Worldwide Java Jag: Comrade Capitalism™

Tuesday, January 19, 2010

Comrade Capitalism™

Rarely are we treated to the spectacle of two intellectual giants squaring off in public like James Chanos, the hedge fund manager and Tom Friedman the journalist did last week. Chanos, who takes short positions, argued in a N.Y.T’s profile a few days before against Chinese trade and economic policies. He said their economy was a bubble about to pop, “a thousand times worse than Dubai.” Nonsense, reported Pulitzer Prize winning author and N.Y. Times columnist Friedman, datelined Shanghai China. He hit back saying China was the future, it had an ambitious populous with “27 million engineering students” and was eager to have a green future. As the China hype grows along with it’s foreign reserves, this debate is going to take place more often and with more urgency. Too bad a fight bill was not printed up announcing this slugfest…it would have made a great collectors item.

Those of us old enough remember the argument that Japan was going to rule the world. We were all told that their form of labor and management unity, of keiretsu capitalism and long-term thinking was vastly superior to American focus on quarterly earnings. As they rolled up American industry after industry they looked unstoppable. Then they went on a shopping spree and bought up the country. We know what happened next, collapse and two decades of stagnation. China, we are told, is different this time. It’s got more people, who are younger and even more innovative. China is also willing to show its power in the foreign policy arena.

If Java Jag were asked to referee this fight we would have to give the match to Chanos. We think China is the mother of all bubbles and when it is pricked will cause a windstorm of dislocations.

First, all humans are fallible and subject to personal interpretations of reality that are often delusional. As post real estate bubble Americans we know that only too well. Our best and brightest in government, regulatory agencies, academia, and business all facilitated, enabled and endorsed a Ponzi scheme of residential and commercial debt that has swamped us in a tsunami of illiquidity. Day after day, year after year bankers created toxic instruments that at their core were not truthful or real. Their promised returns a fantasy fueled by greed. Voices that had concerns and nay sayers were exempted from MSNBC appearances and investment conferences held at swanky mountain resorts. A collective delusion that ever rising asset prices enveloped the capitol class.

Are the Chinese people different? Are they not subject to the same economic hubris that confuses current results with future ones? Java Jag doesn’t think so and in fact thinks that they are headed for an even bigger let down.

The number one reason is you cannot have a command and control economy that allocates capitol efficiently. Russia didn’t. Cuba doesn’t, nor does Iran and Venezuela. All these economic basket cases did the same thing: they used excess capital from the economy to further political agendas and for social engineering.

China with one party, state censorship and jailing of all dissent the distortions of miss-allocated capitol just keep piling up. Corruption, kickbacks and favors are not the aberration, they are the system. Without the rule of law the party steals land upon which to build not what the market dictates, but what they decide should be built like the umpteenth unnecessary steel factory. The resulting excesses and over production are then dumped abroad to an ever growing resentful and indebted customer base. The falsely fixed exchange rate for the illiquid renminbi is only one more symptom of a command and control economy on autopilot.

If you think back to the commercial real estate collapse of the1980’s and its aftermath, which was alleviated by the creation of the Resolution Trust Company, you get an idea of the coming disaster in China. In the American bubble of the 80’s crony capitalism extended to fellow golf club members and friends of Southwestern bankers. They cozied up to developers that were ideologically similar. Yet, there was still laws and accounting regulations. None of that exists in “comrade capitalism™.” In Chinese capitalism the party, the bank and the developer have no oversight. The rules are made up to benefit a political class at the expense of the shareholder or the citizen.

As a result of a predatory trade policy this appears to be working. To the average Chinese and the world at large, China appears to be a miracle. Cities are going up at a mushroom pace, living standards are rising for hundreds of millions. Yet, eventually the victims of this scam, primarily the workers of the industrial world, will put so much pressure on their political class that a backlash is inevitable. That will cause the trade surpluses to shrink the renminbi to be revalued and the Chinese forced to compete on true price, ideas, copyrights, patents and quality. Something they have no experience in or aptitude for. The whole Chinese political façade will collapse just as the Berlin wall did. The fact that no Chinese person can freely read this, that the very lifeline of freedom, the internet, is censored by the government tells you everything you need to know about their ability to be self critical and the fragile state of their government.

Friedman is a brilliant man, so was Alan Greenspan. Yet, for multiple reasons Greenspan looked around and failed to see what was in plain sight. Chanos has on the clearer glasses of a speculator. He has the focused vision of a market maker. Friedman sees the results of the con and confuses those past results with sustainability into the future. Remember in the 1980’s when the land under the Japanese Diet was worth more than all of Florida. They looked unstoppable. Twenty years and the Japanese have yet to recover. Also remember that the collapse of the American economy in 1929 and the onset of the great depression occurred when the American model looked unstoppable. The American car and washing machine factories were working round the clock. The prosperity that was transforming a rural America into an urban giant was forecast to continue indefinitely and stocks were set to be on a “permanently high plateau.” Then the underlying speculative fever, the unsustainable debt that was building up all came due and the Depression started. In every way China feels like America in 1929.

Round two between Chanos and Friedman is sure to be interesting. I’ve got my ringside seat.

0 Comments:

Post a Comment

<< Home