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PeakTrader:

China’s “growth-at-any-cost” policy created enormous waste. It needed a “creative-destruction” process long ago. However, it had to keep its population employed to minimize unrest.

When China’s population ages, which will accelerate from its “one-child” policy and lack of immigration, the average Chinese will live very poorly.

China’s living standards will be much lower than Japan’s, and Japan’s living standards are much lower than the U.S..

It’s sad, the Chinese masses will work so hard for a very low standard of living, because of poor government policies and greedy politicians.

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China needs a “creative-destruction” process to shake out the massive waste in its economy.

For example, in the U.S. creative-destruction process from mostly 2000-02 (which took place in a mild recession), some tech firms failed and others were taken over. The surviving tech firms became much more efficient using fewer inputs to produce more output, and became much more profitable.

Consequently, the U.S. not only leads the world in the Information Revolution, it leads the rest of the world combined (in both revenue and profit).

The entire U.S. economy was shaken out mostly from 2000-02.

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Run, a creative-destruction process makes the economy more efficient and reduces waste. It makes the economy stronger.

After the 2000-02 U.S. creative-destruction process, the U.S. had one of the greatest eras of prosperity from 2002-07, and in a structural bear market that began in 2000, after a spectacular bull market from 1982-00.

After 2002, U.S. producers became much more efficient and resources were freed-up to allow domestic growth to expand, while U.S. consumers were able to go on a spending spree, buying more assets and goods, because of low prices and interest rates.

Efficiency in production is one way to create capital to allow investment.

China creates capital by selling its goods, and lending its dollars, too cheaply, e.g. to the U.S, at the expense of creating low wages and negative externalities. China then employs that capital in poor investments, just to create jobs. Consequently, Chinese work hard for little consumption or slow improvements in living standards. China’s growth to a large extent is a waste.

In 2000-02, it was proven a quick and massive creative-destruction process can take place in a mild recession with appropriate fiscal and monetary policies.

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The “Misunderestimated” President:

Bush inherited the worst stock market crash since the Great Depression and a recession. However, the Bush Administration turned the recession into one of the mildest in U.S. history (which wasn’t a recession based on annual per capita real GDP growth), after the record economic expansion and structural bull market from 1982-00.

Over a five-year period in the mid-2000s, U.S. corporations had a record 20 consecutive quarters of double-digit earnings growth, two million houses a year were built, 16 million autos per year were sold, U.S. real GDP expanded 3% annually, in spite of 6% annual current account deficits (which subtract from GDP).

The U.S. economy was most efficient, while Americans stocked-up on real assets and goods, and capital was built-up. It was one of the greatest periods of U.S. prosperity, the fourth longest economic expansion in U.S. history, and in a structural bear market that began in 2000.

The Bush Administration was adept at minimizing the recession in 2008, including providing a tax cut in early ’08 for the Fed to catch-up easing the money supply, until Lehman failed in Sep ’08, which caused the economy to fall off a cliff. However, appropriate policy adjustments were implemented quickly.

If Bush could’ve been reelected and had his way, the U.S. would’ve completed a recovery in 2010, and we’d be in a strong disinflationary expansion instead of this on-going depression and “train wreck.”

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GDP is an incomplete and inaccurate measure of living standards. I stated before:

In the Keynesian consumption function (or identity), Y = C + I + G + NX; trade deficits, or negative net exports (NX), subtract from GDP growth, because consumption (C) is overstated.

For example, in a $10 trillion economy, a 5% one year increase in GDP expands the economy by $500 billion. Also, if imports are greater than exports, e.g. $1 trillion of imports and $600 billion of exports, then net imports are $400 billion in one year, which adds to our trading partners GDPs and subtracts from U.S. GDP. However, the total added to the U.S. economy is $900 billion ($500 billion from GDP growth in one year and $400 billion from net imports in one year), because the U.S. is consuming more than producing in the global economy.

It should be noted, with trade deficits, the U.S. exchanges dollars for foreign goods and foreigners exchange those dollars for U.S. Treasury bonds. However, the U.S. is able to maintain trade deficits in the long-run, mostly, because foreigners lose through changes or differences in inflation, interest rates, and currency exchange rates. For example, over the past few decades, the Japanese yen appreciated from 360 to 100 per dollar, which means Japan received fewer and fewer yen per dollar.

Also, to a lesser extent, many of those foreigners moved to the U.S., and foreign firms began producing in the U.S., because it’s better to use those dollars than exchange them for their currencies. Moreover, those foreigners can raise their standards of living by selling their assets, exchanging their currencies for dollars, and moving to the U.S., or attending a U.S. college. Furthermore, tourism (by foreigners in the U.S.) adds to U.S. exports.

