The average person in the world owes $86,000

Debt bomb

Does anyone seriously think that this is sustainable? And if it’s not sustainable, then how can it end without causing a massive global economic implosion the likes of which humanity has never seen?

Global debt hit a record $184 trillion last year, equivalent to more than $86,000 per person — more than double the average per-capita income.

Borrowing is led by the U.S., China, and Japan, the three biggest economies, the International Monetary Fund said Thursday, highlighting potential risks to global expansion given that their share of debt exceeds that of output. Overall, the amount of worldwide public and private debt is equal to about 225 percent of gross domestic product.

Total debt is up 60% since the global financial crisis a decade ago. In the meantime, the US government has something like $80 trillion in total liabilities, if you include Social Security, Medicare and Medicaid obligations. That doesn’t even count state and local government debt. In 2014, a team of economists estimated the nation’s total “fiscal gap” (defined as “the difference between our government’s fiscal obligations and the present value of all future projected tax and other receipts”) at $210 trillion. The numbers are so large as to be silly.

The social safety net is going to fly apart like a cheap hammock. A lot of people are blithely indifferent about this, which I find puzzling. But I don’t know, I’m not an economist – maybe this is all… fine? Maybe the problem will work itself out somehow, so we can just keep spending astronomically more money than we have, year after year, forever?

Somebody, please explain this to me. Slowly, and using small words so I can understand.

Tiankai’s tariff terror

Chinese ambassador Cui Tiankai

Cui Tiankai

The Chinese ambassador to the US offers a stern but misguided warning about the alleged dangers of tariffs:

Speaking to Reuters before heading to join Chinese President Xi Jinping’s delegation at the Group of 20 summit in Buenos Aires, Cui Tiankai said China and the United States had a shared responsibility to cooperate in the interests of the global economy.

Asked whether he thought hardliners in the White House were seeking to separate the closely linked U.S. and Chinese economies, Cui said he did not think it was possible or helpful to do so, adding: “I don’t know if people really realize the possible consequences – the impact, the negative impact – if there is such a decoupling.”

He drew parallels to the tariff wars of the 1930s among industrial countries, which contributed to a collapse of global trade and heightened tensions in the years before World War Two.

“The lessons of history are still there. In the last century, we had two world wars, and in between them, the Great Depression. I don’t think anybody should really try to have a repetition of history. These things should never happen again, so people have to act in a responsible way.”

The problem is that protectionism did not cause the Great Depression. Like the idea that the Great Wall is visible from space (which was told to me by a certified tour guide in Beijing), this is a myth that just won’t die.

Allow economist Ian Fletcher to explain:

Let’s start by reminding ourselves of a basic fact: the Depression’s cause was monetary. The Federal Reserve had allowed the money supply to balloon excessively during the late 1920s, piling up in the stock market as a bubble. The Fed then panicked, miscalculated, and let the money supply collapse by a third by 1933, depriving the economy of the liquidity it needed to breathe. Trade had nothing to do with it.

The Smoot-Hawley tariff was simply too small a policy change to have so large an effect as triggering a Depression. For a start, it only applied to about one-third of America’s trade: about 1.3 percent of our GDP. One point three percent! America’s average tariff on goods subject to tariff went from 44.6 to 53.2 percent—not a very big jump at all. America’s tariffs were higher in almost every year from 1821 to 1914. Our tariffs went up in 1861, 1864, 1890, and 1922 without producing global depressions, and the great recessions of 1873 and 1893 spread worldwide without needing the help of any tariff increases. […]

World trade did indeed decline, but this was due to the Depression itself, not higher American tariffs. This is no surprise, as declines in the values of the currencies of America’s major trading partners wiped away much of the effect of the tariff anyway.

