Just one more barrel of flour
September 9, 2009
Those who worry much about the Chinese economy overtaking that of the United States can stop worrying. Worry should be reserved for things we can do something about. This is an inevitable outcome, the product of both a crumbling and corrupt American system and a continually evolving Chinese system, before our eyes assuming world dominance in efficiencies and, as a result, in international trade.
Picture the classic action movie with the protagonist being chased through a hotel kitchen. He owns the hotel, so it’s his kitchen. It’s okay if he makes a mess of it. He makes some headway by tipping over large flour barrels in the path of the bad guy chasing him, who owns a competitive hotel across the street. In the beginning, the bad guy turns on his backpack vacuum (stolen from the set of Ghostbusters). Sucks up all the flour as it pours his way. After a while, two things happen. The vacuum bag gets full, and the protagonist (can’t bring myself to call him the good guy) starts to run out of flour. He grabs his cell phone while still running for the exit and calls the kitchen of the hotel across the street. For a price, they provide an emergency relief fund of flour barrels, and he keeps tipping them over as he scrambles to make his escape. The guy behind him, though, has stopped sucking up the flour and switches his vacuum to blow mode. As much as some people will try, it really is difficult to suck and blow at the same time. Steadily, the kitchen proceeds to fill with flour, now approaching the ceiling. At a point where no more flour can be added, sucked, or blown, the chaser stops chasing and carefully backs out of the kitchen through the rear exit. He calls his own hotel across the street and tells them they can stop shipping flour and get on with serving the new customers who cannot be fed by this now-dysfunctional kitchen.
Stuck in a kitchen full of flour, and no customers to serve, the protagonist calls up his adversary and asks if he’d like to buy a hotel. Bad guy says, ‘sure, at 10 cents on the dollar’.
***
As long as Washington is governed by those in conflict positions (in a system of lobbyists buying influence), money will be wasted in untold sums. To my way of thinking, this is the number one problem. Government spending holds the answer… that is, less government spending holds the answer. Number two problem (which may, in fact, be the same as number one… you choose) is an economy based on debt. It didn’t used to be that way. Used to be based on competitive advantage through an efficient market and entrepreneurism. Too much flour… er, debt, overbakes to the point where your pie… er, economy, chokes all who partake of it.
Too ‘crusty’ a system, way out of balance, strives for equilibrium. Guaranteed that equilibrium will find its way, just as water always finds its level. Economies will always be artificially pulled this way and that, but ultimately, any rubber band stretched to an unnatural state will return itself to a steady state. That’s just the nature of things. This is not to say that this equilibrating force of nature will leave the U.S. economy in a steady state, but rather that the global economy will find its own new steady state. No national economy, in this new global village, operates as a closed system. Those who think they can function as if they were fully in charge of their own economy are deluded.
Too much debt, and too much pork in Washington, have left the American system lacking its most important element – confidence of the consumer. When this confidence is lost, personal spending slows or stops, and the multiplier effect, so enjoyed by purveyors of debt in recent decades, unwinds and launches into reverse. Make no mistake of it. Absent consumer confidence, the rubber band will overshoot the steady state before settling into equilibrium.
Can a depression be avoided? I honestly don’t know. What I do know is that artificial stimuli imposed by one player to one part of an open system will eventually give way to the larger power of that system as a whole. Equilibrium will be achieved. The question at hand should be, ‘how can we best position ourselves to take advantage of this natural equilibrating process?’
Given that the only tenable long-term solutions to the American problem involve less spending and less debt, the best thing may be to just stop running, and to wait to be overtaken by those in pursuit. Times will be tough. No doubt of it. What made the American economy great in the first place was its reliance on an essentially efficient market (he who does the best job gets it) and on creativity. Large competitive economies are making significant gains on both counts. Creativity in business is no longer a predominantly American credo. This position lost, the end is near. Left unregulated, the American economy is dominated by a diminishing number of powerful people. Enhanced concentration of power does not support the concept of an efficient market, but rather the destruction of an efficient market.
- A country declaring that it possesses the greatest system of education in the world is committing the cardinal sin of believing its own propaganda. Education always has been, and always will be, the source of power to the light at the end of the tunnel. Until and unless the Western system of education, created for an early 19th century world, is completely dismantled and overhauled, the path leads only downward.
- A country that spends (so far) close to a trillion dollars on two unnecessary wars is one that operates as if unlimited in resources. Nobody is too big to fail.
- A country that allows those with deep pockets to use those pockets to buy influence among its elected representatives is one not operating in the name of the ‘greater good’.
- A country that allows its monetary system to be run by private enterprise is no longer a sovereign nation. It is merely the instrument of those would take advantage at any and every opportunity.
The road is long, certainly much longer than a four year cycle. In our lifetime, at least one economy will eclipse that of the United States. A country with a consistent trade imbalance measured in several hundred billion dollars can draw on the global system for only so long before other players say ‘no’.
By my count, the United States is the #1 trading partner of just four of the other 19 largest economies in the world (Canada, Mexico, the United Kingdom, and China). In 2008, it operated in a trade deficit position with each of these four, to the tune of $416 billion. Considering all 19 of the other countries in the top 20, the U.S. trade deficit for that year was $696 billion.
China is the #1 trading partner of eight of these 19 countries (Japan, India, Russia, Brazil, South Korea, Iran, Australia, and Taiwan). In trade with other countries in the top 20, China operated in a trade surplus of $297 billion, $267 billion of which came from trade with the United States.
How this relative position for the United States can be interpreted other than as a collision course with disaster is beyond rational thought. Simply put, it is unsustainable.
As individuals, the question that needs to be asked and answered should be, ‘how can we position ourselves not to be blown away by the certain erosion of our standard of living?’ Best answer is that of Wayne Gretzky who said, ‘Don’t go to where the puck is. Go to where the puck is going to be.’ Currently, China has the puck. Where is China going?
Moreover, those who look to China to bail out the American economy are in the straits of desperate thinking. China has no interest but in China. To the extent that China needs America, it will ‘play along’ with America. Once China has weaned itself from that need (and it will), the gloves will come off and the American economy will be left choking in the dust.
The longer this inevitable outcome is delayed, the longer it will take to recover. To play on the age-old metaphor, if you keep digging, eventually, you’ll end up in China. I say, throw away the shovel, re-trench, re-assess, and re-think what can eventually best position our children’s children for a better life. Our own children may very well re-live Hemingway’s ‘lost generation’ (it was actually Gertrude Stein’s term, but Hemingway captured it best in his novel, The Sun Also Rises), disillusioned and detached, seeing no way out but through a bottle. We can always hope that our children will not be caught in this depressing state, but as reminded in the title of a book by retired U.S. Army Chief of Staff General Gordon Sullivan, Hope is not a Method.
I’m prompted to think of this Lost Generation by a recent conversation with a friend. He owns and operates a do-it-yourself winemaking shop. Business is dismal, he says. Ironically, the only hope for him, he wryly adds, is that the economy continues to spiral down, eventually leading the population to turn to alcohol. An interesting take, perhaps not surprising, as he is of Russian descent, and knows that story only too well. Not sure that $3 bottles of wine will be the remedy of choice but it’s a hope… not mine.
Kevin Graham