Chimerica is dead! Long Live China… or America?

It was America who took China out of the cold and by the same president who destroyed the last vestige of the gold exchange for the dollar.  Isn’t it poetic? At least how far finance, politics, and economics can be.  For years the American public has heard a number of iterations of benefits cascading to it from the symbiosis of hard working-low paid Chinese and the busy borrowing-shop-till-you-drop Americans.  Suddenly, Chinese low paid migrant laborer starts becoming the hi-tech, information age worker the Americans were promised during Clinton Administration.  It seems that both countries are at the point of departure from Mutually Assured Economic Destruction.  Our time should be named MAED.  There are three scenarios:  China dies, USA dies or both die. Certainly, this economic model death is in the air.

The American corporations committed a double crime.  They moved industrial production overseas due to cheap labor destroying what has driven the engine of Middle Class (defined loosely) wealth creation since the industrial revolution.  The second crime is the erosion of Middle Class or rather its virtues by pseudo-intellectuals.  This aforementioned engine has allowed the 1% to feed on and prosper.  Following the Marxist adage that the one’s economic and social standing makes one’s consciousness at the given moment, the 1% convinced themselves that history can do without Middle Class with the slogans of overwrought expectations of Artificial Intelligence and Robotic revolution capabilities.  Not even the general Myth of Tech, exemplified by the valuation of Unicorns (billion dollar companies pushing new versions of social networks) which provide no labor-saving services, holds water.  The economy producing prosperous Middle Class is the economy of the physical world supplying the demand created by the magnitude of even their bodily needs, not to mention those more aspirational.  Without physical toilet paper the distribution network run by coolest geeks has no reason for existence, just like pure “social justice” has not produced just one ply of it in Venezuela.  So what is the reason for existence of pure “social justice”?  Power of the few, the cast of the priests controlling the narrative!  If you can not provide something of use, dupe them into buying something useless (possibly harmful).  The receding wages of the physical valued added economy was supplemented with consumer credit.  The substitution of credit for wages had not been just a symptom but the straw which is to break the camel’s back.

Some words on physical economy.  The multitude of manufacturing and consumer products calls for the sustained pursuit of technological advancement.  Cost cutting by corporations are on one end almost pure evil but on the other, that is what makes the advancement of living standard possible.  What is expedient at the moment drives the center of gravity towards one end or the other.  The corporate offices know that the game is up for the domestic economy, they are preparing to abandon their shareholders and think only of their self-preservation.  Democracy is the inclusion of Middle Class in the political process as in industrialized countries Middle Class internalized the virtues of mass productions (yes, there are virtues to industrial production however shocked you are) and with these virtues rationalized its right to have a say in politics.  We don’t know whether this paradigm has changed or what new form it can take after MAED will have been brought to its conclusion.  The advancement in manufacturing is incremental and evolutionary in nature.  You basically take off few cents, even a penny on a part, and if there isn’t enough of them the effort has no economic reason to be pursued.  Vast consumption and Middle Class is a blessing, not a scourge.

Let’s get back to China, the country where the factories are.  In the MAED model, the existence of these factories is predicated on unsustainable credit growth, both in countries where the central banks and customers are and the countries where the factories are.  This is the poison pill to which both countries were forced to resort by the realities of fiat money manipulation perpetuated in international trade once their economies started to”specialize”, and it has the potency to kill both of them.  The consumption in USA, Europe is the reason for these factories to hum.  Even the Emerging Markets demand for Chinese goods is just a byproduct of that in USA and Europe, and these are predicated together with Chinese growth on unsustainable credit creation.  If this credit growth falters everybody’s well-being goes south, and this is inevitable because trees don’t grow to the sky.  China has been called the country of the builder of modern pyramids, namely those who build without any expected utility to their projects.  Yet, some of their debt has utility but only if there is a robust Middle-Class demand left in the world.  America is the country of huddled teaming masses of de-industrialized workers with plenty of consumer debt to them, and if the dollar loses its exchange rate with others,  practically no way to pay it off.  Both countries are at opposing ends of industrial-financial dichotomy yet facing the same problem of excessive credit but each has been dealt a different hand by their history.    Continued in next posting.