January 23, 2009

The Economy is

CHINA

I didnt write these words, but they need to be heard. Years ago in economics class, I learned that the United States perceives long term savings and business planning as 3-5 years in heavy industries like cars, maybe 10-20 in financial planning. In Asia, specifically Japan, South Korea, China and Singapore, long term is a horizon 30, 50 maybe even a 100 years out. Companies like Honda frequently introduce products ahead of their competitors, because they manage on a 30 year planning cycel; the hybrids of today were proposed production ideas in 1973!

In order to finance the last $168 billion stimulus package in February 2008, Congress actually had to borrow money from abroad. That's right: the package did not come from the vaults of the Treasury, but rather from foreign savers from Japan, China, Russia, and the Middle East. Politicians took out a loan that has to be repaid by taxpayers — with interest.

Upon receiving their rebate checks in the mail, many Americans dutifully spent the money as told — shopping at places such as Wal-Mart.

Wal-Mart in turn sent a large portion of the monies back to the original manufacturers overseas, mostly places in China. And the Chinese in turn used the money to buy more US Treasury debt.

Without the Chinese, the United States would not have had any kind of temporary stimulus. Without the Chinese, the United States would not be able to finance its large deficit.

And without a healthy China, the United States cannot hope to finance yet another round of faux stimulation.

In the event that a new stimulus plan is sped through Congress, unless it includes cuts to federal spending or tax increases, foreigners will once again fund it.

At least until foreigners get tired of the same rinse cycle and refocus their funds outside of the United States.

As a result, in the long run, China as a whole will be able to adapt to market conditions and prosper because sick companies will have been expelled from the marketplace and capital will be reallocated to the most efficient participants. Conversely, because the US has given up on bankruptcy and the freedom to fail, they will continue to flounder as they prop up poorly managed firms.

Meanwhile, the Chinese government continues to privatize state-run firms and allow them to go bankrupt.

Thus the only unknown factor for the future is just how much damage the Fed will do to the US currency, potentially driving away foreign holders of dollars.

If history is any guide, while China may be faced with uncertainty once again in 2019, it is backstopped by a nearly $2 trillion foreign reserve and solid financial ground. The same cannot be said for the United States.