Why we won’t be rescued from a global recession by the “Chinese Consumer”

china-private-consumption

The great thing about the internet is the speed at which you can do research. When I heard commentators claiming that China was going to save the world from recession by transforming itself into a bunch of consumers who would take up the slackening demand of western consumers I could hardly believe what I was hearing.

 

Is there something about the majority of economists that makes them incapable of understanding how real humans behave? What is it that stopped these commentators from asking the simple questions – how are we going to transform human behaviour so quickly? Has this type of mass transformation of human behaviour ever happened in the past? When it has, how long did it take and what mechanisms were used? Moreover, are there examples where this shift from saver to consumer occurred in a deteriorating economic environment?

 

 

One of the reason that we in this current global financial meltdown and that we are in an equivalent, but as yet unacknowledged, ecological meltdown, is that we have been seduced by a number of false beliefs.

 

Bubbles and cycles are nothing new – everything in life is subject to the cycle of birth, growth and final decay. And the delusions that inevitability accompany these bubbles are nothing new. New false beliefs are a key part of what drives bubbles  – The key false belief system is that this time it is different – we have a “special case”. Here are a few examples you might recognise.

 

– it is not a bubble

– the growth of China and India have rewritten the old economic rules

– we are in a super-cycle 

– house prices never fall 

– the world has de-coupled  (the world is more connected that ever before)

– Securitisation reduces risk (to the person who issued the security but it acts like a virus and spreads risk and hides it amongst the purchasers of the security)

– The Masters of the universe actually understand what is going on

– Free markets allocate capital efficiently 

– People act rationally

 

One of the few remaining and as yet undiscredited beliefs that I have difficulty agreeing with is the story that we will be rescued from this meltdown by the “Chinese consumer”. 

 

The assumed logic in this belief is that China will defy the global slow down. We are being told that it is a “special case”. And that while growth will slow down from around 11% due to a decrease in global demand for Chinese exports it will remain high at around 9% for two reasons. First, the domestic infrastructure construction boom will go one unabated. Second, domestic demand will increase because the Chinese consumer will pick up a lot of slack by suddenly consuming more.

 

part3-fig3971

 

My thoughts are that we are projecting our wishful thinking onto the Chinese. It is easy to project onto someone you don’t really know anything about. And we are imagining that the Chinese must be just like us – a nation of consumers.

 

I have a bit of difficulty with the story. My prediction is that Chinese consumers will do the opposite – in the current uncertain economic climate they will save more rather than spend more. They will act like the rest of the humans in the world would do in this type of situation rather than a special case.

 

Moreover, the Chinese have not yet developed into American consumers and they may never do. Americans used to value hard work and saving for the future like the Chinese do now – and many of them still do. The conversion of the American population to the “religion” of consumerism and the source of happiness is a relatively new phenomena. 

 

The reality is that Chinese private consumption has been falling as a proportion of GDP for a number of decades – so why should we expect it to suddenly change tack? Surely there has to be reasons that it has been falling. What might these reason be and are they going to change overnight to get the boos in private consumption that is being predicted?

 

Lets start with the facts – Chinese private consumption has falling for decades (as has private consumption in most of Asia)

In 2006 the IMF did some specific research aimed at trying to understand the trends and drivers of Private Consumption in Emerging Asia. They were particularly concerned with the falling trend in China.

 

china-private-consumption

 

Source: IMF, Asia and Pacific Regional Outlook, Private Consumption in Emerging Asia, Sept 2006, page 59

 

More recent data from the Asian development bank indicates this trend has been continuing – the data that underpins the figure that breaks down the components of GDP combines private and government consumption into a gross consumption figure. This has fallen from 57% to 51.3% predominantly because of falling consumer spending.

 

part3-fig3910

 

Economic growth data shows that private consumption growth has contributed a steady but declining share of the total increase in annual growth rate of  2.7% points. A growth in the contributions by net exports and government consumption has offset the decline in contribution by investment.

part3-fig391

 

 

 

 

 

So what has been driving this fall in private consumption and can we expect to see it turned around in the very short term?

 

Decreased consumption means increased saving. Why have the Chinese saved more? What has changed? The suggestion is that there have been two big changes to life in China that have driven the need for the people to increase their savings rate. The first is the breakdown of state supplied services – medical, educational, and pension costs that used to be met by the communist state now needs to be paid for by the people.  They are saving to be able to afford to be able to afford to pay for future education and health bills.

