Category: Trade Page 6 of 15

Growth Through Real Estate Bubbles v.s. Sustainable High Income Growth (China)

On November 4, 2022

All right. Let’s talk some basic development stuff, primarily in the neoliberal era.

Because industrial policy was disallowed with a few marginal exceptions due to the “rule based order” enforced by a variety of trade agreements and organizations, the traditional route of protecting domestic industries and growing behind tariffs became very difficult to do.

Various countries used different dodges. Russia, to get out of the Yeltsin era collapse, went whole hog into resources: advanced nations had to have oil and natural gas and minerals, and bribed key financial regions like London’s city with huge influxes of resource-money.

China did something different. They opened up partially and let foreign companies in, but they used bureaucracy to keep them under control (as had Japan, in part) and offered foreign elites huge labor arbitrage profits. They bribed the West’s elites with personal wealth, in effect. In exchange they insisted on, generally very strictly, in real technology transfer. Meanwhile, they created a protectionist bubble thru monetary policy, keeping the exchange rate in their favor.

But the other thing they did is what Turkey tried. They created a self-reinforcing property bubble. Municipalities and states built tons of new homes, people flooded in from the countryside to get the new factory jobs and the service and government and construction jobs which supported industry. Prices went up, municipal and state budgets went way up and a virtuous cycle was created, for a time.

Turkey did the same thing, but the problem is Turkey didn’t have an expanding industrial base, and that’s why Turkey imploded sooner.

All bubbles, including property bubbles are time limited. The more of a real economy you have, the longer they can run, but eventually inflation in property becomes too high, and most citizens can’t afford the housing. Meanwhile, inflationary increases in living costs make workers too pricey, and the industrial base begins to suffer.

You can start from three positions.

Like the US or UK or much of the EU you can start with an industrial base and cannibalize it, or..
Like Turkey you can start with a poor but big country and cannibalize an increasing part of your population, plus what little industry and agriculture you have (India is similar, but much larger and managed to get some industrialization out of this strategy), or..
Like China you can build your industrial base at the same time.

Whatever you do, this strategy eventually runs into the roadblock of a cost structure which becomes too high to allow actual productive industries.

At that point, you have to tame the housing market and other out of control costs (medical, food, whatever). If you don’t, you’re pushed back from 3 to 1, or if you did 2, the artificial prosperity begins to collapse. (India’s calories per capita have spent decades decreasing and someone who spent time there in the 80s, I can tell you Indians weren’t overfed to start with.)

So China’s now in a position where rather than bubbles, especially the housing bubble, being synergistic with industry and improvements in technology, they’re starting to strangle growth.

The route out (minus mercantalist imperialism, which is long run a loser too) requires you to stop relying on property bubbles, and start strangling your cost structure. The “free” money from asset bubbles has to go away, and you have to create a consumer society: not one like we have now, but one like we had in the post-war liberal era. Housing costs have to be kept at a level where people can buy or rent homes fairly easily: 30% of wages for rent or so, and at most about 5 years wages to buy a small home or condo.

Since the free profits of bubbles and speculation have to go away, companies have to make real money by providing real services and not just count on “real estate always goes up” or (America) “people have to have health care, so we’ll increase prices thru the roof.”

This is the task that China now has. It’s a hard task, akin to getting of hard drugs like heroin or SSRIs or Xanax. It hurts, because the financial pipes are reliant on what amounts to free or easy money.

During this transition, headline GDP and so on will suffer, there is no way around it minus looting expeditions, especially since simply running the printing press (something we’ll talk about in another article) defeats the point, which is making companies earn their money by providing goods and services for small markups at scale. (The post war liberal era worked on 3-4% markups for most mass goods.)

This is where China is. Where America and most of the West is similar: except it’s after destroying much of the industrial base and real consumer economy that doesn’t rely on massive price gouging on items people must have. There is no way to bring the good jobs back for most of the population in the US or UK or Canada or Australia without crushing the cost structure, strangling property speculation and prices and in the US tackling the medical and drug cartels.

China’s making the attempt. A lot of what they’re doing is clumsy and crude (but then, so was the one child law, but it worked even if it caused future problems.) So far the UK and Canada and the US and most of the West are not even trying, which is why you hear more about friend-shoring (aka to cheap places that are Western allies) rather than re-shoring, which can only be done for the goods that are either very high margin or which elites have realized are too militarily strategic to do in other countries.

