A Beautiful Day in the Neighborhood...

Dear Mr. Rogers,

For a few years now I have listened to your incessant rambling about the structural weakness of the USA and the superiority of the Chinese. Yes you might be more intelligent and knowledgeable than me, but I fear your self confidence is impairing your ability to consider the other side of the story.

First, and most superficially, the idea that the 19th century was the British century, the 20th, American and the 21st China is a simple platitude not in and of itself a basis for a view. There is no quota for economic and political dominance and the underlying facts, while supporting the view that China’s relative clout will greatly increase, are lacking to support the thesis that China will become the new dominant power this century.

Consider that Chinese banks have somewhere between $500 billion and $900 billion in non performing loans on their balance sheet. That is almost the same size as their USD reserves. Coincidence? I think not. It is fashionable to see China as financing our spending and to a certain perspective it is true. However it is equally true that we are collateralizing their banking system. You could argue that the Chinese financial system is back by the full faith of the US government. Doesn’t that want to make you pause before you go wildly bullish on China, particularly after bashing American fiscal and monetary policy?

Second, China has a terrible track record for recognizing property rights, an essential component to becoming a full fledged economic power. Everything they have created, outside of great martial arts movies, was stolen from elsewhere. They steal our software, our media, hell, even our nuclear technology. It is easy to experience economic ascension when starting from a low starting point where all that needs to be done is offer a cheaper alternative than your peers. Japan mastered that 40 years ago and the rest of Asia followed along in the 80’s and 90’s. Where, however, will innovation come if property rights are so poorly defined or at least poorly enforced? What will be the incentive for some engineer to develop a new technology if they cant be assured they will get the payoff commensurate with the risk? Economic superiority is highly, highly unlikely without adequate property rights.

Speaking of risk, have you heard about the Communist Party? In case you missed it, they have a mean streak that includes shooting their own citizens when they protest. In the years following Tiananmen the government has essentially made a deal with the populace: we give you economic freedom in exchange for keeping political power. What happens when the economic miracle hits a bump in the road? The last time there was unrest the Army was willing to shoot on students but will they fire on unemployed factory workers or starving peasant farmers? Rest assured, China will hit a bump at some point; Growth never continues unencumbered. We had our panic in 1907 and a little event called the Great Depression (not to speak of many bumps during the 19th century). They will have their version and the outcome might not be so pretty.

There is historical precedent for this thesis. One hundred years ago both the US and Argentina were considered emerging markets and generally on par with one another. In fact, some would have suggested Argentina was better positioned to become an economic power. Why the divergence? Political stability. Argentina went through a century of dictators and corrupt politicians that undermined their growth while the US maintained at least a modicum of stability.

Speaking of politicians, I particularly love your thesis that the American government is lying to the public about inflation. This might be so but again, have you looked at the Chinese? My particular favorite was one quarter when every regional economic district reported growth of 12% but official national growth was 8%. Huh? Your economists must have studied math in American public schools. In this regard, the difference between the US and China is we know American politicians are lying and can point out where. I don’t think the criticism is quite as loud in China.

The bash America thesis is a bit old and tiresome. Yes, America has short term issues with its trade and budget deficits. Yes, it has been printing too much money. To suggest that these trends will continue unabated is short sighted. A new administration and the natural evolution of the economy can change many things. In fact, the arguments you articulate are not much different than what was being said in the late 80’s and early 90’s only Japan was the threat then. Yes, Mr. Rogers, I am sure you remember the economic threat of the Japanese. They were running our economy by financing our deficits also and at one point the real estate for the Emperor's palace was worth more than the state of California. Scarcely 10 years later the Economist ran a cover that asked, ”Is Japan Irrelevant?” China has considerable demographic and resource advantages over Japan which make the comparison not entirely identical. But the fear and hype is.

After considering the bear case, I might suggest that the grass only appears greener over there because you are smoking the grass here...