The U.S. Economy: Stand by for more worse news

That is true, if "consumption" is defined in terms of how much one eats, how much one spends on clothes, vacation travel, cars, etc.

But I did not even speak of "consumption" I spoke of "internal demand." That is rapidly growing part of GDP. Things like new electric generation facilities,(solar, wind and 400 new nuclear plants) new clinics and hospitals, new airports, new and better railroads, smart grids, etc.and of course more and better consumption: Things like cell phones, computers and cameras, new kitchen appliances, electric battery bikes, plus much more fish and meat is being eaten, etc. The price of pork is up 60% in the last year, despite the fact that China now has nearly as many pigs as the rest of the world's total! China is now using 47 times more corn, mainly feeding pigs, than it did a decade ago.

But lets focus on housing, a major part of China's GDP and certainly "Internal Demand":

Critics of China claim it is bubble and point to government built "ghost towns" - "a foolish inefficient waste of capital." It is true that China is building in one decade 100 new cities, each for a population of more than one million, with subways, hospitals, schools, energy efficient high rises (instead of urban sprawl) water and sewer plants, etc. - lot of "internal demand."

China, about three years ago, made a little noticed in the West, but hugely important change: - The government still owns all the farmland but now the peasant can lease "their" tiny plots to business corporations for efficient, vast-acreage industrialized agricultural production. This happened in the US ~100 years ago and transformed the US into an urban nation. It is happening now in China. Now China has the highest wheat yield per acre in the world! (I'm not sure, but think natural fertilizer from all those pigs may be part of the reason.)

With their assured farm rent money, millions of former pig farmers are moving to the new cities, some getting jobs to build them (or the world's fastest railroads, etc) and learning how to live in high-rises, buy their food in grocery stores etc. (Unfortunately, some of the older men, still spit and piss in the street, etc.)

Here, from today's email to me is a very balanced discussion of this major component of "internal demand" :

“… There are currently about 643 million urban inhabitants in China out of a population of more than 1.3 billion. And that number is forecast to rise to 925 million urbanites by 2025. So, over the next 15 years or so, China will need to add 282 million people to city life—nearly the entire U.S. population. Family sizes, too, are getting smaller, further raising the need for housing. In addition, current construction is not just about adding capacity but also about replacing old capacity. Thus, when we hear of “ghost cities” like Ordos (population 1.5 million+), we must bear in mind that it is already a fairly decent-sized city, sitting on huge raw material reserves and expected to grow its urban population aggressively. What people often mean when they talk of “ghost cities” is as yet unpopulated, or under-populated, new developments on the outskirts of large existing urban centers. In other parts of the country, city centers are being redeveloped, too, to create retail and office space for the growing consumer and service sectors.

China needs redevelopment because a large portion of its housing is of poor quality. Much discussion of investment in China focuses merely on the gross amount of new housing built, without considering the net addition to the number of houses after older poor quality housing is bulldozed to make room.

As of 2005 (the latest available data), one-third of city households were living in former, low quality, state-owned enterprise housing units. These socialist era factory worker units have few amenities for modern living. Old housing is being destroyed—about 1 billion square meters worth of public housing (or about 14 million, 70-square-meter units) have been torn down, but that still leaves about 9 billion square meters of this type of living space nationwide.

China’s Vice Minister of the Ministry of Housing and Urban Rural Development, Qiu Baoxing, was quoted in the People’s Daily, as saying that Chinese buildings can stand for only between 25 to 30 years. And the country’s director of the ministry’s policy research center has said that homes built before 1999 will be dismantled to make way for new development during the next two decades. He expects two thirds of Chinese families to be living in new homes over the next decade. That could mean half of China’s urban housing is demolished in the next 20 years.

Some analysts posit that urban redevelopment is responsible for more than two-thirds of China’s housing construction. This lessens our concerns; if construction in China is improving the quality of housing, does that not surely that add value? Estimates of the total housing stock to GDP, at about 75%, look reasonable (the U.S. is twice that level), particularly in the face of so much redevelopment and upgrading. …”

From: http://matthewsasia.com/perspectives-on-asia/asia-insight/default.fs

BTW, China's exports to the US are dropping, at least in relative importance, despite the US's worsening trade balance: While "... China's exports surged 20.4 percent from a year earlier to $175.13 billion in July, a record high, exports to the US slowed slightly to 9.5 percent from 9.8 percent. ..."
From: http://usa.chinadaily.com.cn/china/2011-08/11/content_13090197.htm

I and China have long recognized that China can sell to the US only if it lends the US the funds (buys Treasury Bonds) with which to buy. China is growing tired of this, developing trade with other Asian nations (plus Brazil and Australia) that it needs to import from. The recent fiasco in Congress has hastened the day when China will tell the US:

Go to Hell. Your green paper is worthless to us. We don't need to sell to you and we will no longer finance your debts.

