Foreign powers are also battening the hatches

Jesse passes on a report from China Daily about China's decision to diversify out of dollar-denominated assets, and he notes that Japan and India are doing the same.

Prepare for a storm; they are.

‘Late late yestreen I saw the new moone,
Wi the auld moone in hir arme,
And I feir, I feir, my deir master,
That we will cum to harme.’

O our Scots nables wer richt laith
To weet their cork-heild schoone;
Bot lang owre a’ the play wer playd,
Their hats they swam aboone.

("Sir Patrick Spens")

No paper tiger

Shortly after the Ossetian excursion, Putin tranquillizes a tiger. Could he be sending a message over to the south-east?

Changes in foreign holdings of US Treasury Securities, June 2007 - June 2008

US mortgage GSEs: Bank of China is taking cover

The Chinese have been reducing their investment in Freddie and Fannie (htp: Alice).

The New World Order

I said earlier this week that rich and powerful foreign investors will call the tune now, and London Banker relays a threat from the Chinese re Fannie and Freddie. Unlike the domestic citizen and taxpayer, these people absolutely will not be stiffed.

Which is why we will get high interest rates, to prevent robbery-by-inflation. Which is why cash may remain on its throne for quite a while yet.

The question remains, which currency? One says the yen, another coughs and says "Euro." Wish I knew.

The US owes China a trillion dollars - Setser

"... China’s government already plays a significant role in determining the allocation of credit inside the US economy, not just the allocation of credit inside China’s economy..."

Brad Setser (htp: Jesse's Cafe Americain)

Setser reported to Congress a year ago on the USa's vulnerability to foreign creditors and investors. See my blog here and here.

USA $800 billion subsidy to Asian investors

Read Karl Denninger on how the Fed has been forced to prop up shares of Fannie Mae and Freddie Mac, to please foreign equity holders such as China.

Further comment from Mish.

The taxpayer pays all - and presumably we're looking to do something similar here, to keep the banking show on the road.

This may be the time when those predictions about the Dow hitting 9,000 and gold breaking through $1,200 start to come true.

Inflation, deflation, the world economy and freedom

This article by Matthew Beller on the Mises website tries to show how the US government can't "print its way out" of the present crisis.

The Federal Reserve controls the "monetary base" of physical currency and bank deposits, which represent only 15% of the money supply; the rest is bank lending. Currently, the banks are in a fright, so they are reducing credit, on which the economy depends. But if the Federal Reserve increases the monetary base, the banks' ability to multiply their deposits could lead to hyperinflation and the destruction of the dollar altogether. Hence the attempts to maintain confidence in the banking system instead, even if that means expensive financial support.

This isn't enough for the monetarists. They say the lending in the recent boom went on consumer spending, which encouraged producers to make too much of the wrong stuff and so the economy developed in the wrong way. The econo-Puritans say we should accept deflation because, although temporarily painful, it will rebalance the economy for a more sustainable long-term future.

However, nobody likes nasty medicine, so a political question is whether democracies will allow politicians to take timely corrective action. Past history suggests that we'll only vote for the treatment when we're half-dead, and even then, we'll curse the doctor afterwards.

My feeling is that this tendency to delay means that underneath the business cycle is a fatal linear trend, moving wealth and power to less democratic countries. When the world economy recovers, it may be on very different terms: for although (e.g.) China may suffer a setback as the Western consumer reduces spending, Chinese industrial capacity has been growing over recent years - not only the factories and tools, but equally importantly the skills base. At the upturn, the East will be well-placed to cater for reviving demand, while the West struggles to supply appropriately-skilled labour, and tries to buy back some of the industrial materials it had previously exported. And as the East industrialises, it will generate locally a greater proportion of world demand.

I cannot see how we can avoid becoming poorer, on average, than we have been in past decades, even if an elite in our society grows richer and more powerful (a phenomenon associated with more impoverished economies). We cannot rely on high-end production: China will address its quality issues, as Japan did in the 1950s. Nor can we be complacent about intellectual property rights, in a world where might makes right.

But China itself has deep problems - an growing and ageing population; an increasingly unbalanced demographic structure, thanks to attempts to limit family size; pollution; water shortgages; declining quality of farm land. The Chinese leadership faces a long-term challenge in dealing with unsatisfiable domestic expectations, which will tend to make it intransigent in its relations with foreign powers. The East-West contest may become characterized by desperation on both sides.

