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Tuesday, August 25, 2015

Obama's bear market?

Although I expected a market sell off today, having checked the Asian markets before going to bed, the initial 1000 point drop did surprise me. The Shanghai composite index is presently down almost 5% as of 9:30 PM EST so the US markets face another challenge tomorrow. It could be that all the mania is a technical correction as some Wall St. sages suggest or it could be a harbinger of the inevitable collapse of China's much adored economy. When Obama visited that reactionary police state in 2009 he did encourage more internet freedom but at home he and many in the business community who should have known better spoke in hushed whispers of awe of that ever so remarkable economic engine of growth that escaped the worldwide recession. Fortunately for China it had not developed a Fanny Mae and Freddie Mac which played a key role in undermining our own credit markets and also it had the good sense to shoot dishonest and inept bureaucrats so it prospered as the US declined and appointed more dishonest and inept bureaucrats. China was after all the world's largest producer of solar panels, an accomplishment of which Democrats and Obmabots could only dream.
It could well be China has had its day in the sun. In June of 2011 in a post entitled China Will Get Old Before It Gets Rich, spelling out some of the structural challenges facing China.
If indeed China can maintain its annual 7% growth rate it is game over for the US. While China has not gotten itself involved in the inter-generational Ponzi schemes that are Social Security, Medicare, and defined benefits public pensions it too has problems of its own making. Beijing’s one-child policy, introduced in 1979, was largely effective—though it had the abhorrent side effect of encouraging a disdain for female infants, a prejudice that has led to abortion, neglect, abandonment, and even infanticide. Applying mainly to urban couples of Han descent, the policy reduced population growth in the country of 1.3 billion by as much as 300 million people. There is price to pay for this radical social engineering. By 2015 there will be more older than younger Chinese workers. Males outnumber females 120 to 100. Roughly 30 million Chinese men will not be able to find wives. Within a generation the average Chinese worker will be older than the average American worker.
It is now 2015 and the young, energetic work force is no longer young. As its workforce ages one wonders how China will treat maternity. It will need all hand on deck to assemble iPhones and solar panels and it will need to reproduce to keep that workforce viable. Maybe a two day maternity leave will be the norm but an aging workforce is just one of many problems China must address and soon. Its banking system, over which the government exerts such control as to give Elizabeth Warren orgasmic tremors, has no deposit insurance. No FDIC. Most of its loans are to government companies. If many government companies fail, then banks fail and the depositors lose everything.
The state controlled banks lend almost exclusively to state controlled companies so the few entrepreneurs who can raise cash from friends must compete with subsidized state run companies. Intellectual property rights are all but nonexistent. Real pollution, not the made up carbon dioxide bs, is a serious menace to public health. There is no heavy rail transportation in much of the country and Obama's beloved high speed rail is priced well beyond affordability for most Chinese. There is very little domestic trucking or roads to drive on and virtually no domestic air transportation. Although China has made immense progress since the days when it could not even feed itself it is still a developing country. It cannot reform its banking system or its industry until it reforms its government and until then it can only go in one direction. Down.
Developing countries go belly up pretty frequently with little impact on the global economy but China is to big to fail in the Dodd-Frank meaning of that phrase. Its demise will bring real tears and may not bode well for the US economy.

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