 

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So you're conflating consumption and investment.

As long as we agree that almost all of the growth there is in the "investment" category, and not the "consumption" category.

And then note that such is not sustainable - investment is already 50% of GDP, it can't keep increasing substantially. In fact, it's already way, way, way too high, and very likely to cause a crash in the near future.

At which point the "internal demand" falls off a cliff.

 

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They are getting tired of making billions off of us? Not a chance.

 

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That doesn't go nearly deep enough. The war was a direct result of the looming prospect of energy scarcity and having to secure a base in the middle east from which to defend the flow of oil (from whatever source wants to sell it). We can't have a dictator controlling our economy.

 

Nwo

 

Two

 

huh?

 

Something about "Saudi Arabia" goes here - both in the "base in the middle east" part, and the "dictator controlling our economy" part.

 

More accurate would be to say they have gotten PROMISES of receiving 1.16 trillion dollars from the US, but currently these promises are only paper and are decreasing in market value. (There are occasional short term gains, but I am speaking of year or longer trends.) The US got real goods and services, like iPods, etc.

The truth is somewhat different than your post.

 

China got most of our manufacturing jobs, and they get the cash from all those real sales of ipods.

 

First part is nearly correct, due to the "trickle down" of capital from the rich building newer plants in China (and now other Asian nations that still have cheap labor) than the US has, so US plants closed or outsourced jobs to stay open.

Summary: Trickle down made jobs in Asia and destroyed jobs in the US.
- Another great Republican idea, that took off under GWB with his tax relief for the already wealthy.

Don't restore GWB's tax cuts - the rich are now building plants in Vietnam and might stop if you do. Joe American will have more understanding of the plight of the Vietnamese, if his children are hungry too.

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Second half of your post is false. Do you actually think green dollar bills, "cash", were air freighted to China?

What actually happens is that Apple, etc. get Joe American's charge card and occasionally some of his cash. These retailers put the gained credit in a bank, which eventually transfers the credit to importers who then transfer it to Foxconn's etc. US bank account, still as dollar credits. Foxconn, etc. needs Yuan to pay their workers so the Chinese factories transfer these dollar credits in US banks to the Government of China's US bank accounts and get, in China the Yuan they need to pay their workers with etc.

The government of China, not liking the very low interest rate the bank gives, uses their US dollar credits to buy Treasury bonds. Actually China doesn't even get the bonds - they are held FBO (For Benefit Of) China by US firm that is active in the bond market.

Your idea that China is getting cash is about as funny as "high finance" gets.

As I said: China is getting PROMISES from the US Treasury, and does not even get to hold the paper these promises are printed on!

 

Not at all. I know the difference well. The point I have been making for several years is that China is switching from a rural country with surplus of low wage workers who would slave away 12 or 14 hours a day in "sweat shops" and get little more for their efforts than food and bunk in the factory dorm so that Americans and Europeans could enjoy at very low cost compared to what the goods they were buying from the exploited Chinese (by the CCP mainly) if these buyers had to produce the goods themselves with their high cost labor.

The internet, better educations, etc. has made continuation of this exploitation impossible. The CCP well understands that there is risk the Chinese will want more than full stomachs and that is a political risk the CCP had to take as the old exploit and export to US and EU model is "doubly broken" -I.e. not only are the peasant demanding, even going on strikes, more of the benefits of their labors for themselve, but also the Western buyers are broke and can only buy if China lends them the money.

The CCP has decided to make the lives of the population better so that they will continue at least not to want "regiem change" I.e. The CCP will give them new houses, new rail roads, new cities, new power plants more hogs than the rest of the world, etc. nd try to keep the population from wanting any political changes.

BTW Chinese eat 49% of all the pork eaten in the world and yet export a lot to their Asian neighbors! So far the CCP's plan to keep control via making "internal demand" that makes the peasants live much better seems to be working - they have great support among the masses.

 

Then it would be great if you'd start phrasing your posts as if the distinction mattered.

