Volatility And The Threat To Globalization
"Democracy is the worst form of government except for all others"
--Winston Churchill
"With all the imperfections of our present government, it is without comparison the best existing or that ever did exist"
--Thomas Jefferson
"The attitude of the state towards capital would be comparatively simple and clear. Its only object would be to make sure capital remained subservient to the state."
--Adolph Hitler in support of capitalism
Let's take a break from the markets and talk a little about global economics and very unstable fundamental dynamics. It's no secret I am very bearish on the China story. Okay, that might be putting it mildly based on some of my prior posts. It seems the whole world believe(d) China will inherit the world's economic mantle. The first repressive state to lead the free economic world in vitality? I don't think so. Japan is still the dominant economic power in Asia and I see no reason for that to change. Ever. Ever means until a transformational set of events unfold to support another position. To compare the two economies is rather ludicrous. As time passes, many are waking up to some sense of reality yet I still see unfounded trend following projections and irrational exuberance from organizations that should know better including McKinsey and Goldman. There are simply too many unknowns and unprovens to make such assumptions.
It is amazing to me how many people today loosely interchange the terms democracy and capitalism. I firmly believe in the ideals of both democracy and capitalism. But only when used in the same sentence. When China is compared to the Soviet Union or other repressive regimes, many foolishly come to the aid of China as a capitalist society. It seems to me that most defenders I see are business leaders investing in China. How quickly we discount reality in the name of profits. History is littered with repression intertwined with some form of capitalism. We don't need to go back a thousand years for comparisons. We need only go back half a century to look at the repressive fascist regimes of Italy, Japan and Germany. Did global business leaders also profit from these regimes until events unfolded leading to the most catastrophic of human circumstances? What about the repressive acts of slavery or imperialism conducted by capitalist nations? How capitalism is confused with democracy, and by inference freedom, is beyond me. Honestly, I sometimes wonder how democracy in action can be confused with freedom. But, since the beginning of time no one has come up with a better idea than democracy. Look at what democracy has accomplished over the ages; personal freedoms, civil rights, economic opportunity for all people and on and on. It's not perfect but it's fluid, generally driven by the people and long term changes are most typically for the better. Those of us who live in a free society are very fortunate.
I do believe strongly in generally fair and free trade with China. It may be one possible approach of coaxing a repressive regime forward is by liberalization of trade and normalized relations. So far, that really hasn't happened. Many freedom and rights based groups believe the Chinese government has actually moved towards increased control and reduced rights over the last decade. So, when does one conclude liberalization might never happen? That increasing economic power might actually become a threat to global freedom as happened just a handful of decades ago? Is humanity more civilized than a few decades ago? Has man's desire to control his fellow man diminished? Is concentration of power without oversight something we no longer fear?
I believe volatility is not confined to asset markets but rather symptomatic. War, social turmoil, political upheaval, economic instability, environmental volatility and a multitude of other imbalances are the driver behind market volatility. What drives those events? Randomness? Unknown factors? Sun spot cycles? I do believe volatility is cyclical and that we are entering a new cycle of volatility. That's for another day. On that topic I will say science has crowded out anything not understood or explained through rationalization as invalid in today's world. A completely erroneous assumption in my estimation. It's amazing that thought leaders from cultures many millennia ago understood more about the importance of esoteric factors than we do today. We have become slaves to empirical data. The same empirical data that led almost everyone to believe this was a Goldilocks environment as recently as a month ago. That worked now didn't it? On one hand humanity has progressed beyond imagination but on the other hand much of humanity has lost touch with the esoteric, spiritual or mystical universe. That denial of our natural psyche and basic instinct, in my estimation, is a key contributor to the rise in fundamentalism across the globe. Or put another way, a rise in volatility.
