Shifting Paradigms

The Ron Paul Phenomenon…is this guy ‘The Real Deal’?

2011-09-18T15:26:00.000+01:00

Politics is very much like fashion…fickle and unpredictable and many ideas never get beyond a fringe following…but sometimes events reach a tipping point and what was considered ‘avant-garde’, ‘niche’ or even ‘risqué’ becomes all of a sudden mainstream and the accepted wisdom/fashion.

Is that that we’re observing with Ron Paul? Have Ron Paul’s ideas reached a tipping point?

The latest poll from CNN, conducted in the few days leading up to September 11, 2011, before the last GOP candidates debate shows that Paul has managed to double his support since the last survey conducted by the cables news network only two weeks earlier!

The survey indicates that 30% of Republicans and independents who lean toward the GOP support Perry for their party's nomination, with former Massachusetts Gov. Mitt Romney at 18%. Romney, who's making his second bid for the White House, had been leading the list of Republican candidates in the national polls, but since Perry launched his campaign a month ago he's jumped ahead of Romney to capture the top spot.

Former Alaska Gov. Sarah Palin is at 15% (but she’s not even in the race!) . Then is Ron Paul, who's making his third run for the White House, at 12%. Every other candidate is in single digits. Rep. Michele Bachmann, who was at 10% in the last CNN poll, now stands at only 4%.

With Palin out of the running, the headline stays the same: Perry 32%t, Romney 21%, Paul 13% and all other candidates, including Bachmann, in single digits.

Although still way behind the frontrunner Rick Perry he’s closing in on Romney and put the previous strong contender Michele Bachmann out of the race.

His success comes as a surprise to the many in the mainstream that have played Ron Paul off as a fringe candidate seemingly unlikely to secure the Republican nomination. His hardcore ideology is considered too socially libertine for religious conservatives and too economically callous for crossover Democrats.

He has always had passionate group of followers, who although small in number have always been well organised and vociferous about the qualities of their leader. So what’s happening now?

Ron Paul’s campaign chairman Jesse Benton said recently ‘The straw poll results in Iowa, our growing poll numbers and our strong fundraising show that our message is resonating with Iowans and Americans everywhere,’. Jesse continued ‘our message was the same in 2007 as it is now in 2011, but this time we have quadrupled our support. That means our message is spreading, our support is surging and people are taking notice.’

One of my favourite quotes comes from Seneca…‘luck is what happens when preparation meets opportunity’. Ron Paul’s message is being delivered certainly at the right time in the right place…but is he ‘the right man’?

I’m neither a Democrat nor a Republican, actually I’m not even American! However, I do like a good debate and what’s happening in the US at the moment in the race towards the election of a GOP candidate is very interesting indeed and it’s a sign of the times we’re living in.

A Sense of sense of Déjà Vu- Part 1

Is RP 2012 just like RP 1992?

Ron Paul is in many ways popular for the same reasons as billionaire Ross Perot was in 1992. He's feisty.

Like Perot, Paul has built a following by simply stating what's on his mind, in a way that comes off as honesty in the moment rather than a rehearsed mantra with predetermined talking points…and that’s refreshing. The appeal is that when Perot and Paul speak, we don't feel like they're lying.

Perot and Paul have both proved themselves adept at grasping public sentiment. Where Perot made sense out of the federal budget process by likening it to a family budget, Paul takes advantage of the fact that the average American cares more about their tax bill than they do understanding the intricacies of diplomacy involved in foreign aid and the maintenance of military bases abroad.

Never mind that macroeconomics and microeconomics can't work the same way and that if Ron Paul brings all of the troops home from all of the US bases abroad, that unemployment will skyrocket and America will lose its ability to use the threat of military action credibly to keep peace in unstable regions.

The appeal of both Perot and Paul has been their ability to simplify complex matters into one line soundbites that the common man can digest without having to think through consequences.

Paul and Perot have prescribed major surgery without consideration for the aftermath or recovery. In Perot's case, he wanted the nation to elect him so that everyone could sit around a table and decide what to do, and in the case of Paul, he wants to take the nation back to a purely constructionist methodology for interpreting the Constitution, without deference to the fact that perhaps not only the world has changed considerably, but also the US role in it over the last 200 years, requiring a rewrite or at the very least a re-interpretation of it.

Ron Paul talks and acts as if he has nothing to lose and without giving much thought to the aftermath of the policies he’s promoting. Telling you what’s wrong with the current system, but how would you solve the issues Ron? Ask yourselves has he ever explained (either in ’08 or now) his views on the answers to the solutions he's proposing? Do you know the answers to?

After you reduce the size of the military and federal government, how would you create jobs for displaced employees?
What would you do to reduce our trade deficit and bring manufacturing jobs back to the US?
After you eliminate the Federal Reserve, how would you manage the money supply and interest rates?
After you eliminate the IRS, how would you finance the federal government?
The federal government is bankrupt – what financial obligations would you default on?
Would your balanced budget require higher taxes or just less spending?
How many illegal immigrants in the US would you deport?
How would you reduce the US dependence on imported oil?
What is your solution for the housing crisis?
What changes would you make in airport / transportation security?
How would you reform health care?

A Sense of sense of Déjà Vu- Part 2

Ron Paul 2008 vis-a-vis Ron Paul 2012

The 2008 Paul campaign was a ragtag coalition of anarchists, antiwar activists, goldbugs, paleoconservatives, hard-core libertarians and conspiracy theorists. His grassroots supporters threw raucous rallies, floated a Ron Paul blimp, lionized the 17th century British revolutionary Guy Fawkes — infamous for his attempt to blow up Parliament — and raised huge chunks of cash through online ‘money bombs’. But his organization was hapless when it came to translating that enthusiasm into votes.

When he ran for President four years ago, Paul drew a zealous but narrow following, and his warnings that murky monetary policy, runaway spending and a sprawling foreign empire would ruin the country struck many Republicans as kooky. His GOP rivals smirked or simply ignored him. Although Paul raised a staggering $35 million, he captured just 1% of Republican delegates.

But in the four years since, the world has changed in mostly grim ways that seem to affirm Paul’s worldview. His vision of an eroding Constitution and a Washington — Wall Street cabal helped spark the Tea Party movement. Conservatives who once sneered at his foreign policy as being ‘isolationist’ have grown weary of war. His call for a more accountable and transparent Federal Reserve has morphed from quaint obsession to mainstream Republican talking point in Congress and on the campaign trail

Rarely does a single political commercial reveal as much about a presidential campaign as the ad unveiled a few weeks ago by Ron Paul.

http://www.youtube.com/watch?v=kUHlIPJTMIg&feature=youtu.be

Here is audio-visual near-proof of a crucial difference between Liberty: Too Big To Fail ‘12 and the rEVOLution of ‘08:

This ad shows that this time the libertarian Republican thinks that he’s in it to win it.

The production values are upper tier, the choice to attack Texas Gov. Rick Perry (the candidate to beat as he’s leading the polls by a long margin) indicates a candidate trying to elbow his way past other grassroots-pleasing types, and the Reagan-good, Gore-bad message of bedrock conservative principle is plainly tuned to tickle the ears of mainstream Republicans.

However, for all its immediate relevance, Ron Paul’s candidacy remains quirky and idiosyncratic. The blame for that rests with the man himself. What elevates Dr Paul above the other candidates deflates him in the polls. At the podium he speaks without notes on whatever subject seems to come into his head. To see him in person is to experience the apocalyptic magic of wild prophecy.

His rambling discourse on the moral and economic bankruptcy of America smacks of something missing in modern politics – the truth told honestly. He is so real, he’s unreal. His constituency laps it up. But that constituency – while holding a valid claim to Republican orthodoxy – is too small a base from which to launch a triumph of reason. And an ideologue like Paul could never compromise enough to reach beyond it. For the moment, the man and the movement are locked into a passionate conversation to the exclusion of others.

The fact of the matter is that a base that wasn't too keen on listening to Ron Paul in 2008 has shifted substantially in his direction since then. This presents Paul with an opportunity -- and a challenge -- that he didn't have in 2008.

The key question about Paul's campaign is one that the straw poll was never going to help answer:

Can he build on his sizable (but ultimately limited) base of core supporters and develop mass appeal within the Republican Party?

It seems pretty clear to me a ‘major impediment’ to that is the fact that ‘establishment politicians’ who now talk like Ron Paul because Ron Paul's issues are now prominent in the campaign! Although the base of core support for the things Paul believes to be true has grown…they’re simply not joining Paul's camp. Instead, Paul has to compete with opponents with establishment ties and bigger war chests, who have co-opted him.

In a Nutshell...What's my View of Ron Paul as a Presidential Candidate?

Ron...Enjoy your role as a Kingmaker...The King Job is Not For You

Libertarian or Republican or a Constitutionalist? Austrian Economics Zealot? A lone preacher in a land of non-believers? A maverick?

The reality is that Ron Paul 2.0 isn’t all that different than the original version. For all the focus on how the Texas congressman is running a different race this time around, he is still the same libertarian iconoclast who is unwilling to modulate his views.

There is no doubt that this time he’s a serious contender, but he is not a serious contender for the Republican nomination…Why? Simple: Because he is not a Republican, he’s a libertarian, which places him at odds with the vast majority of the party -- never mind any real Democrat (who on principle favor government).

While his ideals on economics and small government are appealing, his personality is somewhat abrasive and off-putting. He doesn't understand that winning arguments does not equate to winning friends. He simply isn't electable at the national level, despite his extreme popularity with the small-government crowd.

Ron has not learned how to disagree in a persuasive way with anyone, besides those who are already libertarians, and his lack of polish and general wonkishness are his biggest liabilities.

Ron Paul makes the classic marketing error while marketing himself: People don't want to be debated…they want to be seduced!

Ron Paul is the Ralph Nader of the American right and his presence in the primaries sparks an interesting debate whose outcome will be useful.

The reality is that neither Perot in 1992 nor Paul in 2012 could be considered candidates with the wisdom to become presidents, but both men certainly bring important issues to the table worth discussing.

It could be that like Perot, Paul's contribution to the nation is his involvement as a candidate in the public discussion.

Moreover, the USA is still undoubtedly the world’s leading superpower. It has China’s (gross) economic size, matches Russia’s strategic military power, and is as technologically advanced as Japan with 2.5x its population. Therefore, when the Americans elect a President, they’re also electing a world leader, something Ron Paul is not nor wants to be! His views will take the US backwards and inwards…and as that position can’t be left ‘vacant’…China is game over the top spot is yours!