Because as it is, you're asserting that China is going to be able to replace export demand with investment. This doesn't make sense - those export-oriented factories don't generally produce investment inputs. A factory that assembles iPods or churns out cheap children's toys, is not going to be supported by a bunch of big government infrastructure projects or apartment building construction. And in the meantime, the factories that do get stimulated (steel foundries, etc.) end up scaled to unsustainable investment spending - as soon as you stop spending half your GDP on highway and rail projects and brand-new empty mega-malls, you're left with a bunch of idle production (and so, non-performing loans).

The only way that your line about replacing export demand with internal demand can work, is if that internal demand is consumption - then it would actually be demand for the products the factories actually produce. But to do that, China will have to stop suppressing household income to fuel investment spending - and suffer much slower growth in the short- and medium-term. As I've already pointed out, investment growth has been the lion's share of growth recently; if they stop doing that, their growth disappears. This is why they haven't done so, despite all of the official pronouncements in recent years - they're terrified of the political prospects of a few years with near-zero growth, so instead they keep doubling down on the investment strategy to prop up short term growth. This is already at unsustainable levels, and so will soon crash into a wall. At which point we should expect some fireworks.

 

I always have.* YOU were the one not recognizing the difference between "internal demand" and "consumption." You read my statement that "internal demand was growing rapidly" as if that were a statement that Chinese "consumption was growing rapidly."

I.e. you attacked my claim that China's internal demand was growing rapidly by stating that China's consumption was essentially static. Thus, it would appear that you don't you know the difference between "internal demand" and "consumption" (or did you just not read accurately what I said)?

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*As evidence that I have always known the difference between "internal demand" and "consumption" I refer you to my several posts, some more than a year old, discussing the difference in Chinese and American GDP.

I.e. Consumption is minor part of Chinese GDP - the majority of Chinese GDP is investment, both FDI building factories, etc. and Chinese government made internal demand. In transportation, things like new car factories, new roads, many new bridges, including the world's longest & longest over water, many new airports, new and expanded large subways, etc. In electric power, many new power plants, including world's largest hydro-electric one, most rapid installations of wind electric, large fields of PV, building a smart grid, and 400+ new nuclear plants in the budget, new super-heated steam coal plants that get almost 50% more KWH from each ton of coal. In housing, 100 new cities for more than 1 million population each, more new and energy efficient high-rise apartments than you can count - the fantastic urban renewal discussed by MathewAsia.com and quoted in my recent post. etc. with relatively little consumptions in the Chinese GDP.

In contrast the majority of American GDP is consumption and relatively little is investment. US bridges are falling down, no new nuclear power plant in ~35 years, most railroads must reduce speed in large section of their poorly maintained tracks, only talking about a smart grid, etc. but US is doing very well in the consumption area: - Thing of no value a year later like $1000 seats on the 50 yard line at football games, many trips to Disney and Broadway shows, Jazz festivals, overpaid professional athletes, high priced clothes and fancy hair styles for the latest party, etc.

More than 10 million dollars of the US's GDP is just for the "air time" for brief ads during the rose bowl (God only knows what the ad production cost is.): "Prices for advertising space can typically cost millions of dollars; 30 seconds of advertising time during the 2010 telecast is expected to cost US $2.6 million dollars...." From: http://en.wikipedia.org/wiki/Super_Bowl_advertising

A dress Marilyn Monroe wore for about three hours went for more than 5.6 million dollars at a recent auction. Guys that can shoot a ball thur a hoop well often get 50 million dollars, etc. and even after his disgrace, Tiger Woods put 110 million dollars into US's GDP in 2010 for beating the hell out of a little white ball! Many race horses sell for more than million dollars and only NasCar racing contributes more to the US's GDP. Americans over eat to such an extent that "reduction villas" rake in millions not to mention their shrink's high fees. Economists, IMHO, underestimate US consumption included in GDP when they say the US economy is 2/3 based on consumer spending.

Clearly I know the difference between consumption and investment and internal demand, but your reply about Chinese "consumption" being static to my comment that "Chinese “internal demand” was rapidly growing" suggest you think there is little or no difference.

 

That's because, as I just explained in my previous post that you are responding to there, such is the only way to read your assertions that would render them sensible. The suggestion that export demand can be substituted with investment is just plain goofy. The export infrastructure is all geared to produce consumption goods, not fixed assets. I was being charitable by assuming that you were referring to a process that would theoretically make sense - conversion from an export-led to a consumption-led economy - and not one that is preposterous on its face.

