Li Xiangyang, deputy director of the World Economic and Political Research Department of the official Chinese Academy of Social Sciences (CASS) says that the subprime meltdown was a rude awakening for Chinese economists. Li says Chinese economists adapted to Western neo-liberal theories in the 1990s and believed that the global recession in the 1970s and the Great Depression of 1929 would never happen again.

He says “The subprime crisis was actually a ‘correction’ to years of debt-driven consumption in the US, marking the end of unsustainable economic growth based on ‘spending tomorrow’s income today’. However, the cost of this ‘correction’ was borne by the rest of the world. Within the US economy, the ‘spend tomorrow’s income today’ debts of private companies were socialised. The savers paid the bill for the lavish spenders, through government interventions. Meanwhile, American debts were globalised: global savers paid the bill for American consumers, through inflation and devaluation of the dollar. This is the privilege of being the holder of the world currency.”

For the first time in 30 years, Europe, Japan and the US's economies are contracting at the same time and reducing imports from China. A huge inflow of speculative capital has fuelled unstable asset bubbles in China - including rising property prices. Rising production costs are hitting production and a lot of money is tied up in new factories and machinery. Exports accounted for 40 percent of China’s gross domestic product and contributed 4 percent of the country’s total annual growth. Xie said problems with exports could be traced back to 2004, when global commodity prices started to rise. Rising prices led to demands for wage increases. As a result, large numbers of labour-intensive firms, which had always operated on thin profit margins, had been pushed to the edge. .

Xie pointed out that factory owners assumed things would get better. As a result, firms kept their production plans and attempted to maintain export growth over the past three years. Now there are fears of collapse - share markets have fallen by 59 percent, with loss of nearly 3 trillion dollars in value. Local governments, which were dependent on selling land rights and taxing land sales, are also heavily in debt.

Xie predicted that non-performing loans would increase substantially in the next 12 months as the property boom flattened out. He says that 65,000 small and medium firms went bankrupt in the first half of this year putting 20 million people out of work. Many employers did a runner without paying wages to workers or debts to the banks.China wants to turn to production for local consumption but that' s not easily done

http://www.wsws.org/articles/2008/sep2008/chin-s12.shtml

This makes it easier to understand how the US has managed to go on so long with the level of debt it has. China has to face into a massive adjustment.

cactus flower wrote:

Li Xiangyang, deputy director of the World Economic and Political Research Department of the official Chinese Academy of Social Sciences (CASS) says that the subprime meltdown was a rude awakening for Chinese economists. Li says Chinese economists adapted to Western neo-liberal theories in the 1990s and believed that the global recession in the 1970s and the Great Depression of 1929 would never happen again.

He says “The subprime crisis was actually a ‘correction’ to years of debt-driven consumption in the US, marking the end of unsustainable economic growth based on ‘spending tomorrow’s income today’. However, the cost of this ‘correction’ was borne by the rest of the world. Within the US economy, the ‘spend tomorrow’s income today’ debts of private companies were socialised. The savers paid the bill for the lavish spenders, through government interventions. Meanwhile, American debts were globalised: global savers paid the bill for American consumers, through inflation and devaluation of the dollar. This is the privilege of being the holder of the world currency.”

For the first time in 30 years, Europe, Japan and the US's economies are contracting at the same time and reducing imports from China. A huge inflow of speculative capital has fuelled unstable asset bubbles in China - including rising property prices. Rising production costs are hitting production and a lot of money is tied up in new factories and machinery. Exports accounted for 40 percent of China’s gross domestic product and contributed 4 percent of the country’s total annual growth. Xie said problems with exports could be traced back to 2004, when global commodity prices started to rise. Rising prices led to demands for wage increases. As a result, large numbers of labour-intensive firms, which had always operated on thin profit margins, had been pushed to the edge. .

Xie pointed out that factory owners assumed things would get better. As a result, firms kept their production plans and attempted to maintain export growth over the past three years. Now there are fears of collapse - share markets have fallen by 59 percent, with loss of nearly 3 trillion dollars in value. Local governments, which were dependent on selling land rights and taxing land sales, are also heavily in debt.

Xie predicted that non-performing loans would increase substantially in the next 12 months as the property boom flattened out. He says that 65,000 small and medium firms went bankrupt in the first half of this year putting 20 million people out of work. Many employers did a runner without paying wages to workers or debts to the banks.China wants to turn to production for local consumption but that' s not easily done

http://www.wsws.org/articles/2008/sep2008/chin-s12.shtml

This makes it easier to understand how the US has managed to go on so long with the level of debt it has. China has to face into a massive adjustment.

China would not have grown into an economic super power without the US consumer, and other Western consumers, loading up on debt. The implicit message here is that China, and maybe some other nations, should now control a larger slice of the cake; or indeed control the world economy. I'm sure the EU will argue likewise. China, like the US, wants it cake and wants to eat it all at once. Yet, China has steadfastly refused to open its markets up to external competition; has artificially pegged its currency to the US dollar at favourable economic terms; and unemotionally exploited the average worker. I amn't crying a load of tears over China's export plight. China needs the US consumer and its crocodile tears are only for itself.

