Wikistrat's "The World According to Tom Barnett" 2011 brief, Part 8 (Q&A on global economic crisis)

More Q&A from my presentation of the current Brief to an international military audience in the Washington DC area in September 2011.

Audience question was about the global economic crisis and role of China in global economy.

WPR's The New Rules: Obama Must Avoid the 'China Threat' Trap

No credible international affairs specialist would contend that the 2012 presidential election will hinge on U.S. foreign policy, given the state of the U.S. economy and the widespread social anger that one sees bubbling up across the country. What's more, Americans -- if not Beltway partisan pundits -- have achieved a certain sense of consensus on foreign policy under President Barack Obama, whose leadership has displayed a palpable "give them what they want" dynamic that reflects his desire to keep overseas issues on the back burner while he focuses on domestic ones.

Read the entire column at World Politics Review.

Very cool video by friend inspired by Occupy Wall Street protests

Michal Shapiro is a good friend of this blog, longtime reader and occasional mentor.  She just joined Wikistrat because we want her analytically sharp but artistically infused perspective, which she shares regularly in a blog at HuffPo.  Why? We don't want Wikistrat to simply replicate the closed society of intell/consultants from the real world. We want breadth, so that means subject matter experts from around the dial so blind spots in thinking are rooted out ("Has anybody ever considered . . .?") in the simulations we pursue.

Michal is an amazing artist (one of her paintings hung in Don Draper's office in "Mad Men" - and now hangs in my home office thanks to her gift) and turns out to be an amazing singer too, as this video shows.

"Up the Spout" (thanks, Occupy Wall Street) from Michal Shapiro on Vimeo.

Find it to play here at Vimeo.

WPR's The New Rules: 3-D Printing Could Ease Strains of Global Population

According to the United Nations, today marks the birth of the world’s 7 billionth person, an event sure to cause great angst among the many surviving Malthusians who still believe that humanity’s ingenuity and the planet’s resources are both finite. But thanks to globalization’s continued advance and the modernization it enables, roughly four-fifths of humans live in societies with falling birth rates and half live in societies featuring lower than replacement-rate fertility. So we now know that the trajectory of global population growth will proceed somewhat more slowly toward our eighth and ninth billions, and that we may never reach the 10th.

Read the entire column at World Politics Review.

China will spend where it can own

It's becoming clear that China won't bail out Europe, simply because it sees no political will and has no desire to buy more Western debt.  Same will apply to US as things get worse.

What China will buy is access to stuff it truly wants: resources and management talent.  So, as the cited FT story makes clear, China is ready to invest in Brazil's new offshore hydrocarbon discoveries.

And as the Center for America-China Partnership made clear in our grand strategy agreement, China is interested in buying into US companies.

But no, it's not interested in throwing hard-earned money after bad.

Chart of the Day: Slowing trade = slowing global economy = slowing globalization

FT story that matches a previous Economist bit about the slowing of traffic through the Suez (HT Dan Hare on latter).

As I've noted here before, the more than 10% drop in 2009 was basically recovered in 2010. For now, the trade growth still forecast through the rest of 2011 is more than twice as high as the 2008 total, but we are headed in the wrong direction.

In releasing these figures, the WTO hinted that the fiscal crisis in Europe is much to blame (uncertainty depresses production depresses trade).

The danger now - again - is that trade protectionism begins to creep back in, especially of the monetary sort, as the BRICS are getting hot under the collar over the hot money pressuring their systems - Brazil especially.

WPR's The New Rules: Time to Worry About Over-Eating, not Over-Population

The real clash of civilizations in the 21st century will be not over religion, but over food. As the emerging East and surging South achieve appreciable amounts of disposable income, they're increasingly taking on a Western-style diet. This bodes poorly for the world on multiple levels, with the most-alarmist Cassandras warning about imminent resource wars. But the more immediate and realistic concern is the resulting health costs, which will inevitably trigger a rule-set clash between nanny-state types hell-bent on "reining in" a number of globalized industries -- agriculture, food and beverages, restaurants, health care and pharmaceuticals -- and those preferring a more free-market/libertarian stance.