This is why, as far as I’m concerned, the smart money is still on China, and if it wasn’t for climate change and ecological collapse, I’d consider it a done deal even if it took a couple more decades and a lot of screaming and shooting.

As it is, we’ll see. But China’s at least trying to do the right thing.

The Inflationary Consequences of Friendzoning and Decoupling

On October 24, 2022

During the rise of China and the “One World/Free Trade” period, one good thing which can be said for offshoring is that it helped reduce inflation.

It, indeed, drove much of the inflation reduction, with most of the rest of the inflation reduction being concerted efforts to keep wages low, with a strong assist from the Bureau of Labor Statistics to use methods like hedonics to pretend that inflation was lower than it actually was.

The new mantra is “friendzoning” — not so much bringing industry back to the US but moving it to friendly countries. Vietnam and Bangladesh are mentioned often, and Mexico will benefit as well. But friendzoning has limits, these countries don’t have the capacity to quickly take on all the production done for the US and Europe, nor do they really have the technological ability in the medium run.

This means that the determination to have a new cold war, and possibly a hot war with China will drive inflation higher for years to come.

The solution would be to, more than friendzone, re-shore: bring production back to core nations. But that would require reducing the cost structure: and I don’t mean wages so much as I do predatory finance and driving rent and housing prices down massively — about two-thirds at a minimum, along with no longer health-care predation. Do those things and wages don’t have to rise nearly as much, and the US (and Europe to a lesser extent) become much more competitive.

But to re-shore, you have to, in effect, give ordinary people a decent deal and not treat them as assets to shorn, but rather as productive assets to be cared for. (Note you don’t have to do this out of the goodness of your heart, our elites don’t have any of that.)

For the time being, this seems unlikely, so don’t expect inflation to go away. All the Federal Reserve can really do to stop it is push the economy into the dirt, but that’s not going to be a long term solution unless it stabilizes at “you’re a third world nation”, which, actually, probably won’t solve it either.

China “To Those Who Have Everything”

On September 12, 2022

This is why you don’t give away your manufacturing base. China is “gaining market share in both low and hi-tech sectors.” It is “now a more important international supplier than Germany, the U.S. and Japan combined.” China’s share of manufacturing exports grew from 17% in the 2017 to 21% in 2021.

The US recently put a ban on sending advanced AI chips to China, and the CHIPS act forbids any company which takes money from setting up new fabs in China, but it isn’t going to matter. Just as China jumped two chip generations (from 11 to 7nm) far faster than any western expert I know of thought they could, they will catch up in AI chips.

Then they will surpass.

As people at least as far back as Adam Smith pointed out, scale matters for efficiency in a lot of industrial processes. China has it. Once the US did, and before that England. Where the manufacturing floor is matters as well, it leads to faster iteration and more understanding of what works and doesn’t: “to those who have everything, more is given.”

America efforts to stem the rise of China aren’t working. The current anti-Russia sanctions are hurting Germany in particular. The entire “globalization” nonsense was a huge mistake for the West, and it will lead to a civilizational transfer of the locus of power from Europe/America to China/Asia unless climate change interferes (which it might.)

But the key thing to understand is that this is accelerating, not slowing down. In the 19th century, Britain deliberately helped America industrialize so its rich could make more money, without looking at the fact that it was a continental power with a larger population. In the late 20th and early 21st century, America did the same with China.

Helping Japan and Korea and Taiwan industrialize or reindustrialize didn’t matter that much: at the end, they are population constrained.

China isn’t. And for a few coins the West’s elites gave another civilization the opportunity to surpass it in perhaps the most important source of power in the post-industrial revolution world.

The Delusional Dishonesty of the G7 Russian Oil Price Cap

On September 5, 2022

So…

Members of the G7 have agreed to impose a price cap on Russian oil in a bid to hit Moscow’s ability to finance the war in Ukraine.

Finance ministers said the cap on crude oil and petroleum products would also help reduce global energy prices. The cap will be set at a level based on a range of technical inputs.

“We will continue to stand with Ukraine for as long as it takes,” the G7 said.

Russia said it would stop selling oil to countries that imposed price caps.

Well, so the price cap is effectively a “we won’t buy it because you won’t sell it” policy.