One volatility factor I fear greatly is nationalism. Nationalism can be the foundations for very dangerous events. National pride is fine for the Olympics. But, since the beginning of time it has also been used by global politicians and those wielding power to stir up animus conditions leading to violence and even world war. Now I am hardly predicting global war. As I've said repeatedly I am bullish on the global economy after we get through the outcomes associated with this cycle. But, as I've said, that is not a quick stock market correction and the world is right as rain again. Regarding nationalism, the good news is that multiculturalism, intertwined economies and the spread of liberalization and democracy makes it more difficult for extreme nationalism to develop. As more and more of the world embraces democracy, there is less opportunity for such seeds to develop into major crisis. The bad news is monoculturalism and repressive societies still represent much of the world's population. Therefore, any pull back from globalization could cause unforeseen political tensions and consequences. As we've discussed, the world is ripe for a bout of nationalism, protectionism and alot of other -isms associated with volatility.
I still believe it is reasonable odds that China's government (Is China still communist or are we seeing the emergence of a fascist state?) will collapse within the next five to ten years. Or that tremendous upheaval will develop. That may appear bizarre with China's economy seemingly running on all cylinders (it's actually out of control in my estimation) but if one thinks through to an end state in this bout of globalization, it's really quite plausible. Maybe the most plausible outcome. Make no mistake, China will see increased social unrest without democratic reform because this cycle will end badly for China. China's bureaucracy, be it communist or fascist, is a repressive regime seeking to protect its interest before the interests of the Chinese people and recent actions reinforce that fact. Case in point:
As we've discussed, China would be incredibly foolish to unload dollars on the markets. For, as in any situation where one "dumps" an asset, it would be at the seller's loss. They would do so at a significant discount and the rest of the world would pick up very liquid dollar denominated assets at fire sale prices. Even if the U.S. government had to buy them back at a profit. Let's get some context here. The $1 trillion+ of dollars held by China is not exactly going to leave the market for dollar denominated assets in disarray. PIMCO alone manages nearly that much in bonds. There are $10 trillion of U.S. corporate assets held overseas. In the next fifty years, the U.S. Federal government alone will collect north of $200 trillion in taxes and the U.S. economy will likely have a cumulative GDP of quadrillions of dollars barring a global blow up of unprecedented proportions. Ditto with Europe and other nations capable of sopping up discounted dollar denominated assets. This is a major miscalculation in the world of political chess as it exposes the Chinese government as an unstable threat rather than a stable trading partner for all democracies.
Is China's miscalculation a sign of future concern? Disagreements are common and healthy amongst democratic societies. But, what are we to expect when disagreements arise between repressive states that are seeking control through manipulation and democratic states? Is China clearly showing the world to expect more of the same unreliable and dangerous behavior and more unfulfilled promises of fair trade policies and domestic reforms? As a reminder, many countries around the globe are growing uneasy with Chinese trade policies. That includes those benefiting as well as competing emerging economies. While the U.S. and any other country ultimately has no one to blame but themselves for trade imbalances, China will ultimately have no one to blame but themselves if the U.S., in tandem or unilaterally, acts to rectify unfair trade imbalances using their own set of rules. To date, the U.S. has asked that China allow more float in its currency as the rest of the top economic trading partners do. Even when it is not advantageous to domestic policy of these countries. Not that such an action would likely accomplish anything other than sooth the political winds that are blowing. Given that the majority in China still make less than $2 a day as outlined at a recent Asian summit coupled with the fact that Chinese policy doesn't appear in any hurry to change, the trade gap is not going to be rectified by additional currency float. But, the point is China appears unfazed regarding fair trade policy with the U.S. or any other nation. And, their subsidized policies make it difficult for other developing nations to effectively trade and institute policies of wealth creation for their citizens. China's trade policy represents an involuntary dive to the bottom of the barrel for the global work force. I'm not sure how such a policy is constructive. That is, unless one believes capital trumping labor is constructive as many economists do. I totally disagree with that theory. And you'll get a chance to witness that fact first hand soon enough.
China clearly underestimates the prospective backlash developing across the globe unless they adopt more liberalized reform. Many citizen in the industrialized world already believe China is usurping their wealth and their jobs. This is more of a function of domestic policies and social factors in my estimation. But, convincing anyone who has lost their job of this fact while globalizing companies and their executives are printing profits is not high odds. Add in China's exports of counterfeit drugs, automobile parts, industrial supplies, aviation parts, fasteners, medicines, pet food, medical supplies, toys, consumer products, software, autos and foods that have killed people around the globe and we are one medical disaster away from an international trade crisis. Recently, nearly 400 people in Panama died from ingesting cough syrup with counterfeit Chinese diethylene glycol labeled as glycerin. If that happens in Japan, Europe, Australia, Canada, America or any other industrialized democracy, the world could quickly reach levels of international crisis not seen in decades.