Read the entire column at World Politics Review.

China's slows but still grows, thanks to regional "gravity"

Economist talking up a new book by Arvind Subramanian, who often writes for the FT. It's called "Eclipse."

Why China looms large in the future global economy, according to Subramanian: demography, convergence, and "gravity."

Convergence is a take on the healing of the "great divergence" that began around 1800: West grows 1200% over two next centuries while the rest lost 50% (much due to colonialization). The "great convergence," as many call it, predicts that the West grows 600% this century while the rest grow 1200%. Doesn't eliminate difference, but closes gap mightily.

Demography, in Subramanian's take, is all about heft: China is 4X size of US so only needs 1/4 GDP per capita to outpace.  He blows off the ageing issue, according to the Economist, and he doesn't seem to be tracking the decrease in labor either.

Subramanian is no pie-in-the-sky trajectionist, meaning those who place China on a neverending track of 8-10% growth. He buys into the S-curve argument and says China will grow about 5% for next two decades. That's the pattern we've seen in East Asia in the past (reach 25% of US per cap GDP and then slow to 5-6% growth).

The idea that caught my attention was the gravity one: 

. . . the "gravity" model of trade, which assumes that commerce between countries depends on their economic weight and the distance between them. China's trade will outpace America's both because its own economy will expand faster and also because its neighbors will grow faster than those in America's backyard.

Point being: China works its region while we do not.  We play the drug war and China is working infrastructure like crazy in SE Asia. China will also logically work toward an Asian Union with its economy as the centerpiece, while the US puts up a border wall.

Back to an argument I continue to make: we need to be opening up to the south like crazy, not shutting ourselves off on immigration and drugs.  We'll make ourselves weak relative to China and India due to their bulk populations, when our version of their interior rural poor are there for the taking.

We should be expanding the United States, not closing it down.

The real leading indicator of China's power

Apologies for no post for two days. I was in DC and busy.

FT story here on how the demographics are already playing out in China: fewer workers entering the work force can be choosier and more demanding on wages. That sends wages skyrocketing in China along the coast. Companies have two choices: go inland for cheaper Chinese labor - but then accept the higher transpo costs, or they go to neighboring states - all of which are just now on the cusp on a very big and long demographic dividend that will make their labor cheaper than China's from here on out. Those neighbors are basically all of Southeast Asia and especially India and Bangladesh.

So the subheader here says it all: "Demographcis and Beijing policy on workers' pay mean manufacturing is relocating in Asia."

Won't change a whole lot about America's trade deficit with Asia. It was large when "factory Asia" was just Japan and South Korea and ASEAN, and it got bigger when China cleverly inserted itself at the top of that assembling chain and consolidated the region's trade suprlus with America into its massive foreign currency holdings. And it won't go away when others displace China increasingly.

But it does mean that China's days of "inexhaustible" cheap labor are already ending.

And it means that India's eclipsing of China as the next big thing - to include all the soft power that goes with that (which will be greater for democratic India than authoritarian China) - has already begun.

Our fiscal failure eventually achieves the global rebalancing sought

FT op-ed by former senior Chinese central bank official.

The big lesson of the past few weeks, he says, is that China must end its dependency on the dollar.

China has run a current account surplus and a capital account surplus almost uninterruptedly for more than two decades. Inevitably this has led to an accumulation of foreign reserves. It is clear, however, that running these surpluses persistently is not in China’s best interests. A developing country, with per capita income ranking below the 100th in the world, lending to the world’s richest country for decades is not reasonable. Even worse is the fact that, as one of the largest foreign direct investment-absorbing countries in the world, China essentially lends money it borrowed at a high cost back to its creditors, by buying US Treasuries, rather than importing goods and services.

