Economy to Dominate Beijing Congress … China's leaders, kicking off the annual legislative session Friday, face the challenge of how to explain to the nation the gradual withdrawal of an enormous stimulus program without denting public confidence. The annual meeting of the National People's Congress, soon to be underway in Beijing, is about more than rubber stamping the decisions of Communist Party leaders. … When Premier Wen Jiabao (left) delivers his government work report — the Chinese equivalent of a State of the Union address — to the National People's Congress Friday, he is widely expected to reaffirm the government's totemic 8% target for economic expansion, which it has maintained for several years despite significant fluctuations in actual growth rates. Mr. Wen will also reaffirm a commitment to policies that support expansion, though that pledge is vague enough to give him considerable leeway to shift the course of policy. Discussion of the economy is likely to dominate this year's session of the congress, a largely ceremonial gathering of nearly 3,000 delegates who discuss and ratify the top leadership's policies. The ten-day meeting, the pinnacle of the annual political calendar, takes place amid growing public concern about high local housing prices and nervousness about the global economy. Though China isn't now facing the kind of market worries about government debt that are bedeviling Europe, few analysts disagree that China urgently needs to cool down its credit- fueled stimulus. –Wall Street Journal
Dominant Social Theme: Technocratic management of the economy is necessary.
Free-Market Analysis: In Keynesian parlance a soft landing merely means that central bank over-printing of money is lessened. Meanwhile, the bankers running the show hope desperately that the economy does not collapse. That's about all there is to it. Oh, the mainstream media likes to make it sound so much more complicated. But really it's not. There are no measurements that can be applied to "monetary policy" because actually there is no such thing. And more often than not the unfortunate country subject to such malicious ephemera is plunged into the doldrums.
This is why the title of this article is "Toppling Memes." In this article we address two dominant social themes – promotional ephemera – that the elite, from our point of view, is having trouble sustaining. One is the Inevitably of the European Union and the other is the Chinese Miracle.
The Chinese Miracle, first. One of the main dominant social themes of the late 20th century and the early 21st century has been the progress of Chinese society, certainly from the standpoint of increased wealth and possessions. What is the promotion exactly? Well, the Western elite wants you to know, dear reader, just how slick the EASTERN elite really is. The location of the wise man, in fact, makes no difference it turns out. Only his existence – and the level of blandness and expertise that he can obtain. And the Chinese leader certainly "do" blandness well.
The idea is that once the all-powerful leaders of China made up their minds to try capitalism, the country bloomed like a gargantuan blossom. Despite an occasional bobble here and there (like Tiananmen Square) the Chinese miracle is ongoing (so the promotion goes) and the world has those wise Chinese leaders to thank.
The truth, from our point of view, is a good deal more mundane and desperate. The Chinese leadership, facing deserved oblivion after the bankruptcy of their collectivist 20th century policies, decided to give the free-market a try – probably because they had nowhere else to turn. But in typical authoritarian fashion, the leaders didn't merely set the free-market loose, they kick-started it with a torrent of central bank generated fiat-money and those money-printing policies have continued until today.
Trouble is, China is now facing the same dilemma as the West – only moreso in our opinion. The trouble with fiat money is that it distorts the economy because one inevitably prints too much of it. This means ineluctably that the Chinese economy is highly twisted. Not only is it distorted, but it still remains in many ways a top-down authoritarian system. Free-market economics are a kind of overlay grafted onto a gargantuan socialist conveyance. The result is a secretive and clumsy process that likely didn't work well in the best of times and is certainly degrading now.
And here is another problem. The Chinese market-based economy, such as it is, has been constructed to export massive amounts of gadgetry to the West. But the West ain't buying these days. The Chinese solution, thus, is to reconfigure its consumerist target. The massive Chinese population itself will now buy the output once aimed at Western folk. Not only that, but as the Chinese government is quite worried about various investment bubbles forming – especially in real estate – the consumerist realignment is to take place amidst a gradual and general tightening of money.
This is a quite a challenge of course. First of all, the Chinese who are essentially a frugal and still-damaged people (given the privations and starvations of the 20th century) are going to be exhorted to buy all sorts of products over the next umpteen years. Maybe being poor and communist-minded was a virtue once, but in the future, the model China-person may be the one who is the biggest consumer. Quite a turnabout.
