble.
Floating
Following the Asian financial crisis, Korea was forced to float the Won (it fluctuated between 900 and 1400 when I lived there). The Japanese Yen was officially floated after Bretton Woods was abandoned in 1971 and the BoJ has attempted to defend certain price points. While it was initially pegged to bullion, the New Taiwanese Dollar has floated for years (it hovered around 32 when I lived there last year).
Soft-pegs
The Hong Kong Dollar used to float but is now “allowed” to fluctuate between 7.75-7.85 to the USD. The Singapore dollar used to be pegged to both the pound and USD and currently fluctuates based upon an undisclosed basket set of currencies. The Chinese Renminbi (Yuan) has maintained various pegs to the USD. For nearly ten years it was pegged at around 8.27 and since the summer of 2005, has appreciated to roughly 6.85 today.
Government action
In a libertarian world, no government would intervene in currencies. Money would simply be another industry managed by market forces. And despite government monopolies on money creation, market forces still determine exchange rates. See Rothbard and Selgin for more.
True enough, as suggested by the above email, the PRC has practiced some form of partial mercantilism that many mainstream economists note leads to an “imbalance.” This includes Paulson, Setser, Pettis and now evenThe Economist (none of whom condemned the “imbalance” five years ago…).
To their credit, both Hank Paulson and Tim Geithner have tried to get countries like China to float their currencies. And ironically, if China ever did so, it would be the dollar that gets hammered. This is because China artificially props up the USD. In fact, any country that maintains a dollar peg is basically propping up the USD.
And true enough, over the years Korea and Japan have both artificially “manipulated” their currencies by buying or selling dollars on the open market. In fact, in the last quarter of 2008, Korean monetary authorities spent billions of USD to defend the Won — to prevent it from hitting 1500 (it has sat around 1350 this week).
Unexpected Forex changes
At the opposite side of the aisle, one of the reasons Japan has been getting creamed at the macro level in exports is because the Yen has strengthened quite a bit in the past year. Car firms such as Honda and Toyota built margins based upon exchange rates that were way too high and as a consequence, have had huge loses. Even Nintendo’s profits were hit big time during the holiday sales season because of a strong yen.
But this all ignores the role the Fed has played since 1944 (or really, since its creation). Any currency pegged to it has to essentially mimic the monetary policy of the Fed — and not vice-versa. The Yuan is pegged to the dollar and if the Fed inflates or lower rates, so too does the PBoC. And it would be one thing if the Fed maintained a steady rate over the past 20 years, but as shown by this table, the rates have been anywhere and everywhere.
Or in other words, the Fed is peerless as a “manipulator.”
So yes, some central bankers (not just in Asia) probably have tried to “manipulate” their currencies to gain temporary competitive advantages in the export market. Some of them then have invested the “gains” or “profits” to purchase US treasuries. And because of the relatively high demand for US treasuries, interest rates across the board stayed low for many years.
It’s not me, it’s you
Yet, policy makers in both the Clinton and Bush administrations are trying to shirk the blame entirely as if they acted as responsible custodians of the foreign funds. None of OPECs members (collectively the 5th largest holder of US treasuries) forced the GSEs to hand out houses or forced Bush to throw money at wars — the poitical class had access to some artificially cheap money and blew it on really dumb things. That is something the establishment has yet to accept. And again, instead of paying back the trillions in debt, the Treasury department instead issued even more debt.
This cycle was entirely unsustainable in part because nothing productive was being built with the cheap interest rates — government housing in the exurbs, Harrier Jumpjets, Ford Excursions and silicon DD breasts aren’t really good at manufacturing goods to repay the debt. And thus Chinese Premier Wen Jiabao is (partially) correct in blaming the quagmire back where the dollar is printed and to the people (Americans) who benefited from the cheap money and who did jack squat with it.