But now I see that you insist, in the face of that, that you were indeed trafficking in complete nonsense. So, best of luck with that, and congratulations for demonstrating that my assumption you had some basic grasp on economics was indeed false. A highly satisfying victory, I am sure, and not a mistake I'll make again.

 

Quad:
Is there no limit to the number of straw horses you will construct and claim I said they were the facts?

I never said that Chinese CONSUMPTION was rapidly growing. I said that internal demand was rapidly growing. I even gave long list of the things this demand consisted of in three major areas (Transportation, Energy Generation, and Housing.) So your pointing out that Chinese consumption was essentially static only destroyed the straw horse you created but did not dispute my claim (which is well known fact so is indisputable)

Now you come with a new straw horse: Telling that the coastal factories designed for export of cheap (often shoddy) products for consumption cannot convert to making the fixed assets of China “internal demand” (Things like the transportation, energy, and housing facilities, I listed in some detail) That is not entirely true, some already have converted and others have just closed to free up workers which are in very short supply along the coast; However, not being completely accurate in your statement does not make it a “straw horse”

This is what makes it a straw horse:

As before, I never made that suggestion (just like I never said consumption was rapidly growing). In fact I said just the opposite. I said China was EXPANDING its exports, but to its suppliers of raw materials like Brazil and Australia and to other Asian nations suppliers of low value added subcomponents like fans and resisters.

Now, Brazil, Australia S. Korean (and a dozen economically smaller countries) trade mainly with China and only few years ago America was their main trading partner. For one specific example, Brazil imports more cars from China than the US – and a few years ago got none from China. I even told you specifically that China’s June 2011 exports were UP by 20.4% compared to June 2010 and that exports to the US were down, plus explaining why China is switching it trading partners this way. (US and EU can only pay if China lends.):

Never did I suggest that China was converting its costal export factories to make the fixed assets of the rapidly growing internal demand that is transforming the interior of China from an agricultural population into urbanites living in 100 new cities; That was your 2nd straw horse creation.

However, some coastal factories, which once made cheap ceramic dishes, etc. for export are now making sinks and toilets, etc. for installation in the new cities, plus ceramic insulators posts and standoffs for electric wires of the new cities etc. Some costal factories don’t need to convert – their products are in high demand for China’s internal demand. For example, I own stock in Jinpan (US ADR = JST) I bought it several years ago as it was the world’s leading maker of oil-free high voltage transformers. – Highly reliable units that do not contaminate the soil. Perfect for remote wind farms. Back then JST exported most of its production, but now, Chin’s rapid expansion of wind energy has created internal demand JST cannot keep up with. Its units rarely fail, never need check up service as oil filled units do, don’t pollute even if blown up by a lightning strike, and make the high voltage needed for long distance wind energy transmission to the loads in cities.

Jinpan, located in Hainan, China, has ISO9001 and ISO1401 certification of its cast resin transformers and is one of only two in the world, (the larger one), to have earned the UL approval seal for non-oil HV transformers.

SUMMARY: I never suggested your 2nd straw horse. I posted just the opposite.(That China’s exports were growing, just not going so much to the “broke US” as they once did) Your claim (can’t convert / supply internal demand) is not even completely true.– Some coastal factories have converted to make parts of the “fixed assets” of China’s rapidly growing internal demand and others don’t need to convert as they already were exporting units than now are being installed in China’s rapidly urbanizing interior.

BTW, this does not justify your putting words in my mouth /creating straw horses I never said:

If you think my statements are not sensible, then show that, don't try to "help me" by putting other words in my mouth. IMHO my statements were correct and well documented. If you can't understand them, as stated, that is your problem.

 

“The largest wind farm under construction is the 800 MW Alta Wind Energy Center in the USA.
The largest proposed project is the 20,000 MW Gansu Wind Farm in China.” - http://en.wikipedia.org/wiki/List_of_wind_farms
{That is wiki's obsolete information: China's Gansu is already producing more than 6 times the rated capacity of Alta wind center.}

Note that 800MW will be the largest in the US, but China’s new one will be 25 times larger. US currently has more wind energy generation than any other country, but China although a late starter, soon will. That is why the world’s largest maker of wind generators Danish company, Vestas, has relocated some of its production (five new factories) to China and closed five smaller ones in Denmark:

