This is a guest post by Jakobsen.
Macro Digest: The 19th Party Conference – The biggest Paradigm shift in 100 years?
I think next week’s 19th China Communist Party’s Conference is the single biggest event this year – a confirmation a true paradigm shift
China leads world in credit creation, growth and now in most technology fields… My take remains that President Xi will focus on quality over quantity, that pollution reducing is the number one social issue and that The Party is taking more and more control. The net output will be:
- Lower than expected growth next 18 month (while China converts economy from export engine to one of productivity gains – President Xi wants 2010 GDP per Capita doubled (Rule of 72= 72/7% GDP per year = 10 years) which means objective of 7% growth per year, but most of this will be productivity driven which means investment first (hence lower growth) then higher
- Reduction of pollution = Electrification of cars – BDY says by 2030 100 pc of cars will be EV – this catapult China to leadership in battery, E-engines, and pollution reduction (Don’t forget that from 1900 to 1910/13 the US went from 100% horse carriages to 100% cars!)
- High ratio of R&D and innovation to gain leadership China is already, but will be even more dominant in E-commerce, payments and Fintech. (See Mckinsey report below)
- Slow gradual openness in capital account, more access to market for foreigners and BIG FOCUS on converting global trade from US$ to CNY [Yuan vs Dollar]
- Weaker CNY post conference
- Big negative credit & growth impact on rest of the world
Changes comes much faster than we human beings like – our brain is simply not designed to accept quick changes, and one of the few short comings of the brain is that it likes (and uses) the recent past to extrapolate the future. We think linear but world evolves super log-normal. An excellent example is the pictures below from New York in 1900 and 1913. Notice the difference and that in the space of 13 years only.
I think the next 13 years will surpass those years in terms of change, dynamics and how we act, analyze and live.
China is changing and has changed more than market gives it credit for – the Anglo-saxon economist’ keeps focus on banking system and debt, but unlikely western world China can accelerate growth through release of productivity – The US with President Trump has chosen to “retire” from the global economy on a fundamentally flawed concept of America 1st while China is growing its importance, probably best illustrated by this chart:
Now China also wants a new world order in commodities . China will allow exporters to avoid US$ payments for Yuan or Gold!
China is enjoying US’ indecision on foreign policy, which seems to be driven by indecision, spur of the moment changes and randomness opposite this sits China, with its One Belt, One Road, Asian Development Bank and the Shanghai Cooperation Organisation – There is in excess of 3 billion people in this alliance – and with Pakistan and India joining in 2015 that number will be 4 billion by 2050.
The future belongs to the countries and companies which can command the consumers, no one is better placed than China (and India).
We are witnessing a geo-political reality show where one hegemonic power, the US, almost voluntarily is given up its dominance. The result is clear to me:
The King Dollar is dead, Long live the King CNY!
Steen Jakobsen
Mish View – Dollar Not Dead Yet
A paradigm change is indeed underway, but it will be led by cars (autonomous driving and electrification), demographics (aging boomers), the demise of pension plans, a revolt by millennials, and a squashing of the current political class.
A currency crisis is inevitable but it’s too soon to say gold gold will be back in the picture. Some suggest SDRs, but I dismiss that idea.
King dollar is certainly not dead yet, and contrary to popular belief, having the reserve currency is more of a curse than a blessing.
Why Dollar is King
- The dollar is king because the US has open capital markets, property rights, and the world’s biggest bond markets.
- The US also has a Bill of Rights granting freedom of speech and protections from unwarranted searches. China imprisons people for speaking their mind.
- China is a long way from competing with the US on those important issues. In addition China repeatedly resorts to capital controls to stop monetary flight.
China will not supplant the US for at least two decades and may not ever.
Nonetheless, I agree with the general idea that a massive set of disruptions is underway.
Related Articles
- China’s Population Poised to Crash in Perfect Demographic Storm
- China Spotlight: Capital Flight Intensifies, US Treasury Reserves Plunge, Capital Controls Increase
- Steen Jakobsen on the Next 30 Years: “Everything is Deflationary”
- Hugo Salinas Price and Michael Pettis on the Trade Imbalance Dilemma
By the way, those who think electrification of cars and autonomous cars are a decade away, need consider the lead in image, then think again: California Allows Fully Autonomous (No Driver Present) Vehicle Tests .