Ron Paul has more political experience than all his opponents combined…he has been a member of Congress since 1976! However, his idealism and lack of practical negotiating and persuading skills makes him less effective than anyone else.

In big politics, those who don't bend are broken. Paul may have been able to survive as a loud-mouthed, hard-line Representative, but being President requires many hats. And Paul only has the one. Ron Paul’s personality is more likely to give him a heart attack in his first month in office…

Final point… one aspect of the Paul phenomenon that has received little attention so far is his age.

Born in 1935, he will be 77 years old on Inauguration Day 2013 — the same age Ronald Reagan was when he left the White House after serving two terms! If Paul were elected and re-elected, he’d be 85 at the end of his time in the White House. Even though Americans are living longer, most people would probably agree that’s too old for a president…

All that said, Paul's people are demonstrating that whether you organise around a maverick independent billionaire or a maverick libertarian Republican, a concerted mass of people who have figured out how to combine and multiply their voices online can force their way onto the national stage.

Beef...the new 'Hard Currency'!!

2011-08-29T18:33:00.000+01:00

Let's Feed the Chinese the

best beef in the world!!

The new 'HARD CURRENCY' is BEEF (READ MEAT PROTEIN), the 'INVESTMENT CENTRE' is MERCOSUR (Argentina, Brazil, Paraguay & Uruguay) and the exploding market to satisfy is CHINA!

Are you concerned about where to put your money in this uncertain market? About a double dip recession? Is GOLD really a safe haven @ US $1,900/ounce? Way overpriced I would say!!

In 2020, the Chinese will spend nearly $1,000 billion a year on food, up from $350 billion a year in 2010, according to The Boston Consulting Group. As their incomes rise, the Chinese are less interested in buying grains and more interested in more expensive purchases like meat!! Beef consumption, for example, has much more than doubled in the last 10 years; in the next five years, it’s predicted to double again.

The study also revealed trends occurring with Chinese consumers. There is a significant exodus underway from rural areas to urban areas — a trend that will add another 220 cities of more than 1 million residents in the next 15 years — where there are more choices of high-quality foods and where consumers eat more meals away from home. McDonald’s is a popular choice: China has 1,300 McDonald’s restaurants and plans to build 700 more in the next two years.

There are 1.3 billion Chinese and already they rank among the world’s biggest meat eaters. They consume over a third of the world’s beef, half the world’s poultry and two-thirds of the world’s pork!!

Finally you should also increase your red meat intake!!

Consider the following:

Studies indicate that, if our ancestors had not eaten red meats, the brain of humans would be1/4 of its present size! During human evolution, our adaptation to red meat and the vital protein and fats it provides, is one of the KEY reasons behind the rapid growth in our intelligence and brain capacity.. without meat we still would be living in the trees eating bananas!
In regions where people have the longest lifespan, the diet is based almost exclusively on meat of ruminant animals and cultured dairy products.
Protein in beef provides plenty of building blocks for our body, ensuring strong lean muscles and healthy hormones.
Red meat is an excellent source of vital minerals like zinc, iron, and magnesium. In meat, these minerals exist in form that is much easier for the body to absorb compared to the minerals in grains and pulses.
Vitamin B12, which can be obtained ONLY from animal sources and which is abundant in beef, is crucial for a healthy nervous system and blood.
The carnitine in red meat is essential for balanced and steady functioning of the heart.
Beef is rich in linoleic and palmiotelic acids, which have strong anticancer effects and fight viruses and other pathogens.

I'm ready, willing and able to help the Chinese taste the best grass-fed beef coming from my property and those of my fellow cattle ranchers.

This is the only 'sustainable' way of raising cattle, i.e. on grass! Grass-fed beef is even good for the environment , big grasslands areas that exist in the tropical and sub-tropical areas of the MERCOSUR countries can certainly feed the world...without using the 'unsustainable' intensive system of 'corn fed feedlots'.

Grass is to feed cattle and corn to feed humans...simple!!

EAT BEEF = GROW STRONG, HEALTHY & SMART !!

P.S. BEST ENJOYED WITH A NICE CABERNET SAUVIGNON (IDEALLY BLENDED WITH MERLOT) A LA BORDEAUX WINES!

Is the End of Capitalism upon Us?

2011-08-27T14:36:00.005+01:00

Is Capitalism really Doomed? It certainly seems to be the ‘cliché’ of our times. However, I recently read an article by ‘Dr. Doom’ (aka Nouriel Roubini) that makes me reassess the notion that perhaps capitalism has reached its sale by date.

In an interview with The Wall Street Journal he said…‘Karl Marx had it right’. WOW…Karl Marx right? No way!! For a true believer, like myself, in laissez-faire economics (the core principle of capitalism) this is a real shock. Now…you might just dismiss ‘Dr. Doom’ statement as preposterous…after all someone with that nickname can’t be taken too seriously right? Wrong!

For those who are not familiar with this gentleman he’s the one who in September 2006, with markets everywhere still on the rise, told at a seminar at the IMF (International Monetary Fund) Headquarters that the US consumer was just about to ‘burn out’ and that this would mean a US recession followed by a global ‘hard landing’. The IMF’s in-house monthly newsletter (IMF Survey) covered Roubini’s talk more as a curiosity on the last page under the headline ‘Meet Dr. Doom’…and the name stuck.

His simple and pragmatic argument was I quote…‘when supply increases, prices fall: that’s been the trend for 110 years, since 1890. But since 1997, real home prices have increased by about 90 percent. There is no economic fundamental—real income, migration, interest rates, demographics—that can explain this. It means there was a speculative bubble. And now that bubble is bursting.’…unquote.

We all know how it all ended…‘credit crunch’, bank bailouts, or simply put the worst financial crisis since the Great Depression of the 1930s. So…when ‘Dr. Doom’ (who by the way believes in free markets and capitalism) talks now people listen…I certainly do!

What was Marx’s View of Capitalism?

Marx, among other theories, argued that capitalism had an internal contradiction that would cyclically lead to crises, and that, at minimum, would place pressure on the economic system.

He felt that capitalism created two competing classes of people. One, was the bourgeoisie who owned and controlled the means of production and hired wage laborers. The other was the proletariat, who were common workers who owned nothing but the right to sell their own labor.

Capitalism's very nature would ensure that eventually, these classes would struggle against one another to the point where the class of workers would get large enough and oppressed enough that it would overthrow the bourgeoisie, seize the means of production from it and end the economic system known as capitalism. The system of socialism would be ushered in and gradually evolve into pure communism.

Although, the corporate world and the relationship between employers and employees, through legislation and even new concepts like ‘social responsibility’, is now very different from the days of The Industrial Revolution in the United Kingdom when Marx was making his observations…there are nevertheless some disturbing similarities in issues currently affecting the world economy.

The social uprisings in Egypt, which was later expanded in a wider sense to several Arab world countries (with Syria and Libia as I write still fighting for regime change), in Greece, Spain and even recently in the United Kingdom, are all economic in origin primarily unemployment, but also due to the rising cost of living.

The issue is that there is excess capacity in industries, and companies not hiring because there is not enough final demand…but the paradox is that if you’re not hiring workers, there is not enough labour income, which in turns leads to not being enough consumer confidence, which in turns means that there is not enough consumption and therefore not enough final demand.

In the last 3 years this has worsen because there was a massive ‘redistribution of income’ from labour to capital and from wages to profits…which means inequality of income and wealth has increased. This redistribution of income and wealth makes the problem of excessive lack of aggregate demand even worse!

And…this is ‘Dr. Doom’s point…that Karl Marx was right in saying that at some point capitalism can self-destroy itself because it can’t keep on shifting income from labour to capital without not having an excess capacity and a lack of aggregate demand…and that’s what is happening.

The advocates of laissez faire economics have faith in the ability of markets to ‘self-regulate’ (‘the invisible hand’ as defined by the 18^th century Scottish economist Adam Smith) as the belief is that human beings are naturally motivated by self-interest and, when they are not interfered with in their economic activities, a balanced system of production and exchange based on mutual benefit emerges.

The problem at the moment is that markets are not workings as what it’s an individual rational decision (after all every firm wants to survive and thrive) of reducing labour costs more and more misses the point that someone’s labour costs are someone else’s labour income and consumption!...that’s what makes the current situation self-destructive!

So…Marx Was Right Then? Capitalism R.I.P.?

There is no other economic model that proved more adept at creating wealth, develop technology and improve living standards for its citizens that capitalism. However, the main criticism always is the unfair distribution of wealth and power.

A report released in April this year by GlobeScan, an international opinion research consultancy, suggests that the number of Americans who believe in the strength of the free market economy dropped markedly last year. In fact, according to the survey results, both Brazil and China, on a percentage basis, ranked higher than the U.S. in overall support for free market capitalism.

The report, based on 12,884 interviews in 25 countries, asked participants to agree or disagree with the statement that the ‘free market economy is the best system on which to base the future of the world.’

GlobeScan found Americans strongly agreeing or somewhat agreeing dropped to 59 percent from 74 percent, a 15 percent dip from the year prior and the second largest year-over-year drop of any country besides Turkey. An even more dramatic drop (32 percent drop) occurred among those in the U.S. with annual incomes below $20,000, of which only 44 percent agreed that the free market was the ideal system.

If citizens of the nation that epitomises capitalism are disenchanted with it…it’s time to take notice!!

The reality is quite simple and it’s an old story: Capitalism is unstable. Capitalism means growth, but also instability. The system is dynamic and inherently prone to crashes that cause great damage along the way.

It is an economic system that can be ruthlessly productive. But is also one of wheels within wheels – internal contradictions Marx called them – that can, and regularly do, spin out of control. Marx saw these contradictions as opportunities; he figured that capitalism's self-destruction would lead to a better world.

John Maynard Keynes, a British economist who liked to speculate in foreign currency over his morning tea and toast, saw them as problems that could destroy a world he rather liked.

Keynes believed that the free market capitalism was inherently unstable and that it needed to be reformulated both to fight off Marxism and the Great Depression. The welfare state designed in the post-1945 period was in his view the way to save capitalism from itself!

Banks would be regulated to keep financiers from scamming the economy into the ground. Labour unions would be encouraged, in order to give workers a stake in the status quo and inoculate them against radical politics.

The rich would agree to government tax-and-spend policies, knowing that – in the end – it's always better to feed the poor than have them slit your throat.

It was a giant, unspoken bargain – forced by the Depression of the `30s, tempered by war and hammered into shape under the threat of Communism. For about 90 years, we have been trying to regulate the system to stabilise it while still preserving its energy. We are at the start of another set of these efforts…

Towards A New Paradigm…Enter Social Capitalism!