And so democracy in the West will come under pressure. In difficult times, people are thrown back on a network of social relationships and mutual expectations, but sudden, unreal access of wealth has tempted us to put our faith in the amassing of cash, and/or government intervention, to the detriment of agreed internal social control and support systems. When the system enters its failure phase, which Fischer ("The Great Wave") thinks may be starting, the social threads begin to snap: inflation, crime, family breakdown, war. The reification of the ties that bind us together tempts our government to maintain the social order through externalised means of surveillance and enforcement. Ultimately, the mismanagement of national budgets is a freedom issue.

China shakes the steel world

Shen Wenrong, the billionaire who bought Dortmund's Phoenix steel plant and moved it to the Pearl River, is increasing his hold on the privately-owned sector of the Chinese steel industry, as reported in SteelGuru here.

Readers of James Kynge's "China Shakes the World" will recall that Wenrong acquired Phoenix in 2004 partly in order to get into production fast, but also because, having bought it at scrap valuation during the last steel recession, he would not be encumbered with the debts that would wipe out his rivals in the next one.

Which means that he's looking beyond the next recession. And when the recovery comes, where will the West's capacity be found? Those who say that the East's fortunes are bound up with those of the West, had better get new spectacles to correct their short-sightedness.

Bear market: Steiff comes home

Chasing lower costs, Steiff outsourced around a fifth of its production to China in 2003 but has now decided to come back because of concerns about quality and staff turnover.

Steiff is one of a small number of German firms which are swimming against the tide and leaving China, despite its cheaper workforce and a burgeoning consumer population. With fuel at record highs, some cite mounting transport costs.

Production of Steiff toys, which include a distinctive long-limbed bear with a melancholy growl, will come back to Germany and other countries in Europe by the end of 2009.

(Reuters)

That's sort of heartening, except that as it continues to develop, China will deal with quality issues. Japan listened to W. Edwards Deming in the 1950s and soon "Made in Japan" meant, not cheap, tinny and shoddy, but innovative, reliable and affordable.

In any case, this is clutching at straws. Tiny companies making high-value toys won't sustain Western Europe. We need major changes if we're going to become globally competitive. For example, health and welfare provision will have to be reassessed as the budgets shrink.

And here's a big debate to come: how much education? How much benefits the economy, how much is positional (Swiss finishing school for your daughter, etc), and how much is luxury consumption, like foreign holidays and Lagerfeld dresses?

How much education is simply an illogical, implicit pretence that the government is doing something to give all children relative advantage, particularly yours? How much is to disguise unemployment? How much is to keep potential young criminals penned-in during the daytime on weekdays? How much is to baby-mind children so that women can be driven out of their homes to do low-paid work?

As the money dries up, there will be an education debate, and it will be messy.

Zimbabwe: racism and international meddling

Mines in Zimbabwe

Zimbabwe on Saturday welcomed the failure of a Western-backed U.N. Security Council resolution to impose sanctions over its violent presidential elections, calling it a victory over racism and meddling in its affairs. (Reuters)

Racist...

Robert Mugabe is a member of the Shona tribe (as is opposition leader Morgan Tsvangirai), which comprises 70% of the population of Zimbabwe, occupying the centre and north of the country.

The Matabele (Ndebele) tribe, who tend to live in the southern part, make up half of the remaining minority, and (not surprisingly, in view of their post-Independence massacres by Mugabe's troops) are supporters of the MDC (Movement for Democratic Change). ''The denial of food to opposition strongholds has replaced overt violence as the government's principal tool of repression,'' the ICG wrote in August 2002.

Meddling...

Zimbabwe's natural resources include "coal, chromium ore [10% of the world's reserves], asbestos, gold, nickel, copper, iron ore, vanadium, lithium, tin, platinum group metals" (CIA World Factbook), and there are 10 or so foreign-owned mining companies operating there. The Zimbabwean kleptocracy has turned from seizing farms (which they either don't know how to run, or can't be bothered to), to grabbing controlling interests in foreign-owned firms, and a 25% no-compensation stake in mining companies. Presumably, in the latter case, they'll leave the operational side to the experts.

In 2005, the Chinese government and Chinese businesses supplied T-shirts for ZANU-PF supporters, jets and trucks for the Army, and the architectural plans and blue tiles for Mugabe's new 25-bedroom mansion. The recent attempt (April 2008) to ship a load of arms in, so that Mr Mugabe could deal with his little local difficulty, was described by the Chinese as "normal military trade". Annual trade between these two countries was expected to reach $500 million this year.

Zimbabwe is touting Russia for trade and business deals, including tourism (uniformed hunting trips in Matabeleland?)

Perhaps the reason 84-year-old Mugabe is hanging on, is that he and his entourage have a tiger by the tail. How could they get out of their land-locked country alive?

