What are your opinions, for or against, the theory that the Asian producers (and other producing economies worldwide) will “decouple” from the United States economy in the event of a USD based currency crisis and American recession?
Are there any other prominent economists and investors who support this view other than Schiff?
Schiff believes there will be a rise in the Chinese consumer. He thinks that the Chinese are massively propping up the US economy. By what dollar amount per year are they propping up the US economy? It doesn’t seem like a number big enough to make any big investment earnings unless you pick things very well.
I will post some of my own thoughts in the next post.
Jim Rogers seems to believe in China but I’ve never heard him mention decoupling. He usually just says, “China will not go straight up. There are a lot of problems in China just like there were in the US on its way up.” Well… the United States in the 1890’s was leading the industrial revolution and was one of the freest economies on earth. China is fairly free with respect to being able to open factories and industry which are unhampered by environmentalist regulations, but the market is still heavily regulated in ways that the 19th century United States never was. For example, the Hukou registration system severely restricts hundreds of millions of people from finding a job and entering into the productive economy.
There is support to slowly phase out hukou among reformers, and there are rumblings about allowing some people to have more than one child in Guangdong, China’s most populous province. My opinion is that simply repealing those two laws will dramatically increase the freedom in China to such a degree that it will cause a massive boom and worldwide increase in standards of living. Hundreds of millions of people are unable to migrate due to the registration system. Migration is key, because there are pockets of freedom within China. The country is not like the United States, it actually has much more dramatically different regional governments than a country that was founded on the concept of states rights. This is because there are various free trade zones throughout the country which are bastions of capitalism in the economic sense, and which are able to attract millions of people. Meanwhile there are other areas of the country which have hardly changed legally and politically since the 1990’s. Shenzen is a good example of one of the bastions of freedom within the country–20 years ago it was an empty fishing village, now it was 20 million people living in skyscrapers.
But its hard to be extremely bullish over the long term for China when the GDP numbers are fluffed up (but at least the government spending goes to infrastructure investment rather than welfare cheques) and China has an aging population. Population control efforts have been successful (in the utilitarian sense) of achieving less minds, less economic actors, and less productive people. In two decades or so we will see people coming out of the work force with many less entering the work force. Expanding populations (when people live under freedom) are good for economic activity, the division of labour, production, etc.
Also, my experience with living in Korea and observing the politics there, in a much freer country with less government industries, is that the Korean conglomerate exporters still control the direction of the central bank policies. The Korean central bank is in favour of keeping the won low to benefit exporters, because Korea (as well as other Northeast Asian nations) believe in mercantilism. I think this will be even worse for China because the people in government are actually heads of these state-owned enterprises. They have entrenched interests in continuing to benefit exports in the short term. So if we believe in the Schiff thesis that the US is due for a drop in the value of its currency, South Korea, Japan, and China will follow them down for a very long time. It is more prominent in the news with the Yen that they are intervening to keep the currency stable with the US, but I would like to follow more news on China and Korea.
If wanted to bet on the rise of China, how about NYSEArca: CHIQ the Global X Chinese consumer ETF?
I am doubtful of this theory, while i do agree that the chinese with eventually stop lending the US money as he describes. I do not think that the chinese will be unaffected by this and just continue on as normal, only by just consuming its own exports instead of exporting them to the west. Based on the recent footage of the chinese ghost cities, china is already over producing. So i doubt that they will be able to match the consumer demand of the west, even considering the large population.
So i think they would be affected, it seems china needs the west as much as we need china for cheap goods. When they decouple they will also see an adjustment period, which could be worse than the wests or it could be less. I think developing manufacturing basis after major inflation and currency devaluation would be more difficult than increasing consumer spending.
But i do think considering how interwined the economy has come and how far reaching the dollar has become, when the dollar crashes, it will be a global crash. The largest regional economic crash we have ever seen. But I could be wrong. Just keep printing that money.
