Applied Philosophy

Introduction

In 2008 I published two articles that basically took all the numbers about China and divided them on the population and compared them to similar numbers about the US. This normalisation process removes the effects of large number to show the real magnitudes.

In part 1 I looked at the economic data, the conclusion was:

annual growth per person in 2005:
USA= $437,000.375M / 298,213,000 = $1465.4 per person
China= $220,256.289M / 1,315,844,000 = $167.4 per person

US/China = 8.75

The US grew almost 9 times as fast per person last year!!

I left that conclusion without explaining why companies wanted to invest in the Chinese domestic market. Actually my data were just as misleading as the numbers repeated about the fast growth of China, as I will explain below.

In part 2 I looked at the energy consumption of China and India (remember at the start of 2008 the price of oil war rocketing up and increased consumption from developing countries was blamed). Here are some of the conclusions:

Ratio of oil consumption share to population share
USA   =  24.6%  /   4.61%  =  5.33
China =   8.5%  /  20.35%  =  0.42
India =   3.0%  /  17.01%  =  0.18

Ratio of coal consumption share to population share
USA   =   19.6% /   4.61%  =  4.25
China =   36.9% /  20.35%  =  1.81
India =    7.3% /  17.01%  =  0.43

Clearly if a country has to consume less it is not China, or India, but the US and the West in general. Asking developing countries to consume less whether because of global warming or high prices is highly despicable. Here is the view of the Indian prime minister:

“The need for equity is starkly reflected in the fact that the emissions per capita in industrialized countries are 10 to 12 times those of developing countries. We know that total emissions in the world must decline, but what does this imply for emissions in individual countries? We must find a way of solving this problem in a way that does not deprive developing countries of their right to develop,” Singh said.

—Equity must be basis of climate talks: PM, The Times of India, Feb 3, 2012

Well after four years another Olympic Games is coming soon and I thought I would revisit these two articles—that show the numbers in a way I have never seen anywhere else—I will try to do two things here: first I will explain the paradox of the Chinese economy, i.e. low growth per person and fast growing market. Second I will apply the same analysis to compare military-related numbers between the US and China.

Two Countries One System

Hong Kong was famously returned to China under the the principle of “one country, two systems;” here I will show that China itself is actually two different countries living under one system.

In 1958, the Chinese government officially promulgated the family register system to control the movement of people between urban and rural areas. Individuals were broadly categorised as a “rural” or “urban” worker.

—Hukou system: Household registration in China, Wikipedia.

The Hukou system is used to divide the country into two parts that are neither equal nor separate. There is a great wall between the lives of urban and rural Chinese, a big difference exist in the benefits provided by the state and the opportunities to improve their lives. This BBC article shows a great graph that illustrates this divide:

China has redefined the level at which people in rural areas are considered poor to include everyone earning less than $1 a day (6.5 yuan).

Previously people in the countryside were only regarded as poor if they earned less than 55 cents a day.

The move should see millions more people get access to state benefits.

Some 27 million people were classified as rural poor last year. The new threshold is expected to increase that number fourfold.

Income in China: Urban vs. Rural

—China increases rural poverty limit to $1 a day, BBC, 30 November 2011 [my emphasis]

So while an urban Chinese gets $2,500 of disposable income (not much to spend on Western cars and iPads) the rural Chinese only gets about $750 of net income per year: $2 per day. According to Wikipedia 30% of Chinese live on less than $2 per day (based on Purchase Parity and not currency exchange), that is about 400 million people or a hundred million more than the population of the United States.

This unfair distribution becomes an injustice when taking into account two factors: The first is the fact that urban growth was built on exporting cheap labour to the West and most of that cheap labour is migrant rural workers. Their numbers have grown to hundred of millions over the years:

Although residency (Hukou) requirements have been relaxed to a degree, the floating population is not officially permitted to reside permanently in the receiving towns and cities.

As early as 1994, it was estimated that China had a surplus of approximately 200 million agricultural workers, and the number was expected to increase to 300 million in the early 21st century and to expand even further into the long-term future.

It was reported in 2005 that the floating population had increased from 70 million in 1993 to 140 million in 2003, thus exceeding 10 percent of the national population and accounting for 30 percent of all rural laborers.

—Migration in the People’s Republic of China, Wikipedia.

The political, legal and social structure of China is built to favour urban population at the expense of the rural. This can be understood in historical terms as some sort of karmic payback to the damage done to the urban population after the end of the civil-war and during the Cultural Revolution. The rebuilding of the country needed a strong, educated and rich urban population and the best resource China had was cheap rural labour.