Mike “Mish” Shedlock
Will China strip mine the planet for lithium to make all those batteries? Reliance on batteries = electric cars remain toys for the rich or power golf carts. Batteries have to be heating (poor performance in the cold) & cooled (batteries have internal resistance which is why they catch on fire sometimes) to maintain performance and are energy intensive to make. Now if you could use a capacitor, you get around many of the problems of batteries: Very little internal resistance and be charged quickly. Problem is, even with ultra-capacitors, you don’t get even the storage capacity of batteries.
If someone invents a capacitor that has a similar energy density as a tank of gasoline (that is affordable), gasoline cars will be gone as quickly as the horse drawn vehicles in the photos from the article.
Going from horses to cars was a much bigger leap than going from internal combustion to electric engines. Plus horses and cars can’t share the same road, so once a few cars were on the road, it was very dangerous to use horses.
Meh. People completely rejected renewable energy vehicles between 1900 and 1913
I also saw the article on autonomous vehicles but autonomy doesn’t guarantee electrification.
What I expect to happen is the shift towards vehicles being a rent-a-ride model and all ownership will be frowned upon as a greedy & wasteful gesture by those of the “Fat Cat” class. It won’t be hard to sell to the politicians & media and the corporations backing autonomous vehicles will pay billions for the opportunity to remove private ownership and force you to pay for every ride.
And not to mention the argument that autonomous vehicles can never be driven by terrorists into crowds, making them ultimately safer (until someone hacks the vehicle control network).
How one can declare a “paradigm shift” w/o mentioning cryptocurrency is beyond me… If Mish thinks electric and/or autonomous cars will be more disruptive/meaningful than crypto, then I’d like some of what he’s smoking…
China has a number of insurmountable problems, which cannot be solved with financial repression or any other kind. The US political situation is more lately conservative, although not fiscally. That could change. The BB generation is not a problem, in twenty years they will all be gone and the US population will be a lot smaller. At the same time a great deal of personal wealth has accumulated, so Millennials living in basements today will live in luxury tomorrow. The need to monetize growth, military and social welfare will diminish accordingly. In a shrinking national economy the stock market will coalesce. Americans will be more like the Swiss, with plains instead of Alps. The Chinese meanwhile have decades of growing pains ahead of them as they are likely to splinter into regional autonomies, including a large Muslim group.
The industrial disparity between China and the USA is of the same order as between the USA and Japan on the eve of Pearl Harbour. I think the article underestimates the problems of the Chinese economy and that is profitability. The SOEs that are driving expansion have a rate of return of just 3% on fixed assets and 2% on fixed and circulating capital. This is far below the cost of their capital. It is unwise to ignore profitability in a capitalist economy which China is. It is like driving down the road at full speed ignoring the road signs. You can possibly avoid going off the road during the first few bends but as they get sharper……
Bogus chart. Where does China stand as an export partner on a per capita basis? If a country has say 1/3 of the population, it is likely to be the biggest trading partner of all the rest.
This platform for posting is the worst I have encountered. Won’t bother again until it improves.
has not.The info graphic would be more useful if it highlighted the flow of trade. I gather predominantly imports for the Chinese, not exports. Why? Because China has been on a major build out programed, the US g
3) if investing in smaller counTries, look for those with spread dependencies. Any that are excessively dependent on one partner are extra risky.
2) China is #1 in largely emerging nations,
1) where goes China, so go many nations.
info graphic illustrates some thoughts.The o
BEVs powered by filthy coal are not cleaner than gasoline. Hybrids are cleaner than BEVs and Mazda has developed a new gasoline engine that is cleaner than a BEV, well-to-wheel, even when the electric source is clean natural gas. Far cheaper than BEV, 600 mile range, 3-minute refuel time with existing infrastructure, this newest ICE will rule for a long time.
This discussion shows what is wrong with our current economy. The government did not mandate the end of horses due to pollution. The government did not control or subsidize the production of cars. The car was a functional better way of transportation – can travel q longer distance, easier use (fill up the tank verses feeding the horse), easier to start up verses hooking up the harness and carriage. The market pushed the technology forward.
The electric car is subsidized by mandates, tax credit and green energy loans. The electrical grid could not handle the changing up of the cars. The battery functionally takes too long to charge and last to short for going long distance. This is ignoring the fact that the power to produce the electric and send it down transmission lines has a significant loss factor that makes the internal combustion engine “more” efficient than the electric car
“The dollar is king because the US has open capital markets, property rights, and the world’s biggest bond markets.”. Spot on. Add in the biggest military and what underlies all of these, freedom and a sense of trusting the US that your interests will not be negatively impacted on a whim of a person in charge (sort of the rule of law idea). But the key thing underlining all of these is a blend of confidence and trust. The Chinese dont even trust their own government, that is why China is forced to use capital controls in the first place. Would outsiders trust it more? Only if they are very very foolish, or can afford to lose the portion of their interests and assets exposed to Chinese control.