How many people in China have died throughout the years because of such corruption and counterfeit action supported by corrupt government officials? People in China are ingesting much of the same counterfeit product shipped around the globe. Thousands? Tens of thousands? More? We will never know because China is not a transparent society. The issues regarding food safety, counterfeit merchandise and poisonous medical supplies are nothing new. Twenty years ago engineered aviation fasteners were being counterfeited in China and making their way into the U.S. commercial aviation market. One doesn't want to be three miles in the air when an engineered fastener fails because it is a below specification counterfeit. As an aside, it's not an irony that China's airlines hold the title as the world's most unsafe as measured by deaths. Flying to China? Thank you, I'll fly Singapore Airlines.
Here's the dilemma that simply has no solution. Capitalism without democracy is simply bourgeoisie corruption and repression run amok. As the world's great minds of freedom have told us time and again throughout the ages, unchecked concentration of power always leads to calamity. Capitalism generally works in a democracy because of the natural governance and checks of a free society. Transparency, freedom of speech, freedom of thought, freedom of expression, freedom of the press and civil liberty are checks and balances to widespread abuse. Corruption is rooted out for fear of legal recourse, being sacked by shareholders, losing customers, bankruptcy or worse. Poisons in foods are stopped immediately for fear of death, loss of customers, legal liability, bankruptcy, etc. Democratic government oversight is generally successful because the government are stewards of the people and elected by the people to protect the people. In other words, capitalism, while far from perfect, works in a democracy because an open society with a rule of law has self correcting oversight. Communism is based on corruption, cronyism, suppression of the press, suppression of rights, suppression of freedom, lack of transparency and protection of an elitist culture with a jack boot on the neck of society. Hence, there is no oversight or self correcting governance. The problem with counterfeit goods coming out of China is not the people but the system; the repressive state. We don't know how this will be resolved but the history of corruption is much longer than reported. It has been going on since the communist power mongers found out they could profit from it.
China's attempted manipulation and the use of "stick" diplomacy on a benign economic issue of trade shows an underlying abusive behavior that obviously works as a tool to keep order in its own police state. Within the last few days the communist government has released some type of documentary meant to convince its people and the world that its products are safe. Again, another form of mind control which has effectively been used on the people of China will not work with a free world. Democratic countries adhering to their own quality standards are capable of producing quality products in China. Chinese companies adhering to traditional Chinese and free market values are also producing quality goods. But time and again the communist system has shown the ugly head of corruption. To date, I believe governments have been slow to move because multi-national corporations have lobbied democratic officials in attempts to protect their vested interests. Yet, in the end countries will act on behalf of their citizens and not multi-national corporations. There is absolutely no way China can continue the massive job creation needed to quell civil unrest without democratic reforms. The export driven model of growth is simply not sustainable. The U.S., Europe or other large economies are not going to watch their trade deficits swell ad infinitum. Where is China's transformative legislation to drive domestic reforms? I am extremely dubious that it will ever come. Of course, there are many outcomes; a pull back in globalization and a return to an even more repressive China as communist officials fear loss of control; or nationalism inflamed by leadership should restrictive trade barriers arise. The only question is when, how and whether this will happen peacefully or otherwise. In a world of increasing volatility, let's hope a peaceful movement towards democracy unfolds.
--Winston Churchill
"With all the imperfections of our present government, it is without comparison the best existing or that ever did exist"
--Thomas Jefferson
"The attitude of the state towards capital would be comparatively simple and clear. Its only object would be to make sure capital remained subservient to the state."