UPDATE

But why Russia? The New York Times fishes for an explanation as to why Russia indicates some willingness to consider sanctions, and then reneged, dragging China with her. The NYT is baffled, limply quoting the US Ambassador to the UN: “Something happened in Moscow.”

Could it be that Zimbabwe in itself has little interest for Russia, but this veto is a dog-whistle to other African nations where the Ivans may develop more serious business links?

Or could it be, as this blogger hypothesises, part of the Great Game between Russia and the US, particularly reflecting missile defence technology?

How skilfully does Robert Mugabe, the Dom Mintoff of East Africa, play off great nations against one another! If only his skills benefitted his country, also.

Any room for dissent?

I was listening to BBC Radio 4's "Any Questions?". The first audience question was on China's "media-savvy" handling of the Szechuan earthquake.

And with a disgraceful click, the supposedly diverse panel closed ranks behind China, despite some attempt by the chairman to generate at least a little debate. We heard that we have been indulging in "China-bashing" lately, and now that this earthquake has happened, we should stop all this nonsense about China's human rights and/or ecological violations.

I began to wonder whether there might be some business and party-political interests to declare, for I've rarely heard such a combination of unanimity and superficial reasoning. The message seemed to be, "Stop talking about Tibet, look at this crisis instead."

That's imposing a false perspective. China's own news media currently reckon the death toll from this terrible quake to be under 29,000; but "According to various estimates, up to 1.2 million Tibetans have died due to the Chinese occupation and various political campaigns since the Dalai Lama fled his homeland in March 1959." So in cold mathematical terms, Tibet has suffered a death toll 40 times as great - and far more avoidable. Why should a recent misfortune be the pretext for ignoring a long-standing injustice?

And as for rubbishing ecological concerns, there will come a time (and quite soon) when we have forgotten in which year this quake happened, but we will be dealing with the multifarious fallout of China's economic, demographic and ecological problems. For China is a distressed giant thrashing about in the small house of this world.

China's population last year was estimated at about 1.3 billion, and in the next ten years or so is expected to increase by maybe another 100 million. Over the last 60 years, life expectancy has more than doubled and infant mortality has reduced. So despite the one-child-per-family policy (not universally applied in China), the population continues to grow.

And, as time goes by, it is becoming a demographically unbalanced population. Thanks to the preference for sons, there is a disparity between male and female. Should China decide to become warlike in the conventional manner, she will have an almost limitless supply of expendable single men. (Meanwhile, Russia's population threatens to decline to such a degree that reversing the trend was "a key subject of Vladimir Putin's 2006 state of the nation address".)

Less frightening for us, but surely very worrying for the Chinese, must be the growing imbalance of numbers between young and old. Imagine a young Chinese couple who have their one child, but face supporting four elderly parents. And when that child grows up, perhaps up to 6 parents-cum-grandparents (up to 12, after marriage). And the healthcare costs!

And with a smaller proportion of girls surviving to breeding age, the demographic waist will be pinched further. Perhaps the one-child policy will eventually be abandoned.

Meanwhile, China's burgeoning populace must be fed, but how? Changes in diet and the progressive loss of arable land, and reducing yields from such land as is still fertile, have been a serious concern for a long time (see e.g. here).

Then there's the demand for water, and energy, and how to have breathable air while exploiting China's giant coal reserves and rapidly expanding heavy industry.

It's far too simple to make China into a villainess, but she faces enormous difficulties on the road away from her past abject poverty and suffering. These translate into mighty pressures that the rest of the world will feel. We must find a way to assist China in the solution of her problems - but self-censoring discussion of her external relations will not help us find realistic answers.

Nationalism and internationalism

"James Higham" joins his voice to those who detect a revival of the nationalist spirit.

I don't think nationalism will be confined to losers in the game, or rejected by those who claim to love all mankind. Once there was Bukharin/Stalin's "Socialism in one country"; soon it'll be "China first". I can't blame the latter - they have worked so hard for what they've got, and won't understand why we think we can whinge it all back from them.

Speaking as the man in the street, my perception is that we have had a long period in which global businesses and a carpetbagging international managerial class developed and made fortunes. The liberal economists say this system is great for all of us, and should stay that way; perhaps so, if we had honest money and sound national budgets, so the correction mechanisms could steer the course of international trade more steadily.

But thanks to criminal negligence, incompetence and greed by those who could have maintained the integrity of the economic system, I think the aspirant working class and lower middle class in the developed world are paying heavily, and will pay more heavily. As they give up on their aspirations, we shall see a ballooning underclass, increasing the drag on national economic performance; but the situation may prove impossible to change for electoral reasons in a sort-of-democracy. The gap between rich and poor in our countries has widened, but will widen further: "Devil take the hindmost."

