Musings Report #21 5-24-14 How Wealthy Is China? How Wealthy Are We?

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How Wealthy Is China? How Wealthy Are We?

Both anecdotally and in the mainstream media, evidence of China's enormous wealth is everywhere: stories of wealthy Chinese investors snapping up apartment buildings, commercial properties and homes in Los Angeles, San Francisco, Vancouver and even Detroit and other Rust-Belt cities for cash abound, and China is often reported as buying up farmland and energy assets in Africa and elsewhere with seemingly limitless cash earned by becoming the factory workshop of the world.

Having visited China extensively during its ascent (including many factory tours), I am wondering if China is generating wealth or simply issuing claims that are currently being honored as wealth.

Many people have the same question about the U.S. dollar: is it simply a claim that is currently being honored as "valuable," or does it reflect some sort of real wealth?

Hence the title of this entry: How Wealthy Is China? How Wealthy Are We?

If we measure wealth by what is being skimmed by the top .5% Elites of each nation, then both the U.S. and China appear wealthy indeed. Though accurate statistics are impossible, it has been estimated that Chinese Elites have transferred $800 billion out of China in the past few years. This could understate the true sum; whatever the number, it represents a significant percentage of net private wealth in China.

This rush to the exits with pockets stuffed with cash is the primary reason I see China as extremely fragile and extremely vulnerable to social and financial instability: if things were really so wonderful and stable, why is everyone with any real money moving it out of China and getting non-Chinese passports as fast as they can?

We might also ask: what liabilities offset the assets? What unpaid bills are coming due? What asset bubbles will inevitably burst, destroying immense sums of financial wealth?

In the case of China, the liabilities are well-known: the two inescapable ones are a rapidly aging populace (higher social costs, higher tax burdens on a dwindling workforce) and horrendous environmental damage to croplands, waterways and the air. Both of these bills are just starting to come due, and the first one alone is crushing the wealthy developed nations of Europe. Recall that the costs of environmental remediation (along with higher energy costs) pushed the U.S. and other developed economies into a decade-long stagnation in the 1970s, and it's easy to conclude that not only will China age before it's rich enough to support a half-billion elderly, it also isn't wealthy enough to pay the external costs of its uncontrolled industrialization.

Please read U.S. Is No. 1, China Is So Yesterday for another perspective on wealth and purchasing power.

This is being exacerbated by the movement of capital and factories out of China to lower cost regions and the stripmining of wealth by the kleptocrats at the top of the Communist Party and their private cronies.

Many observers seem to have forgotten that the key characteristic of capital is mobility: now that investing in China has reached diminishing or negative returns due to rising labor costs, higher taxes and the external costs of environmental degradation, capital is leaving China for Vietnam, Cambodia and other lower-labor cost regions.

So what's going to replace the loss of exports? The conventional answer is "China's domestic market," but everyone we know in China already has everything: there is little pent-up demand from those with money, and the poor are lucky to afford energy and food, which has skyrocketed in price over the past few years.

Even worse, the accumulated wealth of China's middle class has been funneled into a real estate bubble of epic proportions that will pop, as all asset bubbles do. True believers claim that since the Chinese put down 50% or more and often pay in cash, real estate in China is immune to credit-driven bubbles and collapses. But this view fails to consider China's enormous shadow banking sector of off-the-books loans, and the lack of new buyers for the property bubble Ponzi scheme.

It doesn't matter if every participant in a Ponzi scheme pays in cash--once the supply of new investors willing and able to buy flats at inflated prices declines, the Ponzi scheme implodes. Chinese real estate is a classic Ponzi scheme, as everyone who can afford to buy a flat has bought two or three, and the rest of the populace is too poor to buy flats that cost 100 times or more the average salary of workers with a college degree.

Is China wealthy? I think if we subtract its monumental liabilities and the bills that are coming due, we would find China is poor indeed: poor in environmental wealth, poor in public health, poor in social security and poor in non-bubble wealth.

Are we any better off? That's a topic for another Musings, but until America's kleptocrats start liquidating their U.S. assets and moving their wealth to China, we should look at the movement of private capital for the basic answer.

