Hollowing Out Of American Manufacturing

TW: Folks lament the alleged hollowing out of American manufacturing but is that true? Economies evolve and thankfully become more productive. As the chart portrays manufacturing as a % of our GDP has remained constant but the number of folks needed to achieve that level has plummeted. Rest assured many things continue to be made in the good, old USofA but much more efficiently than in the past. This creates dislocation, angst and change but our manufacturing base remains vibrant.

China Is Blowing the Next Great Bubble

TW: The "recovery" such as it is, is premised upon a couple of predicates: 1) inventories are being worked down and 2) places like China are still growing fairly rapidly. The first point is true but at best would mean the economy stops shrinking and either flatlines or grows very tepidly.

The second is really the basis for most of the commodity and stock market increases. As the pieces below mention, the continuing high single digit growth in China may prove ephemeral. Their banks directed by the national government are lending funds like drunken sailors whilst many of those funds are being directed towards investment- either materials or additional production capacity. Domestic consumption within China is not growing particularly well. For what purpose will all of those materials and additional capacity be needed in six months? The world is awash in production capacity, providing more only feeds the deflationary risk.

As for the loans drunken sailors end up hungover, drunken sailor loans end up as un-repaid loans (something we Americans have considerable experience with in the recent past).

From Michael Pettis' blog:
"...Hu Shilu, editor of Caijing...recently made a strong case against continuation of the current fiscal program when she wrote in an editorial this week that “a policy that encourages loose lending and investment is driving China’s economic engine down an old, unsustainable path.”

'Various signals suggested China’s economy had returned to a stable track by the end of the second quarter, giving us an opportunity to reassess macroeconomic policy. Data released by the National Bureau of Statistics showed that China’s GDP rose 7.1 percent in the first half of the year, and 7.9 percent in the second quarter alone. Apparently, China’s economy has bottomed out. These achievements could intoxicate Chinese policymakers. But we see no miracles here. In fact, economic growth recovery in China is being driven by investment. Some 6.2 percent of the country’s first half GDP growth rate can be credited to investment, while consumption accounted for 3.8 percent. The net export business contributed a minus 2.9 percent to the growth rate figure.'Hu makes the point that the “surprisingly high” Chinese growth is neither surprising nor cause for celebration. It is the automatic outcome of a huge stimulus, and the real question, as I have argued many times, is not whether high current growth indicates that China has turned the corner on the crisis (it most certainly has not, in my opinion), but whether the cost of achieving this growth is excessive and will lead to more difficult conditions in the future..."
http://mpettis.com/2009/07/more-public-worrying-about-the-chinese-stimulus/

From John Mauldin at Barry Ritholz' blog:
"...If I told you that the next US stimulus package would be $4.5 trillion dollars, mostly given to banks that would be forced to loan out the money quickly, do you think that might jump spending and GDP in the short term? Would you start looking for a few bubbles to be created? What about the dollar?

That is the equivalent of what China is now doing. The volume of credit that is flowing into China isequivalent to one-third of their GDP. Banks that already have large problem-loan portfolios are now lending even more, in a very short time frame..."
http://www.ritholtz.com/blog/2009/07/the-statistical-recovery/

The Real Economic Challenge (cont.)

TW: Continuing the focus on what I perceive to be the most challenging aspect of these crises- world wide economic decisions that will benefit all rather than deteriorating into nationalistic free-for-alls which can cause economic havoc and worse.

This Pettis piece focuses on the absolute necessity for China (and while he focuses on China since that is where he works and lives, one could partially extrapolate his points to others such as Japan and Germany and obviously the consuming nations such as the U.S. must as well) to recognize the need to change their economic models. China's model is focused on exports, their knee-jerk reaction is to encourage greater competitiveness with their exports. But making their exports cheaper through investment or subsidies only feeds more goods into an already saturated world market. This is deflationary and risks counter moves by consuming nations (i.e. the US and Europe) to stem the inflow of imports.

China and others may have more to lose in these crises than the U.S. but do they understand this and will they be able to avoid their own nationalistic tendencies?

From Michael Pettis' blog:
"...I have been arguing that a US slowdown would cause a very rapid slowdown in China

...maybe there really is a growing recognition that as a fundamental part of the global imbalance, China is going to have to adjust its economic model just as dramatically as the US. Both countries relied heavily on the same source of growth – infinite leverage on the part of consuming US households – and this was clearly unsustainable. But so far I am not sure that this message is likely to be believed in China.

Not only am I pessimistic, then, about Chinese policymakers’ willingness to confront reality, but my trip to Washington also left me very worried about US policymakers...The impression I got was that there are a lot of smart people very worried about how quickly policymakers are going to react.

I have already suggested that I think it is pointless to hope that Europe – or indeed other Asian countries – refrain from protectionist behavior or provide needed leadership, and my great hope has been that the new US administration surges forward and begins to design not just a short term solution that addresses the current collapse (I know, I know, much easier said than done, but the crisis part will end soon enough nonetheless), but also a longer term plan about what the new institutional framework will look like. But I don’t think this is happening.

Many people I spoke to last week were really bewildered by China’s role, and although many of them were extremely sophisticated in their understanding, they gave me the impression that policymakers are going through an almost existential crisis and have lost all confidence. The world needs US leadership more than ever, and the US is in a very strong position to provide it for at least three reasons. For all the problems of the economic contraction, the US will probably suffer less than other countries, it will emerge more quickly than the rest of the world, and it commands by far the largest amount of the most valuable resource in the world: net demand.

...I am not suggesting that the US is in great shape. I am suggesting that world is in worse shape, and the US has the flexibility and resources to reshape the global balance.

This seems to be something that not many people in Washington believe. The lack of confidence is so deep that several times I heard people refer knowingly to the Chinese fiscal stimulus (yes, that vague, risky, and hard-to-understand stimulus package) as the “gold standard” of economic stimulus packages. Gold standard? Really? The only way this can be true is if every other stimulus package in the world is total garbage. Perhaps it is.

...I suspect that things will continue drifting downward for the next year or so, until it is that much harder for anyone to work out a reasonable plan that doesn’t involve a great deal of hostility and mistrust."
http://mpettis.com/2009/02/the-us-government-frozen-in-the-headlights/