Defeat is in the Air......

I recently wrote about a Time magazine article, in which they gave the delusional argument that the financial crisis is over. I do not have a great deal of respect for Time magazine but, in one respect, they may have value; in the capture of the mood in the US. I recently came across an article in the magazine that makes very bleak reading. A quote which sums up the mood is:

No one wishes for hardship. But as we pick through the economic rubble, we may find that our riches have buried our treasures. Money does not buy happiness; Scripture asserts this, research confirms it. Once you reach the median level of income, roughly $50,000 a year, wealth and contentment go their separate ways, and studies find that a millionaire is no more likely to be happy than someone earning one-twentieth as much. Now a third of people polled say they are spending more time with family and friends, and nearly four times as many people say their relations with their kids have gotten better during this crisis than say they have gotten worse.

The underlying mood of the article, and the personal anecdotes that accompany the article, is one of defeat and resignation. Quite simply, the subtext that underlies much of the piece is that of a belief in a decline that is beyond reversal. A similar mood can be found in another article from Anatole Kaletsky in the Times, discussing the dire state of the UK economy. His answer is simply to continue borrowing and hope:

If, on the other hand, the economy remains paralysed for much longer or experiences only a feeble recovery when growth resumes, then it won't matter what tax or spending measures Mr Darling announces: public borrowing will grow like Topsy and, in the end, the Government's only recourse will be to inflate away its debts by ordering the Bank of England to print money without limit.

He later puts a more positive gloss on the situation, but there is no hiding from the paragraph that is quoted above. As one of the great optimists for government interventions, his contemplation of financial Armageddon comes as a profoundly shocking admission of the fragility of the current situation.

With all of the news of great economic events, it may seem curious to focus in on the mood of the US and UK, but I believe that this is something that we should not ignore. Economics is about more than just numbers, but is also about culture, drive, expectations and many other less tangible factors. The mood that is being expressed belies the recent sprinkling of false optimism, and is a mood of defeat and resignation.

Perhaps the most telling part is in the stories of individuals and families that can be found in the Time article. The tone and mood tallies with some of the commentators on the blog. There is a rejection of the striving, the desire to make more money, a diminishing sense of ambition. It is a rejection of wealth and the culture of consumption.

I will leave it for others to determine whether this shift is a good thing, but will instead discuss what this might mean in economic terms. I have spoken before about the working culture in China, which I have seen first hand. I believe I once gave the example of a couple working endless hours in a tiny food stall, and how their basic motivation was to provide a future for their children. Their absolute determination and willingness to sacrifice themselves was quite astonishing.

If this example from China is compared with that of the West, it is apparent that there is an alternative to the consumption culture that is currently being rejected in the West. The couple working on the food stall are not working to buy the latest gadgets, or to buy a new car. They are working and saving, with a view to their future security and providing for their children. Whilst a consumption culture is growing in China, saving and security is still dominant.

This is the challenge that is facing the West, and it is not just in China that such values and ambition hold sway. It is the Asian approach, and it provides a driver for their economic development.

When I started the blog, my aim was to not only comment on the current situation, but was also to encourage a view amongst readers that reform was needed to pull the UK (in particular) back from the precipice over which the country is now starting to fall. To this end, I have written several posts on ideas for reform of UK institutions, and these can be found in the links at the left of the blog. When writing the posts on reform, I always kept in mind the reality of the competition from China and the other emerging economies. As such, I sought to balance the best of the existing UK system with a move to greater individual responsibility.

As I look at the shifting of the mood of the UK, and also the US, I see a shift which is still not accepting the reality of the situation (the need for reform), and still not accepting that we must actually face the new competition in the world. For example, Kaletsky's argues that, whatever happens, government deficits will balloon, with or without further stimuli. The one thing he does not contemplate is the deep reform of the systems and structure of the economy. In his mind, whatever happens, the government will still continue to spend money that it does not have and, if recovery does not come soon, whatever happens the government will print money to the destruction of the economy. Kaletsky is not alone. Ambrose Evans-Pritchard has the following to say of the US:

One thing is clear: Beijing suspects that the US Federal Reserve is engineering a covert default on America's debt by printing money.