Fletcher quotes economic historian William Bernstein as follows:

Between 1929 and 1932, real GDP fell 17 percent worldwide, and by 26 percent in the United States, but most economic historians now believe that only a miniscule part of that huge loss of both world GDP and the United States’ GDP can be ascribed to the tariff wars. .. At the time of Smoot-Hawley’s passage, trade volume accounted for only about 9 percent of world economic output. Had all international trade been eliminated, and had no domestic use for the previously exported goods been found, world GDP would have fallen by the same amount — 9 percent. Between 1930 and 1933, worldwide trade volume fell off by one-third to one-half. Depending on how the falloff is measured, this computes to 3 to 5 percent of world GDP, and these losses were partially made up by more expensive domestic goods. Thus, the damage done could not possibly have exceeded 1 or 2 percent of world GDP — nowhere near the 17 percent falloff seen during the Great Depression…

Fortune magazine sold

Chatchaval Jiaravanon

Chatchaval Jiaravanon

Fortune magazine has a new Thai owner:

Thai businessman Chatchaval Jiaravanon has acquired Fortune magazine for $150 million, in just the latest example of a U.S. business publication ending up in the hands of an East Asian buyer.

Be smart: The day might not be that far off when there are no major American-owned business publications at all. Even Business Insider is German.

Jiaravanon is a nephew of the famous billionaire and senior chairman of Thailand’s CP Group, Dhanin Chearavanont.

This continues a trend of Anglo-American media properties being sold off to Asian and European buyers. More from Axios:

The similar moves in the space:

Uzabase, a Japanese company, bought Quartz for about $100 million in July.

A mysterious Hong Kong-based group named Integrated Whale Media Investments bought control of Forbes magazine in 2014.

Lachlan Murdoch is openly wondering whether his father Rupert might sell the Wall Street Journal. Should that ever happen, don’t be surprised if that buyer, too, turns out to be East Asian.

I would add to that:

  • The Financial Times was sold to Japan’s Nikkei in 2015.
  • The Economist was sold to Italy’s Agnelli family, also in 2015.
  • Science magazines Nature and Scientific American are owned by Germany’s Holtzbrinck.
  • Book publishers Random House and Penguin – now combined as Penguin Random House – are subsidiaries of Germany’s Bertelsmann.
  • While we’re at it: the largest shareholder of the New York Times is Mexican billionaire Carlos Slim.

It’s not necessarily clear that all of these publishers can maintain their intellectual independence under foreign ownership, especially given the very different attitudes towards press freedom in certain Asian countries. For example, I noted last year that Forbes – having been swallowed by Hong Kong’s Integrated Whale Media – apparently told the prominent China skeptic Gordon Chang they were severing their relationship with him and wiping out his archive of articles. (However, his articles are still available on the site, so I’m not sure what the deal is there.) And Fortune will have to tread very carefully in its coverage of a certain southeast Asian monarch from now on…

A defense of economic nationalism

Darren Beattie provided (in 2017) a much-needed defense of the ideological foundations of economic nationalism:

It is entirely possible therefore to support tariffs, immigration restrictions, and various other restrictions on the free market in a manner that benefits the American worker and that is also consistent with the highest respect for individual freedom, enterprise, self-reliance, and other virtues of capitalism.

He makes a great point about the Cold War context which spawned free-trade ideology:

The Soviets who posed an existential geopolitical threat to the United States embraced a generally classical Marxist philosophy that was both an economic and a moral doctrine.

Free-trade doctrine provided an ideological foil to an expansionist Marxist regime. From that standpoint, it has served its purpose.

But today’s threats of concentrated power do not seem to conform to the “government dangerous, private sector benign” picture as easily as they may have during the Cold War. This is because 1) the distinction between public and private seems to no longer apply to many of the most powerful sectors of the economy, and 2) new forms of technology have enabled equally dangerous concentrations of power to accrue in the private sector (think of Silicon Valley). So, with the end of the Cold War, we must reevaluate the relationship between economics and liberty.

Furthermore, several structural features in the economy have accelerated since the end of the Cold War that severely threaten the middle class, whose robust health is often considered indispensable to a culture of individual freedom.

It is also indispensable to political stability.

Beattie is right that the public discourse is very superficial on this issue, as I pointed out with reference to trade policy in my post on Ian Fletcher’s book Free Trade Doesn’t Work: What Should Replace It and Why. In fairness, trade policy is boring and makes for poor clickbait. Also, most pundits and politicians have absolutely no clue about economics. Fortunately, this article is free of economic jargon and just addresses the ideological assumptions underpinning most people’s thinking on the trade topic.

