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.

In my post The Magical Jet Engine and Global Monetary Disconnect I wrote how dollars printed by a Federal Reserve eager to fight deflation are accumulating into pools outside of economic flow. That was on April 28 2008 when Excess Reserves of Depository Institutions with the Federal Reserve were a meagre $1.737 billion (source St. Louis Fed), today that number stands at $1,560.231 billion. Here is what I wrote, then, about the size of these pools:

So how big are these pools? First there is a little pool of fuel, a small matter of a trillion and a half dollars, called China; followed by a smaller pool, a solitary trillion dollars, called Japan, another trillion is divided by the world: hundreds of billions in the oil-exporting countries of Arabia, seventy billions in Russia, thirty billions in Venezuela, even crumbling Iraq has stash of dollars in its central bank.

Today Total Reserves excluding Gold for China are $3.2 trillion and it has doubled its official gold reserves since that time. Japan is a distant second with $1.2 trillion. Saudi Arabia has $558.7 billion, Russia has $456.5 billion. These four countries alone hold more than $5 trillion in reserves (source St. Louis Fed). US banks hold a trillion and a half with the Federal Reserve and European banks hold about a trillion with the ECB. All added up makes it about $7.5 trillion or fifty-percent of the US GDP.

The US is still printing dollars and exporting them to the world:

The trade deficit in the U.S. widened in January to the largest since October 2008 as imports rose to a record high.

The gap increased 4.3 percent to $52.6 billion, more than forecast, from a revised $50.4 billion in December, the Commerce Department in Washington said today.

—Trade Deficit in U.S. Widens as Imports Hit High, Bloomberg March 9 2012

China on the other hand are starting to export their own dollars:

China had its largest trade deficit since at least 1989 last month as Europe’s sovereign-debt turmoil damped exports and imports rebounded after a weeklong holiday.

The shortfall was $31.5 billion, the customs bureau said yesterday. Imports rose 39.6 percent from a year earlier, after a 15.3 percent slump in January, while exports increased 18.4 percent, the bureau said.

—China Has Biggest Trade Shortfall Since 1989 on Europe Turmoil, Bloomberg March 10 2012

Japan is also exporting its dollars:

Japan’s yen weakened after reported a record current- account deficit, the biggest shortfall since comparable data began in 1985, undermining the currency’s haven status.

—Dollar Reaches 10-Month High as Jobs Gains Dim Outlook for More Fed Easing, Bloomberg March 10 2012

Even Australia, a commodity exporter with a strong currency, is having a trade deficit:

Australia recorded a trade deficit in January, its first in 11 months, as weaker shipments of iron ore and coal contributed to the biggest drop in total exports in almost three years. The local currency fell.

—Australia Records First Trade Deficit in 11 Months on 8% Plunge in Exports, Bloomberg March 9 2012

All this money is going after real physical wealth: natural gas, oil, gold, etc. This in turn is pushing inflation up:

Inflation is back on the European Central Bank’s radar, complicating efforts to bolster growth as the sovereign debt crisis pushes the economy toward recession.

The ECB will lift its 2012 inflation forecast above the 2 percent price-stability threshold today, limiting its ability to cut interest rates further even as it lowers the outlook for growth, economists said.

—ECB’s Inflation Radar Complicates Growth, Bloomberg March 8 2012

High inflation has not stopped the Bank of England:

While inflation eased to a 14-month low of 3.6 percent in January, that’s still above the bank’s 2 percent target. Crude- oil prices have risen about 20 percent in the past six months. The central bank sees inflation slowing to 1.9 percent by the end of this year and 1.8 percent by end-2013.

—King to Face Renewed BOE Policy Maker Rift as Dispute on Inflation Simmers, Bloomberg March 8 2012

Inflation has been above 3.6% for the last 14 months, so inflation has been at least (it was above 5% for two months) 80% above the target. Despite all this inflation the bank has not lifted its centuries low interest rate of 0.5%. In April 2008 the monthly price of gold was $909 (declined to $760 in November) and the Federal Funds Target Rate was 2.25%, today gold is about $1700 and the rate is 0.25%. Somehow I do not believe that the central banks will react to inflation soon and when they finally do they will find that their actions have little effect.