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Run, I don’t know how to respond to your comment, because it has nothing to do with economics, including the U.S. and China economies. Also, you’re supporting your statement with irrelevant information. There’s no connection to what you’re saying.

My comments are supported mathematically and empirically with no contradictions.

For example, the trend in U.S. manufacturing has been producing higher quality and more quantity with fewer domestic resources, which raises U.S. living standards:

Although, U.S. manufacturing lost 30% of its workforce over the past 10 years, the U.S. share of world manufacturing output has remained roughly constant at 20%, even with larger U.S. trade deficits, which boosts foreign manufacturing.

The National Association of Manufacturers (NAM)

•The United States is the world’s largest manufacturing economy, producing 21 percent of global manufactured products. China is second at 15 percent and Japan is third at 12 percent.

•U.S. manufacturing produces $1.7 trillion of value each year, or 11.7 percent of U.S. GDP.

•Manufacturing supports an estimated 18.6 million jobs in the U.S.—about one in six private sector jobs…Nearly 12 million Americans (or 9 percent of the workforce) are employed directly in manufacturing.

•In 2009, the average U.S. manufacturing worker earned $74,447 annually, including pay and benefits. The average non-manufacturing worker earned $63,122 annually.

•U.S. manufacturers are the most productive workers in the world—twice as productive as workers in the next 10 leading manufacturing economies.

•U.S. manufacturers perform two-thirds of all R&D in the nation, driving more innovation than any other sector.

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Here’s a PDF on the state of U.S. manufacturing:

http://www.themanufacturinginstitute.org/~/media/D45D1F9EE65C45B7BD17A8DB15AC00EC.ashx

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Marko, economics is not propaganda. You, like some others here, just can’t accept the fact Wall Street and Corporate America improved U.S. living standards, substantially, e.g. through lower prices, better jobs, higher productivity, etc.

Income Flows from U.S. Foreign Assets and Liabilities
Federal Reserve Bank of New York
November 14, 2012

Foreign investors placed roughly $1.0 trillion in U.S. assets in 2011, pushing the total value of their claims on the United States to $20.6 trillion. Over the same period, U.S. investors placed $0.5 trillion abroad, bringing total U.S. holdings of foreign assets to $16.4 trillion. One might expect that the large gap of -$4.2 trillion between U.S. assets and liabilities would come with a substantial servicing burden. Yet U.S. income receipts easily exceed payments abroad.

As we explain in this post, a key reason is that foreign investments in the United States are weighted toward interest-bearing assets currently paying a low rate of return while U.S. investments abroad are weighted toward multinationals’ foreign operations and other corporate claims earning a much higher rate of return.

U.S. investors earned a much higher rate of return on multinationals’ foreign operations and similar corporate holdings than did foreign investors here, 10.7 percent versus 5.8 percent, respectively.

The superior U.S. rate of return on FDI, as well as the greater tilt in U.S. foreign investments toward FDI, accounts for the $322 billion income surplus recorded in this category in 2011…The United States has earned a substantial premium on FDI investments at least since the 1960s.

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Also, you ignore current account deficits are completely offset by capital account surpluses (for the balance of payments to balance).

I’ve stated before, the U.S. has been a Black Hole in the global economy attracting imports and capital, and even attracting the owners of that capital themselves.

The problem is the U.S. government has been a Black Hole in the U.S. economy, which is why we’re in this depression.

The U.S. government should’ve, at least, “refunded” enough dollars to U.S. taxpayers to spur demand, since U.S. consumers bought foreign goods and foreigners bought U.S. Treasury bonds.

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Marko, you’re determined to turn a positive into a negative, regardless of reality. U.S. multinationals have a lot of market power, high productivity, and top managers to compete internationally. U.S. multinationals have a very successful track record.

Recall, in the 1980s, some people believed Japan would overtake the U.S.. Japan bought U.S. commercial real estate and other assets and lost big, while Americans won big selling those assets.

It’s possible, the U.S. income surplus could fall $75 billion to around $250 billion a year. However, it’s possible, it could rise $75 billion instead.

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China’s economy is most inefficient and it’s way overdue for a “creative-destruction” process:

Connecting the Dots Between China’s Falling Consumption Level and Its Banking Crisis
January 22, 2011

“As countries become more affluent, consumption tends to rise in relationship to GDP…ample evidence of colossally unproductive infrastructure projects in China.

Household consumption has declined over the decade as a share of gross national product from a very low 45 percent at the beginning of the decade to an astonishingly low 36 percent last year.