Mending fences

The first state visit by a Japanese leader to China in seven years suggest that the two countries, which allegedly have deep-seated mutual animosity, are in the process of strengthening ties:

What Happened: China and Japan signed multiple agreements intended to strengthen bilateral ties during the first day of Japanese Prime Minister Shinzo Abe’s official visit to China, the South China Morning Post reported Oct. 26. Both countries will cooperate on roughly 50 third-country infrastructure projects and agreed to resume currency swaps. Additionally, they will further discuss joint East China Sea energy cooperation and China’s lifting of food import restrictions following the nuclear disaster at Fukushima.

Why It Matters: Both China and Japan are recalibrating their strategies toward each other as they look to hedge against uncertainties as well as increasing trade protectionism from the United States.

This makes sense; as the neoliberal world order falls apart, regional trade blocs will emerge and solidify, and Japan and China, with their proximity and shared Confucian heritage, can be expected to align more closely.

Stratfor argues, however, that any Sino-Japanese rapprochement is complicated by China’s maritime ambitions, which clash with Japan’s interests as an island nation. Japan is also expanding its activities in the South China Sea, recently sending a submarine to conduct drills there for the first time. The duo may need to remain frenemies for a while.

The beatings will continue until morale improves

China port source BBC

From Axios, we learn that the Sino-American trade relationship will remain… strained… for a while:

President Trump has no intention of easing his tariffs on China, according to three sources with knowledge of his private conversations. Instead, these sources say he wants Chinese leaders to feel more pain from his tariffs — which he believes need more time to fully kick in.

What we’re hearing: “He wants them to suffer more” from tariffs on $200 billion of Chinese goods, said a source with direct knowledge of Trump’s thinking, and the president believes the longer his tariffs last, the more leverage he’ll have. […]

Behind the scenes: Trump has privately boasted that his China tariffs have driven down the country’s stock market. Experts say the trade war has hurt market sentiment, but the stock market has never been a reliable barometer of Chinese economic strength.

As 罗臻 points out:

A-shares are not a good measure of Chinese economic sentiment, it’s housing. In order to crack the housing market, however, Trump would need to inflict more pain for longer, to the point where China can’t contain the fallout and home prices start sinking 1 or 2 percent per month.

Trump is pursuing the right strategy for his intentions, even if he isn’t watching the right signals. Or maybe the stock market comments are for public (and China’s) consumption.

The Navarro effect

There’s no such thing as a free lunch — anymore:

President Donald Trump announced that the US would pull out of an obscure 144-year-old postal treaty, in what looks to be his latest direct shot at China.

The Trump administration announced Wednesday that the US would leave the the Universal Postal Union treaty, an agreement from 1874 that helps to standardize postal rules among the international community.

The interesting aspect of the UPU decision is a more recent addition to the agreement. The UPU, which is now under the United Nations’ purview, sets rates that national postal services pay to ship goods internationally. Under a deal reached in 1969, developing countries can ship smaller items at lower rates than developed nations like the US. The provision is designed to help facilitate exports from smaller countries to give a boost to growing economies.

But the provision also allows Chinese producers to ship items to the US at significantly low rates even compared to some US domestic shipping rates. The Trump administration says many companies even offer free shipping to the US from China because of these lower rates — and as a result, roughly 60% of inbound shipping to the US comes from China.

Trump’s trade adviser Peter Navarro appears to be the instigator of this move.

US back on top of competitiveness ranking

Some good economic news for the US. Also, Japan is up to #5 from #9 last year:

After a decadelong absence, the U.S. has regained the distinction of most competitive country in the world, according to the World Economic Forum. In fact, only Japan made a bigger improvement of all 140 countries in the survey.

“Economic recovery is well under way, with the global economy projected to grow almost 4% in 2018 and 2019,” said the report, which measures economies by 98 indicators to determine how close they are to the ideal state of competitiveness.