The current international set-up is coming apart. Europe is breaking up. The Arab world is changing. China can not keep exporting cheap labour. Japan must wake up from its state of suspended-animation. Australia can not enjoy the “lucky economy” for much long. The world, as we know it, is coming to an end. End by itself is not bad: pregnancy ends with birth, study ends with graduation, life ends with a eulogy. The problem is refusing to knowledge change, prepare for it and manage it when it arrives.

The leaders of China have neither the will nor the ability to guide China into a national economy independent of the US and its global economic empire. They will drive China into the ground and then bow out of history; China will rise again as it has been doing for the last two thousand years (see The Future History of China Today).

Japan is not a fully sovereign nation and until it become one it will not solve its problems. For a people who have never endured foreign occupation in their history until 1945, they turned out to be rather docile clients of the US economic empire. This situation made sense as long as they enjoyed economic prosperity, but since 1990 they have suffered economic stagnation. The solution to their problems is extremely easy, but impossible to implement. The people themselves have neither the drive nor the will for change.

Australia is currently dominating the region with 22.8 million inhabitants, its close neighbour, Indonesia, has 237.5 million. Australia is enjoying economic prosperity, exporting the resources of the country and then re-exporting the dollars for oil and consumer goods. With a persistent current-account deficit since 1976, little wealth remains in Australia. Australia has the obstacles against change of both China and Japan: an inadequate leadership and unwilling people.

The current international set-up looks mighty solid, but inflation is like heat slowly melting the it and turning the world into a boiling liquid.

See also:

• Flow my Dollars the Central Banker Said, on the inflation/deflation debate of 2008.
• The Printing Press is a Harsh Mistress, once you start printing you can never stop.
• Stock Valuation and Interest Rate, the valuation of the stock market is inversely proportional to the interest rate.
• Zimbabwe’s Monetary Policy, an example of monetary policy in hyperinflation.

In HSBC’s China Expert Predicts a Rosy Future for China I slammed HSBC’s predictions for China over the coming ten years, little did I know they were going to make even more “rosy” predictions for China over the coming forty years!

Crunching everything from fertility rates to schooling levels and the rule of law, HSBC predicts that the world’s economic output will triple again by 2050, provided the major states can avoid conflict – trade wars, or worse – and defeat the Malthusian threat of food and water limits. Growth will rise to 3pc on average, up from 2pc over the last decade.

In a sweeping report entitled “The World in 2050″, the bank said China would snatch the top slot as expected, but only narrowly. China at $24.6 trillion (constant 2000 dollars) and the US at $22.3 trillion will together tower over the global economy in bipolar condominium – or simply the G2 – with India at $8.2 trillion far behind in third slot, and parts of Europe slithering into oblivion.

—HSBC sees China and America leading global mega-boom, The Daily Telegraph

To forecast the future one has to study the past, economists who crunch time series can not predict anything, because all this data has no context. Yet this economist seems able to predict China’s GDP forty years from now to the tenth of a trillion! He should have shown humility and just declared that both China and the US will have about a little less than a fifth of the World’s GDP, while India will lag behind with less than a tenth. Even such a reasonable wording would have been utterly ridicules.

China has been in a transition for the last thirty years, most economic numbers either were not collected or had a totally different meaning. Numbers for the last twenty years can not be used to forecast the future, it would be like using a teenager’s growth rate to forecast how tall he would be at the age of 40. Anyway the statistics published in China are hugely misstated for internal (local government fooling central government) or external (central government fooling the world) reasons.

From the article I can see two important problems with this report’s method. First it assumes that the inevitable will not happen. Current conditions will cause trade wars and food shortages. Assuming this will not happen is like assuming that San Francesco will be fine as long as tectonic plates stop moving. The growth of China in the last thirty years is itself predicated on conditions that will generate conflict with the US. The current situation might last another ten years, but the longer it goes the worst the conflicts will be be.

Second the report considers fertility rates, which I believe to be one of the most important indicators, unfortunately the report, according to the Telegraph’s article, has no understanding of fertility rates or population dynamics:

The surprise is how well the Anglo-Saxon states hold up under HSBC’s model, which is based on the theoretical work of Harvard professor Robert Barro. America’s high fertility rate (2.1) will allow it too keep adding manpower long after China’s workforce has begun to contract in 2020s and as even India starts to age in the 2040s.

