|
|
||
 |
|
|
|
|
||
|
|
||
|
|
|||||||||||||||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||||||||||||||
|
|
||
|
Essays, Opinion, & Commentary |
|
|
|
|
|
|
|
|
||||||
|
July 1, 2007
by Gary North, Ph.D.
It is now half a century later. The United States is bogged down in a war that has lasted longer than its participation in World War II. The government's on-budget debt is in the $9 trillion range. Its off-budget debt is in the $70 trillion range. Here was Mao's assessment in 1956.
Mao has been dead for three decades, yet his words seem strangely prophetic. He understood what the United States was facing. Yet he had no clue about what China was facing. He was completely wrong about China's role in the world economy in the decades that followed his death. China remains officially Marxist politically, yet in fact has become the fastest growing large capitalist economy in history. This began in 1979 under Deng Xiao-ping, the man Mao failed to execute. (Deng was saved by the personal intervention of Col. von Trapp's son-in-law, but that's another story for another day.) THE OTHER TIGER Economist F. A. Hayek in 1969 offered his version of having a tiger by the tail: monetary inflation.
As he spoke, a recession in the United States was about to hit. There was another in 1975. The United States went off the international gold standard in 1971. Price inflation soared in the decade. Then the Federal Reserve stabilized money in 1979. The result was a pair of recessions, 1981 and 1982. Price inflation slowed, but then an international monetary crisis hit in August, 1982, when Mexico threatened to default. To avoid a disaster, the FED pumped in money. Price inflation continued, though at a slower pace. Hayek died in 1992. He lived long enough to see the Soviet Union fall. He did not see the end of inflation. So far, the West has not gotten off the tiger's back. But the tiger has not yet eaten us. Now it is China's turn to ride the monetary tiger. CHINA'S MONETARY POLICY At the beginning of 2007, the Chinese central bank announced its monetary goals for the year. As it does every year, it announced that the policy would be prudent.
Here is what prudence is in today's China. This was the target for M-2.
Consider 8% growth. This means a doubling of the economy every nine years. As for price inflation, the bankers expected 3%. This means that they expected real economic growth of 5%, which is very high for a nation of 1.3 billion people. As for M-1, the narrow money supply, the bank issued no target figure. China's bankers underestimate money growth, year after year.
This discrepancy was easily explained: "The money supply and credit targets are not missions it must meet but only a policy guide, the bank has said." How will the bank achieve its goals in 2007? By winging it. "The central bank pledged to adopt multiple tools for monetary macro-control and to advocate flexibility in interest rate adjustments to address excessive currency liquidity." The money supply in China has risen in the 15% to 18% range, year after year. By April, the increase in M-2 was around 17%, year to year, slightly higher than the announced rate. But what of official growth figures? The government claimed 10.7% growth in 2006, meaning a doubling every 6.7 years. It claimed price inflation of 1.3%, meaning that China in 2006 had real growth of 9.2%. This is astronomical. There is no historical precedent for anything like this. I think we should employ skepticism regarding these figures. Statisticians in Marxist countries must toe the line. POPULATION MOVEMENT Jim Jubak has offered an explanation of how these high economic growth rates are possible. I have mine. They agree. It is due to a freeing up of labor and capital. The labor market is outside the compulsory welfare system of the Chinese government. He thinks this is bad. I think it is good. He writes:
This is a free labor market involving huge numbers of people. Jubak writes: "Estimates of the number of migrant workers in China range from 110 million to 120 million." He estimates that 3.7 million migrants live in Guangzhou, which has 7.5 million people. "Migrants make up 80% of all urban construction workers and 68% of workers in electronics manufacturing, according to UNESCO (the United Nations Educational, Scientific and Cultural Organization)." Consider some implications of these numbers. In China, Inc. (2005), author Ted Fishman offers these tidbits of information.