What are your opinions, for or against, the theory that the Asian producers (and other producing economies worldwide) will “decouple” from the United States economy
It’s happening already.
By what dollar amount per year are they propping up the US economy?
By the amount of the trade deficit with them, i.e. a billion dollars a day, roughly.
china is already over producing. So i doubt that they will be able to match the consumer demand of the west, even considering the large population.
Have you heard of Say’s Law?
So i think they would be affected, it seems china needs the west as much as we need china for cheap goods.
Have you heard of Say’s Law?
But i do think considering how interwined the economy has come and how far reaching the dollar has become, when the dollar crashes, it will be a global crash.
The trade deficit with China alone is at 365 billion per year, a hefty sum. If it were equalized this would mean a net of about $300 per person per year would go back to the Chinese. However, I doubt all of it would go back to the Chinese consumer. It would probably just be spent on infractructure by the Chinese government. I don’t know how to play this investment wise. The Austrian Business Cycle Theory says that manipulations of money and credit distort long term goods manufacturing more than consumer sectors of the economy. Since China is doing all of that for the US, there should be a significant correction in that area which would make investments in companies that benefit from infrastructure a pretty rough ride. Why is it that Schiff believes the Chinese consumer will primarily benefit? I don’t understand how the argument works exactly.
Edit: Looks like the number is only 250 billion per year. I had just multiplied a billion by 365 days. I’m not sure that number is going to produce a massive increase in the standard of living. For Americans it means they will lose $816 of Chinese goods each year. Am I missing something that should make this more dramatic?
Also, what does it mean that it is “happening already”? What, exactly is happening already? Meaning, I want to know what this decoupling is supposed to consist of. The Chinese economy is facing much harder problems than the US one currently. I just came back from Asia. YTD food inflation prices are out of control. Pork went up 60% in the last year in China. I thought decoupling meant Asians were supposed to be getting richer. The stock markets are rising and falling in unison with the S&P and Dow.
The basic idea is very simple. They have factories that produce now. We don’t. First Proof: every day we need a billion dollars worth of their stuff. Second proof: Look at the stuff on the Walmart shelves and/or anything at all you have in your house. Where is it made?
So when the Chinese get sick and tired of giving us their TVs and their everything else and get only paper dollars in return which they have no use for, they will say to us, “No more trade with you”.
The USA will look at it’s empty shelves and say, “We have to make our own TV sets [and everything else]. But we don’t have any factories. And the same reasons that made us close down our TV factories, regulations and taxes and unions, won’t let us open them again. Even if those hindrances were taken away, it takes many years to set up a productive economy, and requires an accumilation of capital that we just don’t have.” I.e. we will suffer serious deprivation for a long time.
The Chinese, on the other hand, will just tear off the English lettering on their products and replace it with Chinese lettering. They will suffer only as long as it takes them to make those minot adjustments.
What is happening is that the Chinese are making every effort to stop “trading” with us [more correctly, lending us money], and to get rid of the dollars they already have.
The decoupling is in two parts. A] no more trading with us. B] no more making it possible to trade with us by selling us their stuff cheap, meaning devaluing their money to make it worth one seventh of ours.
The Chinese are trying to get out of the dollar. Meaning they have opened their eyes to the fact that our paper money is of no use to them. At this stage, they are merely preparing for the big break, by buying gold as much as they can, and trading with dollars as little as they can, and lending us as little as they can. Actual trade still goes on, they still devalue their currency to keep the trade possible for us, but Peter’s prediction is that sooner or later all that will stop, too.
The Chinese economy is facing much harder problems than the US one currently.
No. The problem we share is that we are both foolishly printing money, causing price inflation. Thus the rise in pork prices.
But they have prodcutive factories. They have piles and piles of money. We have no factories and we do have debt. They don’t need us, and will realize it someday. Then they will stop printing money to give us their stuff for free, and they will not need to print money, ending their inflation They will produce more and more, and get richer and richer. We will have to keep printing money to pay our bills, causing higher and higher inflation.
