On Tuesday, January 27, 2009, Dylan Ratigan, the anchor of CNBC’s Fast Money and much invited guest on the New York Talk Show Circuit, proclaimed that he was launching a “War On Stupidity”. We support this initiative and hope that Mr. Ratigan actually launches this war.
We translate our support into real help by suggesting the first target for Mr. Ratigan’s fire – Sebastian Mallaby, who wrote an opinion article titled “What OPEC Teaches China” in the Washington Post on January 25, 2009. That article and its author truly deserve the singular honor of being Mr. Ratigan’s opening target of his new war.
Readers of this blog know that we are not fans of the Chinese leadership or the authoritarian regime they run*. We believe that the Chinese leadership intends to establish hegemony over Asia and that the Chinese military will allow this regime to govern as long as this remains one of its goals. However, even the Chinese Military understands that internal stability of Chinese society is the single most critical objective and without such stability the regime cannot survive.
This is why the Chinese regime has spent an enormous amount of money on development of infrastructure to improve the living conditions of Chinese people, to generate employment and provide income. By any measure, this effort has been an enormous success, leading more than 100 million people out of poverty. The one critical requirement for this effort has been the continuous inflow of unprecedented amounts of global capital into China, an inflow that amounted to approx. $40 billion per month in 2006-2007.
In other words, China has been a voracious importer and consumer of capital. This is reality that every reasonable observer of global markets understands and accepts.
But, not Sebastian Mallaby. In his article**, Mr. Mallaby makes the utterly ridiculous claim that “China was flooding the world with cheap capital”. He then jumps into the theater of the absurd by stating that this surplus of capital created America’s mortgage bubble. To quote Mr. Mallaby, “Yet while there are rival accounts of the origins of the (financial) crisis, neither has the explanatory force of the blame-China narrative.” To put it succinctly, Mr. Mallaby states that the financial crisis in the world is due to Chinese actions. The comparison between OPEC and China made by Mr. Mallaby is even crazier. OPEC controls the supply of Oil but China is dependent on foreign capital. In fact, China is the anti-OPEC in this analogy.
We have seen a great deal of China-bashing during the past few years but nothing, repeat nothing we have seen (massive doses of Lou Dobbs included) has even remotely come close to the sheer absurdity of Mr. Mallaby’s imaginative scapegoating of China. Clearly with the new anti-China tone of the Obama Administration, we have an environment in Washington that encourages anti-Chinese vitriol.
The facts are that US Federal Reserve Chairman Greenspan flooded the world with cheap capital by keeping American interest rates at 1% for far too long. Cheap capital always floods into the most leveraged and highest growth areas. In the past Federal Reserve cycles, low quality, small US stocks were the beneficiary. This is why in 1999, small technology stocks went to the moon and then crashed.
In this cycle, China was one of the two most leveraged and highest growth asset class in the world. The other asset class was of course US mortgages. When you can get a mortgage with no money or hardly any money down, you have a 100% leveraged asset.
China and US Housing were the greatest beneficiaries of the flood of capital unleashed by Alan Greenspan. The bubble in US mortgages and housing has burst in a viciously brutal manner. In our opinion, the bubble in China has begun to burst before our very eyes. This will be the greatest bust we have ever seen, far greater in scope than the bust of the Japanese Real Estate bubble.
There are two huge consequences of the Chinese bust. It will send waves of deflation across the world and push the global economy into recession. It might create severe internal instability in China.
The one hope for China is to keep its currency stable, keep the hot money in China and spend enough of its reserves at home to minimize social instability. Chinese stability is critical for the entire world. If China were to turn inwards like Japan did in 1930s, the country that would be most affected would be USA and its commanding presence in the Asia-Pacific theater.
Getting back to Dylan Ratigan, his Fast Money show has been a fan of Chinese growth and its positive impact on America. So, we hope that for once, he implements his announcement and takes on the absurdity of Mr. Mallaby’s logic on his show.
Our Suggestion to President Obama
Having criticized Mr. Mallaby, we would like express our opinion and invite Mr. Mallaby & of course, Mr. Ratigan to offer their critique.
In our opinion, the Obama Administration should focus its efforts to persuade China to reduce its military expenditure and to use that budget of for development of Chinese hinterlands. A less aggressive China, a less militarized China, a China not hell bent on increasing its territories (Taiwan, India, Korea, Vietnam) would be beneficial to Asia, the world and especially to the Chinese people.
In exchange, the Obama Administration should offer to accept a devaluation of Chinese currency. This would be in the best interests of both the American and Chinese people. The alternative is that the weapons bought with monies sent to China by America will some day be used against American interests and the American Military.
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** “An OPEC lesson for China” – Sebastian Mallaby – http://www.washingtonpost.com/wp-dyn/content/article/2009/01/23/AR2009012303291.html
* Our prior articles on China
– Jim Cramer – Balanced Thinker But Wrong on China – January 9, 2009 http://www.cinemarasik.com/2009/01/09/jim-cramer–balanced-thinker-but-wrong-on-china.aspx
– Chinese Slowdown – Revenge of the Austrians? – November 15, 2008 – http://www.cinemarasik.com/2008/11/14/china–dubai–revenge-of-the-austrians–does-the-size-of-the-stimulus-indicate-the-size-of-the-problem.aspx
– Are The Wheels Coming Off Global Growth? – Dubai and China – October 4, 2008 – http://www.cinemarasik.com/2008/10/04/are-the-wheels-coming-of-global-growth–dubai-and-china.aspx
– China & India – “Are we deceiving ourselves again?” – Forthcoming book by Arun Shourie – September 27, 2008 – http://www.cinemarasik.com/2008/09/27/china–india–are-we-deceiving-ourselves-again–forthcoming-book-by-arun-shourie.aspx
– Iraq & Tibet – Strategic Will of The American and Chinese People – July 26, 2008 – http://www.cinemarasik.com/2008/07/25/iraq–tibet–strategic-will-of-americans-and-chinese.aspx
– Dr. Jeffrey Sonnenfeld of Yale – Is his ignorance symptomatic of Global Investors? – June 14, 2008 – http://www.cinemarasik.com/2008/06/13/dr-jeffrey-sonnenfeld-of-yale–is-his-ignorance-sympotomatic-of-global-investors-and-global-media.aspx