 

The second is the one child policy. The argument is that people  in rural economies usually have more children than people in urban communities because in rural communities children are an asset that can do work and provide protection in old age. In urbanised communities children no longer contribute economically, instead they become a financial drain. For the rural community, the one child policy means that people now have to rely on personal savings rather than children to provide for them in old age.

 

My argument is that none of the factors that has driven the Chinese to save more has changed enough or is amenable to fast change. Moreover, even if the government were to instantly reverse the one child policy and re-institute free education and health, we would not see an instant transformation of Chinese into consumers. This is not a computer game where you change the rules and people instantly change.

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Diminishing Marginal Returns and Societal Collapse – How close is the USA to the tipping point?

debt-contributionserendipitythumb

 

 

 

 

Yesterday I came across this chart . I am assuming it is using the correct data but I haven’t checked. If the data and the trend line are correct we should be very worried – very very worried. Why?

 

This chart is measuring the economic return from new investment in the USA. It is suggesting that there is a trend of diminishing marginal returns. The latest data suggests that for every dollar of new debt there is only 20 cents of economic growth and this could hit zero by 2014. A resurgence of the oil price could speed this process up.

 

And when the incrimental debt to incrimental debt ration dips below zero new investment will start to shrink the economy rather than expand it. 

 

Why we should be concerned with this is that Joseph Tainter, author of The Collapse of Complex Societies, discovered that the common cause behind the collapse of 24 societies that he studied was “diminishing marginal returns”.

 

The story of human progress is a story of our increased capacity to harness and use energy – our modern western lifestyle requires nearly four times the amount of energy per person to maintain than it did 100 years ago. This has only been possible because of cheap oil and this will not last forever.

 

 

human-enegy-use-over-time

 

Moreover, the infrastructure and economy of the USA has been built on the basis of cheap oil and cheap transport. This has left the US economy with very poor resilience.

Tainter’s study showed that as societies become more complex they create problems that they try to solve by adding greater layers of bureaucracy. This complexity costs energy. All around the world we see governments growing larger and consuming a greater proportion of GDP. Even the Republican party – the party of small government – has increased quickly under George Bush. And the latest round of bailouts are a further example of the added costs of government costing more money to try to solve problems brought about by the complexity of financial derivatives.

 

Tainter is not the only historian to suggest diminishing marginal returns lead to societal collapse. Thomas Homer-Dixon has suggested that societal collapse occurs when the Energy return on Energy Invested, or EROEI, approaches 1:1. When EROEI falls below 1:1 it takes more than one unit of energy to harvest one unit of energy and collapse occurs – in today’s world energy and money are equivalents.

 

Tainter describes collapse occuring by one or more of 3 models

 

1. The Dinosaur

2. Runaway Train

3. House of Cards

 

By his definition we fit the Runaway Train model as a society that only functions when growth is present. We are a suicide machine and capitalism is a runaway train. Look at how China is responding to a fall in economic growth from 11.9% to a projected 8% – it has committed over $600B to re-stimulate demand. Even at a growth rate of 11.9% China is only generating 12 million new jobs a year. It needs to generate 24 million new jobs p.a. just to keep unemployment at 25%. So even at this rate unemployment is increasing at the same time as inequality is increasing. (Source Asian Development Bank).

 

In his recent book, The writing on the Wall China and the West in the 21st Century, Will Hutton quotes that China is destroying it’s arable land at the rate of 5% p.a. This seems unbelievable to me and I have not been able to find a source to confirm it. You don’t have to be very good at maths to work out that at this rate of destruction there would be no arable land left in 20 years.

 

And for those people who suggest that technology will come along and solve the problem, I have two questions. What money will we use and who will invest if the environment is unstable? History has shown that innovation only occurs in stable environments. The human race is rapidly losing its resilience. Democracy is an unaffordable system for the whole planet. It has only appeared succesfull because we measure success in the short term and its benefits have been confined to a few.

 

The history of human civilisation could easily be simplified into two parts – pre and post industrial revolution. In almost any chart you look at that has anything to humans over the last 50,000 we inevitably see the same “profile” – the classic hockey stick shape with exponential growth in the last few hundred years.