I thought decoupling meant Asians were supposed to be getting richer.
I have to take back what I said earlier, that the actual decoupling has started. The first baby steps to prepare for it have happened though, as I explained in earlier posts. In other words, we can see from what they are doing what they intend to do.
The stock markets are rising and falling in unison with the S&P and Dow.
That’s because short term, until they tear off the English labels, when we get poorer [ which they think is connected to Dow rises and falls] they have no one to sell to.
Also, they think like Jack Roberts, not like Peter Schiff, and assume China and the USA are siamese twins.
Putting it all together. The lower the number, the more basic and important the idea:
Say’s Law says that he who produces gets rich, all other things being equal. They are producing, we aren’t.
They have no knowledge of economics, and are mercantilists and/or Keynesians. So they think the secret to wealth is to export. What they don’t grasp is that if you export and get nothing in return, that won’t make you rich. And that’s what they are doing for now, but there are signs they are wising up.
There are two ways they give us their stuff for free. One is by lending us money we will never repay [except in highly inflated dollars that have lost much of their purchasing power]. The other is by printing so much of their money that no matter how much we print, their money stays worth one seventh of ours.
Yes China has problems. They are stupid [=believe what Keynesians tell them, don’t understand that freedom produces wealth, don’t understand that higher population means more wealth if combined with freedom] and inexperienced, and shoot themselves in the foot many different ways. But they do get one thing. “Keep on producing” is their motto. Which is exactly the motto that creates wealth.
Decoupling means our economy and theirs will not go up and down together. This will happen when they break what is connecting our two economies, their insane pegging of their money to ours, and their insane accepting paper money for real goods, when the paper money cannot be exchanged for anything they want.
Seems like the US will not have to make TV sets. Americans buy TV sets from Korea. Korea doesn’t purchase any US treasuries currently, although they hold a small amount. China makes a lot of stuff though, especially clothing. But why would Americans have to make clothing? That is too labour intensive. Maybe if the clothes from China get too expensive Americans will have to increase their production of other things to trade, such a lumber. What the Americans will probably have to do is increase output in the factories that they have already and increase hiring in natural resources. I doubt they will have to retool their factories much; probably just expand them more at the things they are good at making. I don’t see why they would have to start making things they’re not so good at making that the Chinese currently make.
The trade deficit with China is not too huge and the total amount of treasuries China holds is not too huge to be able to expect big shifts in Chinese standard of living. Americans and the Fed hold many more treasuries. Also, didn’t the Chinese become net sellers of T-Bills already? AFAIK they’re still eating dirty vegetables. I think the main problem is America’s alone and the Chinese aren’t set to benefit much, if at all, when the USD goes down. It is the Fed who has been the main purchaser of treasuries and who will probably continue to do so in the future.
About pegging: there are many countries in the world that peg. So if they all allow their currencies to rise it will mean more expensive imports for America, right? So this whole issue is way bigger than China. Every government is intervening to keep somewhat in line with the USD. That spells much more trouble for the American standard of living than I originally thought. But it seems like a lot of countries are happy to follow them on the way down, including my own. So should one invest at some point in a global stock market minus US index?
I doubt they will have to retool their factories much; probably just expand them more at the things they are good at making.
Why aren’t they doing that right now?
So should one invest at some point in a global stock market minus US index?
Note: I’m not the one to go to for advice about where to put your money. But just for fun, here’s my take.
You could do worse, though the Euro countries are pretty ill, too. The PIIGS decided long ago to stop working, and bleed Germany dry to live the high life. The better countries are China, Japan, Hong Kong, Singapore, Australia, Canada, Switzerland, Norway. maybe there are others, I don’t pretend familiarity with economies across the globe. Clue: which countries are net exporters, meaning they are so rich they can trade for the goodies the whole world produces with what they make? Put them in your index. Which ones are net importers for years at a time, meaning nobody wants what they have to offer? Keep them out of the index.
