The
UK economy has slowed almost too a halt, and yet, the Bank of England wants to raise rates to fight inflation. The Eurozone is, likewise, on the brink of recession. Rob Portman, another one of the good hair Delay clones in the house is going to be the next trade representative, and who is he blaming all of this on?
China. What did the G-7 talk about in their last meeting, harmonizing European and American monetary policy? No, China. Why the sudden tightening against China? Because the people at the top of the western economy are about to get squeezed, and squeezed as hard as they have squeezed the wage earners over the last few years.
Because China isn't just undercutting the cost of labor, it is now set on undercutting the most bloated cost in the US and European economy - the cost of management. Bush and company are more than happy to have China eat your lunch, but they are now panicked because China is about to eat their lunch.
So what is all of this really about?
What it is really about, from the perspective of the "players", the people with a great deal of liquid wealth, is that China as a competitor for labor is just fine, but that China refuses to open its capital markets so that they can go in and buy up half the country while share prices are still very low, and the Yuan much weaker than it will otherwise be - is a problem. The top of the global economy has made a series of killings off of a process of "thatcherization".
What is it? And how does it work?
The top of an economy is different from the bottom of an economy: on the bottom there is a constant negotiation between how much a good is worth to a consumer, and how much it costs to make it. Consumers have been losing this game for quite some time, paying a great deal more than they could really afford for a variety of goods, but it is still a fairly narrow band.
The top of an economy is different - it is about information, and everything is bought or sold by competitive bidding of one kind or another. You are really rich, when you buy everything at auction.
The top of the economy buys and sells economic information - that is, the ability to get control of capital, or a revenue stream of some kind. In a subsistence economy, because there is much less trade, much less capital, and much less development, there is not a great deal of money flowing around at the top. The rich in a subsistence economy basically have wealth to buy luxuries and to buffer against ups and downs in their political fortune. They don't have that much money compared to the size of the total economy. The very, very apex of a subsistence economy may compete with the wealthy of outside countries, but the rest of the economic elite are not that rich on a comparative basis - and there aren't that many of them. More over, the bottom of the economy puts almost nothing into the capital and debt markets.
The upshot of this is that the cash price of the capital in a subsistence economy is quite cheap - subsistence economy companies regularly trade for values which are below the liquidation price of the company. Even in developing economies the situation isn't that much better - companies will often trade for below book value.
The reason for this - a much smaller wealthy class that owns much more of the total - means that a subsistence economy, or even many developing economies - is well undervalued in terms of the real value of the companies. In essence, unless the subsistence or developing economy protects its assets, it is ripe for being swooped down on and bought up.
And this is what the process of thatcherization is about - force a country to open its markets, which will make it run a trade deficit, which will mean it will, sooner or later, have to open its capital markets, at which point key assets can be bought up rather cheaply. This is the basis of the developed world's arbitrage of the developing world - buy up at illiquid hard currency starved prices, and turn around and charge first world prices for the results.
Most countries fall into this pattern. The successful ones become export tigers, selling back to the developed world, socking away trade surpluses to buy resources and capital, and eventually having enough internal economy to float their own markets upward. It sometimes takes an IMF bail out or two to accomplish, but, in a paradoxical way, a financial crisis helps them out - by shaking out a great deal of the foreign hot money, it puts more of the assets of the country back in local hands.
The less successful ones become resource producers, with a wealthy local elite that does business with the outside, and a vast mass of much poorer people who are stuck in a subsistence mode. There may be periodic reactions against this to some kind of marxist or heterodox left government, but these generally sink back into line rather rapidly.
This brings us to the few exceptions to the rule. One exception are the well capitalized peripheral manufacturing countries - Australia, Sweden, Norway, Switzerland and Canada, as the successful versions, and Brazil as a rapidly emerging exception. These countries find a niche and stick to it. The other class of exception, which weighs more heavily on the world economy, are those nations with resources that are sufficiently desired in the West, and with sufficiently small stakeholder classes to enforce discpline. The oilarchies of the Persian Gulf, and China.
These countries do not have to join the world economy, they don't need to import some key good from the outside, and they work very hard to keep their populace from wanting too much in the way of outside goods. These countries are allowed to be pure mercantilist states - selling, but not buying, from the outside world. It's a very good deal for them - the loose change that is extracted from the loser economies - the United States and the losing developed world economies - flows into their hands, and piles up.
China's huge supply of cheap labor and cheap land - let us not underestimate how those two go hand in hand - was enough to put enormous downward pressure on wages in the developed world. But, for a long time, its companies were not players on the global scene. They were regarded as mere "outsourcing" - a word which indicates how the economic elites of the outside felt about them, mere chop chops to churn out parts.
That has changed rapidly in the last few years, Chinese companies have begun reaching out, and creating branding and organization that will, eventually, rival the US. They are going to use their labor advantage to undercut western firms on development, and in effect, start the developed world arbitrage system for themselves - pay low interest on money borrowed, use internal advantages to develop other countries that earns higher interest.
This, unlike cheap wages, is a panic level threat to the meso-structure of the world economy. Let's not spin conspiracy theories - this is caused by people at the top seeing the same things, and coming to the same conclusion - unless China can be forced open, and bought into, it will have the perfect storm - ability to export, and the ability to protect its corporations from being bought up until it has enough money to float its stock exchange. China has used Hong Kong as a way to raise needed money from the outside world, but not put control of its "Red Chip" companies in the hands of others. It has used manipulation to keep the Shanghai exchange as a farm for extract excess money from anyone who is inside of China.
It has also paid a price for this - China's development in terms of Purchasing Power Parity growth lags behind the development of other tiger economies over similar spans. But the difference is that China is getting something for that slower growth, namely an internal economy under its control, rather than being subsidiary to other economies. It is not that their current course is the only way to do this - other tiger economies have eventually gained control over their political and economic affairs - but it generally takes a generation to do this. The leadership of China is not interested in having this happen.
Forcing the Yuan to float is, then, only half the picture. The other half is that the outside world wants to start charging China a great deal more for intellectual property. A floating Yuan, in itself, doesn't do very much, other than make it so that China can increase inflation by buying more oil and resources. It will slow, by a little, the Chinese edge in labor and land prices, but there is so much cheap labor in China, that they will be able to simply relocate more factories farther inland.
The reason this second part is so crucial is that in order to force open China's capital markets, there needs to be something that China needs to buy with foreign hard currency, and the thing that China's economic elites want is access to capital and technology. Until now China's loose way with other people's "intellectual property" was winked at, because the losses were small compared with the labor and rent savings. Now, however, these losses are no longer acceptable - the West cracks down on piracy when it ceases to be profitable to allow piracy.
So how does this play out? Not well for the West, it is far too late for them to pull out of China, the increases in production cost would either spark general consumer inflation, or gut corporate profits, or both. Since China's leadershp knows this, and knows that if one country pulls out, others will come in just as fast, it has no reason to move on either IP or floating the Yuan any faster than is convenient.
The leadership in China faces a different problem - a country that is coming apart at the seams, with hundreds of millions of people in poverty. It has to supply them jobs, or they will rebel. It can buy time by playing the nationalist card, but not a great deal of time. Thus, it has no incentive in allowing its capital to be bought up, and having money flow out of the country as interest, just to get short term access to hard currency.
What happens net? China will undoubtedly make a few concessions, slow its economic growth a bit, raise nationalist issues to keep people from focusing their anger at the current government - but will hold firm on the bottom line, which is that China is going to enter the world as a superpower in about 20 years, and owe almost nothing to the outside world.