--Adolph Hitler in support of capitalism
Let's take a break from the markets and talk a little about global economics and very unstable fundamental dynamics. It's no secret I am very bearish on the China story. Okay, that might be putting it mildly based on some of my prior posts. It seems the whole world believe(d) China will inherit the world's economic mantle. The first repressive state to lead the free economic world in vitality? I don't think so. Japan is still the dominant economic power in Asia and I see no reason for that to change. Ever. Ever means until a transformational set of events unfold to support another position. To compare the two economies is rather ludicrous. As time passes, many are waking up to some sense of reality yet I still see unfounded trend following projections and irrational exuberance from organizations that should know better including McKinsey and Goldman. There are simply too many unknowns and unprovens to make such assumptions.
It is amazing to me how many people today loosely interchange the terms democracy and capitalism. I firmly believe in the ideals of both democracy and capitalism. But only when used in the same sentence. When China is compared to the Soviet Union or other repressive regimes, many foolishly come to the aid of China as a capitalist society. It seems to me that most defenders I see are business leaders investing in China. How quickly we discount reality in the name of profits. History is littered with repression intertwined with some form of capitalism. We don't need to go back a thousand years for comparisons. We need only go back half a century to look at the repressive fascist regimes of Italy, Japan and Germany. Did global business leaders also profit from these regimes until events unfolded leading to the most catastrophic of human circumstances? What about the repressive acts of slavery or imperialism conducted by capitalist nations? How capitalism is confused with democracy, and by inference freedom, is beyond me. Honestly, I sometimes wonder how democracy in action can be confused with freedom. But, since the beginning of time no one has come up with a better idea than democracy. Look at what democracy has accomplished over the ages; personal freedoms, civil rights, economic opportunity for all people and on and on. It's not perfect but it's fluid, generally driven by the people and long term changes are most typically for the better. Those of us who live in a free society are very fortunate.
I do believe strongly in generally fair and free trade with China. It may be one possible approach of coaxing a repressive regime forward is by liberalization of trade and normalized relations. So far, that really hasn't happened. Many freedom and rights based groups believe the Chinese government has actually moved towards increased control and reduced rights over the last decade. So, when does one conclude liberalization might never happen? That increasing economic power might actually become a threat to global freedom as happened just a handful of decades ago? Is humanity more civilized than a few decades ago? Has man's desire to control his fellow man diminished? Is concentration of power without oversight something we no longer fear?
I believe volatility is not confined to asset markets but rather symptomatic. War, social turmoil, political upheaval, economic instability, environmental volatility and a multitude of other imbalances are the driver behind market volatility. What drives those events? Randomness? Unknown factors? Sun spot cycles? I do believe volatility is cyclical and that we are entering a new cycle of volatility. That's for another day. On that topic I will say science has crowded out anything not understood or explained through rationalization as invalid in today's world. A completely erroneous assumption in my estimation. It's amazing that thought leaders from cultures many millennia ago understood more about the importance of esoteric factors than we do today. We have become slaves to empirical data. The same empirical data that led almost everyone to believe this was a Goldilocks environment as recently as a month ago. That worked now didn't it? On one hand humanity has progressed beyond imagination but on the other hand much of humanity has lost touch with the esoteric, spiritual or mystical universe. That denial of our natural psyche and basic instinct, in my estimation, is a key contributor to the rise in fundamentalism across the globe. Or put another way, a rise in volatility.
One volatility factor I fear greatly is nationalism. Nationalism can be the foundations for very dangerous events. National pride is fine for the Olympics. But, since the beginning of time it has also been used by global politicians and those wielding power to stir up animus conditions leading to violence and even world war. Now I am hardly predicting global war. As I've said repeatedly I am bullish on the global economy after we get through the outcomes associated with this cycle. But, as I've said, that is not a quick stock market correction and the world is right as rain again. Regarding nationalism, the good news is that multiculturalism, intertwined economies and the spread of liberalization and democracy makes it more difficult for extreme nationalism to develop. As more and more of the world embraces democracy, there is less opportunity for such seeds to develop into major crisis. The bad news is monoculturalism and repressive societies still represent much of the world's population. Therefore, any pull back from globalization could cause unforeseen political tensions and consequences. As we've discussed, the world is ripe for a bout of nationalism, protectionism and alot of other -isms associated with volatility.
