Greg Autry

Fighting for space, not over it.

Black Friday: China, Wal*Mart, the Social Bifurcation Engine and Inevitable Disaster

 

When Black Friday comes I’ll stand down by the door

And catch the grey men when they dive from the fourteenth floor

When Black Friday comes I’ll collect everything I’m owed

And before my friends find out I’ll be on the road

When Black Friday falls you know it’s got to be, don’t let it fall on me

– “Black Friday” by Steely Dan, from Katy Lied (1975)

 

Y = C + I + Xn + G

–       John Maynard Keynes, The General Theory of Employment, Interest and Money

–        

In Keynes’ famous GDP equation the size of nation’s economy is measured by its Consumption (C), Business Investment (I), Net Exports (X), and Government Spending (G). Of these four factors only two really offer an eventual return: Business Investment and positive Net Exports both create new wealth for a nation. Investment results in improved production efficiencies, funds new technologies, and generally raises standards of living in the most efficient way yet discovered. When a nation exports more value in goods and services than it imports it recognizes a profit, like any business and its people reap the dividends (albeit not always equally).

However, when a nation focuses it short-term economic hopes entirely on the importation and consumption of consumer products the net result is spending on dead-end goods that do not contribute to production of wealth and are not exported for profit.  Financing of the associated sustained trade deficit must result in either capital transfer (loss of savings or assets) or debt (borrowing against assets or future earnings), which reduces investment and retards future consumption.

When the inevitable shortfall is filled by government spending directed at increasing consumption rather than investment the process of decline is accelerated. In the aggregate funds can only be expropriated from the more productive sectors and are naturally reallocated to the ones that are most quickly failing. Factories close while housing prices and retail sales artificially sustained. Houses do not produce new wealth; factories produce new wealth by adding labor value to raw material and creating something more valuable than the sum of its parts. Using tax revenues to subsidize the purchases of imported consumer goods simply expands the economic leakage.

The result of all this is simple to predict:

  1. The demand and hence value of domestic labor falls
  2. The demand and hence value of labor in the foreign producer rises
  3. The returns to capital invested aboard rises

Bottom line: America has created a system perfectly designed to kill jobs, reduce middle class wages, and make the top-end of the investor class wealthier.

I call this our “Social Bifurcation Engine” and anytime the economy turns down, our citizens encourage our government (Democrat or Republican) rev this engine up higher and higher in the mistaken belief that it will stimulate the economy into a return to production. However, because of the giant leakage of consumer spending and the accelerated flight of capital investment to China such stimulus is no longer effective. At some point, probably not to long from now, this overworked engine will simply explode in an economic disaster with significant business and political consequences.

This is not an indictment of capitalism nor of appropriate government investment in things like infrastructure or R&D, it is an indictment of political naivety and CEO stupidity.

Now, if you wanted to make this scenario even worse, assume that your “trading partner” – the one who is making all the money off this – understands how this works and intentionally suppresses the cost of labor in its own nation by repressing worker’s rights, and ignoring safety and environmental regulations that have enormous health consequences because they don’t value individuals. In other words, “China.” These factors all prevent the natural balancing mechanism that would check the death spiral of American wages by reducing the incentives for U.S. capital to flee to Shanghai.

When the Boys from Beijing beat striking workers with batons, poison Chinese kids with their unbreathable air, and slowly kill the elderly in their “cancer villages” they don’t do it without reason. They do it because they know the never ending trade deficits are undermining the American and European economies and that the Social Bifurcation Engine will eventually undermine the political stability of their enemy. The domestic collateral damage in China is simply a necessary and acceptable cost in their quest to stamp out liberal democracy and export their brand of National Socialism with Chinese characteristics to the world.

Understanding that the existence of a healthy and wealthy America has long driven Chinese yearnings for political reform – witness the Goddess of Liberty at Tiananmen in 1989 – Hu Jintao and co. know that in the end their unpleasant system cannot survive while democracy prospers.

The men who rule China have carefully crafted and sold the world a Big Lie whereby they convince the West that the policy of engagement will lead to Chinese political reform and eventually to shared prosperity through trade. Obviously there is no empirical evidence for either of these outcomes after three decades of experimentation. We have simply created a stronger, more repressive communist China and a weaker, bifurcated America. For God’s sake, it’s time to stop!

You can start by skipping your Black Friday shopping trip to the Great Wall of Mart and instead invest your money in America by buying a U.S. made good or service from a local firm. Or you can save your money for the real Black Friday that is sure to come if nobody else heeds this call.

Greg Autry is the co-author of Death by China.  He teaches macroeconomics at the Merage School of Business, UC Irvine.  He writes and speaks on China, space, economics, investing, and business strategy.  For more information, please visit http://www.gregautry.us and follow the author on Facebook and Twitter.

 

We have forgotten the lessons of Tiananmen

 

We have forgotten the lessons of Tiananmen

 

 

From the San Diego Union Tribune, June 16, 2011

http://www.signonsandiego.com/news/2011/jun/16/we-have-forgotten-the-lessons-of-tiananmen/

 

 

Twenty-two years ago, millions of people gathered in public places across China to demand the respect of their government. As thousands jammed into Beijing’s Tiananmen Square, one of us was there in the crowd as the other watched fascinated from the other side of the world. Unknown to each other at the time, we were connected by the common exhilaration of the moment as free people stood up to claim both their natural rights and a nation’s rightful place in the world order. It should have been a glorious moment as well as a new basis for a true partnership with China’s natural ally, the United States.

Of course, we all know what did happen that June 4. Though one of us was lucky enough to just miss the gunfire by returning to lead protests in Changsha and the other remained safely behind a television screen in America, we shared the horror, disgust and disillusionment of that day. We wept, shook our heads, cried out, “Why?” and reached the same, frankly obvious conclusion: The Chinese Communist Party is a murderous regime that couldn’t be trusted and America’s policy of engagement had failed.

