Abandon Ship
May 20th, 2009By David Goldman
Now that the US market is settling comfortably into a statist torpor, it is time to call attention to the fact that America faces challenges of an entirely different kind than it ever has in the past. This generation of Americans simply doesn’t know what’s going to hit it.
Shanghai Composite Index vs. S&P 500
Wealth comes from sweat and smarts. Here’s factoid for you: China has 60 million elementary and secondary school students studying piano or orchestral instruments and playing classical music. America has 30 million students, total. China has classical music students at twice the number of all American students waiting in the pipeline to join the job market. Add to these the smart Indian kids who will be graduating from India’s technical institutes with the world’s sharpest math skills, and it seems likely that during the next five or ten years, a good 75% of the best-qualified job market entrants will come from China and India.
I cite the classical music students in order to emphasize that we are not talking about robotic nerds who know how to crunch numbers but have no creative ability. A “Spengler” essay from last December provides some detail. Anyone who has not been hiring young Asians has no clue how cultured and curious they are. Their American counterparts have seen life as a perpetual spring break interrupted by brief episodes of work, and are simply in no shape to compete.
In past years, to be sure, the smartest Asians came to America. That’s where the capital markets were. A rich Chinese wouldn’t lend money to a poor Chinese, unless the poor Chinese first moved to America. Our financial system was the glory of the world. That was then. If you are a smart Chinese or Indian entrepreneur, are you likely to get richer by moving to the US or by staying at home? Emerging market equities are a far more interesting proposition than the US stock market under Emperor Obama I. Bonus restrictions? Compensation caps? They never heard of them in Mumbai or Shanghai.
America isn’t getting the immigrants any more, that is, the top-of-the-line human capital. As China reorients its economy towards domestic spending, America won’t get the capital, either. America isn’t going to crash. Unless it changes course, it will slowly sink into the mud, like England did during the 20th century.
Equity investment is worth considering in China and India. China’s doing a great job of providing a serious stimulus, and India’s Congress Party victory puts a very qualified Prime Minister into power. It’s a snooze here in the Republic of Zombies.
May 20th, 2009 at 4:44 pm
I think people who have their eyes open can clearly see the western decline and asian rise. But nowadays people in the west often choose to have eyes closed. It´s more pleasant and less painful. And therefore when we can no more ignore the reality, the awakening will be very cruel.
But it´s rather an irony, isnt it? While US is fighting demons(she partly created) in the Middle East, China is slowly taking over the world. Well, everyone has its own priorities.
Btw, China does not have only pianists, they also have high-tech companies. For example: In 2008 , for the first time, a chinese company(Huawei) topped the list in the number of patent applications. Ahead of all big western multinational companies like Intel, Microsoft, GE, Phillips, Siemens etc. Here´s the link(or just google: Huawei / 2008 / patents):
http://www.ameinfo.com/184049.html
May 20th, 2009 at 7:38 pm
Personally I think this is utter drivel. Stratfor thinks China is just going to fall apart and I agree. China is going to get old before it gets rich - and that will be that. India, on the other hand, is a different and far more interesting story. Having a democracy is in fact something of an advantage - and the commies in china will never let go - never.
May 20th, 2009 at 8:08 pm
Sadly, perhaps tragically from the view of an American citizen, I have to agree for the most part. I started about three years ago to keep foreign lifeboats in view. I have a friend from a Chinese class (nvcc.edu) who is already in Tianjin - He loves China but says Tianjin is a little boring. I don’t think that China will take over the world but as the US sinks and bogs down China and India should continue to grow and become much more important.
Mr. Goldman do you have an any opinion you could share on the work of George Friedman and Stratfor?
I have Mr. Friedman’s book The Next 100 Years and he thinks that China will become a papertiger and that Japan will benefit more from the next few decades. I must reread that again to make sure I have it correct. I think he also had some less than positive things to say about India’s infrastructure and local politics in the different Indian states in a Stratfor podcast. He does appear to make some good points in his commentary.