The growth of China was based on the export sector. The problem is this sector has become, as the communist party, an entrenched class. Instead of leaning on the export sector to support the development of the whole of China, both the rural and poor urban population, the state started to manipulate the currency to support cheap exports and increased (wasteful) government spending stocking inflation especially in food (source):

China Food Inflation – 2000-2011

For someone living on $2 an increase of 20% in the price of food is reason for revolt, none of that inflation has been taken out with deflation, actually the inflation is rising again. Urban Chinese don’t fare better than the rural, but at least they are living the boom buying western products with western prices (on Chinese salaries), investing their savings in a housing bubble as bank deposits give negative rates.

The Chinese ruling elite have skilfully exploited the divide, the urban against the rural with the Chinese Communist Party as the balance keeper. This cannot continue forever. Western investors who claim that the market in China will grow to a billion person will soon be shocked as the market decline instead of growing. Investments based on growth and population numbers with little or no understanding of reality rarely results in any profits.

The Arming of China

In the past I discussed ‘bigger’, ‘faster’ and ‘more’, today I will discuss ‘stronger’. The western media repeats reports about Chinese military spending and the growth of its military budget with little context or understanding. The numbers are as follows:

China, the world number two, has raised military spending by 170 percent in real terms since 2002, in step with its rise to economic prominence as the world’s manufacturing powerhouse, raising concerns among its neighbours and other great powers.

“At the same time, China’s military spending has remained extremely stable as a share of GDP, at approximately 2 percent since 2001,” the institute said. U.S. military spending was estimated at 4.7 percent of GDP in 2011.

—Austerity ends 13-year rise in global military spending, Reuters, Apr 16, 2012

I looked at the numbers of both China and the US (all from Wikipedia, some are for different years) and here are the results I obtained:

• The US active military to population ratio is 1:215, China’s ratio is 1:586.
• The US reserve military to population ratio is 1:215, China’s ratio is 1:1675.
• The US total military to population ratio is 1:108, China’s ratio is 1:434.

So the US has about five-times the active military per population than China and four-times the total military per population. Numbers of personnel is not everything, let us see how much the US spends versus China:

• The US spends $1,751 per person on the military, China spends $79.
• The US spends $376,906 per active personnel, China spends $46,565.

This is the last two results in a chart (notice the logarithmic scale):

Military spending per person and per active personnel, China vs US 2012

(source Wikipedia, Graph made with LibreOffice. Image created with GIMP)

The US spends 22 times per person more than China on the military. The US spends 8 times per active military personnel than China. A big chunk of what China spends is going on military jets and aircraft carriers trying to obtain the same high-tech toys that the US has. Strategically Chinas is in a much weaker position than the US, here are some points:

• China has a long border with Russia on its north (bad history dating back to the Ming Empire).
• China has a long border with India on its west (war and continued rivalry).
• China has Japan and south Korea to its east blocking the pacific (bad history and rivalry).
• China considers Taiwan a breakaway province (Taiwan is armed to the teeth and considering independence).
• China has a border with Viet Nam (war and current maritime disputes).
• China has maritime disputes with the Philippines.

All this is compounded by a string of US military bases and allies surrounding China from Japan to south Korea to Taiwan to Australia, the Philippines, Singapore, India and all the way to Afghanistan and central Asia. Many of these countries are armed by the US or possess technology supplied by the US and superior to Chinese technology. The anti-China stance prevailing in South-East Asia is mostly driven by the US, who has a hold on the foreign-relations of Japan and south Korea and a strong influence on its ex-colony the Philippines. The bad relations with Russia, Viet Nam and India is the result of small-minded politicians in all of these countries.

For the last twenty centuries China has been ruled by successive empires, each covering a larger area than its predecessor. This historical line should not worry the neighbours of the current China as its expansion phase has ended fifty years ago and the current one-child-generation has little apatite to sacrificing their children. This, of course, does not exclude future wars.

See also:

• The Future History of China Today, the rise and fall of the current Chinese empire mapped out.
• HSBC’s China Expert Predicts a Rosy Future for China, selling the dream of an ever-growing China to gullible investors.
• Reviewing the Review – Supplement, graphs about energy consumption.

Continuing with the idea of the last post, today we look at the ratio between social benefits to persons paid by the US government to Federal receipts.

Social benefits to persons as ratio of government receipts

Again this is the view from 1500 Pennsylvania Avenue (i.e. Department of the Treasury). While debt service is taking only one in ten dollars they receive, social benefits are taking almost the whole lot. Here is the FRED graph I used.