Social capitalism, as a theory or political or philosophical stance, challenges the idea that the goals of socialism and the existing system of capitalism are inherently antagonistic.

The essence of social capitalism is that markets work best and output is maximised through sound social management of macroeconomics.

The world has been grouping towards a new economic doctrine, something that combines the animal energies of capitalist entrepreneurship with the distributive justice of socialism.

Typically capitalism as a business model revolves around exploitation of the workers and the market squeezing profits from an underpaid workforce and over charging the consumer.

Social capitalism is not hostile to free markets or the private ownership of property. Instead, social capitalism recognises the unique success of capitalism, particularly under appropriate social supervision. Social capitalism thus seeks to create a balanced approach to business and the role of the state—with a view to optimising the business environment for maximum sustainable economic growth.

On a micro level social capitalism suggests that best business practices should cater to the needs of consumers, including the needs of workers as the bedrock of consumption.

The exploitation of ever cheaper pools of labor with no regard to maintaining consumption results in market failure…as observed by Marx and explained previously here. Social capitalism proposes that a strong social support network for the poor enhances capital output.

By decreasing poverty, capital market participation is enlarged. Social capitalism also proposes that government regulation, and even sponsorship of markets, can lead to superior economic outcomes, as evidenced in government sponsorship for example broad internet access or provision of computer for rural schools in developing countries.

Given the vast diversities in global culture and socio-economic development, we are likely to see a lot of experimentation before social-capitalism can be defined more precisely. One thing is certain though…its inevitability.

Caveat emport!

‘Despite a voluminous and often fervent literature on ‘income distribution’ the cold fact is that most income is not distributed…it’s earned’

‘The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries’

August 2nd...Doomsday? US Defaults on its Debt?

2011-07-22T03:01:00.000+01:00

Hi Everyone! It has been a while since my last blog...but this is 'major news' and needs to be debated, which is why I'm writing again after 5 intensive months as a cattle rancher in South-America...I'm back in England writing at home on this interesting point.

The US 'debt ceiling'...can it go on growing...FOREVER??

On August 2nd. the US runs out of money...i.e. , the United States will no longer be able to pay its bills in full...and slashing spending alone won't cut it! The U.S. government hit the debt ceiling of US $14 trillion on May 16th. Treasury Secretary Tim Geithner told Congress he would have to suspend investments in federal retirement funds until August 2nd. in order to create room for the government to continue borrowing in the debt markets.The funds will be made whole once the debt limit is increased, Geithner said in a letter.

So...what's the debt ceiling anyway?

It's a cap set by Congress on the amount of debt the federal government can legally borrow. The cap applies to debt owed to the public (i.e. anyone who buys U.S. bonds) plus debt owed to federal government trust funds such as those for Social Security and Medicare.

The ceiling is currently set at US $14.294 trillion. The country's accrued debt hit that mark on the morning of May 16th, it is as if it has hit the limit on its credit card. Yours might be US $5,000...theirs is US $14 trillion. So going forward, until Congress agrees to raise that limit, the government needs to pay its bills in other ways.

The US government spends about US $120 billion more each month than it take in, in revenues. That's the amount Treasury needs to find somewhere!! The government has a bank account at the Federal Reserve with a little bit more than $100 billion in it. It has already used that that money! Also, by taking various extraordinary measures like suspending investments in federal retirement funds, Geithner was able to bring total debt down enough to allow the government to continue borrowing until Aug. 2.

All of these measures last until early August. That's when the government runs out of money, even under those extraordinary measures.

Ultimately, if lawmakers fail to raise the ceiling this year, they will have two choices, both awful.

They could either:

Cut spending or raise taxes by several hundred billion dollars just to get through Sept. 30, which is the end of the fiscal year.
Or they could acknowledge that the country would be unable to pay what it owes in full and the United States could effectively default on some of its obligations.

The first option would be impossible to execute without serious economic repercussions. And the second option could cripple the economy and send world markets into a tailspin.

Paul O'Neill, former Treasury Secretary, has recently indicated that in order to get by the next election, i.e. November 2012...the debt ceiling would have to be raised by a whopping US $ 2 trillion more to US $16 trillion!!

However, there is a point at which investors realise that the debt is simply too much and it can't be repaid...understandably so in particular as the amount of that debt owed by foreign investors has been steadily increasing!

What happens if we get to August 2nd and there is no deal??

US government bondholders will be paid
Social Security checks could be delayed
Non-essential government services will be shut-down
Non-essential government workers will be furloughed
US economy would grind to a halt, increasing the odds for a double-dip recession

How likely is that to happen?

There is no provision in the US Constitution to guarantee that the US will always pay its debts, but the American Republic has proven itself for 200-plus years to be about as good a credit risk as has ever existed.

US fiscal resolve has been tested at least five times: at independence, in the war of 1812, during and after the Civil War, and in World War I and World War II. We can debate the exact fiscal pressures in each case, and precisely how various kinds of bondholders were treated, but the simple fact of the matter is that when the going gets tough, the US pays its debts.

At least in the near term, the chance that the US will not service its debt is vanishingly small – perhaps in the same order of probability as a large meteor striking the earth. To be sure, there are big fiscal questions to be sorted out – including how much the government should spend and on what, as well as how much tax it should collect and by what means.

There is also the vexing question of how much debt is too much for the modern US. In a world where international investors (from both the private and official sectors) routinely wring their hands about US fiscal deficits – and then go out and buy more US government debt – who knows the answer?

Countries never default because they can’t pay their debts; there are always ways to decrease expenditures or raise taxes. Countries default because their political processes bring them to the point where the people in power decide, for whatever reason, not to pay the government’s debts.

It is not difficult to identify who would bear what costs if the US did not pay – or if it disrupted markets by not increasing its debt ceiling. Everyone who borrows or interacts with the credit system in any way would suffer a shock that would make the crisis of 2008 look small!!

Among others, the US corporate sector – big and small business – would be livid. To be sure, executives and entrepreneurs like to shake their heads over the current US fiscal deficit. And some of them engage constructively in debates about the real issues: how to control health-care costs, prevent future financial crises, and end America’s expensive foreign wars.

But these are the issues for the presidential election of 2012, in which one hopes for debates that will set a more encouraging fiscal agenda for the next 20-30 years. How and when America’s budget problems will be resolved is unknown, but US fiscal history is encouraging – the Republic has managed and survived crisis before.

Simply put, America will not score an own goal over the debt ceiling – and John Boehner, Speaker of the United States House of Representatives, who's leading the Republican Party's charge on fiscal policy, arguing that his side needs to see 'trillions of dollars' in spending cuts in order for Congress to approve an increase in the US government’s debt ceiling is simply making threats that are not credible.

Framing the issue this way creates a major problem for Boehner as it will directly, completely, and quickly antagonise one of the Republicans’ most important constituencies – the US corporate sector.

Therefore, if Barack Obama’s administration plays its hand well, the result will be a last-minute extension of the debt ceiling with no significant concessions. It is unclear how Boehner or anyone else would be able to portray that as a political victory.

The US 'HUGE CURRENT ACCOUNT DEFICIT' vs Chinas' 'HUGE CURRENT ACCOUNT SURPLUS' Part I

2010-08-20T18:32:00.001+01:00

1. Setting The Scene...

In the immediate aftermath of the global financial crisis even the deepest market fundamentalists embraced the core Keynesian insight that when in deep recession, monetary policy will be ineffective and fiscal stimulus is required. They have now abandoned that view as calls for fiscal austerity abound regardless of the increasingly fragile nature of the global recovery.

While economists and policy-makers debate the short and medium-term remedies to the crisis, there is an incredibly surprising and under-discussed consensus emerging for the longer run....and that's that the United States and East Asia (notably China) have to change the ‘structures’ of their economies.

The US has to stop over-consuming on credit and actually produce things for export again. East Asian nations have to slow down their over-reliance on exports and increase domestic consumption. Another way of putting it: the key actors in the world economy need to undergo structural change.

2. But...How Did We Get Here in The First Place?

Between 1983-90 (the Reagan era) the TOTAL US DEBT (that means households, businesses big and small, government local/state/federal) grew from US $5 trillion to US $10 trillion. It took the US more than 200 years to get to US $5 trillion so the increase of an equal amount in 7 years it's rather significant!! More on this later...

3. Reaganomics...Enter Supply Side Economics

Reaganomics was based on supply side economics and his four pillars of economic policy were to:

1.Reduce government spending,

2.Reduce income and capital gains marginal tax rates,

3.Reduce government regulation

4.Control the money supply to reduce inflation.

Ronald Reagan's economic concept was that if you cut taxes you would increase Federal revenues since economic activity would increase. The increase in economic activity would bring with it increased Federal tax revenues. In other words the tax cut would be self liquidating and self paying since any lost revenues for the moment would almost immediately be made up by increased revenues in the future. It didn't cost anything, therefore, to lower taxes and the economy would be stimulated to new heights.

Ronald Reagan's principles were influenced by the Laffer Curve The curve suggests that, as taxes increase from low levels, tax revenue collected by the government also increases. It also shows that tax rates increasing after a certain point (Equilibrium Point) would cause people not to work as hard or not at all, thereby reducing tax revenue. Eventually, if tax rates reached 100% (the far right of the curve), then all people would choose not to work because everything they earned would go to the government.

In 1981, Reagan significantly reduced the maximum tax rate, which affected the very wealthy, and lowered the top marginal tax rate from 70% to 50%; in 1986 he further reduced the rate to 28%!

As a result of all this, the budget deficit and federal debt increased considerably: debt grew from 33.3% of GDP in 1980 to 51.9% at the end of 1988 and the deficit increased from 2.7% in 1980 to more than double in 1983, when it reached 6%; in 1984, 1985 and 1986 it was around 5%.

In order to cover new federal budget deficits, the United States borrowed heavily both domestically and abroad, raising the national debt from $1 trillion to $3 trillion, and the United States moved from being the world's largest international creditor to the world's largest debtor nation.

The federal government debt when Ronald Reagan took office was about US $1 trillion. That included in it all the debt run up for the Revolutionary war, the Spanish-American war, the Civil war, World War I, World War II, the Korean war, the Vietnam war and all the Social wars of the 1930's and subsequent years. In other words it took the United States from 1776 until 1980 or more than 200 years to accumulate a national debt of $1 trillion...by 1988 the debt increased to US $3 trillion!

4. Starving the Beast...

If government cuts taxes, but not spending, it still gets the money from somewhere—either by borrowing or inflating. Either method robs the productive sector. Cutting taxes is easy. Cutting spending is hard.