There’s long been a delusion that commodities like oil are global. They operated almost as if they were for a while, but oil is produces in certain places, refined in certain places and shipped in specific pipelines, ships, trucks and trains. It has different qualities and not all refineries can handle all types of crude.

To the extent, however, that oil or natural gas or coal or whatever is subject to boycotts, it becomes less of a global market and that won’t generally decrease prices, rather the reverse, at least in the early phases of a breakdown of a global market. (In the late phase prices will diverge significantly in different countries, with extensive measures or realities in place to prevent arbitrage.)

So (2)…

UK Chancellor Nadhim Zahawi said the G7 were “united against this barbaric aggression”, adding the price cap would “curtail Putin’s capacity to fund his war”.

US Treasury Secretary Janet Yellen said a cap would also help fight inflation, which is on the rise in many of the world’s economies.

The price cap helps achieve “our dual goals of putting downward pressure on global energy prices while denying Putin revenue to fund his brutal war in Ukraine”, she said.

Sanctions have not reduced Russia’s income, they have increased it. This won’t be an exception because most of the world isn’t onside with sanctions, including India, China, virtually all of Africa and most of South America, but by fragmenting the market it will increase prices, especially in specific areas like Europe which need to get their hydrocarbons (remember, this is not a virtual good, it has to be extracted, refined and shipped), through specific infrastructure links.

The “price cap” is thus largely a symbolic measure, which will if anything increase prices somewhat. That’s not to say it’s useless, if the plan is a new long Cold War with Russia (and almost certainly China), getting off supplies from those two countries needs to be done and done in stages.

But it sure isn’t going to decrease prices or empty Putin’s treasury. In fact, in the short to middle term it’s likely to hurt Europe, again, far more than Russia.

China Jumps Two Chip Generations Ahead: Why Chip Sanctions Backfired

On July 26, 2022

Faster than most expected:

Semiconductor Manufacturing International Corp (SMIC, 中芯) has likely advanced its production technology by two generations, defying US sanctions intended to halt the rise of China’s largest chipmaker.

The Shanghai-based manufacturer is shipping bitcoin-mining semiconductors built using 7 nanometer technology, industry watcher TechInsights wrote in a blog post on Tuesday.

That would be well ahead of SMIC’s established 14 nanometer technology, a measure of fabrication complexity in which narrower transistor widths help produce faster and more efficient chips.

Since late 2020, the US has barred the unlicensed sale to the Chinese firm of equipment that can be used to fabricate semiconductors of 10 nanometers and beyond, infuriating Beijing.

Now, there’s a question if they can scale, but this is still a huge step. This means that they are ahead of Europe and the US, and behind only Taiwan and Korea. This is also sooner than almost all experts predicted: China did what Western technologists thought could not be done so quickly.

This speed, as I have noted in previous articles, is not that surprising; the technological lead always moves to the country which holds the world’s manufacturing floor. When Britain fell behind the US, it took about 30 years for them to lose their tech lead, but lose it they did. The same will happen with the US and Britain, but likely faster for obvious reasons like jets, the internet, and so on.

To put it simply, when you are right there with the factory floor, your innovation cycles are far faster, or in modern-speak, you iterate more quickly. You also have more practical experience with what actually works.

The “ban semi-equipment and semi-sales” to China card was a card, like the freezing of Russian foreign reserves, that you only get to play once at a great power. China is more than happy to subsidize chip manufacturers to learn how to make this tech domestically, and they are also crashing other key techs they’re behind in (like aviation), because it’s clear if the West would put a ban on semis, they’ll do it to anything or everything else.

China’s Job #1, and Xi has stated this publicly, is to make it so that they can’t be choked out by the US (the “West” is mealy-mouthed; the US makes the decisions, and the EU, Japan, and so on just do what they’re told, with occasional exceptions). Making Russia a locked-in junior ally with the sanctions regime made it so that China couldn’t be choked out on natural resources, and making it clear that crippling sanctions are on the board caused China to scramble to close the deficiency.

Unlike with choking out Japan over oil before WWII (which is why the Japanese felt they had to attack the US), however, the partial sanctions on China were not crippling, because unlike pre-WWII, the US is not the world’s primary industrial power, and it has its own dependencies on Chinese trade.