550px-population_curvesvg

Pre-industrial life has been called a Malthusian trap. Any extra energy that was captured by human’s ended up as extra population rather than as an investment in technology and an increase in average per capita energy usage. I heard the historian Niall Ferguson describe this period as largely a story of subsistence farmers dominated by a few elites. My opinion is that this is an over simplification but the point is that there is an equilibrium between energy harnessed by humans and energy used by humans and this is especially the case in populations that did not posses the technology to store food surpluses.

Modern technology has not only given us the capacity to store food surpluses but it has also given us the capacity to increase the “energy yield” for a given area of land. This has allowed us to increase the carrying capacity of the land. But how sustainable is this? What would happen if energy became more expensive? How much of technology is really only a way of “stealing our future” dresses up as “progress”.

 

Take the example of Australia. Before the arrival of white settlers Australia was home to between 700,000 and 900,000 Aborigines. Given that they had been here for at least 50,000 years it is probably safe to assume that this was the equilibrium population level for their level of technology. Compare this to the current population of approximately 23 million where Australia is a net food exporter.

But look at bit deeper and you will discover that this has come at a cost. As a result of “modern” farming methods least 25% of the original agricultural land has been turned into desert or has such a high salt content in it that it can’t be used for agriculture. Aquifers have been pumped dry and the water for the major farming area is over allocated. The food production and distribution system is totally dependant on fossil fuels for fertilisers and mechanisation. But fossil fuels are set to run out and will become more expensive before they do.

Anyone who looks at these facts and denies that we have “stolen from our future” and destroyed our capital to get where we are is in denial.  And what is our response? To look for further economic growth and population increase. This is insanity.

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Rediscovering Ancient Wisdom to save the human race

One of the by-products of modernity and the notion of constant progress is that Traditional ideas have been discarded for the new. In the Modern world view, reductive science is the measuring stick by which we make sense of the world – we know and we believe because we can measure and experiment. If we can’t measure and verify under controlled conditions we reject. 

 

The unintended consequence of making sense of the world this way is that we exclude anything that we can’t objectively measure and quantify – anything subjective is invalid. 

 

In the medical world the consequence is that we have a medical system that rejects the role of thoughts and emotions on health because they can’t be measured. Any talk of an energy system that can’t be measured is rejected. The end result is we treat what we can measure and that is the external manifestation of disease – the symptoms. The “hidden” causes of the disease remain untreated.

 

 In the economic world the consequence is that we have the free-market system that externalises costs. The present result of this world view is that we have built ourselves an unsustainable economic model. We are destroying our ecological support base and claiming that this model is a success story that the rest of the world should embrace. For example, global commercial fish stocks are projected to be zero by 2050. We are loosing ecosystem services from forests at the rate of $2-$5T p.a. and rising – this is two to three times the size of the projected losses of the current economic meltdown.

Who are we to look to for leadership to extricate ourselves from the mess we are in? The leaders of this world – politicians and business people – are locked into a view of the world that rewards them for short term “profits”. The “rules” of the system reward behaviours that deliver short term “benefits” at the cost of the destruction of the asset base that delivers them.

Clearly we need a new way to look at the world if we are to come out of this one alive as a species. This means that we have to reconsider our place in the world and how it works. Reductionism has failed as a model.  We need models that include the complexity and the interconnectedness of the planet and the whole universe. We need models that place humans in the larger system of Nature, as part of the system and dependant on it for survival. We need models that take into account the long term.

 

Our health and the health of our planet are at stake. My opinion is that the roots of our new human health problems and the health of the planet are connected. We will be unable to heal the planet if we cannot heal ourselves. We need to find a way to live in harmony with our own individual natures as well as with larger Nature.

 

 Our major diseases in the western world are now self created “chronic diseases” – the product of living a lifestyle and eating food that our bodies were not evolved to cope with. We are suffering from an intelligence failure. We do not understand our own natures and how we work. As a result we don’t know how to live in harmony with ourselves.

 

In my opinion there are existing models of the universe, the world and life that can help us understand ourselves and the world and live in harmony with it. These are the models of Yoga, Ayurveda, Chinese Medicine and the like. However most of these models have been discarded  by modernity because of their antiquity and their lack of scientific validation. Famous scientists like Richard Dawkins have written them off as Mumbo Jumbo. Yet Richard Dawkins is wrong. His blind faith in the validity of scientific research as indisputable truth is not born out by John Ioannisis’s work that has demonstrated that most published research findings are false.