I've been waiting for the other shoe to drop for some time now. If we remember back to the first quarter of this year, the pundits would have has us believe that Europe and the rest of the world was now immune from events in the US. Well, when the deleveraging of debt caused by the unsupportable debt levels assumed by individual Western consumers reached tipping point, China and other heavily dependant export nations could only expect to see their exports rates drop.

There was an interesting documentary about Wal-Mart done recently. It concerned their opening of a new shop in a small US town. Previously a French owned TV company was paying good wages to workers to produce said TVs in the town. However, at the same time Wal-Mart was trotting over to China to get similar TV made at the cheapest possible cost so Wal-Mart could sell good, cheap TVs to US consumers. The upshot is that Wal-Mart has its new store; the factory went out of business; and the consumer's demand for ever more cheap and largely useless consumable assets is satitiated; the income levels of the small town worker have decreased so that ever more cheaper goods are required for the consumer to consume. Did the Chinese factory owner care. Why should he/she? Does Wal-Mart, the US govt and Chinese govt know the conequences of these policies? Sure they do. Has China instituted great social reforms to increase lot of the average worker? No. They instead have begun to decry the lack of cheap peasant labour and let bust factory owners walk away from their responsibilites and debts.

I could make many comments but none are printable in gracious society.

Its been clear for some time that the Chinese economy is chained to the US economy inextricably, in that China has produced for the US and invested its profits in dollar holdings. What would happen to the dollar, if the Chinese pull out and what would happen to China without the US market ? For a country that has put so much into developing industry, its a strategy of dependence. With the US unable to afford to import, the whole thing bursts asunder. As you say, the factory owner runs, and the workers, who in many cases live in virtual slave conditions on the factory premises, have got nothing.

Having said all this, surely there is the potential for both the US and China to produce, and to earn their livelihoods, instead of facing destitution ?

rockyracoon

Agree with your points re the structuring of China's economic model.



One of the problems in all economies is the dispersal of money through an economy. Money is just a lubricant, if it does not disperse and collects in small sectors the possibility of booms, high prices and wasteful spending increase. Most people who acquire money do not see further than the end of their own noses. They do not see the opportunities that exist in underdeveloped areas, indeed they often look down on such people. They say they are lazy, indolent, work shy anything to excuse doing nothing.

On the reverse side local economies without money remain impoverished. No money in circulation therefore no services, no opportunity to earn a living, few family contacts and so on.

The difference is stark in many Eastern and 3rd world economies. On one hand you see astronomical property prices in major cities and on the other the peasants who live like medieval surfs and factory workers who work in conditions worse than in the mills of Victorian England.

In the west we are not immune from the problem, the sink council estates, the down at heel towns. In the UK you have the extreme example of London versus some of the old industrial towns.

Problems that prevent dispersal are;

1 Centralisation of power, large administrations and large numbers of relate jobs at the centre. Administrative power needs to be decentralised where possible.

2 People with money and power cling to others with money and power and use that power to retain their positions. If you are the child of a Barrister your chances in life are much better than if your father was a labourer.

3 The idea that the poor are inevitable, lazy, work shy, and will always be with us. It is inevitable therefore why do anything?

4 There are few mechanisms which enable those at the bottom of society to improve their lot and when some do they generally and understandably depart out of that community and pull the escape ladder up with them.


A journey around Africa, China or India is only an exaggerated reflection of our own problems.



There is also another point about the assumptions of globalisation; that trade of itself is good and that exports for others consumption is a good model. This is patently stupid for you must always ensure that you are not just a supply satellite for someone else. There is more to developing wealth than raw trade figures.

Capital is "clumpy" and if you have it, in an expanding economy, you get more. You invest it and other people directly or indirectly work to make money for you.
Most people never have capital and just have to work or take benefits to survive and have a family. Some people on small money get to save or invest a bit, but they aren't positioned in the same way as big money in terms of knowledge of what not to invest in. So there is surely a tendency for money to concentrate in the hands of a few people? This is what seems to have happened in the US and in Ireland.
Galbraith said that this concentration in the hands of a few does exactly what you say Squire and lead to reduced liquidity and diversity.

Your term of a "supply satellite" is a new expression to me and is very apt.

Yeah, the supply satellite concept is quite interesting and obviously has ramifications for Ireland as we're so dependant on mostly US corps for the vast bulk of our exportable wealth generation. At the heart of the export boom, imo, is the degree to which technology, data lead logistics and engeenering have progressed to the point where super container ships can ferry massive amounts of various goods from production origin to final consumption destination more cheaply than many Western countries can manufacture similar products. The only difference now, given the decllining relative per cost unit per item shipped, is the wage factor and to some extent the start up costs of manufacturing facilities.

TVs are always a good example because the technology is easy replicate by modern standards, so there is no technological barriers of entry. As long as start up costs can be covered cheaply over the production cycle and recouped, the only barrier to starting a new TV factory is the labour and material cost inputs. There will be some variability due to material costs, but again shipping in vast bulk makes the variability less of an issue these days.