In realpolitik terms, because this is the case, sanctions should have been all at once, followed by war (I’m not for this, I’m massively against it, not least because of the issue of nukes). Half-assing it just gave China time to decouple its key dependencies and, as noted above, the anti-Russia sanctions were a gift from heaven to China.

The game continues, and if it were not for climate change, all the smart money would be on China as the pre-eminent world power within 20 years, probably sooner. As it is, a lot will depend on variables that humans have chosen not to control and soon will lack the ability to significantly control.

Russia Turns Up the Pressure (and Turns Off the Gas) on Germany and the EU

On July 18, 2022

Well, well…

Russia’s Gazprom has told customers in Europe it cannot guarantee gas supplies because of “extraordinary” circumstances, according to a letter seen by Reuters, upping the ante in an economic tit-for-tat with the west over Moscow’s invasion of Ukraine.

Dated 14 July, the letter from the Russian state gas monopoly said it was declaring force majeure on supplies, starting from 14 June.

Known as an “act of God” clause, a force majeure clause is standard in business contracts and spells out extreme circumstances that excuse a party from their legal obligations.

So, Europe and Germany get gas in exchange for rubles. But Russia can’t spend those rubles for most of what it needs from the West.

The question is, does Europe, especially Germany, need gas more than Russia needs rubles and an increased exchange rate (not always a good thing)?

Everyone has been concentrating on the winter and assuming Germany didn’t need much gas until then, but a great deal of Germany’s electrical grid is supplied by natural gas plants, and as you may have heard, there’s a heat wave in Europe and most of the rest of the world.

So much for air-conditioning. And if much of Germany’s industry will have to shut down as well.

Germany can lose a huge chunk of its industrial base if this continues. The whole “keep buying gas from Russia until we can transition off of it” idea was always dubious, because other gas is much more expensive, but it also rested on the idea that Russia was desperate to keep selling; that there was a symmetry of needs.

But Russia will suffer a lot less without sales than Europe will without gas, and in any case, a shutoff will likely increase the price of gas they are selling elsewhere, making up some of the losses.

The fact is that Germany, an industrial state without a lot of resources, and Russia, a resource state, are natural economic allies, but Germany needs Russia more than Russia needs Germany.

The companies who have been given notice that of force majeure are saying they don’t accept it, but what are they going to do?

The grace period for payments on two of Gazprom’s international bonds expires on 19 July, and if foreign creditors are not paid by then the company will technically be in default.

This is a non-threat threat, because Russia has already defaulted on loans, as it is largely shut out from the Western banking system and thus can’t even transfer the money. (As happened to Argentina.) More defaults theoretically mean that Russia will be unable to access Western loans and so on, but they already can’t, and they have access to the Chinese banking system, which is larger than any Western country’s and perfectly capable of keeping Russia and Russian companies afloat.

Understand clearly that most Germans and Europeans support the anti-Russia sanctions. This is a popularly backed policy: Europeans are paralyzed by fear of Russia and were long before Ukraine. I had a friend in Austria tell me how he scared he was of Putin back in 2016.

We will, however, see what the result of this is. I would guess that in the short-term, it will stiffen opposition to Russia, but I’m less sure about the medium- and long-term. German elites, especially, will feel a need to end the Ukraine war and get back to a steady Russian supply.

No matter what, however, it highlights the price Europe is paying for its anti-Russia stance.

Poland Refuses To Pay For Russian Gas In Rubles, Russia Cuts Them Off

On April 27, 2022

Well, well.

But, so far it looks like Germany will just buy extra (paying in rubles) and ship it to Poland. Me, if I were Putin, I’d refuse to sell Germany more than its usual amount (what is contracted for) and see how long it takes Poland to break. Granted it’s not winter, but so far as I can see Europe can’t switch off Russian natural gas in less than about two years, though perhaps a few countries could (and pay more, since the Russians sell for less than anyone else will.) Natural gas prices (as of this writing) are up about 10% on the news, though it doesn’t mean much.

I remain convinced that sanctions will do far more harm to Europe than to Russia.

Meanwhile, Malaysia has said they will sell Russia semiconductors. They aren’t as good as Taiwanese ones, but they’ll be good enough for now, and China is crashing semiconductor tech anyway, for its own reasons. In a decade, the West and its allies won’t have much of a gap in semis compared to the rest of the world, if any.

Update: seems the news Malaysia would sell semis is probably not correct.