Risk of Depression Low, Says Our Man in China

By Rick Ackerman, Rick’s Picks

( Rick’s Picks frequently runs guest commentaries expressing opinions that differ markedly from our own. Below, Mario Cavolo, an expatriate who lives in China, argues that there is no global, deflationary depression bearing down on us, but rather a muddle-along economy with strong spots as well as weak ones. We disagree and see a period of economic darkness more severe and widespread than any ever recorded.  That’s because the world is unwinding a financial asset bubble with a notional value of nearly a quadrillion (i.e., $1,000,000,000,000,000) dollars. Considering the sum involved, there can be no easy or quick return to economic health. More logical is that a totally corrupt global financial system will have to be destroyed before we can rebuild the economy on honest trade. As things stand, the world’s financial-products-and-services balance sheet is at least ten times as large as the ledger for trade in real goods and services.

Mario notes optimistically that Japan has muddled through its decades-long deflationary recession without experiencing social disintegration. Although this is true, we would argue that it is so only because Japan had the rest of the world – including an insatiable U.S. consumer – to keep its powerful export machinery humming as it traversed deflation’s valley of death.  But who will bail out the U.S. and Europe as we continue to sink together? We could take on Mario’s arguments point by point here, but we’lll let that happen in the Rick’s Picks forum, which continues to attract an intelligent and articulate following.  RA)

It is easy to continue feeling humbled and confused by the sentimental and fundamental dance of the world’s asset classes and regions, be they equities, currencies, commodities, or that shiny stuff; feel free to pick your basket of market sectors to analyze and track.  DaBoyz is a moniker here at Rick’s advisory website, typically referring to the big time market players, institutional investors, bank/investment house trading desks and other various neo-elitists who have literally taken over the world’s free markets.  Planet Hollywood was a great brand name idea. Today, so is Planet Las Vegas or Planet Macau. The singular “George Soros who made billions shorting the British pound” example has

become a cancerous plurality on the daily tape in a high stakes global trading playground. It is indeed real, a separate “sector” of reality, while the rest of reality — the real reality of the real world — goes on day by day, dealing with the damage trickling down. As might be suspected as the new reality unfolds, there is bad news for some and there is good news for others, and the point of this article is the worryingly good good news. Also, note that this article has a point of view with a high correlation to China and the U.S.

The One Exception

The rich are richer than ever the world over, with more than enough evidence available to confirm that this is the case. Furthermore, it is so on an unprecedented global scale now that China and her citizens have led the rise of the APAC region to prominence and power alongside the American and European economic blocs. As we shall see, America’s decline is the decline of only one main sector of her economy, along with the rise of others. No, the baby is not going to be thrown out with the global bath water, and there will be no doomsday collapse with one exception: a 30% chunk of the middle class in America whose lives and careers and futures have been decimated. They may as well pack their bags and come to the APAC/China region to teach English at twenty bucks an hour, because that’s loads better than anything they are going to find staying put. Those are the folks in the wrong place at the wrong time in the annals of history’s economic and political cycles. We should genuinely feel for their plight, including many whom I know personally.

Inflationary Vortex To Hell?

What does it all mean? Let’s make sure we understand where the balance points lie and have a clear understanding of what to expect in the coming years. Rick and a number of his loyal, fabulously intelligent and respecting followers make a well thought-out case for an impending, downward spiral into hell which, however, will simply never occur.  Until you can wrap your mind around the idea of being sucked downward into a spiraling vortex yet that is being sucked upward into an inflationary vortex, you’re missing today’s and tomorrow’s reality.  We have quite the dichotomy to resolve, and it is not a question of inflation vs. deflation. It will not go “one way or the other.” Different regions and sectors of the now intricately connected global economy will experience vastly different economic impacts.

Oh joyful global happy days for so many than ever before! Do you know that? That’s a fact to contend with not argue about, making it very hard to reconcile with predictions of a worldwide doomy, gloomy deflation scenario.  We’ve talked about how the Japanese economy spent 15 years in deflationary hell, going nowhere. But if the majority of her citizens had a million in the bank and house worth that much, who really cared? In the end, if the trappings of daily life are comfortable, if you know your home is secure, you have enough money to make it to your death and beyond, so then what’s the fuss if the economy sucks?

This lack of economic stress is typical of the mindset of today’s newly rich China citizen, both her poor citizens and her newly rich middle class citizens. While it may be frustrating and annoying, it is not a big problem to be unemployed if you have $200,000 in the bank and a home worth $300,000 with no mortgage, like most of your neighbors.

