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GP 12 March 2008: Humpty Dumpties: Chindia Rising

Humpty Dumpty sat on a wall.
Humpty Dumpty had a great fall.
All the king’s horses and all the king’s men
Couldn’t put Humpty together again.

The Worst Decades.  On March 7, an American in Berlin, a plasma physicist caught up in the interesting rebirth of that capital, wrote to us, “Trichet says he sees no need to reduce interest rates in EU....  This is having terrible effects on the dollar, which is steadily losing out to the Euro.  It’s 1.54 here today and heading to 1.61....  At that rate I am not sure we can hold out over here so we are contingency dancing....  And of course there is other just as pleasant news.”  He may come home.

The decay of the dollar is just the most visible sign of the startling reversal America has suffered under the Clinton-Bush Administrations.  At the end of the Reagan administration, just a bit before the Berlin Wall tumbled down, we were riding high in the world.  In just two decades we have gone from king of the mountain to unprecedented geopolitical ignominy and a basket-case economy.  More than the Soviet empire fell with the Berlin Wall.  The Clinton and Bush Administrations are more alike than they are different, when it comes to any of the big issues.  They have both snatched defeat for us from the jaws of victory.

The heart of darkness lies within the federal government.  In 2004 Lawrence J. Kotlikoff and Scot Burns offered up The Coming Generational Storm: What You Need to Know About America’s Economic Future.  Despite its turgid title, the book dishes up some dynamite.  Because of future social overhead promises, the U.S. government has long been effectively bankrupt.  It had 51 trillion dollars of future obligations, the last time this burden was toted up.  This tidy sum does not show up on its balance sheet, a hidden timebomb both Republicans and Democrats have long known about but which they all have tacitly agreed to smother.  It is akin to the pernicious off-balance-sheet financing that is the scourge of business.

With this kind of overhang, we could ill afford the reckless adventures of Bush the Younger, be they the new Medicare pharmaceutical benefit or, more importantly, the Black Hole that is otherwise known as Iraq.  Joseph E. Stiglitz and Linda J. Bilmes have pinned the tail on the Iraq donkey with The Three Trillion Dollar War: The True Cost of the Iraq Conflict.  Stiglitz, a Nobel prize economist, has long been the bete noire of official Washington, and like Paul Krugman of the New York Times and Princeton, he often resorts to politically motivated hyperbole.  The figure might be 2 trillion or as high as 5 trillion, but who’s counting?  The authors had to employ the Freedom of Information Act and a few other ruses to get at the data supporting their argument.  Suffice it to say, this kind of federal governance has laid us prostrate. The Beltway Bandits have emptied out the federal larder.

China versus India.  In “Tipping Points II,” we pointed out that GE’s top dogs have proclaimed that India is a good place to do business, while China a downer, basically because the politicians are thought to play fair in the world’s biggest democracy, but not in the world’s smartest dictatorship.  However, a scrupulous commentator would find the picture to be a little more mixed.  Because of our consulting practice we keep a close eye on the investment climate in different regions.  We would suggest that both countries pose risks for companies and threaten our international equilibrium.  There’s plenty of heartache to be had in all of Chindia. 

For instance, Bob Theleen, a private equity player in China for many decades, comments:

I have a friend who runs Director of Manufacturing of a large US multinational.  He has overseen the construction of several large manufacturing facilities in both China and India.  He would counter your client's remarks as follows:

“India is a country that has no infrastructure, no engineers, no marketplace and they bring a new meaning to the concept of ‘unskilled labor.’  Other than that, it’s a great place to do business.”

On a serious note, there is still no country in Asia that can produce the quantities and support fully the logistical and operational requirements of real time manufacturing than China.  As a wise engineer once said about Chinese manufacturing, “it’s not about cheap anymore, it’s about fast.”