…

Britain at $3.6 trillion also fares well, slipping one rank to sixth place but pulling far ahead of Italy and France, and almost displacing Germany as Europe’s biggest economy. This is chiefly due to the UK’s healthy fertility rate (1.9), although sceptics might question whether a birthrate inflated by the EU’s highest share of unmarried teenager mothers is a good foundation for prosperity.

The low fertility of Korea (1.1), Singapore (1.2) Germany (1.3), Poland (1.3), Italy (1.4), Spain (1.4) and Russia (1.4), more or less dooms these countries to aging crises and population decline unless they open the floodgates to immigration.

—HSBC sees China and America leading global mega-boom, The Daily Telegraph [my emphasis]

Highest fertility rate in the world (from Wikipedia)

2.1 fertility rate is high?! Only a Harvard professor would think so. That is exactly the fertility needed to keep the population at a constant. Without access to the report I do not know if it calls 2.1 high and 1.9 healthy or they are the words of the journalist. What is clear is that these are very low levels which will result in problems over 40 years. The problem is actually bigger because the majority white population of the US have had a sub-replacement fertility rate for some time, as the new census will show that their share of the population has declined below 75%.

The UK is even in a worse situation; I believe that at least Scotland will succeed before 2050. Their agricultural sector is smaller than Germany & France, which is why they get a rebate from the EU, and their economy has ran on North Sea oil, which already peaked, and financial bubbles. Their prospect is similar to that of the USSR in the eighties: breakup and economic crash.

Fertility rates below 1.5 are not low they are catastrophic. Such low rates in peacetime and during economic well being (no one is dying from hunger in Japan or Italy) is a sign of shame on the governments of those countries. They are killing their own citizens to appease the apatite of a hungry imperialist monster in the guise of economic globalisation. These countries are no different than India and Ireland in the nineteenth century where people died from hunger, while agricultural crops that could have fed them twice over where shipped to Britain.

Russia’s demographics are even worse than the absolute decline in population would suggest, because the ethnic Russians are declining while regional minorities are growing. The Russian model of colonialism (flood the conquered countries with poor Russian peasants) is now in reverse. This trend has sometime to run, but eventually it will result in area’s with majority non-Russians seceding.

What the HSBC report is doing is confirming the path their board has already chosen:

After two decades spent expanding in Britain, the United States and other developed economies, the world’s third biggest bank is shifting its focus back to its Asian roots, and especially China. HSBC wants to become the financier and international bank of choice for China’s growing band of entrepreneurs, just as it bankrolled Hong Kong’s tycoons in the second half of the 20th century.

—Special Report: After U.S. failure, HSBC pushes into China, Reuters

Based in Britain and expanding in China, HSBC is committed to this path for the coming forty years. This report in my opinion is just an intellectual cover. In the end I can say nothing better than what HSBC already admits:

HSBC admits that it economic projections are based on a “rather rosy scenario”.

—HSBC sees China and America leading global mega-boom, The Daily Telegraph

See also:

• The Future History of China Today
• Non-linear Historical Development

The end of the third year for this blog seems an opportune moment to examine its track record and update some graphs.

Tsunami

On March 25, 2008 more than 24 months ago I posted the following graph in The Coming Unemployment Tsunami:

Forecast

The target was reached in less than a third of the forecasted duration:

Actual

Result: Predicted employment ratio correct, predicted duration wrong.

Shattered

On July 4, 2008 I posted the following graph in Shattered and announced that US banks were insolvent:

US banks are insolvent

Few months later I updated the graph in The Unemployment Tsunami Has Arrived:

reserves climb from $44 billion to $315 billion in two months

Now the situation looks like this:

Non-Borrowed reserves at $1 trillion

First the Fed kept total reserves constant by lending to the banks, the money was raised by selling treasuries and not printed. This went on from the start of the recession until Lehman went under, at which point the Fed started printing money and flooding the banks with cash.