 

As it turns out subjects like evolutionary biology and genetics are changing the way that scientists think. It is no longer a case of Nature vs Nurture. It is now Nature via Nurture. These scientists are rediscovering the principles of Yoga, Ayurveda, Chinese medicine (and even Jyotish) without knowing it.

 

One of my interests is to facilitate the reclamation of ancient wisdom for the good of all species.

 

Every day on the internet I see stories about new discoveries that are really only rediscoveries of the principles of Yoga, Ayurveda and Chinese medicine. Most of the time these stories make no reference to these traditional systems as the source of their inspiration.

 

The result of this failure to connect scientifically validated rediscovery with ancient wisdom is that we take longer to join the dots. 

 

My view is that we will eventually rediscover Ayurveda and Chinese Medicine because they are more accurate models of how the world works than reductive science. In modern science speak they are complex adaptive systems models.

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Questions and Lessons from the collapse of ABC learning

The Fin Review last weekend had an interview with Eddy Groves. One of the excuses that he gave for the company failing was he only passed on half of the Howard Government’s 10% increase in childcare benefits as price increases.I

This raises an interesting question. If it is a valid statement it implies that Eddie knew in advance that the government was going to raise subsidies – it was part of the assumptions in his business model. So just how could this possibly be the case? Guaranteed increases of subsidies wasn’t public knowledge and couldn’t be guaranteed without “inside assistance”. Moreover the idea of raising subsides – ostensibly to take the pressure of child care costs of battling parents – was being criticised by observers who correctly predicted that in an undersupplied market, subsidies would flow to the owners of childcare centres, who would raise prices, rather than to the needy parents we were told it was aimed for.

 

So for my part we need to be looking very closely at the Howard government. How did the subsidies get passed, who voted in favour of them, did any of these people get back handed in any way?

 

The whole story of ABC is a scam from start to finish.

 

The AFR story was billed as – How I lost an Empire. The more interesting question is how did an “Empire” get to form in the first place? This is a corporate business model that was doomed from day one. The fact that an unsustainable business could get to the size it did meant that many people had to make mistakes – bankers, investors, regulators, journalists etc.

 

When ABC first came on the horizon I couldn’t believe it. How was a corporate business with corporate overheads going to make any money in a regulated business where non profit making companies determined the competitive dynamics? It was straight business strategy 101 – an un-defensible backyard business, low entry and exit costs, no way to get price or cost advantages. In BCG we used to call these “backyard” businesses.

 

So how is it that so many people have been taken in? Banks who lent the money. Analysts who recommended the stock. Investors who bought the stock. Governments who regulated the industry. Journalists who reported on the story?

 

We have a bunch of incompetents at the top masquerading as experts. It is the “Peter principle” in action. People like Terry McCrann clearly still haven’t understood that the private corporate model doesn’t work in an industry with these characteristics – this is what he had to say about ABC on the 6th November in the Courier Mail – “This corporate entity is now clearly doomed. Ironically, in large part because it IS a viable business.”

 

ABC a viable corporate business? Terry can’t have been looking at the same accounting figures that I saw. But it is more than that. It is emblematic of a lack of understanding about how the world works.

 

All around us we have examples of corporate entities replacing small operators. Our world is being hollowed out. Competition is replacing the social glue that maintains cohesion and stability in society. Why? Because it is more profitable in the short run. Because the rules of the system privatises the benefits and externalise the social costs. Deep pockets can be used to drive out competition from smaller operators

 

All around us are the wake up calls that we need to rethink our values and our world view. How many of the things that we think are our great success are going to turn out to be our great disasters and why? What is it about the way that we look at the world that allows us to see the current financial crisis as  a disaster while every year we loose 2-3 times the projected size of this loss in lost ecosystem services from forests alone?

 

There are many lessons to be learned from this story

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Living beyond our means: Global Democracy, Credit card debt and Ecological footprint by country

 

credit card debt by country

credit card debt by country

Check out these three charts – they have a lot of similarities don’t they. They aren’t exactly the same but very similar.

 

 

In a sense they both measure the same thing but in different ways.

 

Credit card debt is a predictor of ecological debt and the common link is democracy.

 

Democracy may be a wonderful thing but has delivered an economic growth rate that is unsustainable.

 

Don’t ask me for the answer

 

 

 

 

 

 

Sustainable footprint is 1.8 hectares/person

Sustainable footprint is 1.8 hectares/person

 

 

 

Democracy Index - Economist EIU

Democracy Index - Economist EIU

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