It now takes $7 of debt to produce $1 of GDP growth…The combination of implicit debt forgiveness and the wide spread between the lending and deposit rate has been a very large transfer of wealth from household depositors to banks and borrowers. This transfer is, effectively, a large hidden tax on household income.”

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China’s Growth: Too Good to be True?
04 February 2011

“If you think that China’s double-digit growth is too good to be true, it probably is. Here are a couple of reasons why China’s GDP could be smaller than it seems:

1. Environmental damage – He Ping, Chairman of International Fund for China’s Environment, believes that China will have to spend at least 2% of its GDP per year to clean up 30 years of industrial waste.

2. Misallocated investments – If you invest $20, then you’re expecting to get more than $20 in return…sometimes the returns actually turn out to be less than the cost of the investment…Some estimates say that up to 1-2% of China’s current GDP growth can be attributed to this.

If you combine that 2-4% of GDP spent on cleaning up China’s environmental waste and the 1-2% of growth attributed to misallocated investments, that means China’s GDP could be overstated by roughly 5% each year.”

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China’s employment and compensation costs in manufacturing through 2008
BLS

“China’s hourly compensation costs remain far below those of many of its East Asian neighbors like Japan [$27.80] and Taiwan [$8.68], but are roughly on par with those of others like the Philippines [$1.68].

Inflation in China has been substantial. Consumer prices in urban areas increased an average of 3.3 percent annually from 2005 through 2008. Consumer prices in rural areas increased even more rapidly, at an average annual rate of 3.9 percent.

Yearly compensation per employee (98.46 million in manufacturing)

2008 21,593 yuans ($3,108)

Despite large increases in recent years, hourly compensation costs in China’s manufacturing sector remained only 4 percent of those in the United States in 2008; that year, hourly compensation costs rose to $1.36.”

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Sorry, China, There Is No Short Cut To Economic Greatness
Jan. 26, 2010

“The government that magically managed to report 6-8% GDP growth in the midst of the financial crisis, when its exports were down over 25%, tonnage of goods shipped through its railroads was down by double digits, and its electricity consumption was falling like a rock. It is hard to manufacture 8% more widgets with a lot less electricity…China did not suddenly become energy efficient during the financial crisis.

This is a government that will go to great length to maintain appearances to keep its ideology going. After all, it censors what its citizens may or may not read and imprisons the ones that write anti-government articles.

China will do anything to grow its economy, as the alternatives will lead to political unrest…Since China lacks the social safety net of the developed world, unemployed people are not just inconvenienced by the loss of their jobs, they starve (this explains the high savings rate in China) and hungry people don’t complain, they riot.

The Chinese government controls the banks, thus it can make them lend, and it can force state-owned enterprises (a third of the economy) to borrow and to spend. Also, since the rule of law and human and property rights are nascent in its economic and political system, China can spend infrastructure project money very fast – if a school is in the way of a road the government wants to build, it becomes a casualty for the greater good.

China has spent a tremendous amount of money on infrastructure over last decade and there are definitely long-term benefits to having better highways, fast railroads, more hospitals, etc. But government is horrible at allocating large amounts of capital, especially at the speed it was done in China. Political decisions (driven by the goal of full employment) are often uneconomical, and corruption and cronyism result in projects that destroy value.

Infrastructure and real estate projects are where you get your biggest bang for the buck if your goal is to maintain employment, since they require a lot of unskilled labor; and this is where in the past a lot of Chinese money was spent. This also explains why, in 2009, new floor space constructed was up 100% and residential real estate prices surged 25%. And this explains why they keep building skyscrapers even though the adjacent ones are still vacant.

To make things worse, before the financial crisis and enormous stimulus ($586 billion), China was already suffering from what I call late-stage-growth obesity, inefficiencies that are a byproduct of high growth rates sustained for a long period of time. Though Chinese growth in the past was high, in its late stages the quality of growth has been low.

For example, in an echo of past Chinese government asset-allocation decisions, China built the largest shopping mall in the world, the South China Mall, that is 99% vacant, years after construction. China also built a whole city, Ordos, in Inner Mongolia, on spec for million residents who never appeared.

The inefficiencies are also evident in industrial overcapacity. According to Pivot Capital, Chinese excess capacity in cement is greater than the combined consumption by the US, Japan, and India combined. Also, Chinese idle production of steel is greater than the production capacity of Japan and South Korea combined. Similarly disturbing statistics are true for many other industrial commodities. The enormous stimulus amplified problems that already existed to financial-crisis levels.”

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