Tuesday, November 29, 2011

China future growth and their scale

I think China will be able to get to 50% of the US per capita GDP in 20 years. If we assume the real US gdp per capita grows by 2% per year until 2030, that will bring it from 46,000$ currently to 68,000$.

At half that level China would be at 34,000$. Since China is at 4,000$ right now that would allow them to grow by 8 times in 20 years. Which would be 11% a year in real terms.

8% should be fairly easy for the Chinese to maintain as an average for the next 20 years. 

Another couple things I want to mention relate to China's sheer scale. There is scale advantages in economies, and the world has never seen a nation of this scale in capitalism. Let me give the example a bank. Every bank needs a legal department, HR, PR, and so on.. and especially software is crucial.

Well whether your bank has 50 branches, 500 or 5,000 it needs basically the same software system. The Chinese will be able to apply serious scale in every investment.. like writing a banking software system.

Another aspect of scale is risk ability. A bank with 50 branches cannot be doing 1 billion dollar investments. Probably more like 100 million dollar investments. But a bank with 5,000 branches can do 10 billion dollar investments at the same risk level. (because it is funding quite a number of them).

We've already seen that in places like the Congo, where China is spending 11 billion dollars on a copper mining projects. The project involves building roads, rail, hospitals, electric grid, the mines and a port. No one else in the world can risk 11 billion dollars on a project that very well might go bad. China can because its one of maybe 50 or 100 similiar projects.. and they know a number will go bad. But for the 90% that work out, the returns are huge, and unavailable to smaller entities.

Sunday, November 27, 2011

Energy's share in production

Also goes to what I've been saying that the nations which use the most energy are the wealthiest. Canada, USA and Australia are at ~14,500 kwh a year per capita of electricity. Britain is at 5,500 kwh! Luckily even half of Australia's level is still wealthy by world terms.

Think about it on a philosophical level to do anything requires energy. Our money is in many ways a representation of our personal share of the energy available to our country. There are other factors, but in my opinion those others factors are in gradual decline relative to energy. As technology and automation advances the human labour aspect of costs declines. And it becomes more about share of available energy.

Think about this example, 50 years ago a vast steel complex employed 25,000 people. Today after quite a few retrofits with more advanced technology it employs 4,000 people. But the output of steel is the same. Obviously for the steel company, the percentage of expenses spent on energy versus wages has risen dramatically. Of course year to year it fluctuates, but over decades the trend is blatantly obvious.

Friday, November 25, 2011

Japan consumer prices fall

Japan consumer prices fall again:


Their scheduled printing is 18$ billion USD a month. In addition I think they've thrown a couple extra printings in to try to lower the value of the Yen.

And 50% of their government budget is borrowing. Year after year. And interest rates are really flying at a base rate of 0.1%.

Still not enough to avoid deflation.

My perscription is to double the printing to 432 billion USD a year. Take that extra 216 billion, buy national bonds and spend it into the economy through the national state. But it is easy to say that.. but culturally and politically it is another thing. Japan is an very conservative society, and the idea of giving people money for nothing is hard for them to imagine.

So invariably they spend the printed money either buying bonds trying to stimulate well something by doing that, or building infrastructure to nowhere.

Wednesday, November 23, 2011

Top 20 nations in world in industrial electric use

Great link from the UN showing nations by electric use going to industrial and construction.  http://data.un.org/Data.aspx?d=EDATA&f=cmID%3aEL%3btrID%3a121

The latest data on this is from 2008.  Here is the top 20 nations:

China: 2,218,085
USA: 914,897
Russia: 360,082
Japan: 303,802
India: 290,027
Germany: 242,123
Korea: 207,851
Brazil: 197,218
Canada: 188,420
Italy: 141,646
France:  141,206
Mexico:  122,768
South Africa:  117,744
Other Asia(Taiwan):  117,067
United Kingdom:  113,558
Spain:  103,258
Australia:  94,868
Turkey:  72,320
Ukraine:  67,142
Sweden:  57,664

Monday, November 21, 2011

Average Income in the USA over a century.

Some is a higher concentration of money pooling at the top few percent.  But some is simply lost economic activity.  If people with the ability to buy new cars drops from 2.5 million to 2.0 million, production falls by 20% to match.  That economic activity simply does not happen.  Its not that the missing amount goes to some rich guys.

We see in the UK a very broad unemployment which is more economic activity not happening.  And in addition many people in jobs like sales roles(like estate agents) doing very little volume.  So effectively marginally employed.

Ok I found one graph this is for the USA.  Unfortunately this is average income, not median.  But we see even on the average income which includes the top few percent, a general flatlining.

You see on the graph from 1910-1940 the average income simply stayed the same(even through the 'roaring 20s', despite the introduction of radical technologies to improve productivity.
Then from 1940-1970 the big rise from 15,000$ a year to 40,000$ a year.  Then from 1970-2010 it went from 40,000k all the way to maybe 45,000k.

China plan to increase consumer spending

Some of the infrastructure in fairness is stuff that would be needed in time anyways.  To move over 1 billion people to a first world style of life with freeways, rail, ports, airports and so forth takes a mega spend over time anyway.
But the consumer demand side is obviously the real long term solution.. for China, for us, for everyone.  And its far easier said than done to do, as the powerful people in the nations want to keep wages and benefits low.  I personally believe the Chinese leaders are serious and will bring up the wages.  Firstly industrialists in China don't have the control over the political leadership in China like they do in say Germany and Japan.  Secondly every time demand dips hard, China is going to veer into deflationary territory like we saw in 2009, so the pressure will always be there on the regime. 