As Professor Laffer himself explained: 'It’s hard to win on spending. People love getting government benefits and they hate paying for them.' Reagan's mantra was the need to 'starve the beast' strategy has been a key tenet of Republican philosophy since Ronald Reagan. The idea was basically that sympathetic politicians should engage in a game of bait-and-switch. Rather than proposing unpopular spending cuts, Republicans would push through popular tax cuts, with the deliberate intention of worsening the government's fiscal position. Spending cuts could then be sold as a necessity rather than a choice, the only way to eliminate an unsustainable budget deficit.

Along with the fundamental concept of allowing the American people to spend more of their hard earned dollars themselves, the goal of tax cuts and lower taxes has been a way of keeping a runaway government in check. The problem is that, in practice, the starve the beast concept has rested on a flawed assumption – namely that a reduction in tax revenue would inevitably lead Congress and the White House to cut government spending. Clearly, that hasn’t happened.

Instead we've seen continued increases in both the size of government and its spending...in mind-boggling numbers!!

5. Understanding US National Debt...BIGGER THAN YOU THINK

Public Debt represents money owed to those (people, businesses and foreign governments) holding government securities such as Treasury bills and bonds.

Total Debt includes intra-governmental debt, which includes amounts owed to the Social Security Trust Funds and Civil Service Retirement Funds.

The debt to the Penny and Who Holds It is a daily review of total amount of public debt outstanding offered by TreasuryDirect, a division of the U.S. Department of the Treasury Bureau of the Public Debt. The mission of Public Debt is to borrow the money needed to operate the federal government and to account for the resulting debt and it's done via a variety of savings and investment products.

As of 18.08.10 the Total Debt amounts to US $13.4 trillion, of which Public Debt amounts to US $8.8 trillion (65%) and Intragovernmental Debt amounts to US $4.6 trillion (35%).

The US economy size is measured by its GDP, and the 2010 forecast is around US $14.6 trillion...which means the TOTAL DEBT of US $13.4 trillion (92%) is nearly the size of the whole economy...and a recent report from IMF indicates that TOTAL DEBT will surpass GDP by 2012!!

The scary thing is though...the FEDERAL GOVERNMENT TOTAL DEBT is not the TOTAL US DEBT (meaning households, businesses big and small, government local/state/federal)...that's the one that remember grew from US $5 trillion to US $10 trillion under Reagan...that number is now...US $57 TRILLION!!..AND STILL CLIMBING

The Chinese View...Cheng Siwei, Vice-Chairman, China's Standing Committee (2009)

'The US spends tomorrow's money today.That's why we have this financial crisis. We Chinese spend today's money tomorrow.'

to be continued...It's The Economy Stupid!

China's Call for One World Currency...

2010-08-17T18:58:00.004+01:00

1. IMF's Special Drawing Rights

On the 23.03.09 Zhou Xiaochuan, Governor of the People’s Bank of China, delivered a speech , published on the central bank’s website and unusually was released both in English and Chinese, emphasising China’s dissatisfaction with the global primacy of the dollar. This was a clear muscle-flexing move with the assertiveness that China now possesses as the 'clear winner' of the global economic crisis.

Mr Zhou Xiaochuan's indicated in this speech...I quote 'The outbreak of the current crisis and its spillover in the world have confronted us with a long-existing but still unanswered question,i.e., what kind of international reserve currency do we need to secure global financial stability and facilitate world economic growth, which was one of the purposes for establishing the IMF? There were various institutional arrangements in an attempt to find a solution, including the Silver Standard, the Gold Standard, the Gold Exchange Standard and the Bretton Woods system. The above question, however, as the ongoing financial crisis demonstrates, is far from being solved, and has become even more severe due to the inherent weaknesses of the current international monetary system.'...unquote

He continued...'the desirable goal of reforming the international monetary system, therefore, is to create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies.'

Beijing indicated that the dollar’s role could eventually be taken over by the IMF’s so-called Special Drawing Right (SDR), a quasi-currency that was created in 1969. Mr Zhou argued that the SDR has the potential to act as a 'super-sovereign' reserve currency, spanning national jurisdictions. In turn, he suggested that this could not only eliminate the risks associated with paper fiat currencies, such as the dollar and pound – which are backed only by the credit of the issuing country, rather than by gold – but would make it possible to manage global liquidity and imbalances more effectively.

He said: 'The role of the SDR has not been put into full play due to the limitations on its allocation and the scope of its uses. However, it serves as the light in the tunnel for the reform of the international monetary system.'

Mr Zhou suggested a shift by which the SDR could form the anchor of a new global exchange-rate system, replacing the former Bretton Woods system of fixed but adjustable exchange rates, which collapsed in 1971. Since then, most large Western economies have had floating currencies, while nations such as China have managed their exchange rate, creating incompatibilities blamed for stoking up the damaging imbalances.

'When a country’s currency is no longer used as the yardstick of global trade, and as the benchmark for other currencies, the exchange-rate policy of that country would be far more effective in adjusting economic imbalances,' Mr Zhou said.

The IMF's SDR, although denominated in US dollars, has a nominal value derived from a basket of currencies. This basket is composed of Japanese Yen (11%), US Dollars (44%), British Pounds (11%) and Euros (34%), and the proportion each of these four currencies contribute to the nominal value of a SDR, which is reevaluated every five years. For the period of 2006-2010, one SDR is the sum of 0.6320 US Dollars, 0.4100 euro, 18.4 Japanese yen and 0.0903 pound sterling.

Due to varying exchange rates, the relative value of each currency varies continuously and thus the value of the SDR fluctuates. The IMF fixes daily the value of one SDR in terms of US dollars based on the exchange rates of the constituent currencies. The latest US dollar valuation of the SDR is always available from the International Monetary Fund web site.

2. Gathering Strength of Voices in China Against US dollar as a Reserve in China

Recently, Yu Yongding (left), member of the state-backed Chinese Academy of Social Sciences and former central bank adviser indicated that U.S. Treasuries fail to provide safety or liquidity when it comes to managing China’s US $2.45 trillion foreign-exchange reserves.

China is unable to sell the securities in a 'big way' and a 'scary trajectory' of budget deficits and a growing supply of U.S. dollars put their value at risk, he said.

The State Administration of Foreign Exchange, which manages the nation’s reserves, said last month that U.S. government debt has the benefits of 'relatively good' safety, liquidity, low trading costs and market capacity. China’s holdings of Treasuries, the largest outside of the U.S., totaled US $867.7 billion at the end of May, down from US $900.2 billion in April and a recordUS $939.9 billion in July 2009.

To help cool demand for the securities, China needs to curb the growth of its foreign reserves by intervening less in the currency market, Yu said. The People’s Bank of China said June 19 it would let the yuan float with reference to a basket of currencies, ending a two-year-old dollar peg.

The yuan has since appreciated 0.8% to 6.773 per dollar and analysts predict the currency will end the year at 6.67, based on the median estimate. China limits appreciation by buying dollars, fueling its demand for Treasuries.

'China has to depend more on demand and supply in the foreign exchange market for the determination of the yuan exchange rate,' Yu wrote. 'Only God knows how much of the value that China has stored in the U.S. government securities will be left in the future when China needs to run down its reserves.'

'The U.S. government has strong incentives to reduce its real burden of debt through inflation and dollar devaluation,' he said. 'Whichever way it is, the yuan-recorded market value of Treasuries will fall, causing huge capital losses to China’s central bank.'

The Sliding Dollar

The dollar has weakened against all 16 major currencies monitored by Bloomberg in the past month, sliding 5.4 percent versus the euro and 4.7 percent against the pound. The Dollar Index, which the ICE futures exchange uses to track the greenback against the currencies of six major U.S. trading partners, is headed for its lowest close since April 15.

Premier Wen Jiabao in March urged the U.S. to take 'concrete steps' to reassure investors about the safety of dollar assets after President Barack Obama stepped up spending to help end a recession. The White House predicts the U.S. budget deficit will hit a record $1.47 trillion this year, about 10 percent of gross domestic product.

An 'appropriate' policy for China would be to allocate its reserves with reference to the weightings of Special Drawing Rights, a unit of account of the International Monetary Fund, Yu said in May. China bought a net 735.2 billion yen ($8.3 billion) of Japanese bonds in May, doubling purchases for this year.

China Economic Situation Today & Going Forward...Part II

2010-08-15T16:52:00.004+01:00

1. China's Huge Trade Surpluses vis-a-vis US Huge Trade Deficits. The Role of the IMF...Fairness in Currency Exchange Rates

The International Monetary Fund (IMF) is the world's central organisation for international monetary cooperation. It is an organisation in which almost all countries in the world work together to promote the common good.

The IMF's primary purpose is to ensure the stability of the international monetary system—the system of exchange rates and international payments that enables countries (and their citizens) to buy goods and services from each other. This is essential for sustainable economic growth and rising living standards.

The IMF was conceived in July 1944, when representatives of 45 governments meeting in the town of Bretton Woods, New Hampshire, in the northeastern United States, agreed on a framework for international economic cooperation on a post-World War II economic environment. They believed that such a framework was necessary to avoid a repetition of the disastrous economic policies that had contributed to the Great Depression of the 1930s.

During the 19302s attempts by countries to shore up their failing economies—by limiting imports, devaluing their currencies to compete against each other for export markets, and curtailing their citizens' freedom to buy goods abroad and to hold foreign exchange—proved to be self-defeating. World trade declined sharply, and employment and living standards plummeted in many countries.

Seeking to restore order to international monetary relations, the IMF's founders charged the new institution with overseeing the international monetary system to ensure exchange rate stability and encouraging member countries to eliminate exchange restrictions that hindered trade. The IMF came into existence in December 1945, when its first 29 member countries signed its Articles of Agreement. Since then, the IMF has adapted itself as often as needed to keep up with the expansion of its membership of 187 countries as of July 2010 (if we consider that there 192 member countries of the United Nations...it means that the world as a whole has agreed to be governed by the IMF) and changes in the world economy.

The IMF under Article IV - Obligations Regarding Exchange Arrangements and in Section 1. General obligations of members point (iii) clearly defines that...I quote 'avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members'

One of the main issues regarding the imbalances of 'China's Huge Trade Surpluses' vis-a-vis 'US Huge Trade Deficits' is related to the perception that China (an IMF member) is manipulating its currency in a sort of 'Beggar-Thy-Neighbour Policy' of currency manipulation.

Paul Krugman's in his New York Times column has brought this issue to the forefront in a recent short and very convincing article entitled 'Chinese Rumbles'.

