The recent flap over China’s
attempt to buy Unocal has brought fears that China will buy
us out and become the new economic superpower by next year.
Not likely. While it is true that most major companies in
China are at least partially state owned, and therefore would
seem to have an unlimited source of funds to buy up the USA,
there are economic considerations.
Japan tried this in the 1980s, putting emphasis on market
share and not profitability. They also had deep pockets as
their banks became over extended, resulting in high default
ratios and an economic malaise that has lasted for over twenty
years. China’s positive is a huge and very cheap labor
force. Their negative is they are trying to have their cake
and eat it too. Socialism (communism if you prefer) is not
compatible with capitalism. Look what happened to Russia and
look at France and Germany – not a pretty picture. Capitalism
works best with the least government interference. This is
a huge advantage for the USA. We have better corporate management
and a stronger venture-capital market that puts less strain
on our banking system. Just as we were not sure in the 1980s
how many bad loans Japanese banks were issuing, we know even
less about bad loans from the state owned banks in China,
but estimates are that they are numerous.
Although wages for Chinese workers are low now, they are
and will continue to rise as the workers demand more and more.
To date the Chinese government has been struggling to keep
a lid on information technology (IT). They would like to keep
their countrymen in the dark as much as possible as to what’s
happening around the rest of the world. IT is the future and
if China does not hop on, they will be left behind. Lastly,
consider our $12 trillion economy vs. China’s $1.2 trillion.
They cannot possibly continue to grow at 9% a year forever.
This is not to disparage China. They are part of the global
economic community and should be embraced as such. All can
take their finger off the panic button now.
There is a bigger problem facing the global community, and
that is the dramatically increasing demand for energy (oil).
In an extensively researched new book, “Twilight in
the Desert,” author Mathew Simmons makes a strong case
for the possibility that Saudi Arabia has much less oil in
reserve than they believe or are acknowledging. His point
is that we will run out of oil much sooner than anticipated.
This brings up the specter of nuclear energy. To date, France
gets 80% of their energy from nuclear. The US obtains 20%.
Some environmentalists are even jumping on the nuclear bandwagon
because it burns clean. Like it or not, new energy bills introduced
in Congress will be looking hard at nuclear. China is already
planning to build hundreds of nuclear plants, and it is estimated
they will need thousands to meet their demands. The risks
are obvious here -- meltdowns and terrorist attacks, and we
haven’t the space to go into it at this time. You will
be seeing more and more research and articles on nuclear in
the future.
It’s hard to look at the US economy and not marvel
at how resilient it is. More than 200,000 new jobs were created
in July and that adds up to over two million in the past year.
All of the jobs lost during the bursting of the hi-tech bubble
have been replaced, many in entirely new industries. Gross
Domestic Product is running at an annual growth rate of 3.5%,
unemployment stands at a low 5%, interest rates are low and
more Americans are drawing a paycheck than ever before. What’s
not to like? Well, the Fed may be looking at labor costs and
productivity. As the level of new jobs generated cuts into
the available labor force, wages will increase. Couple this
with a drop in productivity from 4% in the late 1990s to about
2.5% today, and the Fed has cause for concern about inflation.
Hence, another increase in the Fed Funds rate to 3.5%, and
the likelihood of two more increases to 4% before year end.
Some economists are looking for 4.5% by March 2006. While
this may not be especially good for the economy, it will be
good for holders of adjustable rate securities as the coupons
on these securities adjust up with short-term interest rates.
Welcome back. The treasury is bringing back the thirty year
bond. A good idea as it affords the government (taxpayers)
an opportunity for more attractive financing.
Random thought for August 2005:
"There are two possible outcomes: If the result confirms
the hypothesis, then you’ve made a measurement. If the
result is contrary to the hypothesis, then you’ve made
a discovery."
- Enrico Fermi
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