1929 for China, 1974 for the USA
Posted on 08 December 2008 with no comments from readersOrder my book online from this link
For the Chinese the global financial crisis is fast morphing into a depression with factory orders falling faster than the US in the Great Depression and train stations crowded with former workers heading home for a life with their relatives.
In the US things are bad but they are not that bad. It is 1974 all over again, not 1929. That was also a terrible year for stocks, and yes a Chrysler bailout was the topic of the day.
Indeed the 1974 financial crisis was still being discussed by brokers in 1982 when I went for an interview in the City for a job as a stock broker. That was also a nasty moment for real estate after several years of boom, and it took five years for prices to recover, largely thanks to inflation and not in real terms.
Rural China
So spare a thought for an emerging market like China if you are a financial big shot in the West who feels very down on their luck at the moment. You are not facing the rural retreat of the Chinese in a remake of John Steinbeck’s ‘The Grapes of Wrath’.
The difference is in the level of absolute wealth in the different societies. In the US people still have access to wealth and debt levels on average homes are not so huge.
For the Chinese the wealth was very nouveau and fleeting. Car ownership had soared in the past few years in the People’s Republic, now those same drivers will struggle to fill their tanks.
That means, that far from avoiding or being disconnected from the global financial crisis the Chinese will feel it hardest. It also means that the solution to the crisis will have to come from the leadership of the US and president elect Obama who is making the right noises while playing down expectations.
Necessary stimulus
However, the 14 per cent of GDP Chinese stimulus package does at least show that China is not locked in Hooverian policy mode like the US of the early 30s. Yet given that the scale of the challenge is arguably bigger that is just as well.
If we look back to the 70s that reflation and inflation and devaluation saw the States emerge from its economic black hole by the end of the Carter years, admittedly only in a shape sufficiently strong to take the cold turkey of Reagan and Paul Volcker, now back chairing Obama’s crisis committee.
This is not going to be an easy period for anybody in the developed world, but let us all remember that it is going to be a darn sight worse in the Third World. We should also take care to make sure future enemies are not created out of these hard times, and look upon cries for help with a certain self-interest.
Perhaps we should all be looking at serious infrastructure investments rather than concentrating on scattering money to boost consumption – the very thing that got us into a mess in the first place. In that the Chinese priorities are presently ahead of those of the USA.
no Comments posted by readers:
Any comment about 2nd December 2008 (and onwards), where gold went to backwardation for the first time ever in history?
—> “China will recover first” has Western treasuries and big fgn reserves.
Gao xi-qing bets against Western currencies (that they will fall vs. Yuan): news
12/08. Bill Fleckenstein, why China will recover first.
– : Bil Fleck En Stein, Contrarian, “China will pull ahead first,”
v. PRC is vulnerable to declines in the West, on twenty
four h. gold sites etc 12 . 08
1. Gold is back up again now, nothing seems to keep it down!
3 & 4. Just consider the relative size of the Chinese GDP to US – less than 10% – and the number of mouthes to feed, four times more – I think it is a no brainer who is in the biggest trouble. Americans are far, far richer and to expect the Chinese to lead a recovery is laughable. The US will get their and China will follow – they have $1.4 trillion in reserves while the US has already committed $8 trillion to its bailout plan – a sense of perspective is needed.
“a sense of perspective is needed” Maybe I am missing something Peter? $8Tr has been created out of thin air, and it seems nothing will stop the banksters “printing” ad infinitum. Surely this bodes ill for the $US in the future, not to mention the potential implosion of some nominal $600Tr toxic OTC derivatives, whioh I understand are still being manufactured by the teeny-bopper geeks at the likes of Goldman Sachs et al.
Jim Sinclair seems to have a realistic perspective: the US is facing much more than 1974, when yet again conditions were different: Now we have 70% of GDP based on consumption of things not needed, debt ratios beyond all rational limits combined with negative interest rates, massive future liabilities for medicare and pensions which can never be met, etc
Let me see – maybe I have not got it right: GDP USA 12Tr, 70% useless consumption (non wealth creating), thus 3.6Tr is part wealth creating. China 80% productive GDP say 1.5Tr plus actual 1.4Tr dollar reserves, some soon to be converted to gold, that’s 2.9Tr, not too far off USA! BTW that’s if you believe the US manipulated statistics which we all know are fairy land stuff.
With little debt, strong local agriculture traditional sustainable savings (like Japan and Asians generally) and a less fragile industrialised (more robust in dark times) infrastructure (like Russia in 1998); I would guess China’s future is far more secure.
Even here in S. Africa, we feel far more secure, as if watching from the grandstand of the world, as the G7 implode in ever decreasing circles. Because of JIT lean manufacturing systems, UK is only 9 meals away from going hungry and the Baltic Dry Index is not giving any hope for the better. And in USA I understand that goods move an average of 1,500 miles before reaching the enduser.
I postulate that the developed world is balanced on a knife edge – close to tipping point. But all my friends say I am doctor gloom! Can you offer any hope?
China is a very, very poor country in per capita terms. That means individual Chinese will suffer far more if they lose their jobs than in the West. Also these exports are essentially a capital goods cycle – and are not counterbalanced by a large service sector – so that will exaggerate the downturn as there is no cushion. So don’t be too surprised if China becomes unstable as a result of this crisis. The positive spin is a government nonsense of manipulated statistics but even the FT’s Lex has fallen for it.
Not sure I would feel secure in South Africa with Zimababwe in turmoil on my doorstep, and so many of its nationals now resident and unemployed on the fringes of your cities. These are indeed difficult times – and it is hard to find a safe haven in this crisis. Gold and silver look the best options still – and current weakness will pass as inflationary stimulus packages work through the system.
1929 for China? Are you kidding me! If it is 1974 all over again for the USA, then why won’t it be the same period for China like Japan? As a Chinese, I think you’re too pessimistic about China and too optimistic about USA. I would rather look back into the history, let’s say one hundred years ago – 1908, China is more more like USA, whereas USA is like UK then. Well, this point is not brand new, Mr. Jim Rogers give a good reference – “A Bull in China”. You don’t need to buy the story, but please don’t exaggerate the Chinese problem and underestimate the US situation!
Just remember another good article I read before, pls have a look:
http://ming.tv/flemming2.php/__show_article/_a000010-001040.htm