Summary of the Blog This Past Week

The Essential Role of Volatility, Stress and Dissent 5/24/14

A Productive Economy Is a Trading Circle 5/23/14

A Tale of Two Charts (and Two Economies) 5/22/14

I'm a Fiat Slave, And So Are You 5/21/14

The Decline of Small Business = Decline of Basic Skills 5/20/14

Is Small Business a Threat to the Status Quo? 5/19/14

Best Thing That Happened To Me This Week

Kayaking on Smith Mountain Lake: sunny day, crisp weather, calm water: it doesn't get any better than this.

Market Musings

New high in the S&P 500, finally closing above 1900. Yippy skippy, don't fight the Fed, etc. This is somewhat less impressive when we consider it took almost five months to advance 55 points. Now that the round number of 1,900 has been reached, 2,000 is the next target. But lacking any momentum other than central bank-driven liquidity, the market could noodle around for many low-volatility months or suffer a deleveraging-triggered slump as players decide the 180% gain from March 2009 should be locked in, Fed or no Fed.

As noted two weeks ago, gold is tracing out a descending triangle, which is considered bearish. The descending line is resistance, and support is established by the double-bottom. Gold could bounce between these lines for quite some time, reflecting the larger question of "deflation or inflation?" that is doing battle in players' minds. While gold may advance in both inflation and deflation, money-printing-driven inflation is (to many participants) the main driver of gold's valuation.

Global central bank monetary policy has certainly driven gold, real estate, bonds and stocks much higher, while pushing consumable commodities such as grains and coffee to multi-year lows. Should those trends reverse (as trends are wont to do), then "hot money" might seek outsized returns in undervalued commodities, rotating out of bonds, stocks and real estate.

Gold would likely be influenced by two opposing forces: buying to secure a hedge against rising inflation and selling to raise cash to cover bets in stocks, bonds and real estate that are going south.

This "could go either way" is reflected in gold's chart, in my view. A deleveraging of gambles in real estate, bonds and stocks--increasingly likely, if we look at market internals--could trigger selling of unleveraged assets such as gold to raise cash.

Gold must break decisively above these descending triangles to enter a technically persuasive bull market.

From Left Field

The Women at the Top: The XX Factor: How the Rise of Working Women Has Created a Far Less Equal World -- interesting, recommended:
"According to Wolf, couples at the top lead very different lives, not only from the lower classes, but from previous generations. Within the households, husbands and wives are virtually interchangeable. Both tend to be high earners, and both tend to be equally competent at childcare and household tasks."
"Women and men function like a team in all parts of their lives, pulling together at their manifold jobs, one stepping in when the other falters. They now have more in common with each other than either has with members of their own sex in the lower classes."

11 Amazingly Creative Shipping Container Homes (via G.F.B.) -- inspiring--small is beautiful...

The Organic Revolution in Science and Implications for Science and Spirituality (via Kathy K.)

Eva Cassidy covers Sting's Fields of Gold (5:07) -- I discovered Eva Cassidy via correspondent Kathy K.

Tchaikovsky June: Barcarolle (5:05) -- one of the most beautiful and haunting classical pieces, which my friend Jim E. played live for me this week... nothing beats live music....

Housing debt still traps 10 million Americans -- and another 20% own so little equity that they can't sell their house and exit with enough cash for a down payment on another home. 40% of all mortgage holders are still trapped debt-serfs....

The Secret History of Hypertext: The conventional history of computing leaves out some key thinkers.

How the Novel Made the Modern World: And how the modern world unmade the novel -- this kind of thing can be tedious--how dreadful that elites can't make big bucks selling their private ramblings via Book of the Month Club!--but this is one of the better such explorations of the demise of "serious fiction."

Driverless Cars Could Cripple Law Enforcement Budgets (via Lew G.) -- So jaywalking will soon cost you a $300 ticket as police departments desperately seek new sources of revenues...

How to get beyond the parasite economy (via Bill) Guitar Center as an example of the rot of debt/skimming....

Self-segregation and Statistics -- interesting exploration of statistics...

Tiananmen Massacre 25th anniversary: how Chinese triads enabled the Great Escape (via Maoxian) A great adventure story here... too bad China will never let the story be made into a film....

Artist Ai Weiwei on the Tiananmen Massacre: “Lacking the right to remember, we choose to forget.”

Thanks for reading--

charles