2. Beggar-thy-neighbour predatory currency manipulation?

It has long been recognized that the global financial structure — built as it is around the dollar as the world’s reserve currency — has a fundamental design flaw that makes it inherently unstable. The problem was first identified back in the early 1960s by the Belgian-American economist Robert Triffin, in 'Gold and the Dollar Crisis.'
Such policies attempt to remedy the economic problems in one country by means which tend to worsen the problems of other countries.

The term was originally devised to characterise policies of trying to cure domestic depression and unemployment by shifting effective demand away from imports onto domestically produced goods, either through tariffs and quotas on imports, or by competitive devaluation. The policy can be associated with mercantilism and the resultant barriers to pan-national single markets.

An obvious example, is the use of tariff barriers. A country may place tariff on imports to help promote local domestic industry. This may help local unemployment, but, be at the expense of the other country's export sector. Another example is the manipulation of exchange rates...keeping them artifically low in order to help exports.

That's the key argument here as the US is very critical of China's low exchange rate. The US argues that it increases Chinese growth at the expense of a US trade deficit.

There is one problem though with Paul Krugman's and the US government 'simple and clear argument'...and that's related to the US $ being the de-facto 'world reserve currency'.

A reserve currency, or anchor currency, is a currency which is held in significant quantities by many governments and institutions as part of their foreign exchange reserves. It also tends to be the international pricing currency for products traded on a global market, and commodities such as oil, gold, etc.

This permits the issuing country to purchase the commodities at a marginally lower rate than other nations, which must exchange their currencies with each purchase and pay a transaction cost. For major currencies, this transaction cost is negligible with respect to the price of the commodity. It also permits the government issuing the currency to borrow money at a better rate, as there will always be a larger market for that currency than others.

3. The 'Triffin Dilemma'

Writing about Europe’s accumulation of dollars, he argued that the system carried the seeds of its own destruction. Foreigners could acquire dollars only if the United States ran current account deficits — that is, spent more than it earned. But lending money to someone who lives beyond his means has obvious dangers, and the same is true of countries.

Thus, the American deficits necessary to supply dollars to the world for international transactions simultaneously undermined confidence in the currency. It was only a matter of time, Triffin predicted, before the system would be hit by a crisis — which it duly happened in 1971 when President Nixon ended the dollar’s convertibility into gold.

Whereas Triffin had been primarily concerned about the European accumulation of dollars, the spotlight is now on Asia. In the wake of the 1997 financial crisis there, countries in East Asia set out to build up war chests of dollars as insurance against domestic banking runs or downturns in the global economy. At about the same time, China embarked on a program of export-led growth, engineered by keeping its currency artificially low.

The Main Point of Triffin's Dilemma is...

The use of a national currency as global reserve currency leads to a tension between national monetary policy and global monetary policy. This is reflected in fundamental imbalances in the US balance of payments, specifically the current account.

The dilemma is reflected in that:

In order to meet the world demand for the reserve currency dollars must flow out of US, but
In order to maintain a stable value of the US $, dollars must flow into the US, but
Both can't happen at the same time.

This relationship forces most of the governments into a strict budgetary discipline. Too large a budget deficit and you will end up with inflation as well as a large external account deficit. Currency reserves are finite and eventually you need to cut back on your external deficit as well as budget deficit to balance your accounts.

4. The US 'Free Lunch'...time is running out?

There is one exception. If your external account can be funded by simply printing more money, you can keep on spending indefinitely as long as the world is willing to accept your currency as good money. Large trade deficit? Simply print more dollars and pay it off. Large budget deficit? Issue more treasuries that will be bought by your suppliers with the dollars you gave them. This cycle suited everyone, especially the US.

The real gain for the US in this arrangement comes from the fact that as an issuer of currency of the world, it can create wealth at the expense of everyone else...IN A NUTSHELL THE US 'FREE LUNCH' It has been done before, particularly in the medieval economies when public finances in the current sense of the phrase did not exist, Princes had to borrow and repay debts like everyone else; except that they had the right to issue currency. Adam Smith pointed this out more than 200 years ago in Wealth of Nations:

…the avarice and injustice of princes and sovereign states, abusing the confidence of their subjects, have by degrees diminished the real quantity of metal, which had been contained in their coins… By means of those operations, the princes and sovereign states… were enabled, in appearance, to pay their debts and fulfill their engagements with a smaller quantity of silver… their creditors were really defrauded of a part of what was due to them.

This applies to the world even today. In the short term, an abundant supply of dollars does not seem to have any impact. But in the longer run, people are defrauded as true value of the currency falls on a continuous basis. In fact, if you measure the value of dollar against a more enduring store of value, precious and base metals, the dollar has been debased quite drastically over past few years. It has also taken a lot of other currencies down with it, ensuring that the loss of real wealth is not limited to dollar alone.

The 'world reserve' status of the US dollar created a demand for it, but through this, it also created a glut of Treasury bond holdings in foreign central banks, and an unserviceable national debt in the US. The combination of removing the dollar from the gold standard (President Nixon in 1971) in tandem with gaining world reserve advantage allowed the US government (along with central bankers) to create the most precarious illusory fiat currency in history.

Could this process continue indefinitely? It's possible, but only if the demand for dollars continues to rise annually. As long as people want dollars in greater and greater amounts, the US could simply continue to expand its debt...well into infinity and beyond!...but what happens if demand for the dollar falls, or disappears entirely? The massive liabilities the US has already accrued will no longer have the crutch of perpetual Treasury investment. The US would no longer receive the busloads of foreign capital needed to continue functioning. The system the US has staked its future would just disintegrate.

Anyone who uses common sense would easily conclude that it is highly unreasonable if not outlandish to expect that other countries will continue to pump more and more money every year into what's a very unstable system. Eventually, every undisciplined debtor hits a state of critical mass; a point at which he runs out of options in extending his ability to outrun bankruptcy.

We are seeing this right now in the U.S., most prominently in municipal debt in states such as California and Illinois. These are not just 'local problems'...the growing insolvency in states is a direct reflection of the growing insolvency in the Federal Government.

Enter IMF's SDRs- The Chinese Proposal to the 'Triffin Dilemma'...to be continued

China Economic Situation Today & Going Forward...Part I

2010-08-10T13:23:00.149+01:00

1. The Onset of the Financial Crisis & The Chinese Economic Model

The financial crisis of 2007 to the present is a crisis that was triggered by a liquidity shortfall in the United States banking system caused by the overvaluation of assets. The immediate cause or trigger of the crisis was the bursting of the United States housing bubble which peaked in approximately 2005–2006. Already-rising default rates on 'subprime' and adjustable rate mortgages (ARM) began to increase quickly thereafter.

Low interest rates and large inflows of foreign funds created easy credit conditions for a number of years prior to the crisis, fueling a housing construction boom and encouraging debt-financed consumption. The combination of easy credit and money inflow contributed to the United States housing bubble. Loans of various types (e.g., mortgage, credit card, and auto) were easy to obtain and consumers assumed an unprecedented debt load.

As part of the housing and credit booms, the number of financial agreements called mortgage-backed securities (MBS) and collateralised debt obligations (CDO), which derived their value from mortgage payments and housing prices, greatly increased. Such financial innovation enabled institutions and investors around the world to invest in the U.S. housing market. As housing prices declined, major global financial institutions that had borrowed and invested heavily in subprime MBS reported significant losses...and the rest is history Lehman Brothers, AIG, Merrill Lynch, Fannie Mae & Freddie Mac, RBS, Lloyds, HBOS, etc, etc.

The International Monetary Fund estimated that large U.S. and European banks lost more than US $1 trillion on toxic assets and from bad loans from January 2007 to September 2009. These losses are expected to top $2.8 trillion from 2007-10. U.S. banks losses were forecast to hit US $1.2 trillion and European bank losses will reach US $1.6 trillion.

A good example of what banks went through can be seen below, in terms of the loss of of Market Capitalisation of major banks prior to the outset of the crisis (in Q2 2007) and at January 20th 2009....

Not surprisingly the financial crisis precipitated a global recession. There was an immediate breakdown of the system of international financial intermediation, which had been smoothly transferring China’s unprecedented surpluses to cover the unprecedented current payments deficits of the United States...suddenly some of the long-term questions about the sustainability of China’s early twenty-first-century growth strategy demanded immediate answers.

Could China replace export-oriented growth with similarly strong growth focused on opportunities in the domestic market?
Could China expand expenditure enough and quickly enough if developments in the international economy prevented the accommodation of China’s huge and growing external surpluses?

2. China's Emergence as a Major Player Post-Economic Crisis

The superb Beijing Summer Olympic games in August 2008 and the very impressive show of power presented on the 60th anniversary celebration of the People's Republic of China on October 1, 2009 were major events held in the midst of the global financial crisis that clearly announced the arrival of China into the world stage and a sign to the troubled western economies that a strong and assertive China was moving forward towards the top spot.

The media started talking of a world dominated not by G-7, but by G-2 consisting of the US and China. The credit crisis has certainly pushed China from behind America’s shadow into a central position on the world stage...

3. IMF's endorsement of China's Economic Performance

In a recent report (29.07.10) from the International Monetary Fund (IMF) the Chinese government is praised for skillful response to the global financial crisis.

http://www.imf.org/external/pubs/ft/survey/so/2010/new072910a.htm

In an interview, the Fund’s lead economist on China, Nigel Chalk, said that despite the global slump, the country’s economy had posted an impressive performance. He explains, they clearly understood that the downturn of the global economy would greatly affect China, and you saw a response that involved a large fiscal package to stimulate the economy. It also involved a quite significant amount of monetary stimulus.

All of these things kind of work together, they’re all very helpful in supporting the economy in the face of this very large external shock. And you see that in the outturn for 2009. During that year you had more than 4% of GDP drag on the economy from the decline of exports. Nevertheless the economy grew overall by more than 9%, which is quite an impressive achievement. Our assessment is a large part of that was driven by the public sector stimulus.

The IMF said China’s 'quick, determined, and effective policy response' meant it was now spearheading the global recovery.

There is no argument in regards to the scale of China’s achievement, which can now be viewed over three decades, is extraordinary by any standard! It has industrialised at roughly three times the pace that the West did. What took 100 years in Europe has taken one generation in China. And in handling this massive transformation, what is really striking is the absence of large-scale violence.

It is true that China is a dictatorship...but so were many Western countries when they industrialising their economies, and they had much more mass violence. Other East Asian countries have made this journey, but none has the size and scale to alter the world in the same way China is doing...