Seen and unseen
The last sentence in the email is partially true as well. The Fed induced bubble(s) probably wouldn’t have lasted long if central banks in general had kept a steady, higher rate. And if Chinese central bankers had floated its currency 20 years ago (or pegged it to a metal), the middle class in China would be much larger and wealthier, because their purchasing power would have allowed them to buy the goods they make — and allowed them to import products from the US.
However, as a consequence, Americans probably would not have been able to buy as many electronic gadgets from Korea or China because they would have cost more. Oh and perhaps Americans would be living in roach motels and driving crappy cars made in the Rust Belt…
Who knows what the unseen alternatives are. If foreigners didn’t buy Treasury securities, the Fed might have bought the mortgage paper and Treasury bonds to surpress interest rates — something it is doing right now. So again, it’s hard for me to see how foreigners are largely to blame when the Fed has created bubbles independent of the actions of foreign savers.
Thus in a nutshell, by participating in the pegging system, Asians transfered their own gains in standard of living (purchasing power) to the US. Yet again, instead of thanking Mr. Miyagi and the Wang family for working so hard, the Jones’s and Bush’s blew the loaned money on exuberance — and are now bitching at Miyagi for helping them party. It is the same exuberance which the Fed and Team Obama are more than happy to try to reflate. Bupkis.
QED?
I think the above shows that while “adverse” currency rates contributed to and perhaps helped extend one particular bubble, they were not the root cause or the creator of it.
So Yunnan province has a climate akin to the tropics, yet it is far north of the usual latitudes (see BBC’s excellent “Wild China” for why). It is also home to a number of ethnic groups in China including the Dai.
Earlier today I caught a clip on CCTV 9 of one of the tribal groups near the Laos border that still use fireside dances as part of mate-finding rituals. The funny part was that while traditional instruments were shown being thumped and pounded, Toto’s classic song “Africa” was blarring in the background.
Asia, where the best of the ’80s goes to… live eternally.
And if you liked that, you’ll probably like another ’80s classic, Baltimora’s “Tarzan Boy”:
No, this post is unfortunately not whether or not the Italians invented noodles or if they borrowed the recipe from Marco Polo.
I am still on vacation and had a chance to watch CCTV 9 last night, the segment was Biz China. I was surprised that they had a 10 minute segment on gold. They interviewed a bunch of stock investors, bankers and authors — all of whom had very positive things to say about gold. And at the very end, they briefly plugged Peter Schiff’s book “Crash Proof.” Ha!
I suppose this is not terribly surprising for a couple of reasons. First, apparently many academics and policy makers have bought and read “Currency Wars” from Song Hongbing (here is a review from The Australian). While I can’t endorse the book (in part because it pushes a conspiratorial angle of things and because it doesn’t encourage a free-floating Yuan), I suppose it’s a positive sign of the openness to new ideas.
The other reason is that economist Robert Mundell is an adviser to Chinese central bankers. And he at least appreciates the positive role gold can play in stabilizing a financial system and supposedly even encouraged China to buy all of the IMFs gold at one point. Last year he was chosen as one of the “top 15 most important foreigners in the past 30 years” by a Chinese committee and has written extensively about gold in the past (including somewhat recently last June).
On a different note, be sure to also check out Robert Wenzel’s post about Schiff and Mish.
And lastly, if you’re ever out here on the mainland, be sure to check out the Harbin Ice Festival. One of my British friends just got back and the pictures are pretty bad ass.
Mike Shedlock (aka Mish) is a germane financial analyst. If you get a chance, be sure to subscribe to his blog because he has some good insights regarding both economic and financial trends. See also his poignant podcast with Lew Rockwell.
After reading my recent Mises piece a few people emailed me his latest post titled “Peter Schiff Was Wrong.”
Up front I should point out that I was going to post this on the Mises blog but I don’t want to paint the Mises Institute as a partisan in this issue, this is mano y mano (which is actually an inaccurate transliteration). Secondly, I interviewed Schiff last April (see here) and have not been in contact with him since, nor do I have any money invested with his firm. Nor has anyone asked me to pen this.
