Why the Meltdown Should Have Surprised No One - Peter Schiff - Mises Institute

Peter Schiff on the financial meltdown at Mises Institute

Sentences to ponder:

Back then, we borrowed money to make investments, to build infrastructure, to build factories, to build farms, to build a productive economy. We invested the money; we didn't just spend it on stuff.
...
And we became the world's wealthiest economy because we borrowed to produce. What we've done recently is we've borrowed to consume. We didn't produce anything. ... So how can we possibly pay the money back? We didn't acquire any income-producing assets to pay the money back.

And when the world finally lets the dollar collapse — and they will — our purchasing power isn't going to vanish, it's just going to be redistributed. Other currencies are going to rise. And people in other countries, people that are working in factories right now in China, that are producing products and just shipping them abroad and just kind of waving good-bye, all of a sudden, they'll be able to afford them.

The Chinese will be able to turn in their bicycles and buy automobiles because steel will be cheaper, because cars will be cheaper, because the value of their wages will rise because their currency will gain purchasing power.
Depression Book Bundle 20% Off

It's the Americans who are going to be buying the bicycles. Because, all of a sudden, cars will be too expensive for us, gasoline will be too expensive for us, because we'll be bidding with currency of much less value. And that's what's going to happen. And the world is not going to suffer because we don't buy their stuff. They're going to benefit because now there's going to be more stuff for them.

Right now, because the world lends us so much money, there's a capital shortage. Wouldn't the world be better off investing their savings productively in their own countries, rather than just giving their savings to us? Wouldn't they be better off enjoying the fruits of their own labor, rather than laboring while we enjoy the fruits? It's obvious. And it's going to happen.

Prelude to divorce?

From the divorce counselor, Niall Ferguson:

Wake Up Washington! China Is Already Dumping the Dollar, Niall Ferguson Says

Posted Oct 20, 2009 11:52am EDT by Aaron Task in Newsmakers, Commodities

Just as U.S. policymakers are too sanguine about China's military power, Harvard Professor Niall Ferguson says Washington D.C. is too complacent about China's ability to wean itself off the dollar. With about 1.7 trillion of dollar-denominated assets (mainly Treasuries) in its foreign currency reserves, conventional wisdom goes something like this: If China were to diversify away from the dollar or merely allow the renminbi to float, much less dump its greenbacks wholesale, they would be shooting themselves in the proverbial foot. That's both as investors and because further dollar weakness would put a damper on their biggest export market. (A weaker dollar makes foreign goods more expensive for Americans, meaning Chinese imports would become less "cheap.")
This view is "slightly naive," according to Ferguson, author of The Ascent of Money.
"The idea they don't have anywhere else to go or would shoot themselves in the foot if there were a steep decline in the dollar or appreciation of their currency reassures many people in Washington ‘we can relax'," he says. "An appreciation of the renminbi may reduce value of their international reserves but increases the value of every other asset the Chinese own," most notably the commodity assets they have been buying all over the world.
China's "current strategy is to diversify out of dollars and into commodities," Ferguson says. Furthermore, China's recent pact with Brazil to conduct trade in their local currencies is a "sign of the times."
Perhaps most importantly, China's massive stimulus program is helping to generate internal consumption in the People's Republic, meaning local manufacturers are less dependent on exports. Because of the "rapid growth" of Chinese domestic consumption, Ferguson predicts China's international trade surplus could be gone by next year.
"People in Washington rather assume because the U.S. consumer was so dominant there really isn't a substitute," Ferguson says. But China's trade surplus stood at $12.9 billion in September, down about 56% from a year earlier, according to MarketWatch.com.
From 1998-2007, China engaged in a form of vendor financing, lending money to the U.S. so the U.S. would buy Chinese goods, Ferguson explains. "I think that model has basically broken. They know it and have a new one in which we play a much less important role."

Stark warnings to China Bulls

Albert Edwards warned the coming bear trigger by the China disappointment. He has a good track record. He was previously vilified then praised for calling the 1997 Asian Bubble, and called for a imminent Equity Market Meltdown last Semptember.

Qutoed from FT.com

View of the Day: China bulls will be let down

By Albert Edwards

Published: June 17 2009 15:09 | Last updated: June 17 2009 15:09

The wholehearted belief in China’s economic recovery could turn out to be the biggest disappointment yet for investors, warns Albert Edwards, global strategist at Société Générale.

“The ongoing enthusiasm for all things China reminds me of the way investors were almost totally blind to the fact the US growth miracle was built on sand,” he says.

“We saw this same investor mania 13 years ago with the Asian Bubble, which the consensus thought was a growth miracle.”

At the heart of Mr Edwards’ scepticism lies doubts about the accuracy of official data releases.

“The Chinese data is derided by economic commentators,” he notes. “Many have highlighted that GDP growth seems inconsistent with other data, such as electricity output. Yet few dare to point out that the emperors’ clothes might be absent – and when they do, they are met with robust official rebuttals.”

“That is not to say that the fiscal stimulus has not had a beneficial effect on Chinese activity this year. What I question is the quaint notion that the Chinese economy can grow at a respectable rate when the rest of the world is in a deep recession.

“I believe the bullish group-think on China is just as vulnerable to massive disappointment as any other extreme of bubble nonsense I have seen over the last two decades.

“The fall to earth will be equally as shocking.”

Why China Isn’t “The Next Silicon Valley”

Why China Isn’t “The Next Silicon Valley” and it is more than next Silicon Valley.