Internationalizing the yuan, stimulus packages, letting it rise slowly, bundling up all those bucks in sovereign wealth funds - nothing has really stopped the preciptious accumulation because the government remains committted to keeping the yuan low, seeing in inflation an unacceptable risk.

But by staying so married to the dollar, it runs the same risk extended, as the US will inevitably inflate its way out of a certain amount of its unsustainable debt.

As Yongding puts it, "The longer it continues, the more violent and destructive the final adjustment will be."

Of course, the same holds for the US in this game of chicken.

Leading indicator of India eventually surpassing China as globalization's factory floor

Fabulous Economist story entitled, "India's Guangdong."

Short explanation from me b/c fighting ear infection:

Demographic dividend huge in India, and will stretch deep into mid-century.  China's, by comparison, had heyday from 1980-2010 and now starts slow decline.  China, for example, loses about 1/3 of labor entering workforce over next decade - decline finally set in motion by one-child policy.  India surpasses China in labor around 2030, and has 50% more by 2050.  SE Asia on similar trajectory.

All comes to say: China, as it moves up value chain (all those Foxconn robots!), exports jobs to India and SE Asia - inevitably.  Good and bad thing for China, just like it's been good and bad for US last 30 years.

As I watch this, I keep saying to myself: where is the leading indicator of how India actually gets around to seriously industrializing?

That's why this article so cool:  says Gujarat is the state to watch.  It's India's Guangdong.

So stay tuned.

WPR's The New Rules: U.S. Must Get Back in Touch With Its True Exceptionalism

This month's debt-ceiling deal in Washington did little to quell the growing chorus of complaints around the world concerning America's continued inability to live within its means. As those complaints invariably translate into corporate hedging, government self-defense strategies, credit rating drops -- Standard and Poor's is already in the bag -- and market short-selling, the U.S. will most assuredly be made to feel the world's mounting angst. This is both right and good, even as it is unlikely to change our path anytime soon: Until some internal political rebalancing occurs, America will invariably stick to its current cluster of painfully outdated strategic assumptions.

Read the entire column at World Politics Review.

Rogoff's "second great contraction" and why I'm mad as hell at Washington

Got this by way of Thomas Friedman's Sunday NYT column, which is pretty good (for a blog post!), but the direct source approach is much better. Still, Friedman's upcoming book on fixing America couldn't be better timed, so expect another mega-bestseller there.

Rogoff's point is simple but very revealing: we've all known this crisis to be a financial one versus the usual biz cycle.  Recovering from biz-cycle contractions is historically a quick affair, but recovering from a financial crisis is typically more the 5-7 years horizontal scenario. Rogoff's key insight is to state the obvious (for most of us consumers): the "recovery" of the business cycle has already arrived and it changed nothing for most people, because the hangover is a long-term credit contraction - i.e., the huge deleveraging.

Many commentators have argued that fiscal stimulus has largely failed not because it was misguided but because it was not large enough to fight a “great recession.” But in a “great contraction,” problem No. 1 is too much debt. If governments that retain strong credit ratings are to spend scarce resources effectively, the most effective approach is to catalyze debt workouts and reductions.

Governments, for example, could facilitate the writedown of mortgages in exchange for a share of any future home-price appreciation. An analogous approach can be done for countries. For instance, rich countries’ voters in Europe could perhaps be persuaded to engage in a much larger bailout for Greece (one actually big enough to work), in exchange for higher payments in 10 to 15 years if Greek growth outperforms.

Is there any alternative to years of political gyrations and indecision?

I have argued that the only practical way to shorten the coming period of deleveraging and slow growth would be a sustained burst of moderate inflation, say, 4 per cent to 6 per cent for several years. Of course, inflation is an unfair and arbitrary transfer of income from savers to debtors. But such a transfer is the most direct approach to faster recovery. Eventually, it will take place one way or another, as Europe is painfully learning.

I feel this personally in spades: built a nice big house in 05-06 at the height of the bubble (of course, I walked away from the old house with an inflated sum, so no complaints), so the house is priced in that way - as is my mortgage.  At the time, no problem, because I'm getting paid in a bubblicious way.