Whilst attributing the view to China, it is possible to guess that he too is finally accepting that the massive printing of money to purchase debt is simply a default by stealth. Despite this, no complaint is made, and the reality of the default is simply accepted. In the meantime, China's importance in the world economy grows larger by the day, with this from a Telegraph article:

Nevertheless, China remains the strongest economy among the major nations, with the Organization for Economic Cooperation and Development predicting a 6.3pc expansion this year, compared with a 4pc contraction in the U.S. and a 6.6pc decline in Japan. China is likely to shortly overtake Japan as the world's second-largest economy.

Returning to the article of Ambrose Evans-Pritchard, he talks of the purchase of copper by China, and the possibility of a commodity backed reserve currency. By implication, his article is now suggesting the RMB will be the new reserve currency. On the 2nd of March, I had the following to say:

However, the analyst makes a basic error in thinking that China would have to take an all or nothing approach. He does not consider that China might spread their reserves over a wide range of assets, and this is my best guess for the direction of China's policy. If they follow this strategy, and implement it with care, China has the potential to rapidly jump towards becoming the world's most powerful economy.

I went on to say:

The first step is to manage the sale of US treasuries with the greatest of care, such that they gain as much value of the sales as possible before the $US collapses. As they move out of $US they would likely buy as many precious metals as possible without driving the price too high, as well as buying into emerging market, European and Japanese bonds. In doing so, they will be taking risks but with the benefit that they will be positioning the RMB as the next reserve currency. Furthermore, it is no secret that China has been trying to buy into various commodity companies (or natural resource companies), such as the ongoing saga of the Chinalco purchase of Rio Tinto or their wider expansion of investments in this sector.

You may wish to read the original article, as it was a speculative piece about how China might become the economic power in the world. They seem to be following a similar strategy to that which I guessed/proposed that they would follow. In other words, they are on the path to success.

The point in listing all of these articles is that there is increasingly the smell of defeat in the air. China's growth appears to be an accepted fact, with no attempt to address the rise from the West. For example, the US has now backed down on the issue of the manipulation of the RMB:

President Obama repeatedly accused China of outright currency manipulation during the presidential campaign, and Mr. Geithner echoed that opinion during his confirmation proceedings.

But in a new report to Congress, Mr. Geithner not only refrained from such accusations, but praised China for its economic stimulus program and its move toward a more realistic exchange rate for the yuan.

“China has taken steps to enhance exchange rate flexibility,” Mr. Geithner wrote in a statement accompanying the new report.

In all of this, in the articles I have quoted, in the reality of China's expansion on the world economic stage, there is the smell of defeat. Quite simply, the West has given up.

Both the governments and the people of the US and UK are quietly folding their hands, and abandoning the game to China. All the while the US and UK governments rack up greater and greater debts that they can never hope to repay. There is a resignation to the defeat, alongside a terrible denial of the reality of the situation. There is a belief that somehow it is possible to endlessly conjure wealth from thin air, through more borrowing or the printing press. There is a belief that it is possible for governments to still provide, to still offer salvation, even while they set about the process of destroying the economies that might provide such salvation. There is a denial of the reality of China.

A few months ago, I predicted the collapse of the $US and £GB, and the deadline for my prediction is now very close. It looks like my prediction was premature - I was wrong. However, for those who might point out that I was 'wrong', take a look around you.

Do you really believe that we can emerge from this crisis?

From the recent faux optimism, the maneuvering of China into economic supremacy, the unending bailouts and stimuli being made with borrowed or printed money, the dogmatic spending by governments that refuse to reform, it becomes clear that is impossible that it can go on much longer.