Third and most importantly, while I am partial to the predictions made by Schiff, this post will strictly be limited to the claims by Mish regarding China.
Where’s the beef?
While it is copious in detail, nothing Mish says in his post is new compared to the content of my own equally detail-saturated piece. I discuss the factory meltdowns, the decline in China’s stock markets, the huge masses of unemployment going back to the countryside and the potential for mass unrest. Yet I come to the opposite conclusion. Oh my! In fact, I cite like a dozen or more Bloomberg fearmongering articles that discuss those all in detail (and to his credit, so did Mish back in November).
The problem with his content is manifold.
Standard of living
I actually wrote the bulk of my piece in October — in my small apartment in Seoul — during the height of the meltdown last year but held off from publishing it because I wanted to see this place for myself.
So I’m now here on the ground and have lived on the mainland of China for a measly 75 days or so. I’ve also lived in Korea for about 13 months and down in Taiwan province for about 4 months. That’s all back-to-back-to-back. In addition to the unnamed city I currently live in, I’ve toured Shanghai, Hefei and Nanjing — all big ass Chinese cities. And so far, for a Westerner that grew up in a large suburban house of Dallas, this country probably has the least creature comforts of everywhere I have traveled. Trust me, anyone from the Hamptons would be roughing it by living out here (think Paris Hilton in the Simple Life).
Here is one microcosm: college campuses. There is usually no climate control in class rooms, so you bundle up in a dozen layers during winter time (sucks ass) or melt during summertime. All bathrooms in every city (and college campus) have stinky squatters. Aside from Tom Selleck (playing in Japan), has anyone from the US tried one of those? As one of my students said, the easiest way to find a toilet in China is to follow the smell!
Most college students only take a shower once or twice a week during the winter because they have to literally bring the hot water up in jugs to communal showers at the top of buildings — on most campuses. Plumbed, hot water in rural areas, where 60% of the population lives? Forgetaboutit.
Living the Amish/Gangster Paradise
Their standard of living is total crapola compared to the G7. And big easy loans do not exist. Up until recently they had to save up for 20 years to live in a new apartment because you had to pay 30-50 or even 100% in cash — no credit was available. Very few people have cars. Or rather, only the wealthy do. A cheap car might cost 70,000 RMB (about $11,000) and the average wage, depending on the area can be anywhere from 2000 RMB a month to 10,000 RMB (in a big city like Shanghai). And you pay for it in cash — credit is still rather non-existent. So how many years does it take for a family to buy one? Many moons.
New employment. This past semester my students (all graduating, English-speaking seniors) all wanted to work in any private industry and have done a hojillion interviews in any city that has a job opening. Many even move half-way across the country just to work at a job that pays crapola. Hell, some of them are working at KFC, McDonalds and small thrift stores. Just slightly over-qualified.
Yet even the ones that cannot find jobs are not yelling and screaming or telling me how they are going to burn down the local CCP offices. As I’ve noted before, in 2006 there were more than 20,000 protests held throughout China. I’m sure the number has gone up and will continue to go up. But the protests now are comprised of unpaid factory workers for export firms that go belly up or taxi cab drivers that need girlfriends. I cited a quirky LA Timespiece about Taiwanese-managers scaling factory walls to sneak away from employees they owe money too — because the firm is bankrupt.
Yea, shitty, but not the end of the world — especially when you don’t have much debt, have a bit of savings, and have a family farm to fall back on. Oh and again, 65 million Chinese government workers got fired from their jobs during the privatizations of the ’90s. End of the world? Nope. (Seriously, read my piece). Plus, again, the PRC has roughly $2 trillion in Forex to buy happiness with, the same cannot be said for the US.
