What to Do?

I've been reading a book again, which I have had for at least five years. It is copyrighted in 2001, and titled "The Coming Collapse of China," by Gordon Chang. I read it the first time in May of 2002, and as I always do when I read a book, in the front I write a date and comments. My comments weren't too good in 2002. Now, they make a bit more sense, and especially when coupled with other articles I have recently read on the Chinese banks and economy in general.

I won't go into a 'China Mart,' and despise the fact that just about everything we must have, is made in China, I do believe that all is not well in China. As a matter of fact, I am of the opinion, after reading the book again and reading many other pieces, that China may be printing their yuan (aka Renminbi) almost as fast as the US is printing the buck. The dollar-yuan ratio has gone way up, and especially during the Clinton Presidency. This has made the Chinese able to sell to us frightfully easy. No question about that. Does this bode well for the Chinese, who have built thousands of factories? I'm not sure.

Most Chinese in-the-know people, say that Chinese factories are far too empty and far too under utilized, as well as being poorly built and inefficient. The surge of factory building has gotten out of hand, and over-built. Mini-factories in peasant homes, regularly turn out goods which compete with state owned businesses and factories, and regularly drive the state owned ones nuts because of ridiculous prices. When poor peasants in huts turn out stuff of equal quality as a state owned business or factoriy, to me it's humorous, but I am certain it isn't too funny in large Chinese cities with huge, inefficient factories.

Tens of millions of peasant farmers have been drawn to the cities with their glossy buildings, streets, restaurants, and living quarters with running water and bathrooms. They may only make a quarter an hour, but that's far more than they were making on communal farms. Even at a quarter an hour or so, living quarters with a bed and bath, no matter how tight and confining, beats grunge farming with no electricity, running water, central heat, or even farm machinery. It is said that 140 million farmers are desperately trying to get off the communal farms and into even the tightest, smallest, and rudimentary of big city rooms. China is still a communist state, although they have relaxed a bit, and have allowed hundreds of millions to get a microscopic taste of civilization's conveniences.

China's iron fisted rulers' greatest fears, is of massive revolt and rioting, if the big city dreams of that 140 million aren't realized. They then keep those state owned factories open, even though they might not show a 'profit.' I use the word profit in semi-quotes, because the communists have no idea of what a profit is, or actually what the word means. If they did, perhaps bank loans would be repaid, as is the custom in America. Try to borrow from a bank and not repay in America! In China, when a bank makes a loan, the delinquency and failure rate is so far over 50%, that it is comical. Especially when state owned businesses and factories go to banks, and borrow, never to repay these loans. This means that the yuan is being printed helter-skelter and seemingly without any limits. Sound familiar? It does to me.

China has the filthiest air on the entire earth, and the pollution is blowing into America, as if we didn't have enough blowing in from California. Lung disease is common from merely breathing in Beijing. China's coal is virtually lignite (the lowest form of coal) and thousands die in mines each year. Water is polluted, and in most places unfit for drinking by American standards…but it is all they have to drink…so they do. Tourists see only the parts of China which are highly polished and groomed for tourist consumption.

All that seems to glitter, really doesn't, perhaps is what I am trying to say. The Chinese threat to us is nothing to snicker about, and our thousands of closed factories and millions of laid off workers has been a severe blow to our solvency. Indians answering phones for banks, credit card companies and travel agencies makes me froth at the bit, and I am damned angry at every single thing being made in China, but these facts of life do have at least a smidgen of sun showing through them. The Chinese banks are in mortal danger due to lax operations, and the yuan is being printed probably as fast as the US dollar. It will take a lot of rouge to cover the facial blemishes of the Chinese economy and manufacturing sector.

The basic laws of economics simply cannot be avoided, or for that matter voided. If Chinese currency is being printed, it will loose value, just like the buck. If Chinese banks are making endless loans to non-credit worthy borrowers, and which loans are not being repaid, the banks are insolvent, and are causing even more yuan to be printed. When hundreds of millions have tasted wages and civilized accoutrements, no matter how microscopic, hundreds of millions of others will want the same, and to be out of communal farms with unmentionable hardships, with no wages or conveniences of any kind. It's just human nature, which cannot be denied, and the situation in China is most difficult to control, if indeed it is controllable by the stupid commie bosses.

A rumor last week had the Chinese converting their dollars into euros, and this was false. It was Venezuela and Iran which supposedly did that, and they don't have China's trillion bucks in their banks, so the buck didn't slide. The Chinese are too smart to convert or sell their dollars quickly, because it would start an unstoppable panic, which may destroy the dollar and their best customer, which is America. Other threats to China are the facts that even though the media and officious morons in D.C. won't admit it, America is in the beginnings of a depression-recession, or whatever you may call it. Car sales are down, real estate is even worse than 'down,' and Wal Mart sales are depressed also. Prognostications for Christmas business are glum. I have a client who makes bedding products, and he has just closed his two stores, because no one is buying. He's been in those two stores for over 15 years, and they will be closed in a few days with sales people being laid off. This is but a teensy tiny part of the American economy, but it is being replicated over the whole nation. If America slides into depression, this will crush China's already underutilized factories, because broke Americans won't buy Chinese stuff.

Toll brothers, whose reputation for high priced homes is legend, probably wish they hadn't agreed to sponsor the Metropolitan Opera this season, although I'm glad they did, because their sales are in the basement, as is their profits. Millions of unsold homes, and even the D.C. Gang with their basket of fake statistics, on Monday said that wholesale prices are up by 2%, (I am sure a lot more), which in the words of the common man is "inflation." In China, I am certain, the banks and commie bosses will never admit to a mistake of any kind, but immutable laws of economics will surely catch up to any violator, no matter how expert the cover-up may be. China may appear to be a huge threat, and they have been so far, I'll admit, because that's another law of economics: Labor at a quarter an hour will produce much cheaper things than $10 an hour labor. But also think about this. Quarter an hour labor in China will never compare in efficiency or productivity as will $10 per hour labor in America.

As Austrian hero of mine Ludwig von Mises simply described economics as "People Act," it is impossible to get away from it. Just as people are acting all around the world to compensate for economic troubles, baubles, disasters, and inflations, China is not as good as it is made out to be. China has huge problems, and some of them are unsolvable by idiotic commie bosses, because they can't latch on to market economics and even common sense, even if 140 million peasants weren't breaking down their doors.. Their failure to 'latch on' has come back to haunt them in a big way. Protect yourself.

December 21, 2006

Don Stott has been a precious metals dealer since 1977, has written five books, hundreds of columns, and his web site is www.coloradogold.com