Thursday, October 16, 2008

Meanwhile, across the Pacific...

The Chinese are making economic history themselves.
While the rest of the world is fixated on the biggest financial meltdown since the Great Depression of last century, it may seem odd that the highest decision-making body of the Chinese Communist Party (CCP) has been holed up for four days talking about farmers. There is, however, an important connection.

The collapse of the global financial system has made reform of China's land-use regime - a hot-button issue since former paramount leader Deng Xiaoping first began pushing the country toward a market economy more than 30 years ago - all the more urgent.

With Chinese exports expected to slow dramatically as the world economy contracts, the country's leaders want to boost domestic consumption by spreading China's newfound wealth beyond the cities - where it has created breathtaking modern architecture and a new class of millionaires - to the still-impoverished countryside, where two-thirds of the population continues to live. At the same time, increasing farmers' incomes could go a long way toward quelling rising social unrest often attributable to rural land disputes and the massive wealth gap between rural and urban China. [More]
It is difficult to overestimate how big this decision could be.  While farmers in the US will certainly focus on the idea of more efficient Chinese competitors or on the other hand more Chinese demand for food and things agricultural, I don't think this is the real bottom line.

The savings glut in China fuels our prosperity (er, former prosperity), largely because savers have no choice.  And the numbers are huge.
John Hempton at Bronte Capital has a novel explanation for China’s stratospheric savings rate. He says it’s due to their one-child policy. In any pre-Industrial economy, you’re retirement savings plan was very simple, you had children. Now you can’t so to compensate, you save, save, save. Hempton’s reckons “that the average Chinese person is saving maybe 46 percent of their income”. [More]

Now imagine if that flow now channeled into US Treasury notes was retained in China to buy cars and refrigerators and vacations to Shanghai. We'd really miss those debt buyers, just when our debt is exploding.
The shortfall widened to $455 billion in the fiscal year ended Sept. 30, compared with a $162 billion deficit a year earlier and the previous high of $413 billion in 2004, the Treasury said today in Washington. The gap was 3.2 percent of gross domestic product, up from 1.2 percent last year, the Treasury said. The 2008 deficit was the largest as a share of the economy since 2004, when it was 3.6 percent of GDP.

The excess of expenditures over receipts this year could get even worse. As the Treasury uses $700 billion to rescue the financial system from the credit crisis, Morgan Stanley chief economist David Greenlaw predicts the shortfall may almost quadruple to about $2 trillion.  [More]

We have turned a corner into a new economic corridor  - narrower than many we have traveled down as fellow citizens. It would appear growth will occur much more slowly - similar to Japan or the EU - as a result of new layers of regulation and the loss of trust.

In late 1930, however, a rolling series of bank panics began. Investments made by the banks were going bad — or, in some cases, were rumored to be going bad — and nervous customers besieged bank branches to demand their money back. Hundreds of banks eventually closed.

Once a bank in a given town shut its doors, all the knowledge accumulated by the bank officers there effectively disappeared. Other banks weren't nearly as willing to lend money to local businesses and residents because the loan officers at those banks didn't know which borrowers were less reliable than they looked. Credit dried up.

"If a guy has a good investment opportunity and he can't get the funding, he won't do it," Mishkin, who's now an economics professor at Columbia, notes. "And that's when the economy collapses." Or, as Adam Posen, another economist, puts it, "That's when the Depression became the Great Depression." By 1932, consumption and investment had both collapsed, and stocks had fallen more than 80 percent from their peak. [More]

While I do not think this recession will be comparable to the Great Depression, it is similar to the Panic of 1873, something none recall firsthand.

The bottom line then was it took six years to recover.


Ol James said...

Great post there Mr. John. I was particularly enthralled by the comparison of today with the 1873 Panic. Holy Deja Vu!! The comments at the end of the article were very interesting and mostly in agreeing of the comparison.
Just goes to show....ya learn something new everyday. I may lean to the left, but I aint fell down yet.

Farmer 4ez said...

I agree with much of what you said there. Looking back through history England was the preeminent power in the 19th century, while the US took center stage in the 20th century. Perhaps the 21st century will belong to the Chinese and the US will slip back into something resembling 20th century England.

Anonymous said...

farmer 4ez --- that is exactly my thoughts --north america is not what it used to be---we have so many millionaire + more and even so many more "poor"....between ,debt,work ethics,drugs,crime,infrastructure failure we have a heavy load too overcome,,not too mention most of the rest of the world hates us...and in the paper some politician wants to sue GOD....hmmm this is depressing,i am going to go and shell some corn!!!!---better days ahead-kevin