Better to Be Poor or Rich in China

Let’s get the “poor in China” debate out of the way quickly. If you’re poor in America, you’re really screwed from several points of view. If you’re poor in China, you’re not destitute. Life can still be very safe and comfortable at only USD $200/month.  Why? Because you don’t need a car to get a low paying job, your expenses at the level of “local” life are 10 times lower than in America; you can rent a comfortable room for $75 (the room I rented in Huntington Beach back in the early 90’s was $450/month) and there are no minority drug gangs with guns around destroying the neighborhood and threatening your safety;  that’s even today, even in magnificent Shanghai! You can eat three square freshly cooked meals of noodles or rice, with veggies and a protein for USD $5 total. You ride an old bicycle no one will steal and which can be replaced for USD $10 if it is stolen anyway.  Your medical expenses are equally cheap starting with antibiotics for USD $3 (Cipro or Cefradine, for example) when you catch a winter cough and fever. You can even get a body massage with a haircut and a happy ending for less than USD $20, for those of you who understand what I just wrote. Hard to imagine such a daily lifestyle, eh? Yet it is accessible and normal to a person who is struggling to get on their feet here in China, making it a fabulous place to  be “poor”.  And let’s take a final moment for the supposedly miserable 800 million farmers; they have plenty of food, they live in brick dwellings with cheap coal  brick oil barrels to stay warm in winter, they eat three square a day, freshly picked and cooked. I’m not saying its great. They toil the fields 12 hours a day but it’s just basic countryside living and I wouldn’t call that “poor” as a typical Westerner defines poor or poverty.

America’s Deep Wealth

This lack of economic stress is also typical of the mindset of today’s upper middle class and rich Americans. While it may also be frustrating and annoying for business to be bad or to have your career obliterated, it is not a big problem to be unemployed if you have a boatload of money in the bank and a nice home with plenty of equity like most of your rich and semi-rich neighbors. American citizens with plenty of money are all over the place. They are out spending it and there are enough of them in combination with all the other of the world’s rich and semi-rich to sustain the global economy.

Ah, but wait. You are screaming that can’t be true. Then why is it true? In the U.S., the rich and semi-rich are richer than ever and out spending! We can say corporate earnings are questionable due to accounting questions and games, but are they a disaster indicative of impending doom? They are certainly not. American corporations have gotten lean in the past two years and that has hurt many in terms of employment. But that also means it is much easier to turn a profit and move forward in the global economy, which they are. And imagine what will happen when the U.S. banks do start lending again. Meanwhile, the middle class chunk of around 40 million citizens and their lifestyle has been decimated, transformed and sinking into that miserable abyss.  It is their time of decline in the economic cycle of rises and declines.

China’s Huge Home Equity

Back to China for a moment to do a big little calculation;  I’ve said the rich are richer than ever here with the rising middle class of 300 million also richer than ever, rising proudly and happily. Let’s look at just one key slice of the Chinese population with the following conservative calculation: an average 100,000,000 million homeowners with equity in their homes which has increased from $50,000 to $150,000 equaling a total of  $15,000,000,000,000. May I ask is that 15 TRILLION in pure available home equity wealth with NO mortgages? Yes it is. And is that equity on top of the fabulously rising salaries? Yes it is.  In addition to the elite rich sector, this is their time of rising in the economic cycle of rises and declines. Good for them, they are as entitled as any other nation state to prosper and grow as history reveals in the long term economic cycles of growth and decline.
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So then we reach our happy conclusion; there is plenty in the pockets of the combined army of rich and new semi-rich in the U.S., in Europe and in China, to sustain economic status quo and avoid a collapse.  The bubble will burst in the face of this asset inflation created wealth? Nonsense. I’m tired of hearing it. What bubble? Which bubble? This kind of talk is becoming both misleading and self-serving disinformation fed to the masses via the complicit media. In America and Europe, the rich are richer than ever. In China, the rich and middle class rising are richer than ever. That is not a formula for the collapse of anything.

Keynesian Rape

However, it is a setup for the continuation of the Keynesian social neo-elitist raping of the world which is also arranged by those same in power to simply absorb the entire mess via continued price inflation and decline of currency purchasing power; the only exception being American real estate and wages, more than offset by the polar opposite happening in China!

What will happen, what is happening is this: One slice of the asset pie at a time, in some bizarrely rhythmic fashion will continue to inflate. For example, China wages and prices. Now they are inflating and will continue to do so for years to come. Real estate will flatten a bit but with little leverage, any sharp property value declines will be quickly absorbed and forgotten. Just think of the American expansion starting from the 60’s and you can easily see the point. Then another couple of slices also inflating globally; crude oil and gold for example. Up, up, up they will go.  The cost of energy and water supply: heading up. But not U.S. middle class wages and real estate.  Those are two slices of the pie not likely to budge anytime soon. But that’s only two slices of a very large and complex pie.

Conclusions

The final conclusion is twofold.  First, that the richer and richer hundreds of millions in the global economy identified in this article will sustain the global economy and are easily able to absorb the continued worldwide inflation of prices and decline in currency purchasing power. They will still sleep soundly at night. Interest rates by the way, must remain low relative to risk or these folks will stop spending and investing in the asset classes. Bonds won’t collapse because instead currencies will simply decline in purchasing power across the global board. The daily purchasing power of “the haves” will of course also deteriorate along with everyone else’s, but so what? They will “cut back” but still buy extra virgin olive oil, brand name clothes, send their kiddies to a good college, and go to the IMAX if they feel like it because they can afford it. Their lives will remain relatively protected, nice and comfortable. Secondly, The rest of the world starting with the struggling middle class on down will feel poorer and poorer over the coming years, a daily reality much easier to deal with if you live in China/Asia than if you live in America or Europe.

One might ask is there a historic migration from declining America somewhere in the cards? Maybe, but don’t think for a moment that there’s going to be a welcoming “Ellis Island” anywhere near Chinese shores.

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© Rick Ackerman and www.rickackerman.com, 2010.