However, “Quantitative Easing” is a very dangerous hallucinogenic drug, and quoting Santayana again, “Those who do not learn from history are doomed to repeat it.” Fed chief Ben “Bubbles” Bernanke, who strongly endorsed “Easy” Al Greenspan’s ultra-low interest rate policy earlier this decade, which was designed to inflate the commodity, housing, and sub-prime debt bubbles, is now fueling a massive Treasury market bubble, and legions of speculators are taking collective leave of their senses and succumbing to delusions of zero-percent 10-year yields.

—Beware – “Quantitative Easing” is Hallucinogenic by Gary Dorsch [my emphasis]

As newly printed money was absorbed by the banks, they started paying back the Fed. Their borrowings from the Fed steadily declining since then. The printed money did not cause inflation because the banks kept it in reserve with the Fed, but slowly the money is seeping to assets. Now the Fed is going to print $600 billion new dollars, but the reserves are not going higher.

The high reserves are like a huge body of water behind a dam and the economy is the little village at the foot of the dam. Would you sleep soundly if you knew there were cracks in that dam?

Result: The cure is worse than the disease.

Fed Balance Sheet

On May 15, 2009 I posted the following graph in Four Graphs:

Treasuries held by the Fed

First the Fed sold about $300 billion of treasuries to fund lending to the banks (see graph above). When Lehman collapsed the Fed stopped selling Treasuries and monetised the banks bad assets. Afterwards it started monetising treasury debt, but it did not buy back what it sold, as the following graph shows the Fed has sold short term treasuries and monetised long term federal debt. Treasury Bills (reddish lines) declined, while Treasury Notes and Bonds increased (green, blue and magenta lines).

The Fed's Treasury securities composition

China treasuries holdings, October 2010

When the interest rate increase the value of all these bonds will decline below what the Fed ‘paid’ for them. The Fed will most certainly not mark them to market, resulting in a balance sheet that does not reflect the truth, just like the banks that ‘suddenly’ went bust after years of profit making. The reality was that their balance sheets were not reflecting their true financial position.

Now the Fed’s balance sheet resemble China’s holdings of US treasuries (graph from China Sells Long-Term Bonds In October As Foreign Inflows Moderate, Fed Untouchable At Top Of US Paper Holders List at ZeroHedge.com). While banks and financial institution hold short-term debt, that must be refinanced at the new higher rate, the Fed and China are stuck with long-term debt that they can not sell without taking a loss and if they hold until maturity they will be paid with worthless dollars. For the Fed that is not a problem, for China (and everyone else)  it is a catastrophe.

Result: Federal Reserve balance sheet is going down the drain.

Euro Abattoir

On March 16, 2010 I predicted in Bear to Bear, Lehman to Lehman that after six months of Greece’s ‘bailout’ another such slaughter will take place.

On the evening of 21 November 2010, the Taoiseach Brian Cowen confirmed that Ireland had formally requested financial support from the European Union’s European Financial Stability Facility (EFSF) and the International Monetary Fund (IMF), a request which was welcomed by the European Central Bank and EU finance ministers. The request was approved in principle by the finance ministers of the eurozone countries in a telephone conference call. ….
…
On November 28, the European Union agree to a €85 billion rescue deal of which €22.5 billion from the European Financial Stability Mechanism (EFSM), €22.5 billion from the IMF, €22.5 billion from the European Financial Stability Facility (EFSF) and bilateral loans from the United Kingdom, Denmark and Sweden. The remaining €17.5 billion will come from a state contribution from the National Pension Reserve Fund (NPRF) and other domestic cash resources.
Eurogroup President Jean-Claude Juncker said that the deal includes €10 billion for bank recapitalisation, €25 billion for banking contingencies and €50 billion for financing the budget.

—2008–2010 Irish financial crisis, Wikipedia [my emphasis]

The workers’ pension fund is raided to bailout foreign creditors of private banks. Ireland is the second to enter the slaughterhouse, but it will not be the last.

Result: Prediction was accurate, but took two months longer.

Hyperinflation

Hyperinflation has been a recurring theme on this blog. People in the West have many misconception about hyperinflation, it conjectures up images of wheelbarrows and banknotes burning in the heater. The reality is that hyperinflation is more subtle than that (see Beware the Boom!) and most likely such images will not be seen in Western countries any time soon; there must first come an intermediary period of high inflation. This period will be: The Great Inflation 2011-2012.