We are defeated, because we have given up on the one thing that might pull us from the crisis. That 'thing' is the willingness to accept reality, to wake up, and to earn our place in the world. Instead, we continue to delude ourselves, continue to think that it will be better one day, but make no effort to change the situation. We have given up on our belief that our own situation is in our own hands, and believe that government can rescue us, that China can rescue us, that the world can rescue us.

Somehow, it will all come right in the end.....

My answer to this view is simple. It will not come right. If the $US and £GB survive another month, or another two, or another three, it does not alter their final trajectory. If we sit in an oasis of calm for the moment, it is only at the cost of a greater disruption - greater catastrophe - later. Yes, it appears possible for reality to be delayed, but economics does not work by magic. One way or another, the root of economic success is about the creation of real wealth - not the faux wealth of printed money and borrowing. Printing money and borrowing may delay, but they do not create the wealth that will change reality, they simply destroy that wealth. They may keep the economy moving for a while, but only at the cost of a more painful halt later.

On that very gloomy note, I will end the post.

Note 1: In light of the fact that I have now (probably) called the collapse of the $US wrongly, I was tempted to list all of the things that I have got right. However, I am not sure that this would not just be about flattering my own vanity, so decided against it. Also, as one of the 'big movers' in the world economy, calling the state of the $US wrongly probably eclipses the points that I have been correct about.

Note 2: Tiberius - I also read the story about Goldman Sachs going after a blogger. Hopefully my blogs are general enough to avoid such troubles, but I hope I would in any case still publish and be damned if the need arose. However, I do not think that I would attract such attention as things stand.

Note 3: I have read a long report on the state of the commodity markets. It is a report that has been lent to me, such that I can not quote it. However, it outlines a period of stagnation in the metals markets. By contrast, if Ambrose Evans-Pritchard is correct, it is quite possible that there will be some shifts in commodity prices in the coming months, and the trajectory will be upwards.

Note 4: I talked recently about the need for oil to be traded in RMB if the RMB was to become a reserve currency. I suggested that a back door for China to start this process might be Venezuelan oil. This from the NY Times:

In February, China’s vice president, Xi Jinping, traveled to Caracas to meet with President Hugo Chávez. The two men announced that a Chinese-backed development fund based here would grow to $12 billion from $6 billion, giving Venezuela access to hard currency while agreeing to increase oil shipments to China to one million barrels a day from a level of about 380,000 barrels.

Mr. Chávez’s government contends the Chinese aid differs from other multilateral loans because it comes without strings attached, like scrutiny of internal finances. But the Chinese fund has generated criticism among his opponents, who view it as an affront to Venezuela’s sovereignty.

“The fund is a swindle to the nation,” said Luis Díaz, a lawmaker who claims that China locked in low prices for the oil Venezuela is using as repayment.

This could be coincidence, but the article also deals with wider expansion of Chinese influence throughout Latin America. From my perspective, it is simply China positioning itself for the the crisis that will emerge with the collapse of the $US.

Note 5: Retail sales in the UK were up, according to a report in the Telegraph. If I remember correctly, it was in my last post that I mentioned that inflationary impacts might be reported in positive terms, giving the example of renewed asset price growth. It is therefore to the credit of the Telegraph that they reported the rise in sales as follows:

Last month was the first time since May that clothing sales rose. Sales were strongest in women's and childrenswear, as shoppers were attracted by the new spring and summer ranges. The value of food sales also rose, partly driven by inflation.

The important point is at the end of the quote; yes, if inflation is increasing then it is quite possible that there will be an increase in sales in monetary terms, but this is not a cause for celebration. Expect to see more examples of inflation feeding into figures.....I hope to write on inflation figures in the near future (events allowing).

Note 5: I have had a message from a commentator that a comment was not published. I am not sure why this was the case. If anyone else has had similar problems, please let me know. I am not sure what I can do, but if I know it is a widespread problem, perhaps I can find out the possible causes. As such, if you could let me know what you 'did' and what went wrong, it would be a great help.