The net effect is that we have the rise onto the world stage of a new great power and one with massive potential for further growth along all dimensions. Of course, nothing can be taken for granted. China does have a restless middle class, persecuted minorities, border disputes, and the challenge of moving up the economic ladder, all within the context of a one-party system.

Why China Succeeded & The Soviet Union failed at Implementing Reform? Part II

2010-08-06T13:33:00.088+01:00

4. Deng Xiaoping...'Socialism with Chinese Characteristics'

Deng Xiaoping was the leader of China from 1978 (two years after Mao's death) until his death in February 1997. He was the last of the great revolutionary leaders of China and a Time Man of the Year twice (see below). The Person of the Year (formerly Man of the Year...name changed in 1999 in an effort to be more inclusive) is an annual issue (tradition started in 1927) of the prestigious US current affairs magazine Time that features and profiles a person, couple, group, idea, place, or machine that 'for better or for worse, ...has done the most to influence the events of the year.'

1978 1985

Interestingly...Mikhail Gorbachev was also Man of the Year twice! In 1987 and 1989 (where he was also considered Man of the Decade).

1987 1989

These are excellent examples that put into context the seismic changes that both leaders were trying to implement in their respectives countries...which in the end resulted in very different outcomes for both. As Alexis de Tocqueville wrote in his treatise on the French Revolution, 'The most perilous moment for a bad government is when it seeks to mend its ways. Only consummate statecraft can enable a king to save his throne when, after a long spell of oppressive rule, he sets to improving the lot of his subjects.'...chaos rides in on rising expectations.

A tough, abrasive, resilient, with many political comebacks (Deng was purged from the Communist Party three times: in 1933 as a mid-level party official; in 1966 during the Cultural Revolution; and in 1976 during a dispute with the Gang of Four, who called Deng a 'counterrevolutionary') Deng was 74 years old when he embarked on his Deng Xiaoping Theory whose social and economic philosophy is an attempt to merge a 'market economic model' with a 'socialist political system'. This became known as 'socialism with Chinese characteristics.'

In the Chinese spirit of balance between yin and yang, Deng's attempt was not only on a monumental scale, but also it was aimed at blending seemingly irreconcilable elements: state ownership and private property, central planning and competitive markets, political dictatorship and limited economic and cultural freedom. Indeed, it was almost, as it so often seems to skeptics in both the Western and Marxist worlds, an attempt to combine Communism and Capitalism.

One of Deng's most famous quotes, dating back to the years before the Cultural Revolution, states that 'it doesn't matter whether a cat is white or black, as long as it catches mice.' In other words, he did not worry too much about whether a policy was capitalist or socialist as long as it improved the economy.

In December 1978 at the Third Plenum of the 11th Central Committee, Deng Xiaoping announced the official launch of the Four Modernisations, formally marking the beginning of the reform era. These were in the fields of agriculture, industry, national defense, science & technology. The Four Modernisations were designed to make China a great economic power by the early 21st century.

These reforms were a reversal of the Maoist policy of economic self-reliance. China decided to accelerate the modernisation process by stepping up the volume of foreign trade, especially the purchase of machinery from Japan and the West. By participating in such export-led growth, China was able to step up the Four Modernisations by attaining certain foreign funds, market, advanced technologies and management experiences, thus accelerating its economic development. Deng attracted foreign companies to a series of Special Economic Zones, where foreign investment and market liberalisation were encouraged.

5. Agriculture...The Basis of Chinese Success Story

The animating spirit of Deng's reforms was the liberation of the productive energies of the individual, a daring concept not just for a Marxist but for a Chinese (the concept of individualism has a negative connotation in Chinese society). He began, appropriately, with agriculture, which had been collectivised by Mao to a degree extreme even for the Communist world. The land was worked by communes that grew what the state directed and turned over all food produced to the state for distribution. Pay was based on a system of 'work points' that bore little relation to production: a peasant would accumulate a certain number of work points for planting rice seedlings, for example, but he or she would fare no better if the eventual crop was large than if it was small.

Deng's reforms abolished the communes and replaced them with a contract system. Though the state continued to own all land, it leased plots, mostly to individual families. Rent is paid by delivery of a set quantity of rice, wheat or whatever to the state at a fixed price. But once that obligation is met, families can grow anything else they wish and sell it in free markets for whatever price they can get (though the state determined limits on how much some prices could fluctuate).

Most of the first leases were for two or three years, but they were extended, usually for 15 years and as long as 30 years on grazing land. In 1985 a law established that made leases inheriterable. Peasants owned their draft animals, and those who prosper could buy machinery; ownership of tractors and machinery exploded.

Though the state retained the power to cancel a peasant family's lease and award it to someone else, that power was rarely exercised, therefore farm families started to regard the good earth as theirs and using it about the way they would if they owned it outright. Farmers were allowed, indeed encouraged, to build privately owned houses on their state-owned land....agriculture today in China is completely privatised.

The results have been simply phenomenal...agricultural output increased by 8.2 percent a year, compared with 2.7% in the pre-reform period, despite a decrease in the area of land used. Food prices fell nearly 50%, while agricultural incomes rose.

A more fundamental transformation was the economy's growing adoption of cash crops instead of just growing rice and grain and increases in agricultural productivity allowed workers to be released for work in industry and services, while simultaneously increasing agricultural production. Trade in agriculture was also liberalised and China became an exporter of foodstuffs, a great contrast to its previous famines and shortages.

Private enterprise began as a king of offshoot of the agricultural reforms. Mao's 'people's communes,' for all their faults, at least guaranteed everyone in the rural economy a job of sorts. Deng and his lieutenants feared that breaking up the communes would cause masses of jobless peasants to descend on the cities, where there might be no work for them either. So beginning in the late 1970s, individual farmers and village collectives were permitted to start sideline businesses and keep any profits.

The first enterprises were connected with farming: a group of peasants would set up a roadside market to sell their crops and perhaps buy a truck to haul their own produce as well as, for a fee, food grown by other peasants. But private entrepreneurs and village collectives very quickly expanded to all kinds of other businesses—inns, restaurants, stores, tailor shops, beauty parlors and light manufacturing like assembly of TV sets—often in competition with government-owned businesses.

Some entrepreneurs even opened services in major cities to recruit maids and other household help for busy urban families. Businessmen could hire workers privately, a practice that conventional Marxists regarded as inherently exploitative. Legally, no private entrepreneur was supposed to employ more than 15 hired hands, but local Communist Party officials often ignored that limit.

6.The Shift from Heavy Industry to Consumer Goods Industry

The pre-reform system, that operated under what Mao had copied from Stalin, was that ministries in Peking assigned all raw materials and dictated all investments, told every factory manager what and how much to produce and where to sell it and at what price, set wages and assigned jobs, took all profits and subsidised any losses. As late as 1984, one factory manager in Shanghai said, he had a discretionary fund of only US$33 that he could spend without getting permission.

Early on, Deng's government began revising this system too. In 1979, it halted a Stalin-style Five-Year Plan that emphasized heavy industry, like steel mills, and redirected much investment into consumer goods: refrigerators, washing machines, TV sets.

In the main move towards market allocation, local municipalities and provinces were allowed to invest in industries that they considered most profitable, which encouraged investment in light manufacturing. Thus, Deng's reforms shifted China's development strategy to an emphasis on light industry and export-led growth. Light industrial output was vital for a developing country coming from a low capital base. With the short gestation period, low capital requirements, and high foreign-exchange export earnings, revenues generated by light manufacturing were able to be reinvested in more technologically-advanced production and further capital expenditures and investments.

7. Final Thoughts on Difference with the Soviet Union.

Deng's program of reform termed Gaige Kaifang (meaning Reforms and Openness) preceded the most popular and well-known Perestroika and Glasnost introduced by Mikhail Gorbachev who was in reality 'borrowing' those terms from the Chinese.

On ascending to power in 1978, Deng ridiculed the Cultural Revolution slogan that held it was 'better to be poor under socialism than rich under capitalism.' The blunt, practical Deng offered instead: 'Poverty is not socialism.' Gorbachev observed and admired the changes that were taking place in China under Deng Xiaoping and they strongly influenced his own reform plans following his election as General Secretary of the Communist Party of the Soviet Union on the 13th of March 1985.

A nice and short synopsis (one to which I totally subscribe) on why China succeeded and the Soviet Union failed at implementing those critical reforms is given by Richard Evans, former British Ambassador to China and author of 'Deng Xiaoping and the Making of Modern China', he sees three secrets of success in China's drive to development that distinguish it from the failures of the former Soviet Union.

China began by reforming agriculture rather than commerce or industry. This made food and raw materials for light industry plentiful and thereby created conditions conducive to change in the cities.
China avoided hyperinflation and a rapid decline in living standards by removing price controls gradually, so that the consumer was not turned into an enemy of reform.
Economic reforms preceded political reform, which improves the chances that a more open political order will survive once it does come about.

Another key issue, not mentioned by Evans but still of huge relevance, was the 'implementation type' of the reforms....i.e. the bottom-up approach of the Deng reforms vis-à-vis to the top-down approach of Gorbachev. Bottom-up reform cannot be resisted because it requires no negotiations, avoids confrontations, and it spreads like an unstoppable plague. Top-down reform can be killed easily by ridding the leadership of reformers or by high-level sabotage, however it was perceived 'easier', particularly in a totalitarian society, than securing support at grassroot level.

In China, there was a massive grassroots constituency which clearly understood the reform’s potential benefits. They acted quietly on their own, according to the Chinese saying, 'Do more but say less; do everything but say nothing.'

In a little over 30 years, Deng Xiaoping policies have allowed China to move from the peasant society it once was to an industrial superpower with a GDP second only to the United States. Since the beginning of Deng Xiaoping's reforms, China's GDP rose from some US $147.3 billion in 1978 (the size of the US economy in 1978 was US $2.3 trillion) when it was the 11th largest economy in the world to US $9.7 trillion in 2010 (with an annual average increase of 9.5 percent over that period) and 2nd largest economy in the world overtaking Japan this year, Yi Gang, China's chief currency regulator, mentioned the milestone during an interview with China Reform magazine, which was published on their website on the 31.07.10...see link below.

http://english.caing.com/2010-07-31/100165775.html

So China is now just behind the USA (the size of US economy in 2010 US $14.8 trillion)...and most analysts are now predicting that China's economy will be the world's #1 by 2020 or even earlier...

OK...China's path and results have been totally different to those of the Soviet Union...but will it still collapse? to be continued

Why China Succeeded & The Soviet Union Failed at Implementing Reforms? Part I

2010-08-05T18:08:00.004+01:00

1. Setting the scene...Time for Reform

When historians look back on the twentieth century, they will note that the first three-quarters of the century were marked by extreme and violent revolutions on both the right and the left. They may be even more intrigued, however, by the fact that in the last quarter of the century, the governments established by those revolutions shifted to considerably more moderate positions and they did so in a non-violent manner.