The burden of public debt is usually measured compared to GDP, but that is an economist concept; I wanted to use a real tangible number.

I decided to look at the debt burden of the US federal government the way an accountant in the Treasury would. I divided the the government outlays on interest on two numbers: the government receipts and the total debt. Dividing on the receipts gives us the percentage of income that goes to servicing the debt. Dividing on the total debt gives us the effective interest rate.

The following graph shows the two ratios from the end of the sixties. Both government receipts and outlays are annual (fiscal year), while the the total debt is the amount at the end of the year.

Interest burden and effective interest rate 1967-2011

The total debt has tripled since the Clinton administration, but the effective interest rate has collapsed since then:

Effective interest rate 1998-2010

This is the view from 1500 Pennsylvania Avenue and there is nothing here that says “too much debt”. If you want to adapt the graph you can use this FRED graph to get you started.

See also:

• Liquidating the Debt of the United States

The WordPress.com stats helper monkeys prepared a 2011 annual report for this blog.

Here’s an excerpt:

A New York City subway train holds 1,200 people. This blog was viewed about 7,000 times in 2011. If it were a NYC subway train, it would take about 6 trips to carry that many people.

Click here to see the complete report.

The composition of the Federal Reserve’s treasuries’ holdings that I discussed ten months ago (see Fed Holdings: Short vs. Long Term Securties) is now at the center of the Fed’s monetary policy:

The Federal Open Market Committee concluded its September 21, 2011 Meeting at about 2:15PM EDT by announcing the implementation of Operation Twist. This is a plan to purchase $400 billion of bonds with maturities of 6 to 30 years and selling bonds with maturities less than 3 years, thereby extending the average maturity of the Fed’s own portfolio

—History of Federal Open Market Committee actions, Wikipedia

This how the Fed’s holdings were split in January 2007:

Federal Reserve treasuries holdings January 2007: short-term in blue, long-term in red

Four years, nine months and one financial crisis later it looks like this:

Federal Reserve treasuries holdings September 2011: short-term in blue, long-term in red

Operation Twist is the implementation of the Fed’s promise to keep interest rates low until 2013. Investors do not want stable low rates, they want declining rates. Short term rates are already at zero, so longer term rates have to decline to satisfy the financial world. Interest rates have been declining since their highs 30 years (see Liquidating the Debt of the United States) and as long as they keep declining the financial structure built after Nixon closed the gold window will survive; when they start rising that structure will die and so will the fiat dollar with it.

Twisting might have once worked, but that was back in 1961 when the dollar was linked to gold. Extending the average maturity of the treasuries today means that while investors roll over their bills at higher rates, as the dollar starts to lose the remaining one percent of value it still has, the Fed will be stuck with long dated treasuries. A positive feedback loop descending all the way to zero dollar value.

If you want to make your own graphs you can use this FRED graph to get you started.

Contrary to what might you have heard, dear reader, the S&P 500 index was not up 13% in 2010, it actually went down 13%.

First an updated graph of the S&P 500 which I first posted in Beware the Boom! showing the S&P 500 index in nominal terms and relative to gold price:

S&P 500 Index, nominal and relative to gold

For those of the opinion that gold price is a bubble I would advice they take a good look at the graph above and bear witness that the S&P 500 three decades bubble is coming to an end.

We can see the change of the S&P 500 and gold in US dollars last year with this graph from StockCharts.com:

Gold and S&P 500 nominal performance in 2010

Their ratio went from 1.017 to 0.89 in one year, a decline of 13%. If their ratio goes to 1983 level, about 0.30, that would be a decline of almost two thirds from current level; a simple example would be gold rising to $4500 or the S&P 500 crashing to 400.

The stats helper monkeys at WordPress.com mulled over how this blog did in 2010, and here’s a high level summary of its overall blog health:

The Blog-Health-o-Meter™ reads This blog is doing awesome!.

Crunchy numbers

A Boeing 747-400 passenger jet can hold 416 passengers. This blog was viewed about 4,600 times in 2010. That’s about 11 full 747s.

In 2010, there were 26 new posts, growing the total archive of this blog to 151 posts. There were 30 pictures uploaded, taking up a total of 1mb. That’s about 3 pictures per month.

The busiest day of the year was February 19th with 92 views. The most popular post that day was Russia Commits Naval Suicide.

Where did they come from?