At the same time, on both sides of the Atlantic, people suspect a sell-out by the political class, which is intertwined (professionally and often maritally, or extra-maritally) with the business, media and public relations people. I have often said that I think we are seeing the reconstruction of the aristocracy in Europe. Many Americans also fear that their society is moving away from its historic and constitutional foundations.

The implications for democracy, social cohesion and international relations are worrying.

Second blow

TV ad tonight: Woolworths children's jeans £2. I said, you wouldn't have got a zip for £2 a few years ago. (So many Birmingham kids I used to teach years ago thought school didn't matter, they'd be getting a job at Tucker Fasteners anyway. That or Lucas' - now joining the list of nostalgia subjects.)

Then a thought: when the recession really bites, the price war will be unrestrained. I don't know what is still manufactured in Britain, but in the second phase, when the poor become acutely cost-conscious, I can't see domestic manufacturers staying in business.

Of course, with social benefits still generous, we're not there yet (they're still buying their kids Xboxes and Lacoste trainers, while SoSecurity lay on taxis to take the tearaways to school-for-the-expelled); but wait for the tax and benefit reviews when public finances finally unravel.

And if I ever do get another new car (the Fiat Brava is kept going on a radiator refill every Saturday), maybe it's the Tata Nano for me.

I'm looking at checkmate and trying not to believe it. But that's my problem; the difference between Western waster education and Chinese school is too clear. And we'll be a sort of nationwide museum of once-were-workers. But I don't want to live in the past.

Hi ho-ho, hi ho-ho

It's stagflation, obviously, says Lance Lewis. And he expects gold to resume its climb. Good news for China: "The world’s largest producing nation with 276 t was [in 2007], for the first time, China", says 1read's Weblog.

For the playful, you can join the game here.

China sponsors African dams, for minerals

See this blog on Chinese support for foreign hydropower projects - and their growing responsiveness to ecological issues nearer home.

Tibetology

The New York Times on China, museums and winner's history.

But is it possible that some of our own museums have an agenda or two?

And after Tibet?

This is the disputed territory of Arunachal Pradesh (red) - currently Indian, formerly part of Tibet, and included in Tibet on modern Chinese maps. See "Better Days" blog post (Nov 2004) here; a current Indian political comment here; Wikipedia entry on the region here. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>

Tibetans number an estimated 5 - 7 millions. The official Chinese 2000 Census has the Chinese Han population in the "Tibetan Autonomous Region" (TAR) as merely 6% of the total. However, as this illuminating BBC guide explains, the TAR is not Tibet as its government in exile defines it. The larger Tibetan area including Amdo and Kham contains 6.5 million Tibetans and 8.5 million Chinese immigrants. And there may be bigger plans: "Chinese demographers back in the 1980s estimated that Tibet could provide living space for 100 million Chinese."

Tibet is important because of timber, minerals, extra living space for Chinese - and it houses up to a third of China's nuclear arsenal. A major interest is water, because Western China is very dry; among other plans, one is a hydroelectric plant exploiting the Brahmaputra River, which further down flows through Bangladesh and ultimately joins the Ganges. The Chinese claim it will have twice the output of the Three Gorges Dam. "Work is tentatively scheduled to begin in 2009 but has been described as a 'declaration of war' against India and Bangladesh. One of Tibet's most sacred lakes, Yamdrok Tso, has already been mined, tunnelled and used for hydroelectric development."

The population of Arunachal Pradesh (formerly a part of the Indian state of Assam) is slightly over 1 million. The area was a lifeline to China in WW2 after the Burma Road was cut off by the Japanese in 1942. It is well watered and forested.

UPDATE

Climate change already threatens to reduce the great northern Indian rivers to "seasonal water flows", without further constriction by Chinese projects. The potential extra disruption is discussed in this Guardian article from a year ago.

What the rubber mat said

I sat in my clients' office yesterday afternoon, waiting for them to arrive. The office had lovely new desks; as it turned out, not new, but taken from another business that has recently closed.

The reason for the delay - at least for one of the directors - was a last-moment requirement for tico rubber, needed next morning for anti-vibration matting under a five-ton machine that was being re-sited. The usual supplier, a major international concern, has recently shut down the closest depot to Birmingham. Rationalisation. Outsourcing. Globalization.