May 20th, 2009 at 8:39 pm
David, apart from making Kaiten’s day with your latest post, I think you’ve finally succeeded in being wrong for once! Your Tom Friedmanesque comparison between the US and China or India will only hold water for awhile…but only for awhile. Accordingly, from a guy who really appreciates your capital markets’ genius, I must say I agree with JimP’s remarks, and, therefore, also with those of George Friedman of Stratfor, regarding the inevitability of America’s continuance as the more or less single straw that will stir the global cocktail during the next hundred years. Through the lens of the present, I fully admit our nation’s appears past its ascendancy. The politics of the past eight years, as well as of the next four, clearly will have accomplished little to pry us from the muck. However, through the lens of geopolitics, America has by far the best cards to play in the planetary deck, and its hand will improve considerably with the passage of time…just like our “zombie” consumers, financial institutions and economy in general. This is not the forum for me explain the details as to why people like JimP and George Friedman hold this view, especially since the mere posting of such hypotheses will incite many of your left-leaning Inner Working’s flock to riot. However, if you can find a way to send me a direct message, I will only be too happy to outline the argument, or, better yet, send you the same book I recently sent Tom Keene on the very same topic. Respectfully yours, Chip PS, what happened to my BAC prfd L today?
May 20th, 2009 at 9:48 pm
David, interesting points as always.
Regarding the points about China’s potential population decline, don’t lose sight of the fact that the current trends are man-made, and that China’s population growth has always been explosive. David has mentioned in other articles that America’s population grew from 200 million during Jack Kennedy to around 300 million currently. Well, China grew from 200 million to 300 million between 1767 and 1790, in a span of 23 years, and 250 years ago. I know there are cultural factors nowdays that play into family formation too, but I don’t buy into the population factor at face value.
As long as China and the US share the same geopolitical goals, it really doesn’t matter that much anyway, does it?
May 20th, 2009 at 11:54 pm
Chipster,
Would you mind sharing the book that you are referring to?
May 21st, 2009 at 5:10 am
Oh, so I was right then. Most of americans really choose to have their eyes closed. But why to open them after all? There are so many interesting books. You only need to choose the right one and then you can continue the dreamin …
Still, I prefer to have my own opinion. I dont need anyone to tell me what to think. I like to create my own opinion based on facts and reality.(such useless things nowadays, arent they?) It´s relatively easy, you only need to use your brain a bit and have your eyes open. And it doesnt even hurts!
But have no fear. I understand you, I know the feeling. Oh, that soothing, blissful ignorance
May 21st, 2009 at 6:38 am
George Friedman and his crew are former US intelligence and offer readings that fall close to the consensus. They have no qualifications whatever in economics. The key to the matter is people. The US used to skim the cream of Indian and Chinese graduates. Something like half of Silicon Valley was Asian during the tech boom of the late 90s. No more:
1) post 9/11 immigration is much harder for everyone (because the US didn’t want to offend Muslims by making it harder only for them)
2) China and India have moved leaps and bounds and offer entrepreneurial opportunities at home — their young people don’t have to abandon culture and family in order to get rich
3) The US business environment is deteriorating thanks to the Obama adminsitration
4) The quality of Chinese graduates has improved enormously — remember that the massive investments in education China has made in the past decade are only beginning to show
5) The US does have the best cards to play, but isn’t playing them
May 21st, 2009 at 8:33 am
Agreed on all five points above, including GF’s qualifications as an economist. However, David, you can’t determine such geopolitical outcomes in situ or in the moment. You know that. Such outcomes are based on very long term trends. And the US is so much more dynamic and adaptable than any other country over such periods that it’s difficult for other nations to compete with us over extended periods that are measured in decades. Am as certain that our immigration policies toward attracting the best and brightest will eventually change for the better as I am that consumers’ debt to gdp will eventually fall to a more comfortable ratio. There’s an ebb and flow. Nothing moves in a straight line but a good regression analysis will spot a trend using the prism of history.