More on Japan’s economic recovery.

The United States of Bezos

Jeff Bezos Dr Evil

We are all Amazonians now. At this rate, Bezos might as well take over the US government:

In his best-selling book “The Four: The Hidden DNA of Amazon, Apple, Facebook and Google,” Galloway cites some arresting statistics: Far fewer U.S. households have a gun than Amazon Prime, by 30 to 64 percent. More Americans have Prime than voted in 2016 (55 percent), or earn $50,000 or more a year (55 percent), or go to church (51 percent). He calls Amazon’s ability to woo Prime subscribers at a $119 yearly cost the equivalent of “entering into a monogamous relationship” with its consumers, who as of 2016 spent, on average, $193 per month. (Non-Prime members average $138 per month.)

From 2006 to 2016 Amazon’s stock price growth surged by 1,910 percent, destroying Sears, J.C. Penney, Kmart, Best Buy, Macy’s, Nordstrom, Target and Walmart.

Perhaps most importantly: Since the Great Recession, Amazon has paid just $1.4 billion in corporate taxes compared to Walmart’s $64 billion.

Amazon is also making inroads into a wide array of sectors and institutions that have nothing to do with retail, let alone selling books:

Bezos has even greater ambitions. His acquisition of Whole Foods, which plunged competitor Kroger’s stock from $31 to $22 per share, is but one step in dominating what and how we eat. Amazon is spending $5 billion on original programming this year and is on pace to outspend Netflix by 2022.

Think about that, Galloway says: A retailer in Seattle as content king. And after announcing a vague health care initiative back in January, stock prices for major health care insurers plummeted — such is Amazon’s power that the mere hint of market entry damages long-standing competitors.

That’s not all. Bezos’ company Blue Origin, with a mission statement that goes not just to colonizing the planet but outer space — “Earth, in all its beauty, is just our starting place” — plans to launch the first private manned spaceflight by next year. Bezos also says he’s going to establish free preschools in low-income areas based on the Montessori method.

Outer space aside: Amazon wants to feed, treat, entertain, educate and medicate America — and that’s just what it’s told us. Nothing Orwellian here, right?

And while Amazon is raising its minimum wage to $15 an hour, the mega-corporation is also striving mightily to replace its human workforce with robots. Perhaps not coincidentally, Bezos has expressed support for the idea of a universal basic income. It’s not hard to envision a future in which a fully automated Bezos empire services all the needs of a jobless, perpetually entertained population — with Alexa replacing the school system, Amazon Hospitals treating the sick, and Amazon Prime Drones equipped with Hellfire missiles providing security. Brave New World is real, and His Fordship sits in Seattle, a bald guy with a creepy laugh.

The Party wears the pants

There is a widespread misconception that China is actually a capitalist country that for some reason calls itself Communist. For example, Rupert Murdoch is said to have remarked (in the late 1990s) that he had yet to meet any communists during his trips to China.

Certainly, it’s easy to see how a tourist spending a week in an economic hub such as Shanghai or Shenzhen would get this impression, especially today:

But like many beliefs based on surface appearances, the idea that China is not really Communist is mostly false. As Australian journalist Richard McGregor argued in a 2011 article:

If Vladimir Lenin were reincarnated in 21st-century Beijing and managed to avert his eyes from the city’s glittering skyscrapers and conspicuous consumption, he would instantly recognize in the ruling Chinese Communist Party a replica of the system he designed nearly a century ago for the victors of the Bolshevik Revolution. One need only look at the party’s structure to see how communist — and Leninist — China’s political system remains.

Sure, China long ago dumped the core of the communist economic system, replacing rigid central planning with commercially minded state enterprises that coexist with a vigorous private sector. Yet for all their liberalization of the economy, Chinese leaders have been careful to keep control of the commanding heights of politics through the party’s grip on the “three Ps”: personnel, propaganda, and the People’s Liberation Army. […]

Perhaps most importantly, the party dictates all senior personnel appointments in ministries and companies, universities and the media, through a shadowy and little-known body called the Organization Department. Through the department, the party oversees just about every significant position in every field in the country. Clearly, the Chinese remember Stalin’s dictate that the cadres decide everything.