I still believe it is reasonable odds that China's government (Is China still communist or are we seeing the emergence of a fascist state?) will collapse within the next five to ten years. Or that tremendous upheaval will develop. That may appear bizarre with China's economy seemingly running on all cylinders (it's actually out of control in my estimation) but if one thinks through to an end state in this bout of globalization, it's really quite plausible. Maybe the most plausible outcome. Make no mistake, China will see increased social unrest without democratic reform because this cycle will end badly for China. China's bureaucracy, be it communist or fascist, is a repressive regime seeking to protect its interest before the interests of the Chinese people and recent actions reinforce that fact. Case in point:
- China's currency manipulation drains the wealth of the Chinese population while serving leadership's need to create millions and millions of jobs of any quality to maintain civil obedience.
- The world's largest polluter is poisoning its own people at the expense of growth at all costs to maintain control and obedience.
- Projects approved through bribery and corruption result in massive over investment in many sectors deemed priority by the communist leadership as opposed to letting the people or market demands determine investment and educational needs.
- Nearly 100,000 documented human rights abuses annually including the fact that people who chose to exercise their liberties still generally receive no due process. While there may appear to be a modicum of freedom, there is really no intrinsic freedom of expression, religion, thought or press in any repressive society.
- Up to one third of the economy is an illegal pirating, patent and copyright abuse machine generating nearly 70% of the world's counterfeit goods. Goods that compromise the very safety of the world community while flouting intellectual property rights laws that cost legitimate businesses revenue, profits and jobs.
- A massive reliance on exports for growth because creating a consumer empowered economy would require political reform and democratic ideals. Or as I said before, it would work every communist official out of a job. When have we ever seen repressive regimes freely call for a new constitution and elected leadership? We can't get politicians to willfully leave their posts of power in democratic countries let alone a society without elections.
As we've discussed, China would be incredibly foolish to unload dollars on the markets. For, as in any situation where one "dumps" an asset, it would be at the seller's loss. They would do so at a significant discount and the rest of the world would pick up very liquid dollar denominated assets at fire sale prices. Even if the U.S. government had to buy them back at a profit. Let's get some context here. The $1 trillion+ of dollars held by China is not exactly going to leave the market for dollar denominated assets in disarray. PIMCO alone manages nearly that much in bonds. There are $10 trillion of U.S. corporate assets held overseas. In the next fifty years, the U.S. Federal government alone will collect north of $200 trillion in taxes and the U.S. economy will likely have a cumulative GDP of quadrillions of dollars barring a global blow up of unprecedented proportions. Ditto with Europe and other nations capable of sopping up discounted dollar denominated assets. This is a major miscalculation in the world of political chess as it exposes the Chinese government as an unstable threat rather than a stable trading partner for all democracies.
Is China's miscalculation a sign of future concern? Disagreements are common and healthy amongst democratic societies. But, what are we to expect when disagreements arise between repressive states that are seeking control through manipulation and democratic states? Is China clearly showing the world to expect more of the same unreliable and dangerous behavior and more unfulfilled promises of fair trade policies and domestic reforms? As a reminder, many countries around the globe are growing uneasy with Chinese trade policies. That includes those benefiting as well as competing emerging economies. While the U.S. and any other country ultimately has no one to blame but themselves for trade imbalances, China will ultimately have no one to blame but themselves if the U.S., in tandem or unilaterally, acts to rectify unfair trade imbalances using their own set of rules. To date, the U.S. has asked that China allow more float in its currency as the rest of the top economic trading partners do. Even when it is not advantageous to domestic policy of these countries. Not that such an action would likely accomplish anything other than sooth the political winds that are blowing. Given that the majority in China still make less than $2 a day as outlined at a recent Asian summit coupled with the fact that Chinese policy doesn't appear in any hurry to change, the trade gap is not going to be rectified by additional currency float. But, the point is China appears unfazed regarding fair trade policy with the U.S. or any other nation. And, their subsidized policies make it difficult for other developing nations to effectively trade and institute policies of wealth creation for their citizens. China's trade policy represents an involuntary dive to the bottom of the barrel for the global work force. I'm not sure how such a policy is constructive. That is, unless one believes capital trumping labor is constructive as many economists do. I totally disagree with that theory. And you'll get a chance to witness that fact first hand soon enough.