The two most notable examples of this phenomenon were China and the Soviet Union, where Deng Xiaoping and Mikhail Gorbachev were engaged in trying to turn their countries away from what was called the 'Stalinist model', with its emphasis on heavy industry, centralised planning and authority, and political and cultural repression.

There were previous efforts to reform the Stalinist model, but what made the Deng and Gorbachev approach different was that they not only acknowledged the need to change, but also seeked to implement changes that challenged the vested interests of their own communist parties. Most of their colleagues, whether high officials or middle-level bureaucrats, seemed willing to recognise the shortcomings of the existing system, but they opposed with all their being its reforms, as the reforms threatened their existing status.

To understand what both leaders had to overcome, it is necessary to recollect what each found when he assumed power. In some ways their situations were similar...

Both countries began serious reform after the passing of a leader (or leadership) that abhorred reform. Deng Xiaoping and his allies succeeded Mao Zedong in 1978 after a brief power struggle with hardliners. Gorbachev succeeded the initial beneficiaries of Stalin’s purges of the 1930s, who rose quickly as young men to replace those who were executed.

At the time of Deng’s return to power at the Third Plenum of the 11th Central Committee of the Chinese Communist Party in December 1978, and Gorbachev’s selection as General Secretary of the Soviet Communist Party in March 1985, both were confronted with stagnant economies that were based on state ownership of the means of production, centralised planning and collectivisation of agriculture. Each man led one-party states that emphasised democratic centralism, meaning that all decisions and administrative appointments flowed from the top down.

2. The Soviet Union Case- Perestroika (Economic) & Glasnost (Political) Reforms...The Beginning of the End of the Soviet Union

These were the 2 key areas of reforms that the seventh and last General Secretary of the Communist Party of the Soviet Union (serving from 1985 until 1991), and the last head of state of the USSR (serving from 1988 until its collapse in 1991) Mikhail Gorbachev introduced as ways of reviving the stagnant Soviet economy.

In 1985, he announced that the Soviet economy was stalled and that reorganisation was needed. Gorbachev proposed a 'vague programme of reforms', which was adopted at the April Plenum of the Central Committee.

Perestroika poster...

'Don't Be Afraid of Work.'

Gorbachev's economic changes did not do much to restart the country's sluggish economy in the late 1980s. The reforms decentralized things to some extent, although price controls remained, as did the ruble's inconvertibility and most government controls over the means of production.

By 1990 the government had virtually lost control over economic conditions. Government spending increased sharply as an increasing number of unprofitable enterprises required state support and consumer price subsidies continued.

Tax revenues declined because republic and local governments withheld tax revenues from the central government under the growing spirit of regional autonomy. The elimination of central control over production decisions, especially in the consumer goods sector, led to the breakdown in traditional supply-demand relationships without contributing to the formation of new ones. Thus, instead of streamlining the system, Gorbachev's decentralisation caused new production bottlenecks.

He soon realised though that fixing the Soviet economy would be nearly impossible without also reforming the political and social structure of the Communist nation.

Glasnost poster...

'Be Bold, Comrade! Openness: Our Strength!'

While glasnost is associated with freedom of speech, the main goal of this policy was to make the country's management transparent and open to debate, thus circumventing the narrow circle of apparatchiks who previously exercised complete control of the economy.

Through reviewing the past or current mistakes being made, it was hoped that the Soviet people would back reforms such as perestroika. However, relaxation of censorship resulted in the Communist Party losing its grip on the media. Before long, much to the embarrassment of the authorities, the media began to expose severe social and economic problems which the Soviet government had long denied and covered up.

In Summary...

What Gorbachev did not realise was that by giving people complete freedom of expression, he was unwittingly unleashing emotions and political feelings that had been pent up for decades, and which proved to be extremely powerful when brought out into the open.

By the late 1980s, the Soviet government came under increased criticism and members of the Soviet population were more outspoken in their view as Gorbachev's policy of economic reform did not have the immediate results he had hoped for and had publicly predicted. Glasnost did indeed provide freedom of expression, far beyond what Gorbachev had intended, and changed citizens' views towards the government, which played a key role in the collapse of the Soviet Union.

3. The Chinese Case- From Mao Zedong's 'The Great Leap Forward' & 'Cultural Revolution' to Deng Xiaoping's 'Economic Reforms'

During the 1950s, Soviet-guided China followed the Soviet model of centralised economic development, emphasising heavy industry, and delegating consumer goods to secondary priority; however, by the late 1950s, Mao Zedong had developed different ideas for how China could directly advance to the communist stage of Socialism (per the Marxist denotation), through the mobilisation of China’s workers. These ideas progressed into the 'Great Leap Forward'.

The 'Great Leap Forward' of the People's Republic of China (PRC) was an economic and social plan used from 1958 to 1961 which ostensibly aimed to use China's vast population to rapidly transform the country from an agrarian economy into a modern communist society through the process of agriculturalisation, industrialisation, and collectivisation.

The 'Great Leap Forward' is considered as a major humanitarian and economic disaster, effectively a 'Great Leap Backward' that affected China in the years that followed. Industries went into turmoil because peasants were producing too much low-quality steel while other areas were neglected.

Furthermore, uneducated low-income farmers were poorly equipped and ill-trained to produce steel, partially relying on backyard furnaces to achieve the production targets set by local cadres. Meanwhile, essential farm tools were melted down for steel, reducing harvest sizes. This led to a decline in the production of most goods except substandard pig iron and steel. To make matters worse, in order to avoid punishment, local authorities frequently exaggerated production numbers, thus hiding and intensifying the problem for several years.

In the meantime, chaos in the collectives, bad weather, and exports of food necessary to secure hard currencies resulted in the Great Chinese Famine. The official toll of excess deaths recorded in China for the years of the Great Leap Forward is 14 million, but scholars have estimated the number of famine victims to be between 20 and 43 million.

On the other hand on May 16th 1966, Chairman Mao launched 'The Great Proletarian Cultural Revolution' or simply the 'Cultural Revolution' to stem what he perceived as the country's drift away from socialism and toward the 'restoration of capitalism'. The campaign, which was euphorically described at its inception by its progenitors as 'a great revolution that touches people to their very souls' and which inspired radical students across the world, was again another major catastrophe that created a nation-wide chaos and economic disarray and stagnation that only ended officially with Mao's death in 1976.

The origins of the Cultural Revolution can be traced to the mid–1950s when Mao first became seriously concerned about the path that China's socialist transition had taken in the years since the CCP had come to power in 1949.

Mao concluded that the source of China's political retrogression lay in the false and self–serving view of many of his party colleagues that class struggle ceased under socialism. On the contrary, the chairman concluded, the struggle between proletarian and bourgeois ideologies took on new, insidious forms even after the landlord and capitalist classes had been eliminated. The principal targets of Mao's ire were, on the one hand, party and government officials who he felt had become a 'new class' divorced from the masses and, on the other, intellectuals who, in his view, were the repository of bourgeois and even feudal values.

The Cultural Revolution is now referred to in China as the 'decade of chaos' and is generally regarded as one of the bleakest periods in the country's modern history. The movement's ideals were betrayed at every turn by its destructive impulses. Hundreds of thousands, if not millions, of officials and intellectuals were physically and mentally persecuted. The much–vaunted initiatives that were to transform the nation often had disastrous consequences for China's education and cultural life. Economic development was disrupted by factional strife and misguided 'ultraleftist policies'.

Enter Deng Xiaoping...to be continued

China or India 2020 & Beyond- To Be or Not To Be The Next Superpower...That's The Question

2010-07-29T15:15:00.004+01:00

China Reigns Supreme

On paper and looking at the current statistics China wins the race...and by a long way!!

Global Trends (the latest one is Global Trends 2025) is an excellent strategic analysis produced by the US National Intelligence Council (NIC) on how world developments could evolve, identifying opportunities and potentially negative developments that might warrant policy action.

http://www.dni.gov/nic/PDF_2025/2025_Global_Trends_Final_Report.pdf
That report, which was published in November 2008, indicated that China was going to be the world's 2nd largest economy by 2025, behind the USA.

However, on the 21st of January this year John Hawksworth, head of macroeconomics at PriceWaterhouseCoopers (PWC), said in a report published in London, that China could overtake the United States to become the world's largest economy as early as 2020!! underlining the "seismic change" in global economic power.

Jim O'Neill, chief global economist for US investment bank Goldman Sachs, and the one coined the term 'BRICs' to refer to the four emerging market powerhouses Brazil, Russia, India and China (which have since formed an informal grouping to discuss global issues and economic policies) indicated in a Global Economics Paper (No. 99) entitled: Dreaming With BRICs: The Path to 2050 (published 01.10.03) that China's economy was going to overtake the United States by 2041.

In other words, the speed of growth and development of the Chinese's economy is surpassing the most optimistic forecasts...currently expected to overtake the US's economy 21 years earlier than predicted by Jim O'Neill and his team at Goldman Sachs only 7 years ago!

Size of Top 10 World Economies in 2010 (GDP in US $ trillion)

1 USA 14.8
2 China 9.7
3 Japan 4.3
4 India 3.9
5 Germany 2.9
6 Russia 2.21
7 UK 2.18
8 France 2.15
9 Brazil 2.14
10 Italy 1.8

Size of Top 10 World Economies in 2020 (GDP in US $ trillion)

1 China 28.1
2 USA 22.6
3 India 10.2
4 Japan 6.2
5 Russia 4.3
6 Germany 4.0
7 Brazil 3.9
8 UK 3.4
9 France 3.2
10 Mexico 2.8

Comments ref. changes in world economic order from 2010 to 2020

India will displace Japan from 3rd place as early as 2012.
New arrival in the top 10...another emerging economy Mexico.
Brazil's economy becomes considerable larger than both UK & France.
Russia moves ahead of Germany into 5th place, making the largest Western European economy only 6th in the world.
The gap between India in 3rd and Japan in 4th is equivalent to the size of the German economy in 2020 (i.e. US $4.0 TRILLION!!)

R & D...a key competititive advantage

Moreover, it's expected that China will lead the world's scientific research by 2020. Vast state investment in schools, universities and research programmes has driven the rapid growth, with academic discoveries rapidly tapped for commercial potential. Chinese scientists are particularly strong on chemistry and materials engineering, both considered central to the country’s industrial development and economic future.

