Stopping-Up a Volcano With a Garbage Can Lid

Chinese government may have the best intentions, its leaders may have IQs of 250 each on a bad day, but it is impossible to centrally manage an economy of China’s size.

– Vitaliy Katsenelson (HT: Business Insider.com)

When China decided to modernize its northern province that abuts Outer Mongolia, it built a magnificent city called Ordos. Ordos was designed to hold 1.5 Million residents in an ornate sea of apartments, shops, libraries and museums. It was a triumph of centrally-planned government intervention into economic matters except for one thing: nobody really wants to live there.

This fatal conceit, as Hayek termed it, is leading the world to the precipice of an unimaginable economic failure. China has become a low-cost manufacturing bubble. They got a great idea, they took it too far, and now they have the PRC government running interference, in a vain effort to prevent the iniquitous laws of unintended consequence to end their Wile E. Coyote walk on air. V. Katsenelson describes China’s precarious and unstable economic equilibrium below.

One way to think about the Chinese economy is by comparing it to the bus in the movie Speed with Keanu Reeves and Dennis Hopper. In the movie, a bus was wired with explosives that would blow up if the bus’s speed dropped below 50 miles an hour…Since China is manufacturer to the world, that manufacturing business comes with a lot of fixed costs….. High fixed costs are great when revenues are rising as income grows at a faster rate than sales. But they are devastating to profitability when sales decline: costs decline at a slower rate than sales and you start losing money, fast.

(Ob. Cit. Business Insider.com)

This desperate rush for sales volume inflicts pain on other countries. They cannot compete with the Chinese cost structure. In America, also under adverse credit conditions, industries increasingly cease trying. The durable goods order statistics serve as a de facto scoreboard for how much future manufacturing will happen in America. According to the US Census Bureau, the following took place last month.

New orders for manufactured durable goods in October decreased $6.8 billion or 3.3 percent to $196.0 billion, the U.S. Census Bureau announced today. This decrease, down two of the last three months, followed a 5.0 percent September increase. Excluding transportation, new orders decreased 2.7 percent. Excluding defense, new orders decreased 2.1 percent. Transportation equipment, also down two of the last three months, had the largest decrease, $2.9 billion or 5.2 percent to $52.3 billion. This was led by defense aircraft and parts, which decreased $1.6 billion.

(HT: Business Insider.com)

The first order knock-on favors the Asian Dragon. Americans consume more, make less and have to get the goods to consume from somewhere. China to the rescue!

Yet here’s where the lot goes to seed. To consume the goods, the Americans need a vibrant economy that produces either A) jobs and income, or B) jobs and cheap credit. The closest we get right now is an economy that forces cheap credit through a policy of unsustainable quantitative easing. We’ve got $600Bn worth of Fed Cash to buy debt securities with. Then, the fuel runs out while the aircraft stays aloft. That can’t lead to happy-happy, joy-joy outcomes in the Good ‘Ole US of A.

Here’s where the wise and mystical Wyrm of the Orient gets acid indigestion. If America runs out of ideas, airspeed and bright ideas, China needs to eject. Projects like Ordos were an effort to astroturf in an economic grassroots that would then provide a domestic consumption in line with China’s manufacturing output. This transubstantiation would somehow allow underpaid factory workers to consume like West Hollywood Yuppies and all would be well in The Middle Kingdom of Old.

China sees the lack of sustainability in America’s extend and pretend economic regime of today at tomorrow’s expense. The see the ghost towns that the PRC erected for people who can’t afford rents, working for industries which can’t pay them and economically compete with Germany, Japan or South Korea.

At this juncture Wile E. Coyote wobbles as he walks upon the ether. He may feel a nagging self-doubt. “Am I the Supra-Genus my business cards claim I am?” In the totalist state, self-doubt leads to external criticism. External criticism could delegitimize the all-powerful state. The cycle must be broken and the passions of increasingly frightened and desperate people must be focused externally.

At this critical juncture the guns of China’s North Korean client state resound across a cold and bitter harbor. The eyes of the world are riveted away from the empty, dust-swept streets of Ordos. North Korea shelled a South Korean Island as a cry for relevance and attempt to extort more money from the West.

China’s response (or lack thereof) to the killing of several South Koreans will be a statement of their concern over American economic policies. As America’s currency wanes and individual American consumers save more and play less, China’s Speed economy threatens to drop below the requisite minimum rate of growth to afford their industrial base. They view the structural weakening of American currency as a figurative artillery volley athwart their economic commonweal. The nasty and suspicious part of my mind can’t help but wonder if the PRC secretly enjoyed seeing the North Koreans respond to the West in the currency of hot, hard shrapnel.

But in the long run, this relationship of codependency masking a thinly-veneered mutual contempt will fail the US and China. China’s laughable ghost cities and Helicopter Ben’s QE II, The Drunkard’s Folly, are pitiful attempts to defy the unchanging hideous eloquence of economic truth. Neither their Marxians nor ours will ever get something for nothing. When we attempt to deny this fundamental reality of adulthood, both of our nations look as risible as an idiot attempting to stop-up a rumbling volcano with a garbage can lid.