China’s efforts to boost domestic consumption are bad news for the US and the dollar. This is because China is likely to face a choice in the near future when domestic prices start spiraling out of control A) Give up on their efforts to boost rural spending and brutally suppress domestic demand to bring inflation under control. B) Give up on the dollar peg and aggressively sell off its dollar reserves to bring inflation under control. The solution China will choose is obvious. Its efforts to boost domestic spending are producing double digit growth in its service sector and are raising the standard of living for Chinese across the nation. Meanwhile, the cost of supporting American consumers is higher than ever, with China running record surpluses (around 40 billion each) in the last four months, and the benefits of supporting American consumers are disappearing faster than ever, with Chinese exports falling 17.5% this January.This is as I had predicted some months ago, when China announced its big "stimulus package." (Of course, it really ought to be obvious to anyone who pays enough attention.) The question still remains: will it work? I'm still leaning towards "not so much." Certainly, it is better than trading with America, so it would be an improvement over the status quo. But the fact remains: China still has to subsidize these activities, and to no small degree, as Eric points out:
Beijing began its program to provide 13% subsidies to rural residents on purchases of electronic goods such as cellphones, washing machines and personal computers in 2007 in three provinces.A good idea doesn't need a 13% subsidy. This fact says to me: this activity is probably running a 10% loss, so the government needs to pay people to do it. That foul stench you detect is the smell of burning capital. Burning capital doesn't make you more productive and more wealthy. Unfortunately, such trivial concerns don't seem to bother Eric:
The subsidy plan is working. Rural sales overtook urban sales for the first time in the company's history last year. Also, in the first 20 days of January, Chinese farmers bought more than 160,000 items of home appliances on government subsidies, 90 percent of the total in December.Amazing! When the government pays people to buy things, my golly, they do! For some reason, Eric seems to buy into the bizarre, illogical, counter-intuitive, and completely irrational idea that Chinese people save too much and should spend more money if they want their economy to grow. Somehow this idea has managed to become prevailing wisdom among the mainstream financial talking heads, despite its arrant stupidity. Alas, Eric has the good sense to be skeptical of the dogma that China's economy is bound to go straight to the moon, just, you know, because it is China and it has been growing at 9+% for years and always will. He is certainly good with the raw data, facts, and details, and running through the low-down on manipulations by central bankers. But he is not able to tell that the Keynesians that he is listening to are full of garbage. He even regurgitates the old "consumer spending contribution" nonsense:
In 2008, domestic consumption contributed about 39% of China's gross domestic product for the first nine months of last year, compared to about 69% of GDP in the US.I feel queasy... Chinese people save their money because their markets do not provide them with goods they would like to buy at a price they are willing to pay. Production is not an end in-and-of-itself. A massive GDP means nothing if the product so generated is not desired by anyone. Economics is about achieving human happiness, not crunching ever larger numbers. Activities that are not directed towards satisfying consumer demand, such as those that require government intervention and especially subsidy, therefore ought to be considered economic anathema, not "solutions" to some "problem." And it is a lot easier to sweep a fundamental economic failing under the rug by artificially shifting production towards cellphones and purses for Westerners than it is to make the fundamental changes necessary to achieve relatively honest, stable financial markets that support the kinds of financial instruments that all those savers would really probably prefer to buy with their saved funds. Like private health insurance and pension accounts that can stand on their own merit instead of state-sponsored "solutions." Furthermore, saving is not bad for an economy. It makes resources available to entrepreneurs and businesses at lower prices, both by reducing interest rates and by leaving a corresponding amount of goods in the marketplace unconsumed, thus lowering prices of those goods. This shifts the production structure towards capital assets and away from goods for immediate consumption. This is the classic "time preference" that Austrians are always harping about. By showing low time preference, the Chinese encourage investment in capital, a higher division of labor, and a deeper and more complex production structure. All of these increase per-capita productivity, reducing prices in the marketplace and making each worker more valuable. This is the true path to wealth. Of course, by inflating the money supply, the Chinese government does the opposite. It is, in effect, re-appropriating those saved funds and resources away from productive market activities, like satisfying real, open-market consumer demand, and towards capital-burning ventures, like government boondogles, lending money to the inflating US, politicians' private accounts, and paying farmers to buy appliances they otherwise wouldn't have. This doesn't make any sense. Most Austrians are full-tilt on the Chinese bandwagon. I have to respectfully disagree. The high savings rate everyone likes to site isn't so much a reflection of a hugely primed economy ready for blast-off, but an indication that something is very, very remiss in the Orient. They can't seem to satisfy their own wants, so they try to substitute satisfying the wants of others to keep themselves busy going somewhere and doing something. Or at least they have for the past 30 years or so, until that strategy was revealed as an illusion, and are now trying to "switch gears" by force. I do not think they can do so successfully. I don't think China is doomed, not by a long shot. They certainly face a major correction and tremendous currency woes in the short term, as Eric points out in such detail. But the real indicator of a destiny of wealth is culture. Not of saving and scrimping, though that is important, but of valuing ethical behavior, honesty, and respect for others. As I have said, the best kept secret of wealth generation is ethics. Capitalism can't survive without it. Freedom is expanding over there, despite what the China bashers want to tell you. This is a good sign, and China is certainly on a better trajectory culturally than the West is. But I still think we are very, very far apart. Until a proper ethical foundation is laid, I do not think they will be able to achieve what the West has. Rule of law, governmental transparency, and honesty in the marketplace are to me far better indicators of a bright future than simple savings rate. On this front, it seems to me there is still much to be desired. But at least they are in the process of building up their foundations, while we in the West are in the process of tearing ours down. I could be wrong, of course. Maybe China is headed straight for the top, as many of my Austrian brethren like to speculate. I am, alas, still just an amateur.