The figures, compiled by the publisher Thomson Reuters for the Financial Times , showed that Chinese scientists had increased their output at a far faster rate than counterparts in rival 'BRIC nations'. Although India has long been tipped as the most likely threat to US academic supremacy, the study found it now lags well behind China.

So...game over then...2020 China is the Next Superpower! Maybe...just Maybe

The case for India
1. The reigning superpower would like to see India, rather than China joining the ‘elite club’

A recent US strategic review, Quadrennial Defence Review 2010 (Feb. 2010), suggests that the US is more comfortable with the rise of India than it is with the ascent of China. According to the review, Washington wants India to play ‘a more influential role in global affairs.’

The Pentagon review, issued every four years, broadly sets the US security and military policy and worldview. So it’s interesting that the rise of China and India is the dominant theme of the 2010 review.

If the US finds itself more at ease with India, rather than China, and it makes perfect sense. Their religious and cultural pluralism, English language and the fact that the US and India are home to the two biggest and most successful film industries are some of the other factors. Some of the brightest minds in the Silicon Valley and US universities are from India. These ties in recent times have expanded to military and economic cooperation making it a truly win-win partnership.

Understandably, China makes the US uneasy with its pace of economic and military growth as well as its growing political clout. The tightly controlled, single-party ruled socialist China also worries the US because it defies and challenges Washington’s global supremacy.

2. The population issue

India will overtake China as world's biggest country by 2026 said a report published in July this year. India's current population of 1.1 billion will swell by 371 million in 2026, the report said, taking it beyond China's current 1.35 billion. At the same time, China is aging faster than any other country in history, largely due to its one child policy.

China’s working-age population will begin to contract starting around 2015 and will experience negative growth rates beginning around 2020. By 2025, the size of India’s working-age population will overtake China’s, and by mid-century will be a staggering 50 percent larger.

China will start ageing and suffering from a declining workforce, and will be forced to revalue its currency. So its growth will decelerate, just as Japan decelerated in the 1990s after looking unstoppable in the 1980s.

Roughly a fifth of the world’s children reside in India, and about a third of its population is under 14 years of age, one of the highest ratios in the world. Astoundingly, over the next two decades, India will add about a quarter of a billion workers to its labour force — a figure that nearly approximates the entire current US population! As a result, by 2020 India will provide 25 percent of the global workforce.

Over the next 25 years India will reap a demographic dividend of high economic growth...but only if they make huge investments in human resources and health. Pavan K Varma, one of India's most influential social commentators, recently explained that India already produces 160,000 newly qualified engineers and more than one million technicians every year, which will increase as its population and investment in education rise.

3. The faster GDP growth

Already this year India’s GDP growth is expected to be higher than China’s whose GDP will likely grow by between 8.3% and 8.8% next year, while a bountiful monsoon this year and impending tax reforms mean India may reach 9.0 per cent in the financial year that runs from April 2011 to March 2012.

China’s economy has been growing at a double-digit pace for much of the past decade but is starting to slow as the government in Beijing eases back on stimulus measures and seeks to put a brake on runaway property prices.

India has also made better use of invested capital than China. China's investment as a share of GDP is twice that of India, but its GDP growth rate has been only 50 percent higher. Rising domestic investment is likely to lift India's trend GDP growth rate way above 7 percent for some time...

India's economic reforms, which formerly were driven by responses to crises, are now driven by policy and several key sectors, including pharmaceuticals, power, telecommunications, civil aviation, insurance and real estate, are now open to foreign direct investment. Many other positive steps have been taken, such as recognising product patents on drugs, lessening of bureaucratic controls and the recent announcement by the main opposition party that they will support ongoing reforms.

China's export-oriented model will erode sharply - the world will no longer be able to absorb its exports at the earlier pace. Meanwhile, India will gain demographically with a growing workforce that is more literate than ever before. The poorer Indian states will start catching up with the richer ones. This will take India's GDP growth to 10% by 2020, while China's growth will dip to 7-8%.

India is definitely picking up pace in its GDP growth, though inflation remains a significant risk factor. As a consequence, Reserve Bank of India Governor Duvvuri Subbaraor raised interest rates for the fourth time since mid-March on the 27th of July to cool prices. India’s wholesale-price inflation rate has stayed above 10 percent since February and the finance ministry expects it to accelerate as the June 25 fuel-price increase filters into the economy. The increase was by 0.50%, which was more than the expected 0.25%.

So...it's India Then...The Next Superpower! Well...Yes and No

Improving private consumption, capex and capital inflows will lead to strong growth in 2010-11, but sluggish structural reforms, liberalisation and removal of supply-side bottlenecks will prevent a return to 9-10 per cent growth rates in the coming years. India has not had a full year of double-digit growth in the six decades since gaining independence at the end of the 1940s, though it reached 11.3 per cent for one three-month period in 2003-04 and two quarters of 10.2 to 10.3 per cent in 2006-07.

India’s ‘demographic dividend’ is still more hypothetical than real, since the vast bulk of the youthful workforce is neither well educated nor engaged in particularly productive employment.

Unlike China, India cannot exploit its comparative advantage as a labor-abundant economy due to highly restrictive laws that shackle the capacity of large-scale manufacturing companies to absorb surplus rural labor. As a result, the country’s manufacturing sector remains largely skill- and capital-intensive — a disconcerting anomaly given India’s raw demographic bounty...which makes India’s underuse of its growing labour force the country’s Achilles’ heel.

In the abstract, India’s future might appear brighter. Despite its spectacular current growth, China is on the verge of a significant demographic decline, apparently destined to become a rather curious type of great power — gargantuan but filled with a rapidly ageing and relatively poor populace. Moreover, it’s an open question whether its authoritarian political structures can adapt to the demands of economic globalisation. India, on the other hand, has obvious potential for gains simply from making better use of its existing labour and knowledge resources. The pivotal question is whether India can get its institutional act together.

Finally...The 'Chindia Effect'

Regardless of who actually wins 'the superpower race' the influence of these 2 countries over the next 2 decades will be dramatic.

We can already see now changes in the world order, with The Group of 20 (G20) developed and emerging economies taking over last year from the traditional Group of Seven (G7) UK, Canada, France, Germany, Italy, Japan and USA-- as the main forum for economic talks.

Authoritarian regimes often yield impressive short-term economic results, as seen in Germany in the 1930s, the Soviet Union in the 1950s, Brazil in the 1960s, and China in the 1990s. Unencumbered by such things as property rights, legal recourse, and public debate, the authoritarian regime can harness significant economic and political resources to create impressive industrial and economic feats.

Conversely, democratic regimes tend to be sloppy affairs with loud public discourse, a vocal press, stubborn land owners, and a myriad of civil liberties. Far from being able to harness economic resources, the government often must act more as a regulator. The result is that there are very few grandiose government-sponsored projects. Instead, there are countless private-sector initiatives driven by the invisible hand of the market. While the authoritarian regime is envied by some, the fact is that longer term, this type of socioeconomic model has typically led to economic and social distortions.

My personal view?? I say the 2010 to 2020 decade will belong to China and 2020 t0 2030 will be India's decade...from then on revising who's the real superpower will certainly be interesting!

One plausible scenario 'cold war 2' develops with India (more open, democratic, pluralistic) taking the role of the USA in 'cold war 1' and China (centric, undemocratic) the role of the USSR.

Stress Test...is the pain over for UK banks?

2010-07-27T16:00:00.000+01:00

It's very interesting to observe the current 'signs of recovery' in the market. On the 23rd of July The Committee of European Banking Supervisors (CEBS) announced the results of an EU-wide stress test of the banking system.

The overall objective of the 2010 exercise was to provide policy information for assessing the resilience of the EU banking system to possible adverse economic developments and to assess the ability of banks in the exercise to absorb possible shocks on credit and market risks, including sovereign risks.

The results were, in particular, encouraging for the 4 major UK banks: Lloyds, RBS, HSBC and Barclays as they all passed the tests with flying colours. The tests were performed by the FSA on behalf of the CEBS.

Of the 4 banks the results are more relevant to the 2 nationalised banks...Lloyds and RBS...and not surprisingly in day were flat for the FTSE they both performed remarkably well...with Lloyds and RBS both shares prices increasing over 8% today!! RBS at 50p and Lloyds at 70p are looking for me as the best buys of 2010...by a long way!!

Latin America...has its time finally arrived?

2010-07-06T16:21:00.001+01:00

I recently read an article on the FT, which indicates that economic growth in Latin America and the Caribbean is forecast to average 4.5 per cent this year, twice the estimated US rate and four times faster than the eurozone. Fiscal deficits in Latin America are expected to average 2.3 per cent of gross domestic product in 2010, compared with 6.8 per cent in the euro area and 10.6 per cent in the US!!

http://www.ft.com/cms/s/0/28446610-8930-11df-8ecd-00144feab49a.html

What?? Fiscal discipline and faster economic growth in Latam than in the 'knowledge economies' of the EU and USA?? What's going on?? What happened to the land of hyperinflation and generalisimos??

The answer is the 'agribusiness boom' particularly in the Southern Cone Region of Brazil, Paraguay, Argentina, Uruguay & Chile (all part of the MERCOSUR common market). This region has positioned itself as a powerhouse in major commodities and with the huge demand from China and increasingly from India this very competitive and vast region of the world has become the 'world's agriculture heartland' with good climate and modern and efficient technology this is a key strategic area now and over the next 20 years as the balance of power/money moves East.

However...2 big problems remain in Latin America...EDUCATION & INFRASTRUCTURE!! There are huge disparities in wealth and levels of economic development...due to mainly to the inability of local governments to collect taxes...and more importantly to use to taxes efficiently and honestly!

And...therefore we come to the chicken and egg question?? The only way in which probably the area of the emerging world with the biggest potential for improvement in quality of life and economic development can achieve its goals is through an efficient and honest tax system, but taxpayers refuse to pay taxes as they feel their money just goes to fill somebody's pocket!!

Instead of having that money reinserted in the local economy via better infrastructure, health and education...it goes abroad to benefit developed economies and not their own.

In other words there is growth, but the wealthy fear for their lives (kidnapping, armed robbery are widespread). There is growth, but the have nots increase not only in number...but also in resentment and we know what happened in France when the masses had enough of the excesses of the King and his entourage!

Latin America is blessed as one of the most beautiful and plentiful areas of the world, but until they develop a love for the country that matches the passion for the national football team...well this great opportunity for a restructuring of the social/economic system triggered by the current economic boom, will simply pass by the majority of the population and instability will simply increase...let's hope the Presidents shown here get the message.