The top referring sites in 2010 were newwars.wordpress.com, en.wikipedia.org, michael-hudson.com, en.wordpress.com, and warnewsupdates.blogspot.com.

Some visitors came searching, mostly for king edward vi usury, applied philosophy, example of liquidation, liquidation example, and the prestige philosophy.

Attractions in 2010

These are the posts and pages that got the most views in 2010.

Russia Commits Naval Suicide February 2010
2 comments

Bacon on Usury December 2008
5 comments

A Liquidation Example November 2008
1 comment

Euro Debt Rising January 2010

Zimbabwe’s Monetary Non-Policy May 2010

After posting in my last blog post the following graph showing the composition of the Federal Reserve’s Treasuries holdings:

The Fed's Treasury securities composition

I returned to the excellent St. Louis Fed: Economic Research website to further examine the data and produce a more concise graph. I grouped the six data series into two lines; the first (in red) shows the total face value of securities maturing from 1 year to over 10 years, so Notes and Bonds. The second (in blue) shows the total face value of securities maturing in less than a year, so Bills (maturities refer to the remaining time to maturity and not the maturity of the security at issue).

Federal Reserve treasuries holdings: short-term in blue and long-term in red.

At the start of 2007 short term securities formed the majority of the Fed’s holdings:

Federal Reserve treasuries holdings January 2007: short-term in blue, long-term in red

After almost four years, at the end of 2010, short-term Treasury debt declined to less than a tenth of the Fed’s holdings:

Federal Reserve treasuries holdings December 2010: short-term in blue, long-term in red

If you want to adapt these graphs you can use this FRED graph to get you going.

I decided to investigate the intrinsic values of Euro coins, the result is the following table:

Metallic values table

All prices except Steel, Tin and Dollar/Euro rate are from Kitco. Information about mass and composition is from Wikipedia article Euro coins. The important part of the table is shown in the following graph:

Metallic value as a ratio of face value

A tripling of metals’ prices, due to currency devaluation, will put the ratios of the €0.01, €0.02, €0.1, €0.2 coins above the 50% line. Once this line is crossed the coins will have to be withdrawn from circulation. The €0.01 & €0.02 are already being phased out (due to low face value):

The one and two-cent coins were initially introduced in order to ensure that the introduction of the euro was not used as an excuse by retailers to heavily round up prices. However, due to the cost of maintaining a circulation of low value coins, by business and the mints, Finland and the Netherlands round prices to the nearest five cents (Swedish rounding) if paying with cash money, while producing only a handful of those coins for collectors, rather than general circulation.

—1 cent euro coins, Wikipedia [my emphasis]

Coins are problematic in an inflationary environment due to their substantial intrinsic value compared to paper money, sooner or later their intrinsic value will exceed their face value. A piggy bank might be the right gift this Christmas.

In a preliminary report released Tuesday, the U.S. Federal Reserve said it will turn over $46.1 billion to the federal government. That money comes from income the central bank received mostly from its investments in U.S. Treasury bonds and mortgage-related securities.

The Federal Reserve also made money from loans to banks and other firms.

The bank’s profits follow an unprecedented amount of spending in emergency investments.  At the end of 2009, the bank was holding more than $1.5 trillion in U.S. government debt and mortgage-related assets.

After paying operating costs, the Federal Reserve turns over all profits to the U.S. Treasury.  It returned $34.6 billion in 2007.

—US Federal Reserve Makes Record Profits in 2009 [my emphasis]

In September 2009 the Fed’s balance sheet was $2,144 billion, while in June 2007 it was $869 billion (source). Thus the profit-to-assets ratio is:

click to view

Record profits, indeed! Record low profits that it is.

In False Hope Rising I argued that most countries in the table will have higher debt levels soon. Ireland, Belgium, The Netherlands and Spain are all members of the Eurozone, let us examine the debt level of the whole zone:

Click to view

The graph is from Monthly Bulletin December 2009 . What is of real importance is the change in debt-to-GDP ratio (right side graph, thin black line). Notice, dear reader, how it was negative from 2005 until the bust in 2008 (an achievment of the Federal Reserve more than anyone else) and then it shot up to a high number, at this rate the ratio will double in only 9 years. For the whole Eurozone debt-to-GDP was 75.8% in 2009 Q2, thus at the current rate of increase it will be 150% by 2018.

In Beware the Boom! I wrote the following about China’s gold reserves:

China’s official numbers are constant, but gold produced in China is not exported, hence the gold is being accumulated outside the official reserve.

