As I pointed out in the first part of this series, every inflation advocate points to the demise of the west and the rise of Asia as a consequence of global trade imbalance and failed policies of the U.S. No one can argue the mistakes of our policy makers, but I say 'not so fast' on the rise of the Chinese. It amazes me that these same analysts who run down the U.S. actually believe that current growth in China is actually organic. How in the world do you think China went from being an export-driven economy to one that is completely independent of the contraction in the west? Man did that happen fast. Anyone who believes that China has turned its mostly underpaid citizenry into a robust middle class overnight is delusional.
I have a close relative who owns a major manufacturing operation in Shanghai, and I can tell you first hand that their business, and all the businesses they transact with there, are extremely dependent on Chinese government spending over the past year. In short, their business would be gone were it not for government spending. Sound familiar? Yes China is hoarding resources, and they could be right in the end about the demise of the dollar. But at what point should we concede market sophistication and knowledge to Chinese leaders? People point to their long term outlook where we have such a short one, but who wouldn't with billions to feed and support? Having a long term outlook does not necessarily make one right in the short term- say over the next few years. Are you willing to bet, along with China, that commodities are the only investment worth owning right now? Perhaps you are, but know that you are casting your die with a government opting for the same monetary practices that you currently disparage here in the U.S.
A perfect example of their government stimulus is in the plastics market, where a huge disparity exists that is seldom seen. Where the spot price here for raw stuff is $1200, the market price for finished goods in China is less than the raw spot price! That's right- you'd have to pay $500 more per ton here than it costs Chinese companies to buy it internally on the cash market. Do they make plastic there- is that why it's so cheap? Because of their cheap labor? Nope. They don't make refined plastics there- that would require oil and they don't have any. No, they got so much of the stuff by the government cornering the market in plastic through their state-subsidized manufacturing complex. Isn't China just being smart- spending all those dollars now while they still can? Maybe, but remind me again how China's society is improving so dramatically? The majority of the wealth is in the hands of the elite in the population centers. Beyond better electronics, the quality of life has not markedly improved there for most of their population. I defy anyone to go visit China and make an argument to the contrary. But you'll have to leave the safe confines of the Hyatt and venture beyond whatever metro center you're staying in, because it's one hell of a big country. That's assuming you've actually gone there. Call me crazy but maybe that should be a criteria for the money manager you're paying for the buy-Asia advice.
Listen, I'm not saying that China won't be the powerhouse of the next century. They probably will be. It just may be worth your time to consider if we're wrong about monetizing debt, then foreign powers monetizing hard assets can be wrong too. What we have here is the corrupt use of state assets to prop up the elite in both countries. Pick your poison.