One scenario could be: In the coming year prices of essentials will rise but those of non-essentials and wages will decline. This means that profit margins and disposable income will decrease. The year thereafter will see shortages as producers go out of business. Most of the inflation will be concentrated at the end of the second year. Afterwards the economic crisis will metamorphose into a political/social crisis. The US will enter long-term stagnation, while the EU will leave stagnation (entered a generation ago) and start to visibly decline.

Inflation is coming one way or another, gold and oil have risen respectively 24% and 8% year to date. Food cost is going up, led by wheat prices. People are starting to worry about inflation, which is the best measure of inflation.

Result: The End is Nigh.

He really does predict a rosy future for China (source A Guide to China’s Regions, Provinces and Cities):

The guide is half survey and half forecast, the latter seems to be a simple extrapolation of past data. Of course my own prediction, which is anything but rosy, is in The Future History of China Today.

Philosophy lets you ignore mortal facts in your search for the immortal truth. HSBC’s China expert (see his biography at the end of the report) has very little philosophy in him; he is a graduate of China and the US.

China got stuck in Confucianism for 2000 years only to leave it for extreme Stalinism; afterwards it jumped from that frying pan to the fire of Consumerism; when it finally figured out its lack of philosophy it imported an English expert on Confucianism to lecture in its university!

US universities teach economy without any history or historical context:

The history of economic thought was taught as a core course when I attended graduate school in the early 1960’s. It has been replaced by mathematical economics, trivialized by being based on conceptually questionable, ideologically based statistical categories. My most imaginative students at the New School where I taught in New York City dropped out of the discipline and went into sociology or something else. They wanted to study economics to discover how the world operated, but were disappointed to find that this is no longer what the discipline is about.

The situation is worse for those students who stayed in the field and sought academic positions. Promotion is conditional upon publication in “vetted” journals. The key publications are controlled censorially by an intellectual inquisition that blocks any critique of pro-financial free market ideology.

—NeoLiberalism and the Counter-Enlightenment by Michael Hudson [my emphasis]

HSBC’s China expert was a professor of finance at The David Eccles School of Business at the University of Utah.

see also:

• The 3 by 3 Rule
• Non-linear Historical Development

[This is not a speculation on what might happen, rather a general description of what will happen. The future is unknown by definition, but like the next line in a poem it follows the rhythm of the whole and rhymes with what comes before it.]

1919— 1948

“In fact, the protracted history of the Chinese socialist revolution started 90 years ago in 1919 on May 4, when 5000 students from Beijing University and twelve other schools held a political demonstration in front of Tiananmen, the focal point of what is today known as Tiananmen Square.  The demonstration sparked what came to be known in history as the May Fourth Movement of 1919-21, an anti-imperialism movement rising out of patriotic reactions to China’s then war lord government’s dishonorable foreign relations that led to unjust treatment by Western powers at the Versailles Peace Conference. May Fourth was a political landmark that turned China towards the path of modern socialism through Marxist-Leninism.”

—The Socialist Revolution Started 90 Years Ago in China (Part 1) by Henry C. K. Liu

The seed for a new empire was planted, a new kind of empire. This one was not based on peasant armies or a foreign clan, this was based on an idea; the idea was simple: the only way for China to regain its world position was to apply the latest ideas from the West, whether they were tested or not. In 1919 the latest idea from the West was communism.

1949—1978

“The Mao era lasted from the founding of the People’s Republic on October 1, 1949 to Deng Xiaoping’s grip onto power and policy reversal at the Third Plenum of the 11th Party Congress on December 22, 1978.”

—History of the People’s Republic of China (1949–1976)

In 1949 the People Liberation’s Army took over the government, their first act was to split the population into two parts: city and country. The PLO spread out its rule: East Turkistan in 1949, Tibet in 1950. The Americans sucked the Chinese into the Korean war and helped drain their energy out.

Ten years later the ruling elite were quite ready to jettison communism, but Mao had other ideas and exploited the city/country divide to delay the transition for another ten years.

1979—2008

“The power transition from Hua to Deng was confirmed in December 1978, at the Third Plenum of the Central Committee of the Eleventh National Party Congress, a turning point in China’s history. The course was laid for the party to move the world’s most populous nation toward the ambitious targets of the Four Modernizations.”

