Letters by a modern St. Ferdinand III about cults

Personally I believe that the Statist construct of modern China will ultimately fail. National Socialism in any disguise always does. As well the Chinese are prone every century to various forms of revolution and social chaos. I see no reason why this pattern will not repeat itself, especially given the massive disparity between the advancing coastal areas, and the poor, agrarian and dispossessed interior. Add in incipient inflation, environmental degradation, a lack of representation and free speech and the crushing poverty endured by the majority, as a small minority of 30% or so, becomes increasingly wealthy and the forecast for a convulsion is obvious.

On the other hand between now and the implosion of China, we will witness a different political-economy. China has always coveted hegemony of East Asia. Its state managed 'capitalism' [an utterly incorrect assessment of managed trade], has produced the desired result. Economically and militarily the world has changed. US hegemony, an international political-economic fact since 1890, is now at an end. The Americans are fast erecting a massive, ossified and bankrupted socialist state. The opposite policies are the only means to re-establish international dominance. There is little likelihood that the US political elite will do what is necessary to regain control of the IPE or even of their own currency whose destructive depreciation is the clearest indictment yet of US weakness:

“[Brett Arends writing at MarketWatch] - In addition to comparing the two countries based on exchange rates, the IMF analysis also looked to the true, real-terms picture of the economies using “purchasing power parities.” That compares what people earn and spend in real terms in their domestic economies.

Under PPP, the Chinese economy will expand from $11.2 trillion this year to $19 trillion in 2016. Meanwhile the size of the U.S. economy will rise from $15.2 trillion to $18.8 trillion. That would take America’s share of the world output down to 17.7%, the lowest in modern times. China’s would reach 18%, and rising.

Just 10 years ago, the U.S. economy was three times the size of China’s.

Naturally, all forecasts are fallible. Time and chance happen to them all. The actual date when China surpasses the U.S. might come even earlier than the IMF predicts, or somewhat later. If the great Chinese juggernaut blows a tire, as a growing number fear it might, it could even delay things by several years. But the outcome is scarcely in doubt.

This is more than a statistical story. It is the end of the Age of America. As a bond strategist in Europe told me two weeks ago, “We are witnessing the end of America’s economic hegemony.”

We have lived in a world dominated by the U.S. for so long that there is no longer anyone alive who remembers anything else. America overtook Great Britain as the world’s leading economic power in the 1890s and never looked back.

And both those countries live under very similar rules of constitutional government, respect for civil liberties and the rights of property. China has none of those. The Age of China will feel very different.

Victor Cha, senior adviser on Asian affairs at Washington’s Center for Strategic and International Studies, told me China’s neighbors in Asia are already waking up to the dangers. “The region is overwhelmingly looking to the U.S. in a way that it hasn’t done in the past,” he said. “They see the U.S. as a counterweight to China. They also see American hegemony over the last half-century as fairly benign. In China they see the rise of an economic power that is not benevolent, that can be predatory. They don’t see it as a benign hegemony.”

The rise of China, and the relative decline of America, is the biggest story of our time. You can see its implications everywhere, from shuttered factories in the Midwest to soaring costs of oil and other commodities. Last fall, when I attended a conference in London about agricultural investment, I was struck by the number of people there who told stories about Chinese interests snapping up farmland and foodstuff supplies — from South America to China and elsewhere.

This is the result of decades during which China has successfully pursued economic policies aimed at national expansion and power, while the U.S. has embraced either free trade or, for want of a better term, economic appeasement.

“There are two systems in collision,” said Ralph Gomory, research professor at NYU’s Stern business school. “They have a state-guided form of capitalism, and we have a much freer former of capitalism.” What we have seen, he said, is “a massive shift in capability from the U.S. to China. What we have done is traded jobs for profit. The jobs have moved to China. The capability erodes in the U.S. and grows in China. That’s very destructive. That is a big reason why the U.S. is becoming more and more polarized between a small, very rich class and an eroding middle class. The people who get the profits are very different from the people who lost the wages.”

In actual fact US manufacturing as a percentage of GDP has not changed much in 50 years. It is still between 25-30% of the total economy, and 3 times more efficient and productive than in 1970. It is simply untrue that the US 'makes nothing'. Many of the world's greatest manufacturing enterprises are in the US and are American owned [even if they are foreign owned, this matters not, the important fact is location and the creation of local jobs].

This part of the story is a nonsense. But the IPE implication of a strong China, able to exert economic, political and military muscle is not. And what will happen to the US dollar when the Chinese decide that it is more profitable – either strategically or monetarily – not to support US deficits and stop buying US bonds ?