Sunday, October 18, 2009

China's Dollar Bonanza!

Kenneth Rogoff has done a good job of writing a yellow journalism article about China's accumulated holdings of $2 trillion dollars. By tossing in as many rotten walnuts as he could find, he made a scrumptious banana split into a diabetic disaster waiting to happen. Just because, one time, way back when, America ruined the Europeans' banana split by mixing in rotten walnuts, it does not have to happen that way again. Do you think we might have learned from prior mistakes? Is the current situation really all that analogous to the hyper-inflationary times of the late 70's?

History does indeed rhyme time and again but Mr. Rogoff has stretched time all the way around the corner from a tough deflationary recession to his perceived future time of ravaging inflation. The ravaging inflation of the past that he attempts to link us to was "the cost of waging the Vietnam War and a surge in oil prices". Duh! From best I remember, the cost of the Iraq war and the price of oil in this cycle peaked a year or two back. Is Rogoff ready to predict that oil is going to $300 per barrel anytime soon? Rogoff is fighting the "last inflation war" just like old generals are inclined to re-fight "the last military war".

The reality is that comparing the America-Europe situation in the 1970's to America-China situation today is the biggest stretch Rogoff makes. Europe and America were far more protectionist in those days. All the big industries were protected from outside competition such that each time prices rose, the union bosses in each industry would demand over-compensating wage increases. This inflation was called a "wage-price spiral".

Today, we enjoy almost the opposite situation. The real cost of producing goods is actually going down. The movement of goods production to the low cost producer is lowering the wage cost per unit of goods. In the 1970's the world experienced the oil price shock when supplies were suddenly severely restricted. This time, because billions of poor folk around the world are moving up the acceleration curve of wealth, it was increased demand that pushed the price of oil to $150 per barrel last year. Those same poor folk felt the crunch even more than the rest of us. When a few months of high priced oil wipes out the entire net worth of a family, it is natural for that family to save a higher portion of his net worth. It is not a problem but common sense at work when a few billion very poor people save an excessively high percentage of their wealth.

High energy prices have served as a call to action. Development of additional resources is well underway. The best example is the nuclear power production assembly line built by the Chinese. The Chinese are building energy production at a cost of less than $30 per barrel of oil; as scale and efficiency develops, the price could go to $20 per barrel!

What a blessing for a nation of poor farmers 20 years ago, to have been able to accumulate $2 trillion dollars in savings! What a blessing for these people of rising standards of living to remain conservative enough to save such a significant portion. Until the recession hit hard, Americans had grown overly financially secure and they enjoyed living too well.

Like it or not, the USA just went through a cycle where "the dogs (banks) were allowed to run". Everyone had a good time until the choker lease was cinched. The policy of government went from encouraging home ownership on 100% borrowed money to a policy of choking the dogs for having run so fast. Goldman and friends made a few trillion off the switch.

We went from one extreme to the other and are now in the process of settling somewhere closer to the middle. Americans were given a harsh lesson that excessive leverage is risky. The Chinese have been given the lesson that their levels of savings are more than adequate.

Rogoff implies that Chinese savings will double from $2 trillion to $4 trillion. To keep from being easily proven wrong, "pornographic economists" do not make outlandish predictions but only imply them. The reality is that whil

in reference to: Project Syndicate (view on Google Sidewiki)

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