Then the crisis.  All of a sudden everyone says my labor is worth a whole lot less.  Still love me and the work, just want to pay a lot less.  Everybody is doing this, except my mortgage holder.  He wants that to stay the same.

I'm lucky. Despite losing a ton of income over the past three years, I've scrambled and replaced the vast majority.  I have to work three times as hard for 5 times as many customers, but I'm managing because I'm not reliant on any one job and I'm willing to hustle.

So I do the right thing and don't strategically default on a mortgage, which is tempting, not because I can't pay it because I can - and am. It's tempting because, geez, why should I pay off this debt honorably across this long crunch while so many others get help or simply run away?  Because when I do, I subsidize all their behavior.  If I strategically default, I suffer some serious inconveniences, but I can put us in a rental tomorrow for a fraction of what I'm paying on my mortgage.  You hear these tales all the time, but usually from couples with few or no kids, because making that sort of move would be a mega-bitch for a family of 8.

But I built a big house (six kids, go figure) and I'm above the usual government help parameters, so - again - I do the right thing but feel mightily screwed by the turn of events.  I keep wondering, where's my haircut - you know, the one everybody else seems to be receiving?

Worse, I have a White House that claims I'm the problem because I don't pay enough taxes and so it wants to soak me because that's an evil state of affairs.  Funny thing is, I pay the Fed a whopping sum every year - about three times as much as my dad ever made in a year while he supported us seven kids.  So naturally, when more than one out of every three dollars I make goes to the government, I feel like I'm supporting all sorts of programs for the needy, plus I'm doing the right thing by the mortgage, plus I keep up my charity donations, plus I pay 3 private grade school tuitions (saving the public schools) and two public college tuitions (eldest daughter and wife).  I don't ask for any hand-outs from the government.  Hell, I fund them and am glad to do so.  But then I'm told I'm the reason why the government is so in debt (not enough taxes from the "rich") and yet I'm the dupe who continues honoring that mortgage from another era while paying for the bail-outs of those who can't. And you know, I don't feel like I'm the problem - or evil for doing all that.

In short, I'm doing everything I can to help this economy. I'm working my ass off, I'm honoring all long-term debts and keeping myself out of any short-term credit. But you know what that takes in this economy?  It means I am as stingy as possible on consumer spending. It means I put off business investments for as long as possible.  It means I've got nothing for venturing investments.  It means I'm more incentivized than ever to stuff as much into retirement funds to avoid the tax man.  It means I will vote for anybody who seems to spell reasonable restraint and relief - and that sure as s--t ain't Obama.

I'm not a Tea Partier.  I'm very middle-of-the-road: a conservative Democrat on domestic and a liberal Republican on foreign. I crave compromises in Washington because our political elite's inability to make those deals happen reasonably means I compromise across the board.  They do nothing to lift the economy out of its doldrums and I reciprocate. Everything I read from them says, "Screw you" and I can't help wishing them the same.

There's your national angst in a nutshell. I've been laid off.  I've had my salary cut plenty of times. I've been asked to work twice as much for half as much money. I've seen hours slashed. I've had to arrange my own health insurance for the first time in my career.  Moreover, virtually every risk I once shared with employers has, over the years, shifted to me as an individual. As somebody who studies globalization, I've learned to accept that tough reality, because the economic models we relied upon before globalization went big time are now unsustainable.  I don't regret that transformation, because it's part of the globalization process that's lifted hundreds of millions out of poverty globally. But it does mean this country needs to retool most of how it's dealt with economic "losers" and those made vulnerable by these changes. But Washington seems clueless in this regard, with everybody holding firm when a bit more imagination is needed (my column tomorrow).

So yeah, as a small businessman (Barnett Consulting), I've had it all across my various endeavors across this Second Great Contraction - sometimes voluntarily but oftentimes not. Everybody has had to tightened up dramatically - that's the basic inescapable reality in this business environment.