So while waiting, I tried to help my client find the material somewhere else. Googling away, we found it in the far north of England, or Cornwall; too far. Maybe just possibly in Market Harborough or Leicester? On calling the nearer companies, specifications and stock levels were doubtful.

My clients' business is contrarian: they move machines, and although originally that meant from one UK site to another, more often now it involves sending them abroad. As the decline of British manufacturing industry has accelerated, they've been very busy recently. For obvious reasons, the bonanza will end sometime.

But back to the matting. Once, suppliers of components you needed would be close at hand. Now we could be looking at journeys to the ends of the country - meaning cost, delay and maybe, sometimes, a lost contract.

The Pearl River in China is now home to myriads of small manufacturers, and the synergy improves everyone's productive capacity. Like it used to in Birmingham, "city of a thousand trades". But now in the UK, we could be dropping below the threshold of economic viability for manufacturing industry.

That's what the mat said to me.

A small town in Germany

The TV was on, and I forget what programme we were watching. Sometimes they were Dutch - we were near the border - but more often German. I was eleven, and would watch anything. Even the adverts were fun, linked by shorts featuring little cartoon characters, the Mainzelmännchen. HB cigarettes, Allianz insurance, Bear condensed milk ("Nichts geht über Bärenmarke……Bärenmarke zum Kaffee!")

Then a newsflash cut in: the President of the USA had been shot on a visit to Dallas and had been rushed to hospital. My father went upstairs. The programme resumed.

My father came down. I still remember him buckling his belt over his uniform, as ever uncomfortable and determined to do his best, a stocky man with a straight back, now full of tension. He watched with us as another newsflash came: the President was dead.

I think the camp sent a driver with a Jeep; in any case, Dad was gone. We watched some more TV, interrupted by occasional updates and speculation. Then it was time for bed. Flannel pyjamas, cotton sheets, the heavy blankets that trapped your feet. I went to sleep.

Lights woke me, illuminating the curtains. Heavy engines, headlights passing, heading in the direction of Düsseldorf. One after another after another. Now, I know they were tank transporters, racing to position the heavy armour in readiness for the Red invasion.

And now there are no more Communists, or so it seems. We buy fuel from the Russians, hardware and toys from the Chinese. The people my father, a gentle and sensitive man, was prepared to die fighting, are our friends and trading partners. As reported by The Independent, Chinese interests even supported our Conservative leader and former Prime Minister, Edward Heath (Sir Edward protested the following week, saying the claims were "misleading and inaccurate" - but did not go so far as to say that they were untrue). Surely, we're all friends now. After all, Dad had helped the Germans start to rebuild their country; he'd worked with German civilians, learned to speak the language fluently, married a German refugee. Wars happen, and so does peace. The people of the world are vexed by their leaders, yet love for one another endures and triumphs.

But Communism is not a nation, and does not love people. Everything, even its own most ardent supporters, can be burned on the altar of abstract principle. Informed that a general nuclear war would kill a third of humankind, Mao said good, then there would be no more classes.

And dictators, dressed in a little brief authority, ignore warnings. On the eve of World War II, when the conflict could yet be averted, Hitler was with guests in Berchtesgaden when the clouds over the mountains assumed an ominous red and yellow appearance. A woman told him "Das bedeutet blut, und mehr blut" ("This means blood, and more blood"); Hitler trembled, but then said if it must be so, it must be so.

As gypsies and beggars used to sing:

So proud and lofty is some sort of sin
Which many take delight and pleasure in
Whose conversation God doth much dislike
And yet He shakes His sword before He strike

(The Watersons performed it on "Frost and Fire", which our English teacher played to us in the late Sixties. I associate it with cold, freshness, the musty fragrance of the Monmouthshire woods, animism, hope.)

By degrees, this brings me to the current state of affairs. Our leaders wish us to believe that the history of our fathers is at an end, and now only efficient administration remains to be achieved. The revels of democracy are ended; they were fun, but their time is past.

No: as Christopher Fry said, "affairs are soul size", still. Although I do believe that sudden and total conversion is possible, as in James Shirley's now implausible-seeming play "Hyde Park" (who would have believed the Earl of Rochester's conversion? - and there are those who still doubt it, not knowing how the sinner hates sin), I doubt that all who worked with the old Soviet and Chinese Communist regimes have abandoned their principles and plans. Like the remark about the significance of the French Revolution (variously attributed to Chou En-Lai and Mao Tse-Tung), it's "too early to say".

Even if our leaders should be gullible or merely suborned, Jeffrey Nyquist reminds us again that there are still people who think differently from us, and we must be prepared. It is not all right to be weak, whether militarily or in our economies. Good fences (and good borders) make good neighbours.