I agree with the part China is moving fast at a rate "Which dozens of “old” and “new” economies are all maturing amid one another, and the hyper-network effects that such economic progress is having throughout the country." One of the problems is that it is moving too fast, and nobody cares much about long term prospect. Or I am wrong. We will see.

Since I got home from China last week, I’ve found myself in a lot of conversations where phrases like “the next Silicon Valley,” or “just like Silicon Valley used to be,” keep coming up. But while China is swimming in capital and littered with start-ups, I’m going to argue it’s not the next Silicon Valley. In fact, it’s something far different than I’ve ever seen before.

If you think about it, Silicon Valley doesn’t really move as fast as people say it does. Sure, the rest of the U.S. business world may feel out-lapped by the pattern of companies going from nothing to billions in a few years, but those start-ups are mostly the outliers. For every wunderkind smirking on the cover of a magazine, there are far more entrepreneurs who slogged away for thirty years before ever getting their Nasdaq moments. And there are even more who slogged away for longer and didn’t.

And even the breakout Googles and Facebooks of the Valley had the clear benefit of building their companies on top of decades of infrastructure build-out. I mean “infrastructure” in the sense of technology infrastructure—the chips, routers, open source stack, etc.— but I also mean it in the sense of Valley infrastructure that makes it possible to come up with an idea at breakfast and have a company by noon. It’s taken decades of continual boom-and-bust cycles to create the complex fabric of venture capitalists, angel investors, lawyers, term sheets, accounting methods and best practices that a newby entrepreneur waltzing in the Valley today has the luxury of taking for granted.

What makes China so staggering is that everything that happened to corporate America over decades—think the television and media studios build out of the 1950s, the greed of the 1980s, the dot com bubble, the build out of physical and IT infrastructure, current Web 2.0 and CleanTech innovation—is all happening to China at once.

Imagine: At the same time eCommerce is getting sea legs, TV Home Shopping is also getting hot. Online ads are growing not because people are TiVoing through commercials—both TV and online ads are growth markets at the same time. Ditto for entertainment and piracy: While Hollywood sees the Internet as a threat to its cozy legacy business, China’s entertainment industry is just now building amid a world where piracy is already rampant. No one assumes anyone will buy a CD, so they just look for other ways to make money. The wonder of China right now isn’t just the size of the market. It’s the rate at which dozens of “old” and “new” economies are all maturing amid one another, and the hyper-network effects that such economic progress is having throughout the country.

As for China’s start-up ecosystem , it’s working to build its own Valley-like infrastructure, but it doesn’t have the luxury of growing it steadily over several decades. Experts say there’s at least $20 billion in venture capital sloshing around the country right now. It’s probably double that if you count angels and unofficial or very local funds, says Rocky Lee of DLA Piper, a law firm that represents much of that venture money in China.

That’s why calling China merely “the next Silicon Valley” misses the singularity of what’s happening there. The Valley has never been like this, and I don’t say that to knock the Valley. In many ways, our steady development has been healthier. But it’s also a lot less electric. In the next ten years or so way more money will be lost amid the China chaos, but I’m betting way more money will be made too.

It reminds me of the distinction between start-ups who develop products in “parallel” and those who develop them in “serial.” In the former, you raise a bunch of money, hire an army of coders and develop your whole vision at once. In the latter, you build one product, prove that one works and can make money, then raise more money to develop a second. Typically in a time of economic plenty and investor froth everyone pushes for parallel. When the funding and revenues get tight, the serial approach comes into vogue. Parallel is always more exciting; serial is always more rational.

Silicon Valley tends to develop start-ups in “serial waves,” if you will. There are always outliers and waves can coincide in timing like CleanTech and Web 2.0 did, but investors and entrepreneurs tend to jump on dominant high-growth bandwagons and ride them until a few billion companies come out of them and many more fail. Then they wait for the next wagon.

China, as a country, is developing in parallel. The wagons are running constantly and going in nearly every direction. It’s a time of chaos that can burn people out, but it’s also one so unique in the history of modern economics that many ambitious people can’t ignore it. That’s why most transplants from the West who survive their first two years in China tend to stay for more than ten.

Given all this, China is a lot more inwardly focused than other places like Israel and Europe where start-ups have to be global from day one to have a big enough addressable market. When it comes to the Web and mobile, the biggest surprises will likely come from local, non-English speaking entrepreneurs, maybe even those outside the largest cities. They probably don’t read TechCrunch and may not even know where Silicon Valley is on a map. But that won’t matter, because their local market will necessarily develop very differently than ours.

And while China gets a rap for ripping off U.S. Web start-ups now, I think we’re going to start seeing U.S. start-ups copying a lot of elements of Chinese entrepreneurs’ business plans, whether it’s unlocking the value in virtual goods, experimenting with alternative online payment methods or developing more social forms of e-commerce, where like-minded friends shop together.

You always find the best ideas within atmospheres of constraints. It’s why some of the best companies are started during recessions. It’s why Israel was such a surprising hot-bed for Nasdaq IPOs in the late 1990s. And it’s why Chinese Web companies have come up with other ways of making money than just slapping ads on a site, because they had to.

I’ll be going back to China in October, and I’m learning Mandarin in the meantime. Because odds are the next great grinning Web coverboy may not speak English. (And for the commenters who keep complaining that India isn’t getting enough TechCrunch love, calm down! I’ll be there most of November.)