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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 Times piece 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 several times… 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 to Hustle 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!).

Let’s put the target three years from now. Deal?

See also: Why Congress Must Stop The Fed’s Massive Pumping
The Fed Versus The Banks: Who Will Blink First?
Why Aren’t The Fed Injections Leading To Massive Price Inflation?
Long on China, Short on the United States
The Bailout Reader
The Depression Reader