We begin to see the nature of the tiger that China is riding. China has the highest rate of monetary inflation of any large industrial nation. It is experiencing the largest migration of population in recorded history. In less than one generation, well over a hundred million people have moved from farms to cities. It may be closer to 200 million people. Monetary inflation is not the main source of China's economic boom. This kind of increased economic productivity does not arise out of increases in the money supply. Fiat money does not create new wealth. Economic growth has arisen out of a freeing up of capital and labor in what had been a Communist economy. Monetary inflation does affect the allocation of capital and labor at the margin. Companies that get access to the newly created money can buy goods and services at yesterday's prices. They can fund new plants and new projects more inexpensively than companies that get access to the fiat money later in the flow of funds. Which are these companies? Obviously, among the winners are companies that export to the West, whose importers can buy the Chinese yuan at a low price due to the increase in the supply of yuan. China is imitating the five Asian "tiger" economies that were built on exports to the West: Japan, Taiwan, Hong Kong, South Korea, and Singapore. To subsidize the export sectors of the economy, the Chinese central bank has adopted monetary inflation. It has used its newly created currency units to buy foreign currencies, which it then uses to buy the debt certificates issued by Western governments, including the United States. This has helped keep interest rates lower in the United States than what would have prevailed, had the Chinese central bank not inflated or else had bought assets other than T-bills. THE BOOM-BUST CYCLE Hayek pointed out the nature of the tiger in 1969. He had learned this from Ludwig von Mises, who had discovered the nature of the boom-bust cycle in 1912. The cycle comes from monetary inflation, which stimulates economic growth. Then, when the rate of price inflation slows, the underlying forces of the economy reassert themselves. Interest rates rise as prices rise. Projects that had been launched because of the low interest rates that had been produced by the fiat-money-funded purchases of government debt, now face bankruptcy because of rising interest rates. China has now moved into the industrial world. It is part of the world economy. It is experiencing huge population movements. People are moving off low-output farms and moving into huge cities. In cities, there is a much higher division of labor than in rural villages. There is much greater specialization of production. So, there will be much greater economic losses when a recession hits. On a farm, you can switch production to self-sufficiency when market demand declines. In a city, you get fired when market demand declines. Your income ceases. You must find different employment. How do you do this if the urban economy takes the brunt of the economic losses? You lower your price. You work for less. To persuade workers to do this, companies must create incentives. They fire people. Until workers recognize the new conditions and adjust to them by lowering their wage demands, they remain unemployed. This is a major threat to the Communist government. The tight controls imposed on the population by the political system were justified by guaranteed employment in state-owned companies. These have been steadily shut down by the government. What happens to the political order when the tiger of inflation is replaced by the tiger of recession? This is the nature of the tiger that Hayek described. The central bank has placed the entire society on the back of this tiger. It dares not stabilize the money supply. So, it continues to create new money, hoping that prices will not rise domestically because of the downward pressure on wages created by the flood of rural workers streaming into the cities. So far, this policy has worked politically. Enormous economic growth has kept down domestic prices. But the threat of recession grows ever greater as people keep filling the cities. A fall in employment in a city where millions of newcomers are living is far more dangerous politically to a centralized political order than a dispersed, unorganized rural society is. CONCLUSION No society is riding a more dangerous tiger than China. China has combined an aging, centralized political hierarchy with a youthful market-driven population. To this risky brew the central bank has added monetary inflation, which has now become endemic. Participants in the economy have planned on this monetary inflation. It is unexpected changes in the rate of monetary expansion that create serious losses. The central bank dares not reduce the rate of inflation. So, the results are predictable: rising commodity prices, supply bottlenecks, real estate bubbles in fast-growing cities, a stock market bubble, and euphoria regarding the future. The move from farms to cities by young men is the central factor in the deferral of production crises. Labor is a large component of any economy. China's is no exception. The flood of immigrants from the farms is holding down production costs. The bubble in China resembles the bubble 1995-2000 NASDAQ in the United States. The Chinese stock market is trading at a price/earnings ratio above 50. Some stocks are trading at 80. In a speech on June 12, Alan Greenspan commented, "Some of these price-earnings ratios are discounting Nirvana." But let us not forget that the NASDAQ reached a p/e ratio of more than 200 in December, 1999. China's goods will continue to be cheap. In a recession, they will be even cheaper. The problem will be in the debt markets. When the Chinese central bank starts buying its own government's debt in order to bail out the Chinese government directly, interest rates in the West will rise. China has exported price deflation: cheap goods. It has done this by purchasing western governments' debt. When that strategy hits the iceberg of domestic recession and unemployment, the West's days of low interest rates and economic boom will cease abruptly.
Dr. Gary North earned a Ph.D. in history and is one of America's keenest economic analysts and commentators. He supports the Austrian school of economics and is a previous assistant to libertarian congressman Dr. Ron Paul. Visit his website at http://garynorth.com. To subscribe to Gary North's Reality Check go to http://www.dailyreckoning.com/sub/GetReality.cfm If you enjoyed this essay and would like to read more of Gary's writing please visit his website at http://www.garynorth.com or http://www.freebooks.com
|
||||||
|
Enrich your life with a book about politics and current events...
|
||||||
|
|
||||||
Mao
Tse-tung in 1956 called the United States an
empire. He called it a paper tiger.
|
|
||
|
|
||
[Homepage] [Newsletter] [Search] [Support the Academy] [Link to Us] [Contact the Academy] [Citing Articles from Our Website] [Privacy Policy & Disclaimer]
Copyright 1998-99, 2000-01, 2002-03, 2004-05, & 2006-07 by The Radical Academy. All Rights Reserved.