This leaves Ireland, and others, in a very vulnerable position. Infrastructure plays an important role but many developing nations know the score on this point and are creating industrial production facilities in proximity and in tandem with world class port facilities in order to gain access to raw materials and be able to export the goods. In the EU the infrastruture from one country to anther is quickly leveling off and multinational know this as well. I wondering, given our high cost base structure in term of wages and living conditions, if we won't soon be entering the era of tax auctioning in order to attract and maintain multi-national interest. If such an auction occurs the natural rate of taxation will go to zero.

The educational issue will often be thrown into the mix suggesting that we will produce a population that is somehow smarter than our competitors. However, you'll find that any educational survey finds that the population of any country's educational attainment shows a normal distributive bell-shaped curve of intellectual capacity. That is, you will always end up with percentiles who score at the higher end of an educational test methodolgy being matched by percetiles who score proportionally at the lower end. It's called reverting to the mean. Having said that, there is no reason why we can't marginally increase the results by highlighting certain industrial activities to focus education and so skew the results to these selected industries. Having said that, if economic advantage acrues, it will be matched by others in time. It is not the panacea it is being made out by the government at the moment and, furthermore, planning is only a good as the eventual implementation. Also, we will probably see an even greater degree of wealth distribution by the haves and have-nots if the strategy actually bears fruit.

On a side note, if you want to gauage the future sentiment and activity of export activities across the globe, have a gander at the Baltic Dry Dock Index. This measures the interest that shippers (ie shop onwers) have in renting out or hiring shipping for export activities. The higher the index, the higher the likely activity of exports.

On the nail again rockyracoon: but as I have posted here, rising oil prices have pushed shipping costs up and a number of factories have already been shifted back to the US from the UK, Mexico, and one so far from Ireland. This makes Ireland even more vulnerable, as we are more distant from markets than our competitor locations.

On the question of pressure to reduce corporation tax, this has already started. Some of the new EU states have very low or zero tax. In yesterday's
Irish Times the CEO of Dell in Ireland said that Dell would probably leave Ireland if Corporation Tax rates are not reduced.

On education, in Ireland young people shifted away from computer technology after the dot com bubble burst, and were never attracted back to it in big enough numbers - firms can't get Irish applicants and are bringing them in from Poland and elsewhere.

Ireland is very strong on literacy and communication skills and not strong on science and technology. We also have a sizable chunk of our low income/poor population who don't get an education.

As Ard Taoiseach has pointed, we are still able to attract footloose jobs by tax advantage. The political tensions with the countries losing the jobs will only get worse - at the end of the day they may either drop their own tax rates or try to exert pressure in other ways.

We can't relocate Ireland, so we need to maximise high speed broadband, that cuts down the location disadvantage in selling services. Education is something we can do something about. On tax, the tendency to globalisation is so strong that I don't think it can be resisted - wages and taxes will inevitably tend to equalise across the globe and we will see an end to the preferential wages in western countries. The only thing acting against that is the end of oil, which may bring about a return to localised and self-sufficient production and consumption.

On China, for all the 20 million unemployed, they still had a 13% growth rate last year and their home market is growing exponentially. They are making enormous investments in science and technology and have a lot of very, very bright people. They certainly have a problem in terms of starting up as a supply satellite, but they have a very good chance of overcoming it by selling at home and broadening their markets. They will come under more pressure to open their own markets, but to be honest, do they have much to fear from that?

My husband has just come back from the US and is a big gift shopper. He couldn't find anything to buy that didn't have a Made in China label, including
cowboy boots and shirts and "Indian" silver artefacts.

cactus flower wrote:

. . . On China, for all the 20 million unemployed, they still had a 13% growth rate last year and their home market is growing exponentially. They are making enormous investments in science and technology and have a lot of very, very bright people. They certainly have a problem in terms of starting up as a supply satellite, but they have a very good chance of overcoming it by selling at home and broadening their markets. They will come under more pressure to open their own markets, but to be honest, do they have much to fear from that?

My husband has just come back from the US and is a big gift shopper. He couldn't find anything to buy that didn't have a Made in China label, including
cowboy boots and shirts and "Indian" silver artefacts.

Actually, I'm not surprised by the "made in China label". A few years back it was a "made in Japan" label. It's been that way in the US since I can remember. However, I just replaced a printer cartridge and I have a habit of looking at the boxes to see who makes the products (always in investor mode) and to my surprise is was made in the USA. And it only cost €5 including VAT. I have a sneeky feeling the Yanks are beginning to "ear mark" certain industries for investment and growth potential and the govt is readily giving some businesses support. To the Yanks this would smack of socialism, so I can't get any verifiable proof yet. Only coming up with trade mission data and so forth. Just a feeling I have. Of course, the US banking system is reeking havoc on industrial investment potential and they seem to have ruined the chances of US auto maker's abililty to plan for future recognisable gains through highly restrictive bond convenants, so the US is still in alot of trouble for the future.