With Charles Hugh Smith & Gordon T Long
26 Minutes, 36 Slides
The US and China may have both passed their Golden Era's where the low hanging
fruit of prosperity has been picked. Though very different situations with
different challenges, both global industrial powerhouses exhibit some surprising
similarities. Also, both face challenges and hurdles that may not be surmountable
without great social readjustment.
USA - A Former Export Led and Now Consumption Driven Economy
The 1950s/60s in the US should not be considered as "normal" -- but rather
as a one-off, extraordinary anomaly. The era was extremely unique. Unfortunately,
many unsustainable assumptions became inculcated into the fabric of American
culture based on false expectations. This has subsequently led to massive distortions
as a result of futile fiscal and monetary attempts to sustain a society consuming
more than it produces.
The distortions are now in plain view as the Wall Street financial engine
and its financialization has completely disconnected 'Wall Street' from the
realities of 'Main-Street America'.
CHINA - An Export Led but Investment Driven Economy
China's problems may be different but their unprecedented growth of credit
is not.
When China's economic (in purchasing power parity (PPP) or nominal dollars)
GDP was $500 billion, an expansion of $50 billion equated to 10% a year. Now
that China's PPP gross domestic product is around $13 trillion, a 10% growth
rate would require an expansion of $1.3 trillion--roughly the entire GDP of
Spain or Canada.
Obviously, fast growth is easy when low-hanging fruit was abundant, but becomes
progressively more difficult to maintain as the economy expands. This is especially
true when you realize that China's GDP has been investment driven. The investment
growth now required is no longer mathematically possible as is the rate of
moving to a more consumption led growth. The Chinese people are savers, not
the consumers that Americans are.
Chinese savers and investors have historically, instead of consuming, invested
heavily in housing. Unfortunately, Chinese housing is showing major signs of
cracking. Both Charles and Gordon see the Shadow Banking system as the commonality
which is being used to sustain the imbalances and distortions - at least temporarily.
It is clear the Chinese and American economies are facing new era's where
the low hanging fruit is gone and the 'heavy political lifting' lies ahead.
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