History tells us that engagement with totalitarians has been a proven dead end since Napoleon used the 1801 Treaty of Amiens to consolidate his regime of fear and to prepare for war, and the lesson for democracies has been the same from Hitler to Gadhafi: Bad guys don’t change and they do not honor agreements.

Two decades of failure since have made clear that fake smiles aside, Hu Jintao and Wen Jiabao are no different from the rest of history’s rogue’s gallery. It’s no surprise that China’s dictators continue to lie, cheat and steal their way through domestic politics, international affairs and business engagements.

What is surprising is that America’s business leaders, politicians and pundits continue to pander to this particular group of thugs against all reason. Decades after Tiananmen, we ask those Americans just how many artists, peacemakers and religious practitioners must China lock up before America opens its sleepy eyes? How many millions of women need be subjected to forced reproductive control? How many executions must there be? To what degree must China’s cities, rivers and seas be polluted by a perverted state capitalism that keeps Communists in power?

If human rights no longer carries weight with America’s free traders, then we ask how many American jobs need to be sacrificed to China’s blatantly manipulated currency, sad labor conditions and abuse of World Trade Organization rules? How many American firms need to be destroyed by intellectual property theft, forced technology transfer, “partnership” requirements, tariffs and export restrictions? How badly do our most promising new companies, like Facebook and Google, have to be cheated by market-restricting censorship and government-backed cyber attacks?

Before he was oddly silenced, Jeff Immelt, the CEO of General Electric, commented to the Financial Times, “I really worry about China. I’m not sure that in the end they want any of us to win, or any of us to be successful.” Of course they don’t. Why would a government whose very name – “The People’s Republic” – is a lie and that uses its own constitution – which guarantees freedom of speech, religion, and assembly – as a doormat honor any partnership with your company or America – the embodiment of the principles it despises?

Finally, if you find repression and economic warfare an unwelcome distraction from consumption of cheap goods, please consider this before you fill your shopping cart: China is building a massive, high-tech military force that grows faster than its breakneck gross domestic product. A rising armada of naval power, missiles, stealth aircraft and space weaponry is aimed squarely at our allies in Asia, U.S. armed forces and the heartland of America. Is this the kind of regime we should be doing business with?

Over the years we have become very familiar with the argument that U.S. policy should remain forever frozen regardless of how outrageous Beijing’s behavior becomes, because any action in support of our principles would either prove futile or worse, resulting in economic retribution. The former argument may be true, but has not altered our approach toward China’s good friends in Iran, Zimbabwe or Sudan, while the latter simply makes it clear that we are falling into the Communist Party’s web of intimidation. That is exactly the reason we must make a stand sooner rather than later.

—————–

Autry is the co-author of “Death by China” and teaches macroeconomics at UC Irvine. Tang was a student leader in China in 1989, still works for Chinese democracy, and is the co-author of “My Two Chinas: The Memoirs of Chinese Counter-Revolutionary.”

Economic Karma

[Our Customers] are running out of money.”

– Wal-Mart CEO, Mike Duke

Well, Mr. Duke, if you’re looking for who killed the consumer, start with your predecessor, Lee Scott, that criminal mastermind of American job genocide. Ruthlessly driving prices down at all costs and demanding “The China Price” rather than “Made in USA”, Mr. Scott chucked the last of Sam Walton’s “Buy American” campaign and brought us “Zombie-Mart.” A nightmare on main street where every time you push a cart of “Always Low Prices” junk out the door, one of your neighbors joins the ranks of the living dead – the underemployed. As a bonus nightmare you also fund the engine of Chinese worker exploitation, environmental degradation, civil repression and military expansion.

That’s how the Win/Win of so our called “free trade”* relationship with China has been running over the last decade. Long after you’ve run out of money and the crap you bought at Wal-Mart is broken, the factory you funded in Chengdu will still be there, though its counter-part in Ohio will be a fenced-off brownfield. And that Jin Class nuclear missile sub you helped the Boys from Beijing buy will be locked and loaded.

Mr. Duke’s moaning also brings to mind McDonald’s big announcement that they were hiring 50,000 workers in one day! Judging for the media photos, most of these weren’t college students or retirees, but prime age workers who should have been getting real jobs actually making something. However, rather than holding down a shift in a factory that enriches our nation and earns them a salary big enough to buy a house and raise a family, these folks are joining the “service economy.” You know, that mythical world where we somehow create increasing standards of living by selling stuff to each other – stuff made somewhere else, of course. We never dirty our hands with actual production; we just keep driving up the consumption component of the GDP equation to greater and greater heights while ignoring that cumulative net-trade leakage.  And where has this economic mass delusion gotten us?

Ben Bernanke recently tried to calm inflation worries with the dubiously comforting comment that “wages are not increasing.” Well Mr. Bernanke, I’ve got news for you: Wages ARE increasing – in Shanghai. Prices of finished goods in America will be determined by a supply curve defined elsewhere and commodities will be priced by a demand curve defined elsewhere. What Americans (and Europeans) get to do now is sit back and watch their wages stagnate, prices go up, businesses close, and government tax revenues collapse.

Want to know who stole our market power Ben? Track down Lee Scott. He did more damage than Osama bin Laden, and will be much easier to find. Send in Seal Team Six while we still have a defense budget. I kind of hope he “resists.”

–       Greg Autry teaches Macroeconomics at the Merage School of Business, UC Irvine and is co-author (with Peter Navarro) of the new book “Death by China” www.gregautry.us

*We are, by the way, big fans of real free trade. However, unlike a lot of American pundits, we know the difference between engagement and date rape.