MUST SEE: NIALL FERGUSON – THE DOLLAR IS DYING, THE U.S. EMPIRE IS ENDING
20 October 2009 by Cullen Roche
14 Comments
Niall Ferguson did an excellent interview with Aaron Task on Tech Ticker this morning. He touches on many of the long-term secular points that I have detailed here at TPC. Ferguson touches on the historical comparison of the UK vs the USA. He thinks the U.S. dollar is essentially doomed and that it represents the end of the U.S. empire as we know it. You can read my detailed analysis here.
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We are so screwed. How can we sit around and watch them print all this money and run up these debts without doing anything. I feel so powerless about watching this great country die.
Learn Mandarin.
Niall Ferguson is a pompous ass who likes nothing more than to dump on the US. Look, there are huge problems in the US and I am certainly not happy with the actions that have been taken. But the relative decline of the US versus China ignores the fact that China is the biggest bubble of all.
When I hear about China today, I am reminded of nothing so much as all that was said about Japan in the 1980s (or the US for that matter in the Tech or the Real Estate bubbles). The simple fact is that an economy never seems more dominant than when it is in the middle of a bubble. And that is precisely what we have in China.
What has China been doing? They have clearly been manipulating their currency in order to stay hypercompetitive on exports — the Law of Comparative Advantage has not been repealed and China cannot consistently maintain huge trade surpluses without manipulating their currency. The consequence of their currency manipulation, however, is that they have lost all control over their domestic money supply, which has produced negative real rates of interest and an investment bubble of huge dimensions. This investment bubble has been aided enormously by a banking sector which is directly controlled by the government and which, as we saw very graphically earlier this year, doles out money on command to meet the political objectives of its master.
China implodes when it becomes clear that the investments that have been undertaken, and which have been driving GDP growth, are in fact valueless. Don’t forgot, if China goes out and builds too many factories, or too many apartment buildings or shopping centers, that still shows up as economic activity in the national accounts even if the factories/apartments/shopping centers are excess to requirements and valueless. And this is precisely what has been happening.
So all of the facile projections about China overtaking the US economy by 2027 or whenever — pick a date — are fundamentally flawed because they assume that China will continue to grow at the unsustainably high rate that it has exhibited during this period of investment bubble. Will the China’s economy grow? Of course — it has a huge amount of catching up to do. Will it continue to grow at this rate? Of course not and at one point it will hit a ceiling, just as the Japanese economy has, once the easy gains of catching up and converting from a agricultural economy have been realized and the movement into an advanced economy is impeded by the heavy, heavy hand of China’s government. Because that is another law that China has not succeeded in repealing: the law that the government, any government, will always fuck it up.
One consequence of the fall of the American empire is class warfare. Americans normally don’t have a problem with the rich because the pie is usually growing for everyone, even if the rich always get the biggest slices. In the new normal, where the pie is no longer growing or may even be shrinking, I think we’ll start seeing strong resentment towards the rich and moves by the government to redistribute wealth and punish capital. Doesn’t bode well for future asset prices.
This details that phenomenon pretty well: http://pragcap.com/small-companies-struggling
Thanks TPC
TPC,
A lot of people I read say the jig will be up when:
1. the chinese and Japanese stop financing the US deficits
2. OPEC stops pricing oil in dollars.
What probability would you give either of those two scenarios? You gotta figure that it wouldn’t be in the best interest of the principals to commit to those courses of action while the global economy is still on it’s knees, but will they do it just as soon as we emerge from this Great Recession?
The Chinese can’t stop funding our debts. Their economy is still too lopsided on the export side for them to control the amount of dollars that come into their country. They literally have no choice but to continue buying up US debt and US assets.
OPEC is kind of in the same boat. The US is still their largest customer. All of this talk about diversifying out of dollars is just talk until some of these countries actually begin to diversify their business models.
Until that happens we can continue to devalue our dollar and alleviate some of the budget pressures here at home. The dollar doesn’t truly become a crisis until these other countries can afford to stop doing business in dollars. As of now, they have no choice because we are the largest consumer of just about everything they export.
TPC, what’s your best guess on how many years it will take for China to grow a domestic consumer and service economy?
I’d have to do some research and get back to you on that. I couldn’t give you a number off the top of my head. Sorry.
Agreed on china, but OPEC’s biggest customers will soon be emerging market countries. Do you think OPEC would considering pricing oil in a basket of EM currencies?
They already are considering it. The rumors have been some sort of basket, but it would almost certainly include the Yen and Euro….
The U.S. government isn’t going to lose power quietly. That is the scary part. And if the rates are going to go up, the government will crash the markets some way some how. Like I said, America won’t go the way of Britain. It will cause wars, instability and destruction in my opinion to stay as the ultimate power.
The US does not need China to fund it. Interest rates will rise, and the standard-of-living bubble of 1995-2007 will be gone. Remember the days when you walked 100 miles to school (kidding) and your first car was a $200 12-year old beater and TV was not wall-to-wall home/garden/cooking shows, when only adults had credit cards and loans? Also, China will have a tough adjustment but they will survive as well. Many countries (like Korea’s spectacular rise) have never weened themselves off an export lead economy, but it doesn’t mean they can’t, and before the 98 Asian crisis, they didn’t have the huge FX reserves they are now criticised for, so they don’t need them either. They will adjust and create a new trading block with Europe and other emerging countries. In this case, NA natural gas juniors and services companies and ag will be great stocks (because oil will be $300 USD/ba). The US will flourish again as a lot of manufacturing will be repatriated, but a new ipod every 6 months will be a forgotten dream. As others have noted, the chasm between the working and upper classes, will widen again, after being postponed by the bubble.