China clearly underestimates the prospective backlash developing across the globe unless they adopt more liberalized reform. Many citizen in the industrialized world already believe China is usurping their wealth and their jobs. This is more of a function of domestic policies and social factors in my estimation. But, convincing anyone who has lost their job of this fact while globalizing companies and their executives are printing profits is not high odds. Add in China's exports of counterfeit drugs, automobile parts, industrial supplies, aviation parts, fasteners, medicines, pet food, medical supplies, toys, consumer products, software, autos and foods that have killed people around the globe and we are one medical disaster away from an international trade crisis. Recently, nearly 400 people in Panama died from ingesting cough syrup with counterfeit Chinese diethylene glycol labeled as glycerin. If that happens in Japan, Europe, Australia, Canada, America or any other industrialized democracy, the world could quickly reach levels of international crisis not seen in decades.
How many people in China have died throughout the years because of such corruption and counterfeit action supported by corrupt government officials? People in China are ingesting much of the same counterfeit product shipped around the globe. Thousands? Tens of thousands? More? We will never know because China is not a transparent society. The issues regarding food safety, counterfeit merchandise and poisonous medical supplies are nothing new. Twenty years ago engineered aviation fasteners were being counterfeited in China and making their way into the U.S. commercial aviation market. One doesn't want to be three miles in the air when an engineered fastener fails because it is a below specification counterfeit. As an aside, it's not an irony that China's airlines hold the title as the world's most unsafe as measured by deaths. Flying to China? Thank you, I'll fly Singapore Airlines.
Here's the dilemma that simply has no solution. Capitalism without democracy is simply bourgeoisie corruption and repression run amok. As the world's great minds of freedom have told us time and again throughout the ages, unchecked concentration of power always leads to calamity. Capitalism generally works in a democracy because of the natural governance and checks of a free society. Transparency, freedom of speech, freedom of thought, freedom of expression, freedom of the press and civil liberty are checks and balances to widespread abuse. Corruption is rooted out for fear of legal recourse, being sacked by shareholders, losing customers, bankruptcy or worse. Poisons in foods are stopped immediately for fear of death, loss of customers, legal liability, bankruptcy, etc. Democratic government oversight is generally successful because the government are stewards of the people and elected by the people to protect the people. In other words, capitalism, while far from perfect, works in a democracy because an open society with a rule of law has self correcting oversight. Communism is based on corruption, cronyism, suppression of the press, suppression of rights, suppression of freedom, lack of transparency and protection of an elitist culture with a jack boot on the neck of society. Hence, there is no oversight or self correcting governance. The problem with counterfeit goods coming out of China is not the people but the system; the repressive state. We don't know how this will be resolved but the history of corruption is much longer than reported. It has been going on since the communist power mongers found out they could profit from it.
China's attempted manipulation and the use of "stick" diplomacy on a benign economic issue of trade shows an underlying abusive behavior that obviously works as a tool to keep order in its own police state. Within the last few days the communist government has released some type of documentary meant to convince its people and the world that its products are safe. Again, another form of mind control which has effectively been used on the people of China will not work with a free world. Democratic countries adhering to their own quality standards are capable of producing quality products in China. Chinese companies adhering to traditional Chinese and free market values are also producing quality goods. But time and again the communist system has shown the ugly head of corruption. To date, I believe governments have been slow to move because multi-national corporations have lobbied democratic officials in attempts to protect their vested interests. Yet, in the end countries will act on behalf of their citizens and not multi-national corporations. There is absolutely no way China can continue the massive job creation needed to quell civil unrest without democratic reforms. The export driven model of growth is simply not sustainable. The U.S., Europe or other large economies are not going to watch their trade deficits swell ad infinitum. Where is China's transformative legislation to drive domestic reforms? I am extremely dubious that it will ever come. Of course, there are many outcomes; a pull back in globalization and a return to an even more repressive China as communist officials fear loss of control; or nationalism inflamed by leadership should restrictive trade barriers arise. The only question is when, how and whether this will happen peacefully or otherwise. In a world of increasing volatility, let's hope a peaceful movement towards democracy unfolds.
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