And now we read:

“China, owner of the world’s biggest forex reserves, said Friday its gold reserves had risen to 1,054 tonnes by the end of 2008.

China is now the fifth biggest holder of gold reserves in the world, with only six countries having a holding of more than 1,000 tonnes, Hu Xiaolian, head of the State Administration of Foreign Exchange, told Xinhua in an interview. The new figure represents an increase of 454 tonnes from 600 tonnes in 2003, the last time China announced an adjustment of its gold holdings.

The country adjusted its holding of gold reserves twice this century. It raised its holding from 394 tonnes to 500 tonnes in 2001, and to 600 tonnes in 2003, Hu said.”

-China’s gold reserves reach 1,054 tonnes, China Daily

Over the last six years China’s gold reserve has been increasing at a yearly rate of about 10% while all published statistics showed it as a constant. Since 2000 the reserve has increased two-and-a-half times. Even with the latest increase the reserve is still pitiful, equalling about a three-hundredth of an ounce per person. The following table compares that to other countries:

Click to view

“If they cannot be bothered to reproduce, why should any European soldier sacrifice himself for future generations that never will be born?”
-Why Europe chooses extinction by Spengler (hat tip to Fabius)

The following map is taken from Wikipedia and edited by me to emphasise the difference. The map shows the birth rate per country (births/1000 person), I changed the nine colours to three.

Click to view

The red countries are all dying out, the blue represent the inflection point and the green are the only countries with potential to grow.

It seems that modern western social order is not capable of chewing gum and walking at the same time. Reproduction is a necessary condition in the biological definition of ‘life’; societies that cannot reproduce themselves are dead.

In Long Term Prospects of Georgia I showed that the future for Georgia is to be stuck between a declining hostile Russian north and resurgent hostile Islamic south. Today I will show that Georgia is just as weak internally as it is externally.

The BBC published (and also broadcasted) the following

“The country’s birth rate increased by nearly 20% during 2008 – a rate four times faster than the previous year.
…
He tells me that the jump from 48,000 in 2007 to 57,000 in 2008 can, in part, be explained by the Patriarch’s incentive, but also by the rise in average household incomes.
…
In a country which early last year boasted of having economic growth rates of 7.9% there is little doubt that economic factors may have played a role in bringing on the baby boom.”

-Church leader sparks Georgian baby boom, BBC News [my emphasis]

Every line of this article is soaked in dishonesty and false reporting. The “four times faster” is actually the second derivative of a ratio, a meaningless number.

The article claims a “baby boom” prominently in its title even though the birth rate is significantly lower that what a real baby boom would be. A baby boom is defined as births amounting to 2% of the population-in the case of Georgia that would be 90,000 babies, 58% higher than 57,000.

There is no comparison with other countries because even with the jump Georgia’s birth rate still ranks 158 out of 191 countries (see List of countries by birth rate from Wikipedia).

To put the birth rate in context we have to look at other demographical indices:

Birth rate: 10.62 births/1,000 population (2008 est.)
Death rate: 9.51 deaths/1,000 population (2008 est.)
Net migration rate: -4.36 migrants/1,000 population (2008 est.)
Total fertility rate: 1.43 children born/woman

-Demographics of Georgia (country), Wikipedia

The birth rate is slightly above the death rate and with a fertility rate so low the population is declining significantly. In reality the net change (birth minus death plus migration) is about negative 3.25 for every one thousand.

The rise in population since the Russian revolution has long since peaked-coinciding with independence-and now it is on a downward trajectory (graph from Wikipedia):

Click to view

The projected stabilisation is extrapolation of the last few years’ slowing decline, in reality the decline will start accelerating in as the economy declines.

“The former Soviet state’s economy grew more than 12 percent in 2007 on the back of foreign investment attracted by the pro-Western government of President Mikheil Saakashvili.

But a five-day war in August 2008 — when a Russian counter-strike repelled Tbilisi’s assault on the breakaway region of South Ossetia — scared off investors just as the financial crisis was beginning to take hold.

Official figures for 2008 are not yet available, but the government expects GDP growth to have slowed to 1.5 percent last year. The government expects the economy to grow around 2 percent this year.”

-Georgia gets $187 mln IMF tranche to weather crisis, Reuters

Boom or no boom the long-term prospects of Georgia are very bleak.

In The Coming Unemployment Tsunami I showed how the employment ratio has formed a head-and-shoulders pattern that indicated a steep decline over the next five years. Here is an update of that graph: from the Federal Reserve Bank of St. Louis (series: EMRATIO):

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