Richard, what you suggest is exactly the point of 5G cellular service. High frequency short range communications ( a few thousand feet) reliant upon super high density of transmitters to be able to continually triangulate communications. There will be towers required everywhere as the high frequency is such that it will not even penetrate human bodies requiring every location have access to at least two simultaneous transmitters. Right now most self driving systems rely on on board monitoring systems (camera and radar) to define their environment but as density of these vehicles increases they will need to communicate with each other continuously and instantly. The cost will be immense and likely drive change on many other fronts.
Principles and morals exist because they have evolved as the only sustainable model. We will continue to accept any and all loss of liberty for the sake of convenience and faux security. We are evolving to a coddled society of dependents who spend the bulk of our time complaining of our collective’s failure to deliver ever more convenience and faux security.
We will sacrifice every liberty for a bit more convenience and faux security. Everyone can appreciate the convenience that self driving cars represents, but none of it’s costs. No value at all on independence, a society of coddled dependents spending their days bitching over the failures of the collective to provide even more convenience and faux security. Any corruption will find acceptance as long as it is perceived to “deliver”.
Hmm, no editing possible. Anyway, as I was saying, cars don’t have the benefit of radio beacons lining roads and highways. Until this happens, I suggest that driver-less cars and trucks will be a non-starter. Just relying on visual cues just won’t cut it. IMO
Commercial airplanes can approach and land completely automatically. This is because of strategically positioned radio beacons which constantly tell the planes guidance computer where the plane is positioned relative to the runway.
Once you fully automate the airport/airplane business, then full steam ahead for driverless transport on messy roads. With regard to China, India and such places; when they cease to be overpopulated hellholes in maybe hundred years (if they don’t export the surpluses), they can take on the still spacious North America. Until then, good bye.
Who will own my driver-less car, me or the government … ???
Driveless cars are the lawyers mosh pit. Sorry I couldn’t disagree more. I am not a Luddite. Driveless cars are merely more socialization of the culture, more control of activities, tracking, and loss of liberty. It is a down shift.
Maven loads much faster in my Internet browser than WordPress, no doubt for underlying technical reasons. Being able to sign in via my email and bypassing Google and Facebook was a good option. However, there is no way I can find to reply to specific points in other posts. Maven seems very hierarchical, no doubt purposely so for whatever reasons. But sense of community is lost when there is no way to reply directly to other comments. Was this a purposeful decision, part of the cost-benefit equation in building the Mish “brand”?
Poor Steen….. In 1913, the Fed was created and The US income tax was ratified. Pick any decade prior to that in the US, and beginning/end pictures would look like two different worlds. Pick any decade after, and change has happened slower and slower, and become more and more inconsequential. China is no pre-progressivism America. They may have a marginally less net dysfunctional system in place than the contemporary US, but they are no free country. Hence won’t change fast, since the ones capable of changing things fast, are virtually never the same ones awarded privilege and power by the kind of overgrown government that has been the almost universal standard everywhere, since the American experience with freedom ended. Right around 1913….
Chinese Yuan will be used for reserve currency between countries, but individuals across world may not hold Yuan , because no one trusts China. So CNY may not become reserve currency as soon as they expect. (3) I think electric cars and solar are the future but it won’t happen within the next decade, since technology of car and batteries are not time-tested yet. It may happen only after a 15 to 20 years. Meantime if there is a crisis central banks will again do extreme measures probably and people will probably panic move into gold and silver ( the time-tested) money. EURO has its own set of problems.
My thoughts on article is below: 1) Yes people all around the world trust USDollar more than CNY because a) US is a more open country 2) US is not as much of a welfare State YET as Europe 3) US has a well developed bond market (though there is a lot of fraud going on in American bond markets) forr one would trust
I have a problem with this overall logic. First we are moving rapidly towards a future of electric cars and at the same time the world is on the brink of a financial meltdown due to being overextended. Sorry, you cannot have both. Either we collapse or we catapult forward on greater heights of productivity and growth. Which is it Mish.
Agree with Mish. King Dollar will occupy its throne for quite a while longer. De-dollarization will be a slow process.