Yes, I've been lucky because I never had all my eggs in any one basket, but I survive only because I've refused to lay down. I lose one job (and I've lost several since 2008), I go out and immediately get two or three more - because that's the terrible math.

So - again- I do the right thing. I honor all my obligations and simply work that much harder. But no, I have no optimism about the future of our economy right now. I don't how I could. I know what I know about globalization and America's long-term strengths, but I look at Washington and I see clueless politicians with no business experience spending all their time trying to tear each other down and I wonder why I must suffer these fools.

I don't have any choice.  We made the "mistake" of having three kids.  We made the "mistake" of adopting three needy kids from around the world (there are worse ways to spend your money, but it's essentially my helping the world without the same tax breaks as when I give to international charity X). I built that nice house (which I love, BTW) in a nice school district (so I don't pay tuition to my son's excellent public HS, which I support with property taxes, even as I privately fund his show choir's appearance at the London Olympics next summer because that's what excellent public HS's do - damn it!).  Frankly, I am very happy with my family's existence here in Indy, which is a state that's cheap but well run (and yes, I would have liked to see Mitch Daniels run).  

But I am plenty angry about the economy and the place it has put me in. I am forced to scramble non-stop.  I hustle like a maniac. I am full of angst and it's mostly about debt (what I honor while others do not, and what I work like a demon to avoid, but honestly, what's the value of a stellar credit rating at this point - except to subsidize others?).  I pay huge taxes and am denied any haircut-like relief on my mortgage - when everything else I see in this economy has been negotiated downward to account for the new reality (I know, because I've done it myself with all sorts of counterparties).  

But most of all, I f--king hate the government right now for being such incompetent boobs.  I would be happy to see them all lose in 2012 - and will vote that way.

How to lose the globalization game

Disturbing piece by John Bussey in the WSJ, noting how, as Congress dithers on free trade pacts regarding Colombia, Panama and South Korea, our competitors are moving ahead with their own and on that basis expanding their export presence while US firms cannot due to the higher tariffs suffered.  The US soybean industry (a big deal here in Indiana) alone thinks it's losing $3B in ag exports.  Boeing says it's losing out to Airbus in South Korea. The list goes on and on.

Our problem is that we try to legislate all sorts of additional regulations into the FTAs, attempting to force this or that "fairness" on the counterparty in terms of how they treat their environment, labor, etc.  We use the excuse of the FTA to attempt all manner of socio-economic engineering and, in doing so, make the deal so complex that it lingers in legislative limbo sometimes for years on end.

It is a fascinating method of shooting our economy in the foot and then wondering why we lose the race, especially since, if you want real socio-economic progress in any country, the fastest way to achieve it is to foster income growth and let the locals manage it on their own timetable and agenda.

But that would be too easy, make too much sense, and preserve too many American jobs.

Chart of the Day: South-south trade defines Africa's rise

WSJ story on US companies seeking to "catch up" in Africa.  As the chart indicates, US trade with the region has remained steady in the high teens (percentage), while it's Europe that has lost ground to emerging south-south trade (emerging and developing markets trading with each other).  That share was about one-third at Cold War's end, but now it's up to more than half.

Old Core demand for African commodities has long been an up and down affair (boom and bust according to its business cycle), but with rising New Core economies creating plenty more demand, Africa enters into a supercycle of demand that floods the local economies with money and cheap consumer goods in reply.  In combination, Old and New Core demand create a lift-off moment for the continent, the likes of which it has never seen before.

Many good things will come of this, but so will a host of painful transitions, the trick being that the primary integrating agent right now on the continent is the one country famous for not caring about its local impact whatsoever.  This is touted as a virtue by many (Beijing consensus), but it comes with a price - this indifference.

Chart of the Day: why everyone loves shale gas

From FT story.  Simply answer:  because of its weirdly even spread.  Unassociated gas, meaning gas not associated with oil, is the future.  We always just found gas alongside oil and assumed its distro geographically was similar.  It's not.  Unassociated gas is everywhere, and this chart doesn't even include methane hydrates (unassociated gas frozen solid in sea beds).