Then again, a Canadian chief executive who sources his goods in several Asian countries would find that the Chinese commonly do not negotiate in good faith:

The primary problem with China is that seem to want to test the length of the rope frequently, particularly with tooling costs.  They will hopefully send you an unsupported number and then retract it as soon as you point out the range you will contemplate.  We have a number of very good Chinese suppliers in whom we have full confidence but still also have some who frequently test the tolerance limits.

The argument can go on and on.  We have just visited with a retail merchant who worries that her first orders of goods from Chinese suppliers are always just fine, but every round thereafter is defective.  Historically it has been hard to get a nickel out of China, even if you do earn a profit there.  India will spite its nose—and American multinationals as well—in ways that are terribly disappointing.  Enron learned this when it attempted to build a power facility there: the project had to abort.  The American traveler will discover no American Express offices in India, which appears to result from yet another of the endless political schemes to bar effective competition from abroad.

Playing a Weak Hand.  As it turns out, all this discussion about the relative merits of the two nations is rather academic.  We have to do business everywhere, and we have to do a lot more of it.  For at least the last two decades, because of cronyism, corruption, cupidity, and confused thinking, our government and our multinationals have trampled on our national interest abroad, striking bad bargains with other nations.  Our trade negotiators have given the store away, and the treasuries of both our parties have been enriched while the politicians look the other way.  Often, in China and elsewhere, our manufacturers have outsourced their purchases, losing their own manufacturing prowess while contributing to pollution and other substandard conditions in developing nations.  Wal-Mart, China’s biggest customer, has piled high its shelves with cheap goods often of terrible quality.

Gradually this state of affairs is giving rise to protectionist sentiment, seen most recently in the debate about NAFTA.  While correctly regulated free trade is still the best outcome for the community of nations, it may not survive the outcry against distorted trade resulting from two decades of bad domestic governance.

Sadly, too, our weakened government will be playing a weak hand—as well—as it tries to remedy the imperfections of the global trade system and to control the vastly unstable ways in which world finance now conducts its business.  It is important to understand that our hapless government now is hard-pressed in dealing with other governments to summon up the strength to rebuild the global system in a way that can point us towards prosperity.

P.S.  Read “Clinton, Obama Ramp Up Their Rhetoric Against China,” The Wall Street Journal, February 27, 2008, p. A10.  Their raillery could just as well have been directed against India, or a host of other countries.  It is rather ironic that Senator Clinton is spanking China, since the Clintons have played footsie with the Chinese for several years in ways that brings no honor to our nation.

P.P.S.  The Canadians who currently are doing fairly well based on their abundant natural resources (the same thing that has kept Australia going) also recognize that the international economic rules of the road have to be rewritten for the welfare of all.  One Canadian MP has relayed his concerns to us, though he thinks purely in Canadian terms.  The Canadians have always displayed more caution about the loss of liberty and economic vitality that can ensue from malign foreign intrusions into their affairs.  We North Americans would do well to take a joint North American initiative on worldwide structural economic reforms.

P.P.P.S.  We let you down last week.  You will remember that we rejoiced over the vast effort to undo Katrina by planting 10,000 trees over denuded stretches of Louisiana.  But a technical lapse caused us to omit the video on Acorns of Hope 2007, which links you to bicycle riders planting trees, a round of Cajun music, catfish, shrimp, and fried alligator.  Just goes to prove, if you want to get something done, you have to do it yourself.

P.P.P.P.S.  We are ill aware of how straitened our government is.  Partially this is because we have chose to bury our heads in the sand.  But mostly it is because our governors are hiding the truth from us, not telling us about our huge indebtedness or the frightful costs of the war.  Just the other night, a government planner from Sweden visiting with us waxed on about how wonderfully the U.S. did in the 90s.  What he did not know is that our statistics are phoney, and, in all probability, grossly understate inflation.  For those who want to understand more about our no-growth economy, read John Williams’ Shadow Government Statistics, which we learned about through Ray DeVoe.  We have been the victims of pretty bad data.

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