“… Vestas has five factories in Tianjin, a sales office in Beijing, a new factory in Hohhot, a procurement office in Shanghai, and is currently commissioning a new foundry in Xuzhou. By the end of 2009, Vestas had invested more than three billion RMB in China and 3,000 employees committed to providing wind energy solutions to Vestas’ customers and partners in China. This is a concrete sign of our confidence in the Chinese wind energy sector. Vestas is working hard to build up a strong value chain in China that can fully support the construction of wind turbines from its factories in China. Every year, Vestas improves its Chinese sourcing capabilities; the aim is to have 100 per cent Chinese-made content. …” From: http://www.vestas.com/en/media/news/news-display.aspx?PID=0&NewsID=2392&action=3
{Sorry that above is two year old data but that was first I could easily find - Two years is a long time in China's fast expanding green energy efforts as footnote below will show.}

Also note that three of the ten largest wind machine makers are Chinese already - http://en.wikipedia.org/wiki/List_of_wind_turbine_manufacturers

The CCP has decided to overtake the US's lead in green wind energy. Some of the old export factories that have closed and are now shells are being converted to be green energy factories. China wants to spend dollars from it reserves and buying green energy systems is one way.

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* The Gansu Wind Farm (also called Jiuquan Wind Power Base) is a group of large wind farms under construction in western Gansu province in China. {has} an estimated cost of 120 billion Chinese yuan ($17.5 billion). The project is being developed by more than 20 developers[1] in two localities in Guazhou County and near Yumen City.[2] As of November 2010 the installed capacity is 5,160 MW.[3]

{Billy T insert: Note that generation is already more than six times larger than the US's largest, and project is well ahead of schedule!
China has the money to "go green" and the US does not, if "go green" means to make more than 5% of the electric energy used from wind and solar.}

The project is divided to multiple phases. ... The second 8,000 MW phase will consist of 40 200 MW farms. The planned total capacity is 5,160 MW by 2010, 12,710 MW by 2015 and 20,000 MW in 2020 From: http://en.wikipedia.org/wiki/Gansu_Wind_Farm

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Compared to wind, solar photovoltaic generation is small and expensive:
"... As of December 2010, the largest photovoltaic (PV) power plants in the world are the Sarnia Photovoltaic Power Plant (Canada, 97 MW), Montalto di Castro Photovoltaic Power Station (Italy, 84.2 MW), Finsterwalde Solar Park (Germany, 80.7 MW), Rovigo Photovoltaic Power Plant (Italy, 70 MW), Olmedilla Photovoltaic Park (Spain, 60 MW), the Strasskirchen Solar Park (Germany, 54 MW), and the Lieberose Photovoltaic Park (Germany, 53 MW).[43] Larger power stations are under construction, some proposed will have a capacity of 150 MW or more.[1] A planned installation in China will produce 2000 megawatts at peak. [44] ..." from: http://en.wikipedia.org/wiki/Photovoltaics

Note here to China is late starter but the fastest mover and doubling its capacity this year. Here too, wiki is obsolute -can't keep up the rapid change in China. That "planned" 2000MW (2 GW), pictured below, will reach full 2GW before the end of 2011!

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It is likely that after a few days ChinaDaily will cease honoring request to up load this photo. If that is the case, go here to see it:
http://usa.chinadaily.com.cn/business/2011-08/13/content_13105764.htm and then click on the image for the article and larger photo.

Article will tell you:
China produced 48 percent, or 13 gigawatts, of the world's solar panels in 2010.
China had 900 megawatts of solar capacity by 2010 and more than one thousand players in the industry.
China plans to obtain 11.4 percent of its energy from renewable sources by 2015.

 

To put it more simply:

Soon the US will be like the kid with lice on the playground. China and the other kids will be having fun playing together while the US (and possibly EU) is ostrasized for being too poor and dirty.

Do you agree with this BillyT?

 

No. It will be many years (30?) before China, world's greatest polluter of air and water, can call US "dirty"

Nor will the US be "poor" - it will just be much poorer than it is today. Typical Joe American's living standard perhaps 50% lower than now, or much lower if he has no job.

Nor will the US be "ostracized" - it has the fertile fields of the Mid West and too much coal for that.

The problem is that shipping food stocks and coal to China, provides jobs for less than 5% of the US population. There is nothing else the US has, that I know of, which China and India cannot make for half the cost and of equal quality. It only took Japan a decade or so to go from supplier of cheap junk to "Toyota quality" China and India will do the same. - In many areas, like making iPods etc. China has already passed the US in quality production. The US ceased to even try to make flat screen displays about six technology generations back!

 

I think the massive U.S debt assures it 2nd world status after the economy tanks. Something like...perhaps Brazil before it started booming.