May 21st, 2009 at 8:47 am
Btw, I enjoyed your recent interview with Keene. I believe you’re correct on the idea regarding a “pro-natalist” orientation to our tax code. It’s so commonsensical. Again, I submit, with the passage of time, this will occur along with your [implied] recommended “Canadization” of our immigration policy. Over the long term America has historically never failed to adopt policies that are in its long term self-interests.
May 22nd, 2009 at 7:12 pm
If you ask me, it’s not the piano lessons, but rather it’s the characters that came first. After learning to draw the first 5000 or so of these things, putting a few thousand hours on the piano comes naturally.
If we really believe that China will be rising, maybe it’s time to invest in some brain equity and start studying Mandarin — unfortunately, this is not an easy language.
May 23rd, 2009 at 6:06 pm
The reason not to jump ship:
“It may be outrageous, but it is not far-fetched, to speak of a special grace for America”
-Spengler, ‘America’s Special Grace’, July 8, 2008
May 23rd, 2009 at 6:08 pm
Somehow, someway, the U.S. will right itself
May 24th, 2009 at 1:06 pm
“Somehow, someway, the U.S. will right itself.” That’s correct, DodgerUSA. Always has been. Always will be. We’re an emotional country. Our mood swings are notorious. It’s like we have PMS one day and the next it’s Kumbaya. We’re like the crazy boxer in a ring. We got no form whatsoever. We’re sloppy in fact. But we throw an occasional surprise round-house that’s a knockout punch when lands. Our country’s infatuation with the current administration is but the latest example, much the same with W’s two terms where he railed against much of the world for 8 years, the “free” part and otherwise. However, when the pendulum returns to the center (or to the right), many of our current ills will be dealt with with appropriate remedies, some of which David might recommend. Some of these remedies may even appear to be as radical as some of the things that are being implemented or proposed right now…just in the opposite direction. The single thing one can always count, something which foreigners can’t comprehend, is that America never stops reinventing itself. Often foreign observers astutely spot a trend in American policy and then plot a trajectory from it only to be fooled later. Why is that? Because we are a nation capable of endless mid-course corrections. We turn on a dime and do so with utter unpredictability. We commit genocide against our aboriginal population in the name of Manifest Destiny and later “feel sorry” and regretful for our atrocities against Native Americans…so then we build them Casinos. We look “the other way” one day, feigning benign neglect, and ferociously attack the next. Ask Tojo. Ask Saddam Hussein. It’s not just in war but also in civil rights, education, commercial regulation and technology. It’s partly due to our lack of attachment to any permanent culture, a polyglot-like society, our positively inconsistent political discourse, and, of course, our creative destructiveness. The invisible hand is uniquely American. We never fail to ultimately do what’s in our country’s long term best interest…we just don’t have a road map for doing so…from the American Revolution, to finally waging the Civil War to our entrance into WWII. None of these things were popular decisions at the onset. If history is any guide, we ultimately will wind up changing our immigration policy, fixing our entitlement mess, paying down and stabilizing our net foreign debt and growing our economy. How? When? I don’t know. But it will surely happen. And when it does, the course correction will occur with astonishing speed. Spengler or no Spengler. Kaiten will never understand this phenomena.
May 25th, 2009 at 11:16 am
Oh, yes, I agree, Casinos for Native Americans and Casino economy for the rest
And Chipster, you could save your time and words. It´s called evolution what you write about so nicely. And believe me or not, evolution is not purely an american thingy. It´s how human race works. we´re correting ourselves from day One. Otherwise we would still live in the stone Age.