The leaders said their next plan is to put in place the social welfare state, with unemployment insurance, higher pensions, free healthcare.. so that Chinese dont' have to save so much of their income in case of what-ifs.  50% of Chinese income is going to savings which is unsustainable the other way. 
On a deeper level the leadership has to create a broad national labour shortage.  So that firms are bidding against each other for workers.  The temporary infrastructure build did this temporarily, 40 million migrant workers who lost their jobs in factories moved over to these projects.

Right now China is in a good place, inflation is running at 5% yoy, so a strong sign that demand is actually outpacing supply nationally.  Even though there are areas of oversupply.   

Thursday, November 17, 2011


Imo manufacturing has absolute advantages over services in a variety of ways.  First off manufacturing is scalable.  You can make 10,000 of something or 100,000 of something.  With services you are limited by your hours in a day. 

Even a successful solicitor has next to no money compared to an industrialist.  That should tell you something.

Next and most importantly manufacturing has barriers to entry.  We've seen with software that as wages go up the pressure builds to outsource to places like India.  Actually we are seeing that across nearly all UK strong points, like accounting, business services.  Buy them a computer, rent an office, get an internet connection and you are in business. 

If you develop mega scale industry the sheer capital cost creates a barrier to entry.  Just because say refining becomes very profitable, doesn't mean a bunch of competitors are going to come up with 10 billion pounds each and jump into the market.  The likely person to expand is you(again scalable).

All you need to know is the power of Germany right now. 

Wednesday, November 16, 2011

EU room to print

There is some cushions.  A big part of why the loans are going bad is the economy is in the tank and then some.  That means there is little to no credit expansion going on from private credit growth.  So whatever amount that was running at before the bust, that amount can be printed and put into the system each year to hit the same inflation rates as before.

Euro wide we are talking probably 3 trillion Euros a year. 

Secondly its hard to say how much bond buying they will have to do to stabilize these nations.  For example if Greece is rolling over high interest rate debt into 40 year, 4% bonds that the ECB starts buying, that is going to take huge strain off of Greece. 

Thirdly the EU can come in with stricter leverage controls on the private banks if the economy ever starts growing again to contain inflation on that side of the curve.
Also the EU can begin imposing tougher budget requirements on the member nations going forward.  Although in honesty in the long run I believe they will need a closer fiscal union to stabilize things.  Even when California's economy was nearing collapse they could rely on huge social security, medicaid, education, defense and so on spending coming in from the federal government, in fact 26% of the US GDP is federal spending - compare that to Europe where what 2% of EURO spending is the EU.  And an implicit view of bond buyers that at the end of the day the Federal government would back up the state debt.

Saturday, November 12, 2011

German Surplus

I have to agree with people that the German standard of living is way below where it should be compared to their production.  A country, just a couple of years ago the world's largest exporter with 83 million people.. should nto have an average standard of living that appears below the UK average.
One of my best friends a computer programmer lived there for five years, and he was saying wages and what you can afford are lower than in the UK for comparable jobs.

In one of the posts earlier on this thread it talked about an industrial worker in Germany who was happy to take less pay and benefits in exchange for greater job security.  On an individual level you can see his point.. but on a national level German workers should not be having lower pay and benefits than ten years ago, considering the sparkling success of their industries.

It seems to me German industrialists, major corporations and the German state is taking these enormous surpluses and investing them outside of the country, in a systemic attempt to keep wages lower in Germany.  For if these surpluses poured into Germany itself so much of the labour would move to things like home construction or services which would outbid labour from the industrialists.

Mercantilism is a fine strategy for an emerging nation trying to industrialize, but for a fully industrialized country, let alone the leader of Europe its not a viable long term plan.

Sunday, November 6, 2011

Without the bailouts

Yes in a capitalist economy as those big institutions like Lehman Brothers and AIG came down, they would have taken everyone with them.. as the counterparty risk was exposed.

After the shareholders are wiped out then it moves to the levels of creditors. First the depositors at the institutions would have been wiped out as they are the most junior creditors. Then moving up the seniority of creditors.

After all the bond loss writedowns and counterparty writedowns, the institutions would be sold for pennies on the dollar. Giving the most senior bond holders something, and wiping everyone else out. Indeed the most senior bondholders would likely choose to hold onto the assets until the process was sorted out.

Whoever bought the mortgage bonds and others that would be sold off in the bankruptcy court would be buying them for again pennies on the dollar. They would then immediately call up the debtors and offer to clear the debt for say 10 cents on the dollar. Then as credit got moving again as the debt was cleared, the offers would not be so generous, and the value of the mortgage bonds would be selling for more.

To make a long story short at the end of the process, the institutions like Goldman Sachs would still be around, only with much reduced balance sheets. But many rich and average people alike would see the vast majority of their investments/savings disappear. Simply as debt is written off, the other side, savings is destroyed.

The system cleared, the game would start over. When the powers that be decided to stop the unwind that was the end of our capitalist system. We now have a zombie economy. Its almost reverse of a normal economy, liek we are happy if the real economy shrinks by only 1%.

Friday, November 4, 2011

Foxconn will mass produce their own robots

A good debate and discussion on Nextbigfuture about Foxconn's plans for automating some of their work.

Foxconn being in the top 5 of the world's largest employers with in the range of 900,000 employees.