In his astonishing 2010 book The Party: The Secret World of China’s Communist Rulers, McGregor points to a study by emerging markets brokerage CLSA that estimated that China’s private sector contributes 70% of the country’s GDP and 75% of its workforce. As he notes:

A week later, a rival and equally respected China research unit at UBS, the Swiss bank, put out a rejoinder, saying the private sector ‘accounts for no more than 30 per cent of the economy, whichever indicator you use’. The report said: ‘In China, the big sectors are either 100 per cent or majority controlled by the state: oil, petrochemicals, mining, banks, insurance, telcos, steel, aluminum, electricity, aviation, airports, railways, ports, highways, autos, health care, education and the civil service.”

I believe that last sentence (the report was published in 2005) is still true today. The media is also state-controlled. The internet sector is ostensibly dominated by private firms, but the government keeps Alibaba, Tencent and Baidu on a fairly tight leash and is reportedly considering buying direct stakes in Tencent as well as Youku (the YouTube of China), which is owned by Alibaba.

Why is it so hard to nail down the size of China’s private sector? According to McGregor:

“The confusion about what is public and what is private is a deliberate result of the system’s lingering wariness about clarifying ownership. Ask any genuine entrepreneur whether their company is private, or ‘siying‘, literally ‘privately run’, it is striking how many still resit the description in favour of the more politically correct tag ‘minying‘, which means ‘run by the people’. […] Most economists now skirt the issue, by dividing companies into two categories, state and non-state, and leave it at that.

The issue gets murkier the closer you look at it. John Robb cut through the complexities most succinctly by describing China’s politico-economic system as “capitalism in a Leninist cage.”

Now it is certainly true that China has a large and wealthy entrepreneurial class, which was born out of the liberalizing reforms that began under Deng Xiaoping. That is the “capitalism” in the aforementioned “Leninist cage.” The Party realized it needed entrepreneurs to build China into the massive economic juggernaut it has become since the 1970s. The tycoons had their heyday after the mid ’90s and into the 21st century, as the Party unleashed private businesses to create jobs for the tens of millions of workers laid off by a shrinking state sector. Today, the private sector is reported to contribute over 60% of China’s GDP growth and over 90% of new jobs (take those figures with a grain of salt).

However, even while fostering the rapid growth of the private sector, the Party has also taken pains to infiltrate and co-opt it. This is where the Leninist cage comes in. China’s leaders have carefully studied the example of the former Soviet Union and in particular, the rise of a powerful class of corrupt oligarchs who carved up and destroyed Russia’s economy during the botched privatization of the ’90s. The Party is determined to avoid a repeat of the Russian oligarch scenario in China, and will not permit the country’s tycoons to challenge state power.

This message has been sent in recent years with the disappearance and detention under bizarre circumstances of a spate of Chinese billionaires, including Xiao Jianhua, the businessman who was abducted from Hong Kong by mainland authorities — whisked away from the Four Seasons hotel, reportedly in a wheelchair with a sheet over his head. The disappearance of Wu Xiaohui, who bought New York’s Waldorf Astoria hotel, in June of last year seemed to indicate that the Party was cracking down on the private sector in earnest.

The New York Times, in a story this week, finds further evidence that China is turning its back on free-market policies:

For 40 years, China has swung between authoritarian Communist control and a freewheeling capitalism where almost anything could happen — and some see the pendulum swinging back toward the government.

State-controlled companies increasingly account for growth in industrial production and profits, areas where private businesses once led. China has stepped up regulation of online commerce, real estate and video games. Companies could face higher taxes and employee benefit costs. Some intellectuals are calling for private enterprises to be abolished entirely.

The political winds are shifting, but the discontinuity is not as sharp as it may seem at first glance. China has never had “a freewheeling capitalism where almost anything could happen.” All that we’re really seeing here is that the cage around the private sector is getting smaller and more restrictive, but the cage was always there. The Party is simply reminding China’s entrepreneurs who wears the pants in this relationship.