We're not sure it will get there though. There is the little matter of a soft landing to negotiate. Now maybe the Chinese technocrats will surprise us and bring the ship of state in for a perfectly gentle landing. But we speak here of a nation of well over a billion people with an export-oriented economy and trillions of newly printed yuan surging through its corpus. The Chinese haven't experienced a "recession" or even a real slowdown for years, and it is going to take a mighty effort to create one now.
Will the Chinese leadership overshoot and tighten too much? Possibly. Just as likely, the economy will begin to slow, civil unrest will tick up and the leadership will back off. At this point, either the economy will continue off the cliff anyway, or it will reverse and head toward inflation and even hyperinflation. Either way, the Western promotion of the all-wise, all-powerful communist elite will begin to fizzle. Worst-case (or best-case) scenario the authoritarian political system itself will begin to unravel. We think it's fairly brittle anyway.
So … there's one dominant social theme in danger of degrading. Another one is the European Union. The idea of this meme was that a visionary group of selfless leaders would put aside national rivalries to build a greater European state – one that would do away with war, guarantee a stable currency and generally provide a better life for all who came under its sway. Again, the key was for the leadership to be provided by a tiny group of men who know best for everyone else. Yet do they? Here's something we found yesterday on the Huffington Post:
Cash-Strapped Greece Should Sell Islands, German MPs Say … Two German MPs have recommended Greece sell off some of its islands to counter the country's notorious debt problem. Josef Schlarmann and Frank Schaeffler spoke to Germany's Bild daily newspaper, a tabloid owned by Axel Springer. "The Greek state must sell stakes in companies and also assets such as, for example, unpopulated islands," said Schaeffler, a member of parliament for the pro-business Free Democrats. Marco Wanderwitz, an MP for Angela Merkel's Christian Democrat party, said Athens should provide collateral for any money it receives from the European Union. "In this case, certain Greek islands also come into question," said Wanderwitz. The article ran under the headline "Sell your islands, you bankrupt Greeks – and the Acropolis too!" Greece has around 2,000 islands off its coast, only 227 of which are inhabited. The aggressive tone of the article is likely to heighten tense relations between Germany and Greece. Greece had a deficit of 12.7% of GDP in 2009. Angela Merkel will meet Greek Prime Minister George Papandreou in Berlin on Friday, where the prospect of a Greek bailout will be discussed.
You know it would be kind of funny if it weren't so sad. Just as with China, the promotion went wonderfully well so long as the printing presses could spew out sufficient euros. But now the party is over, the land is barren and belt-tightening looms like a noose. Yet the bankrupt Greeks are indignant at the sacrifices they are suddenly being asked to make and the German public is equally indignant about the idea that German funds should be used to pay for Greek governmental deficits.
We've written in the past many times about the European tribal mentality. The Greek culture goes back thousands of years and most every Greek is likely well aware of the breadth and depth of their heritage. German culture is no less insular and insistent about its own cultural prerogatives. The idea that the bureaucracy in Brussels – as corrupt a bunch as ever sat behind a gavel – will be able to mediate between these two peoples is questionable indeed.
In fact, we have read lately that the Greeks intend to go to the IMF for the funds that the European Union seems incapable of providing. We find this solution, however, to be just as difficult as any other. Imagine if California or New York turned to the IMF rather than to Washington DC to insure solvency. On every level the international community would question the efficacy and credibility of the American union. Increasingly, the solution forthcoming from the European Union seems to be to insist on greater and greater cuts in Greek government services.
No doubt most of these cuts are justified and even necessary but to believe that the Greeks will accept them coming from Brussels and Germany seems somewhat of a stretch. And now comes the above the article suggesting that the Greeks sell some islands and the odd archeological treasure to pay off their outstanding debts. The result is merely another insult that will fester in the Greek imagination, rendering a smooth solution to the problem even more difficult.
Two memes, both in difficulties. The Western power elite has spent a good deal of time and energy promoting the idea that nations need to be run by a handful of efficient technocrats who can act quickly and properly utilize the awesome money-printing power of the central bank. But the trouble with central banking and fiat money is that it eventually reaches a place where more stimulation is extremely difficult to come by. The money that greases the promotional wheels begins to dry up. And the promotional mechanisms themselves begin to buckle and seize – especially in the Internet era. The dominant social promotions that were the Chinese Miracle and the European Union are both foundering. They may be salvageable. What if they are not?