But, what a shame you left out hard fact from your lecture. Like 50 trillions in debts, and rising. Like another 50 trillion in unfunded liabilities and rising. Like US becoming the biggest debtor in the world, instead of biggest lender. Like US being a net importer of high-tech products, etc. It´s all well and nice that US is an emotional country, but unfortunately, you cant pay off those mountains of debts with emotions. And as Europe is not much better off, hence Asia. Asia´s rise is not a sure bet, but very likely. If not China, than India, or someone else. Asia already has first-class, first-world, hight-tech countries. Like Japan, South Korea, Tchaj-wan, Hongkon etc. They can do it.
Oh, and Chipster, one good advice for you: Never say never
June 3rd, 2009 at 8:25 am
Stratfor’s latest on China:
“China and Separatism
China also faces significant hurdles, albeit none as daunting as Russia’s challenges. China’s core is the farmland of the Yellow River basin in the north of the country, a river that is not readily navigable and is remarkably flood prone. Simply avoiding periodic starvation requires a high level of state planning and coordination. (Wrestling a large river is not the easiest thing one can do.) Additionally, the southern half of the country has a subtropical climate, riddling it with diseases that the southerners are resistant to but the northerners are not. This compromises the north’s political control of the south.
Central control is also threatened by China’s maritime geography. China boasts two other rivers, but they do not link to each other or the Yellow naturally. And China’s best ports are at the mouths of these two rivers: Shanghai at the mouth of the Yangtze and Hong Kong/Macau/Guangzhou at the mouth of the Pearl. The Yellow boasts no significant ocean port. The end result is that other regional centers can and do develop economic means independent of Beijing.
(click image to enlarge)
With geography complicating northern rule and supporting southern economic independence, Beijing’s age-old problem has been trying to keep China in one piece. Beijing has to underwrite massive (and expensive) development programs to stitch the country together with a common infrastructure, the most visible of which is the Grand Canal that links the Yellow and Yangtze rivers. The cost of such linkages instantly guarantees that while China may have a shot at being unified, it will always be capital-poor.
Beijing also has to provide its autonomy-minded regions with an economic incentive to remain part of Greater China, and “simple” infrastructure will not cut it. Modern China has turned to a state-centered finance model for this. Under the model, all of the scarce capital that is available is funneled to the state, which divvies it out via a handful of large state banks. These state banks then grant loans to various firms and local governments at below the cost of raising the capital. This provides a powerful economic stimulus that achieves maximum employment and growth — think of what you could do with a near-endless supply of loans at below 0 percent interest — but comes at the cost of encouraging projects that are loss-making, as no one is ever called to account for failures. (They can just get a new loan.) The resultant growth is rapid, but it is also unsustainable. It is no wonder, then, that the central government has chosen to keep its $2 trillion of currency reserves in dollar-based assets; the rate of return is greater, the value holds over a long period, and Beijing doesn’t have to worry about the United States seceding.
Because the domestic market is considerably limited by the poor-capital nature of the country, most producers choose to tap export markets to generate income. In times of plenty this works fairly well, but when Chinese goods are not needed, the entire Chinese system can seize up. Lack of exports reduces capital availability, which constrains loan availability. This in turn not only damages the ability of firms to employ China’s legions of citizens, but it also removes the primary reason the disparate Chinese regions pay homage to Beijing. China’s geography hardwires in a series of economic challenges that weaken the coherence of the state and make China dependent upon uninterrupted access to foreign markets to maintain state unity. As a result, China has not been a unified entity for the vast majority of its history, but instead a cauldron of competing regions that cleave along many different fault lines: coastal versus interior, Han versus minority, north versus south.
China’s survival technique for the current recession is simple. Because exports, which account for roughly half of China’s economic activity, have sunk by half, Beijing is throwing the equivalent of the financial kitchen sink at the problem. China has force-fed more loans through the banks in the first four months of 2009 than it did in the entirety of 2008. The long-term result could well bury China beneath a mountain of bad loans — a similar strategy resulted in Japan’s 1991 crash, from which Tokyo has yet to recover. But for now it is holding the country together. The bottom line remains, however: China’s recovery is completely dependent upon external demand for its production, and the most it can do on its own is tread water.”