Nearly all of the factories that are closing are export related and have nothing to do with the domestic situation. The exporters that survive will learn from this experience and will hopefully develop contingency plans for steep drop off in the future. Some are even marketing their products to… the domestic population. Craziness. Furthermore, the whole idea of bankruptcy is that a firms assets and capital will be reallocated towards other, more productive markets.
So worse case scenario — everyone closes up shop, washes their hands, moves back to the farm, stretches their hams (pulling them really hurts), reallocates existing capital to new entrepreneurs and starts all over again ala Deng in 1979. And because they weren’t living la vida loca with H2s, Long Beach condos and fake boobs, it wouldn’t make sense for them to all of sudden, start rioting everywhere. That’s bullocks.
Tell me something you don’t know
My point with all of this: it is not like Chinese were used to living a fake country club lifestyle funded by credit cards and home equity.
No, these people have zilch. Nada. So it’s not like they could possibly have a huge drop in the standard of living. Think, 1950s US of A, or as one of the retired expats I work with from rural Iowa said: “China reminds me of growing up without any life pleasing amenities.”
That’s not to say they all live on the brink of starvation or destitution. Many households own refrigerators, TVs, computers — just nothing fancy or sparkly. And insulation? Holy crap is it cold taking a shower in a brick bathroom — and I live a relative hi-life as a college instructor! So yea, lots of domestic growth potential and a very low drop off to “the basics” of undeveloped life.
Have you just seen it on TV?
A quick, supporting anecdote.
In just the second issue of Wired magazine (circa 1993), the late Michael Crichton (“Mediasaurus“) talks about essayist Barry Lopez who visits some Eskimos in 1986. The Eskimos ask Lopez how long he is going to stay for while he writes his piece and they quickly followup with: “One day – newspaper story. Two days – magazine story. Five days – book.”
My point with this is, unless you have lived here, the perception most people (including me) have of modern China is unintentionally skewed by rushed journalists – who only see littered train stations packed with departing, disgruntled migrant workers – because unfortunately their bureaus had them stay for just a few days. This translates to kaleidoscopic bullshit.
I have no idea if Schiff has ever been to China, but Jim Rogers sure has. And he holds some of the same bullish opinions on China, because there is so much domestic potential. Though maybe Mish think he’s full of hot air too.
While they live measurably healthier and wealthier lives (600 million have been lifted out of poverty since 1981), thirty years ago these people really were destitute like North Koreans (which I have written about severaltimes… without ever going there!). As I said, today many urban Chinese live like Westerners did maybe 50 years ago, at best. Maybe a car, furniture and a few entertainment devices. But probably nothing like the cavernous, comfortable home you are currently sitting in.
And I can just imagine the horror of manually moving yourself vertically up and down in one of these apartments: “You mean I have to walk up five flights of stairs? Oh hell no, show me the elevator!”
Thus it is hard to imagine China being creamed when everyone has savings to dig into and little debt to pay off. Sure aggregate growth might slump for a few years, but it’s not like they will all want to move back and live on family farms forever. Again, capital will be reallocated to other entrepreneurs and things will kick off again — though, perhaps the export market may never reach the highs from the last several years.
And as both Rogers and Schiff have pointed out, because the standard of living of China is so low and both private property and entrepreneurship are now legal, there are huge potentials and incentives for domestic-side growth.
Or are the Chinese incapable of developing internal industries without the hot money from the Fed?
Wish upon a star
In fact, far from doom and gloom, here are a couple of comforting mustard seeds (to borrow Larry Kudlow’s favorite phrase):
- While foreign direct investment (FDI) slumped in December, China was still the largest recipient of FDI for all developing countries, swallowing $92 billion in 2008 — a title it has held for 17 years in a row.
- China has recently liberalized the fertilizer industry, opening the domestic market to foreign imports and allowing prices to be determined by the market.
- And most importantly, the monks of Shao Lin temple are now on YouTube, teaching everyone how toHustle the Stephen Chow Way. Just kidding, but boy that would be cool.
