Monday, January 18, 2016

No Pain, No Gain

I've long expected China's era of rapid economic growth to end, much as Russia's did as it used simple inputs to industrialize yet falter when it moves beyond that stage of development. I'll take the pain of a Chinese economic reordering to escape a militarily more powerful China.

China is at the end of their industrial export-model development that has delivered double-digit economic growth for many decades now. The resulting collapse of demand for raw materials will have wide-ranging effects:

But we have not yet hit bottom. The new reality of a much slower growth in China’s demand for basic manufacturing inputs is still young and its impact is only now beginning to be felt. There is more to come, and the consequences have yet to manifest themselves fully. Over the next few weeks and months, the realization that the China Party has ended will spread through more industries and more markets.

As I've long said of China's growth, if you take the most efficient peasant and put him in the most inefficient factory, your GDP will go up a good deal. But eventually that simple input strategy comes to an end.

In China's case perhaps not because that massive country ran out of peasants (but I'm no expert so perhaps that is the problem), but more likely because they simply don't have a world big enough to handle all those new factory workers at a price that will keep the urbanization going. Regardless, that strategy is ending. And the means China has used to string it along will have their own repercussions.

Yes, this will have bad effects on the world economy. But I will accept that rather than salvage our interest rate policies for a continuously growing China that turns its economic power into military power and which sees its growing economic power as a reason to return to their traditional dominance of the land and waters around them as just the way things should be.

Which doesn't mean we should remain oblivious to the repercussions of a faltering Chinese economy.

Yet as we watch China and wonder how their economic troubles will affect them, and get into the predictions game, let me raise the possibility of "all of the above" as to which direction "China" goes:

With a state both cruel and failing economically, governing a continent-sized population with a history of fragmentation, I don't know why we need to guess which course the government of China will follow. The continent of China is big enough that it could follow all the possible paths.

These are certainly interesting times.