You may think that gas is only so-so exciting compared to oil, but electricity generation is crucial, and avoiding coal is crucial to reduce pollution/CO2.  You go mostly gas on electricity to crowd out coal, and then go modular nukes to supplement that (especially where infrastructure is "hostile" in its enviro layout:  remoteness is big example), and you use the modulars to make water potable and crack it for hydrogen, and that's how you make transpo happen increasingly (hybrid electricals shifting to hydrogen, with ultralights providing a lot of the energy savings along the way).  

Oil has had its time.  Gas is the next big node going down the hydrocarbon chain.

The big hold-up/uncertainty on gas remains the enviro impact of fracking.  This is why I continue to think that methane hydrates will ultimately be more the answer.  But someone please disabuse me of that assumption.

Chart of the Day: Good governments come with good income

WSJ story on academic study.  Gist of story is that China cannot really move into high-income without dramatically improving its government, but the converse logic also holds:  we shouldn't expect too much from governments until their society's per-capita income level gets up there.  Yes, there are exceptions in each (rich-enough Russia, rich-enough emirates), but the basic pattern is clear enough.

Why the lag?  It takes a demanding citizenry to get good governments, and citizens get more demanding, the more money they have.  It's really that simple.

At the end of the day, all things being equal, there's no question that democracies outperform autocracies. But the "all things being equal" part doesn't include the catch-up phase, like the one China is going through now. 

When does that "catch-up" end and the democratization kick in?  The people decide that, usually between $5,000-$10,000 per capita income.

Note that the numbers above are PPP, so high.  China measured less relativistically sits at about $4400.

Chart of the Day: Asia and Africa's near-perfect asymmetry on trade

From FT.

Africa has raw materials to sell and needs manufactured goods, one would assume.  Asia is just the opposite. The asymmetry is acceptable so long as both growth as a result of the trade - like now.  But over time, everybody wants things to even out some.

And yet, with climate change, that logic may go out the window.  Africa will suffer, but it's got about half the unused or underused arable land in the system, whereas Africa is a major grain importer already.

North America will face similar asymmetrical pressures in its trade with Asia, begging the question, Will we be happy enough being - once again - the land of the plenty?

Why Mauritius highlighted on ease of doing business?  It's an Indian Ocean banking center (island) that aspires to be the main conduit of finance from Asia into Africa - the Singapore of this equation.

The rise of the rural market

WSJ story on GM betting big on China's rural market and FT story on Lenovo planning to use the selling expertise it gained there to penetrate similar bottom-of-the-pyramid markets in Indonesia, Brazil, Mexico, India and Turkey.  

Per the chart above, you can see GM's logic plainly:  China is already a market roughly equal to its US share.

Per both, you begin to understand the logic that says, To sell globally is to succeed first in China.  Why?  It's not just the market size, but the BOTP experience gained.  Thus the larger logic of allying with Chinese firms as they go global.  Master the one, progress to them all.

The rise of the global middle class necessitates being able to sell in the rural market, because that's where a good chunk are located amidst all the urbanization between now and 2050 (we basically double the number of urbanites globally from 3.3B to 6.6B).  In marketing terms, this is Leninist-Maoist:  Go back in time and catch your target in their pre-branded state!

First car and PC sale is like first vote as adult:  brand affiliation is often set for life, so the effort is more than worthwhile for a GM and Lenovo.

Just how scared Beijing is becoming over inflation

FT story on the big fine the Chinese gov levied on consumer products company Unilever for publicly announcing that it planned to lift prices.  Apparently some consumers rushed into stores and bought up stuff in anticipation of the price hike, spooking the authorities.  So they slapped a $300,000 fine on the company.

FT:  "The move by the National Development and Reform Commission, China's economic planning agency, will heighten concern among foreign and domestic companies that they may not be able to pass rising costs on to consumers."

Nervous in government service.