Michael Pettis
Never listen to this man about bubbles. Here is his blog. I watched his interview on CCTV a couple of weeks ago and he had the balls to blame China for the housing crisis. I have a new Mises piece that will be published in the coming week that rips that apart. Suffice to say, the only hot money in the system was that produced by the Fed (remember, there is only one Fed and it’s not in Beijing). And guess who flooded all markets with cheap capital? Yea, the Fed.
Pettis is utterly and completely wrong. The worst thing that could happen is that all foreigners liquidate their Chinese holdings. Yet, doing this does not magically take away the saving deposits of the Chinese and throw them onto the street. The same Chinese, who again, don’t have debt. (See also Murphy).
A bet for Mish
And while China probably will have a couple of shitty years for 2009-2011 in terms of aggregate growth, what shiny gold stars does the US have left to show off in home room? What exit plan does Bernanke have that won’t end in either ’70s style inflation or massive bankruptcies due to higher interest rates? What crazy policies will Team Obama put together that saps capital from private markets?
China is not in that situation. Nor does China need to beg anyone to finance it’s virtually non-existent deficits. In the US, basically no one has any savings and a huge pile of debt (I posted some stats in the footnotes of the piece) — and contra Brad Setser, with a shrinking tax base the US will have to rely heavily on international investors to purchase Treasury securities to fund Obama’s Next Deal.
The only x-factor is what the policy makers at the PBoC will do with the Yuan. Will they inflate the RMB to keep pace with the USD? I suspect that in the long-run they will not because that will pound the people in the country side with inflation which in turn could really cause civil unrest. Which of course, everyone and their dog is apparently worried about.
Mish let’s do a bet just like Schiff and Laffer did 3 years ago. For a penny (sans inflation) I bet that while aggregate growth may even go negative for China and its unemployment might reach a modern, record high: that they will bounce back much stronger than the US. Nor will China have as deep or long of recession. And consequently, the Chinese stock markets will have been a better bet than US markets.
And Lebron James will be traded to the Mavericks. And bad things happen to Jerry Jones (hate!).
Haha, BK Marcus posted this the other day and I couldn’t help but laugh because I am so headstrong when it comes to apriori versus aposteriori.
For instance, during my oral exam for my masters, the committee chairman asked me what I thought of social sciences in general — if I had changed my mind about Likert scales. I told him that despite all of the statistics classes and various case-studies we had dissected, interval methodology was invalid for anything but anecdotes in social sciences.
For example, I thought the most recent episode of It’s Always Sunny In Philadelphia was 4.5 out of 5. You think it is also 4.5 out of 5. However, the problem is, our values are entirely subjective and cannot be averaged or quantified as if it were one concrete opinion. Sure sites like Amazon or NewEgg usually create useful generalizations with user ratings, but you can’t use the interval scale as an ironclad law because subjective minded humans do not have the same internal preference scales.
It’s one of the reasons that Quant funds on Wall Street were decimated this past year because they attempted to quantify human action (or in their case, artificial incentives) using inherently incomplete equations — using false assumptions to fill in for a continually changing series of individual preferences (or in their case, risks/demand).
Back in one piece, though I did attach myself with a very friendly head cold. Don’t play drinking games with soldiers again, bad idea.
So I spent about 4 days out in a city with some college students I know. They wanted to practice English and I can’t read much Chinese — so it was a win-win friendship.
We stayed at a Home Inn which I recommend to anyone that likes the comfort of the West (e.g., no squat toilets, clean bottled water) and it’s fairly cheap. There are tons of things to see, both from a modern and historical perspective (just look at the list of things on the Wiki entry).
The nightlife at 1912 (here and here) was fun, memorable, but kind of expensive (you have to buy bottles of liquor, not just glasses). Music was performed by live DJs and everyone wants to hang out with the foreigners — to do a dance off (I managed to pull off the sprinkler and shopping cart).
