is in a Scylla or Charybdis scenario. If China continues to inflate it
will overheat. If it doesn't, unemployment and unrest will soar, and
the economy will implode. Either way, there is no winning solution.
oil and environmental pollution compound China's problem immensely.
China is simply on an unsustainable path for many reasons.
Chinese asset bubbles are guaranteed to pop, but as I have said many
times, the timing of such events is unknown. In this case however, I am
more apt to believe sooner, rather than later.
The Real Threat
We are already in uncharted territory, and the risk is what the Fed, Congress, the Treasury department, the Administration, and central bankers globally do to prevent something that needs to happen: the liquidation of malinvestments and debt.
Thus the "real threat" (and risk) is not deflation, but rather the foolish attempts by Keynesian clowns to circumvent what needs happen.
Japan is proof that such efforts are futile. Note that Japan is once again back in deflation, and all the government has to show for its efforts is debt equaling 150% of GDP. Falling prices, lower wages, lower asset prices, and especially debt liquidation are not to be feared, they are a necessary part of the healing process, lest the country stagnate for years.
They could be out of work for a long time. Japanese industrial
production has plummeted almost 40 percent and with it, the demand for
At the same time, the future is looking less bright.
Tighter finances are injecting a dose of reality into some of Japan’s
more fantastic projects — like pet robots and cyborg receptionists —
that could cramp innovation long after the economy recovers.
THE 19th century was dominated by the British Empire, the 20th century
by the United States. We may now be entering the Asian century,
dominated by a rising China and its currency. While the dollar’s status
as the major reserve currency will not vanish overnight, we can no
longer take it for granted. Sooner than we think, the dollar may be
challenged by other currencies, most likely the Chinese renminbi. This
would have serious costs for America, as our ability to finance our
budget and trade deficits cheaply would disappear. ...
This decline of the dollar might take more than a decade, but it
could happen even sooner if we do not get our financial house in order.
The United States must rein in spending and borrowing, and pursue
growth that is not based on asset and credit bubbles. For the last two
decades America has been spending more than its income, increasing its
foreign liabilities and amassing debts that have become unsustainable.
A system where the dollar was the major global currency allowed us to
prolong reckless borrowing.
Now that the dollar’s position is no longer so secure, we need to
shift our priorities. This will entail investing in our crumbling
infrastructure, alternative and renewable resources and productive
human capital — rather than in unnecessary housing and toxic financial
innovation. This will be the only way to slow down the decline of the
dollar, and sustain our influence in global affairs.
"Between 40 and 45 percent of the world's wealth has been destroyed in
little less than a year and a half," Schwarzman told an audience at the
Japan Society. "This is absolutely unprecedented in our lifetime."
The National Stadium, known as the Bird's Nest, has only one event
scheduled for this year: a performance of the opera "Turandot" on Aug.
8, the one-year anniversary of the Olympic opening ceremony. China's
leading soccer club backed out of a deal to play there, saying it would
be an embarrassment to use a 91,000-seat stadium for games that
ordinarily attract only 10,000 spectators.
The typical real estate secured interest rate was 6 to 6 1/2%, so
that's at least $36,000 interest per year, yet we were able to
negotiate a rent of $800! And there were lots of apartments available.
People would approach us with incredible deals. You could tell they
were hurting, had bought extra apartments and were struggling with
paying the mortgages, and were desperate for any help from any rent
they could get.
Without jobs there is little reason to believe this economy is close to
turning around. Yet, stimulus plan or not, there is simply no reason
for jobs to pick up any time soon. I expect another half million jobs
will be lost in each of the next couple months.
The key is
consumer attitudes towards debt and spending have changed, and those
attitudes are not changing back. Expect a long, deep recession no
matter what Obama and Bernanke do.
The construction is the start of a vast experiment, an attempt to
create the world's first car-free, zero-carbon-dioxide-emissions,
zero-waste city. Due to be completed in 2016, the city is the
centerpiece of the Masdar Initiative, a $15 billion investment by the
government of Abu Dhabi, which is part of the United Arab Emirates. The
new development, being built on the outskirts of Abu Dhabi city, will
run almost entirely on energy from the sun and will use just 20 percent
as much power as a conventional city of similar size. Garbage will be
sorted and recycled or used for compost; sewage will be processed into
fuel. Concrete columns will lift the city seven meters off the ground,
creating space underneath for a network of automated electric
transports that will replace cars. Planners predict that the
development will attract 1,500 clean-tech businesses, ranging from
large international corporations to startups, and--eventually--some
spite of what Krugman and other economists say, Government cannot
really "create" any jobs per se. It can raise taxes and shift private
sector jobs creation to government jobs (typically a malinvestment),
and it can bring production and consumption forward for those jobs that
are genuinely needed (filling potholes and repairing bridges), but once
the potholes are filled and the bridges repaired, one has to ask the
question, "What will we do for an encore?"
There is no free
lunch. It is impossible to spend one's way out of a hole. It cannot be
done and should not be tried. Japan proved it. So did FDR. Ultimately
it was World War II and the destruction of much of the world's
productive capacity that ended the great depression. The US was
relatively untouched by the war, and could lead a worldwide recovery.
That said, there is a genuine need to repair infrastructure and that need must be done at the cheapest possible price.