—History of the People’s Republic of China (1976–1989)

Communism, which was ultra-modern in 1919, had become a stale idea in 1979. The empire returned to its raison d’etre: apply the most modern Western ideas whether they are tested or not. The fashion in 1979 was: free market, deregulation, tax cut, et cetera.

“Chinese economic reform has been undertaken through a series of phased reforms. Generally, these reforms were not the results of a grand strategy, but as immediate responses to pressing problems. In some cases, such as the closing of state enterprises, the government has been forced by events and economic circumstances to do things that it did not want to do. As of 2005, 70% of China’s GDP is in the private sector. The relatively small public sector is dominated by about 200 large state enterprises concentrating mostly in utilities, heavy industries, and energy resources.”

—Economic reform in the People’s Republic of China [my emphasis]

Adopting ideas without a sound philosophical foundation is not really a good strategy even if the idea is an old test one, let alone adopting crazy ideas coming from either intellectuals or think tanks.

“China’s growth has been so rapid that virtually every household has benefited significantly, fueling the steep drop in poverty. However, different people have benefited to very different extents, so that inequality has risen during the reform period. This is true for inequality in household income or consumption, as well as for inequality in important social outcomes such as health status or educational attainment. Concerning household consumption, the Gini measure of inequality increased from 0.31 at the beginning of reform to 0.45 in 2004. To some extent this rise in inequality is the natural result of the market forces that have generated the strong growth; but to some extent it is “artificial” in the sense that various government policies exacerbate the tendencies toward higher inequality, rather than mitigate them. Changes to some policies could halt or even reverse the increasing inequality.”

—Poverty in China [my emphasis]

And so China started to open up, granting economic and social freedoms but holding back political power.

2009—2038

“To say that China’s one-child family policy has been a disaster is an understatement. A report released earlier this month by the nation’s top think tank – the Communist Government’s Chinese Academy of Social Sciences (CASS) – says that the policy has created a huge gender imbalance with significant implications for future social stability.”

—China’s Cassandra prophecy [my emphasis]

The single worst idea adopted in 1979 was population control. The pyramids of Giza might appear mighty but all three rest on the plateau of Giza and their combined weight, millions of tonnes, hardly moved it an inch. The Chinese government might appear mighty but it rests no the Chinese people.

“The sex ratio at birth (between male and female births) in mainland China reached 117:100 in the year 2000, substantially higher than the natural baseline, which ranges between 103:100 and 107:100. It had risen from 108:100 in 1981—at the boundary of the natural baseline—to 111:100 in 1990. According to a report by the State Population and Family Planning Commission, there will be 30 million more men than women in 2020, potentially leading to social instability. The correlation between the increase of sex ratio disparity on birth and the deployment of one child policy would appear to have been caused by the one-child policy.”

—One-child policy [my emphasis]

2039 will be the last year of this central  government, the empire lasted exactly 120 years divided into four generations of thirty years each: germination, growth, glory and decline.

See also:

• The 3 by 3 Rule — Part One
• Non-linear Historical Development
• The Story of Europe
• Dynasties in Chinese history from Wikipedia

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

Here are more graphs that I have been extracting from BP’s Statistical Review of World Energy 2007 (available as an MS Excel workbook on the Internet at: http://www.bp.com/statisticalreview).

Graph 10: This graph shows oil production in different parts of the world, which has experienced significant decline. It plots total US production (thousands of barrels per day-right side) and the total production of Australia, UK and Norway (thousands of barrels per day-left side) from 1965 to 2006. Read the rest of this entry »

[Note: this piece was written some time ago and the numbers are those of 2006]

Some people blame the high oil prices on China and India, how true is that accusation?
First let’s take a look at the size of the three biggest countries in the world:
Read the rest of this entry »

[Note: this piece was written some time ago and the numbers are those of 2006]

Some people claim that China is the second biggest economy of the world, they give this list as a proof:
http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28PPP%29
so: USA=$12,277,583M  & China=$9,412,361M
    USA= number 1     & China= number 2

But this list is not real numbers, it’s made with statistical mumbo-jumbo which very few people in the world understand (always a bad sign); you can try for yourself at this article:
http://en.wikipedia.org/wiki/Purchasing_power_parity

The real numbers come from this list

Read the rest of this entry »