There were some Korean restaurants that were sandwiched in between the thousands of local Chinese eateries (none of which are “chain” restaurants… all mom and pop). Mexican food sucked, don’t eat at Tucos (the beef tastes like gerbil meat). If you are dying to eat some Western cuisine, check out Golden Hans buffet. It’s relatively cheap, food is plentiful and everyone dresses up in 18th century-period German attire.
On to the pictures:
Don’t let the smiles fool you, they are rabid, heartless anti-Americans that had to be carefully monitored 24/7. They carried around miniature pictures of Betsy Ross and burned them at dusk and dawn. Oh and they like Edith Wharton, Gossip Girls and World of Warcraft. Damn commie scum!
This is along side the Qinhuai river. It’s slightly blurry because it was raining that night. The entire area is a fairly modern tourist trap with all sorts of stereotypical Chinese architecture. Oddly enough, while there were lots of Chinese wandering around, there weren’t many Laowei (foreigners) out and about. Definitely worth checking out. More on the “bazaar” night market here and here.
This is the outer wall of the old Presidential Palace used by various entities including the Heavenly King and the Kuomintang. Look at all those horses and rickshaws in the street!
This is the first courtyard you come to inside the palace. It’s one of the few that wasn’t burned down by either the Japanese or British. The British burned down the Old Summer Palace because the Chinese policy makers didn’t want to buy opium. And the Japanese had the dubious distinction of doing similar acts during the 1930s.
I’m standing in front of a throne (replica, as the original was purportedly made of gold) of Hong Xiuquan who said he was the brother of Jesus Christ — and you thought that only Westerners like Mormons or Davidians made such claims! Be sure to read up on the Taiping Rebellion. That’s a lot of dead people.
That’s a bronze bust/carving of Hong’s motley crew. If you get a closer angle they all look like they came from the movie 300, big and ripped.
This is just one of the million pagodas inside the palace. The porous rocks had something to do with a guy named Confucius, whoever that was. See also the Nanjing Confucius Temple.
Yes yes, I know, dreary gray skies. It rained later that day, but the construction crews kept building whatever evil communistic Armageddon device that lays behind the bamboo scaffolding. This is right across the road from the Palace.
This is the new Nanjing Library which is also next to the Palace. You don’t want to know what happens to people that return books late!
What, no signs in English? Actually, nearly all of the road signs are also written in English. Most of the signs in the Palace were written in English, Japanese and Korean. The sign at the very top points to Albuquerque.
I’ll try to upload some more photos. I also visited a few other sites including Purple Mountain, Linggu Temple and Sun Yat-sen’s mausoleum. Yes, I know, a libertarian that visited government temples. Sue me.
While everyone + dog watches the inauguration, I’ll be out in Nanjing. I have a new Mises piece that should run during this time, so if you see me out at Fuzi Temple or Zhongshan Tomb feel free to tell me how much you hated it. Oh and I probably won’t make the effort to login to the interwebs at all. So flame away.
With that I leave you with a song I was forced – by pretty women of course – to sing at a KTV tonight.
Contra the Japanese contest that says this is the least useful robot of 2008, there is indeed utility for this robot: as a doorman at popular nightclubs. If you watch the video it is the second one in, the YKRN.
In continuing the meme of what songs are popular with Chinese college students, today’s entry is “Winning women” by Nicole Scherzinger and Rihanna. I’ll be in heading to Nanjing next week and might take a peek at the nightlife — to independently verify if this song is indeed caliente.
My new piece is up over at Mises.org that discusses Asian savings and its purported role in the housing bubble. Bob Murphy has also written a good piece about the topic.
Government action
It’s not me, it’s you
Seen and unseen
Mike Shedlock (aka Mish) is a germane financial analyst. If you get a chance, be sure to subscribe to his 
Living the Amish/Gangster Paradise
Have you just seen it on TV?
A bet for Mish
