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Spengler

Don’t Cry for Argentina: Me

January 27th, 2014 - 7:56 pm

Cross Posted from Asia Times Online

By Spengler

I wish I had a nickel for every prediction of social unrest in China that I’ve read in the past year. Apart from the risk of stampedes at shopping malls before the Lunar New Year, China is tranquil. Meanwhile there are several dozen dead in Cairo overnight, central Bangkok remains under lockdown, street protests are out of control in Ukraine, Argentines are looting stores during power outages, and the stink of tear gas still overhangs the public squares of Istanbul from last year’s demonstrations.

There is social unrest in a lot of places other than China, and it goes together with the collapse of local currencies. The Chinese aren’t rioting because they are gainfully occupied and their wages are rising 15% to 20% a year. Other so-called emerging markets are in trouble because they are teeming with people who have nothing remunerative to do.

Most of the world’s people farm for a living, but we need perhaps 1% of the world’s population to grow crops at American standards of productivity. The rest are marking time. We will need less unskilled factory labor as automation takes hold, which implies dire consequences for most of the farmers who managed to get to a city and get an entry-level factory job.

Turkey was supposed to be the poster-boy for prosperity through Muslim democracy. Instead, it has become an object lesson in emerging market mediocrity, and its currency is collapsing because it pretended to be something better than that.

The Turks can spin polyester into sweaters for the Russian market, build washing machines for Southern Europe, and assemble cars for the Koreans. They can’t build a smart phone, let alone a modern aircraft, although their military has put some down-market drones in the air. There are a handful of fine universities that produce good engineers and financial types, but not enough to make a dent in the country’s overall economic backwardness.

Turkish Stock Market ETF, Past 12 Months

Turkish Lira to US Dollar

Argentine Peso to US Dollar

Turkey is in trouble because the Turks aren’t very good at anything in particular, but acted as if they were the next China. They borrowed vast sums from the international market against a glorious future that was never to be. Among all of the world’s big economies Turkey has the worst current account deficit, at nearly 8% of economic output, roughly where Greece was before its national bankruptcy. Investors reckoned that with high economic growth, Turkey would have no problem carrying its debt; what they did not take into account is that the growth itself was largely an illusion, a carnival of consumption and construction that depended on increasing debt in the first place.

Of all the so-called emerging markets only China addressed the problem of a sidelined population, by methods that appear cruel, even repugnant in Western eyes. The one-child policy, surely the worst intrusion by any state into personal life in modern history, stopped the growth of the peasant population.

By main force, China will move 700 million people – the equivalent of all Europe from the Urals to the Atlantic – to cities from the countryside within little more than a single generation. This great migration has great costs – separation of families, arbitrary removal of farmers from their land, and the occasional construction of a city in the wrong place. But Chinese household income has risen 16-fold since 1987 as a result. And the Chinese by and large do not riot because they are too busy working. There is no reserve of idle farmers to bus into the center of the capital for a few dollars a day apiece, as in Thailand.

Unrest, to be sure, has different proximate causes in different places. The Ukrainians want to join the European Community so that they can leave Ukraine and go to places where they can earn money. The Turks object to the ruling party’s stealth construction of an Islamic dictatorship with its attendant cronyism and corruption. But the common thread in all the financial and social crises which broke out during the past several months is this: the world economy has left behind large parts of the world’s people.

The Egyptians, with 40% illiteracy and a more than 90% rate of female genital mutilation, dependent on imports for half their food while 70% of the population languishes in rural poverty, are the worst off. The Turks have a future, but it is a humbler and poorer one than their leaders have promised them. The adjustment of expectations will be wrenching, perhaps violent.

Argentina, whose currency collapsed last week, is another case in point. Blessed with great natural wealth, the Argentines have resented the oligopolies who control their resources, and try to vote themselves rich with depressing regularity. One government after another offers handouts to the querulous voters, who have learned that this practice breeds inflation and currency devaluation. The Argentine game is to be first in line at the public trough, and first in line at the foreign exchange counter to get out of local currency before it collapses yet again.

The industrial countries have the same kind of problem just below the surface. In America, fewer than half of adults available to work with a high school education or less actually are working.

US Labor Force – High-School Graduates

That is, only 58% of the noninstitutional adult civilian population with only a high school degree is counted in the labor force. For adults with less than a high school diploma, the labor participation rate falls to just 44%. Deduct the unemployed, and the result is that less than half of Americans without college are at work. That’s why 60 million Americans are on food stamps, and why a third of all American households have at least one member receiving means-tested government subsidies.

Meanwhile employers report shortages of skilled labor in numerous fields. It is hard to find skilled machine operators, who require the equivalent of a couple of years of college math to master the computer controls on industrial equipment, for example.

Spain’s unemployment rate remains at 26%. Spanish workers are now willing to take jobs at 700 euros (US$957) a month making clothing to compete with Chinese imports. That’s roughly what better-qualified Chinese workers earn with overtime. The low end of the European labor market, that is, already has converged with the high end of the Chinese labor market.

US Labor Force – High-School Dropouts

The risk is that the unproductive, unskilled and unemployable portions of the industrial world’s people will decide to vote themselves rich. Their leaders encourage this by focusing on income inequality. That is President Obama’s message as well as the consensus at the World Economic Forum last week at Davos, and it is nonsense.

The problem isn’t inequality of income, but inequality of knowledge. One pilot flying a modern military aircraft could destroy the whole of an ancient civilization. One farmer from Nebraska can replace a hundred in Egypt. A thousand years ago, everyone knew how a watermill worked; 200 years ago, most people knew how a steam engine works; how many people today know how a computer works?

East Asia is faring better than the rest of the world in this great transformation because its culture imposes a merciless meritocracy. The West should be able to do better than this. If we can’t, we can see our future in Argentina.

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All Comments   (24)
All Comments   (24)
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Oh yeah, big talker? In the 1950s people like you thought that China and Korea would be stuck in poverty forever. How do you know what people can do until you give them a chance? Maybe you're right about some countries, God forbid--but we don't know that yet.
51 weeks ago
51 weeks ago Link To Comment
So what is the answer for the low-IQ / unskilled? A modern eugenics program?
51 weeks ago
51 weeks ago Link To Comment
I never used the word "IQ." I don't know how smart the poor-educated are. I just know what they can and can't do. My long-standing proposal is to create a National Infrastructure Corps like Roosevelt's CCC or WPA. We need the infrastructure work in any case. I'm against spending public funds to pay consruction unions $50 or $60 an hour, but we can hire a lot of unemployed to do this work for $20 an hour.
51 weeks ago
51 weeks ago Link To Comment
Didn't mean to take you out of context... my apologies..

Another thought: While I was in Puerto Rico on business, I met an engineer who told me that the PR graduates 1,000 engineers a year at which point the promptly leave the island for better prospects on the mainland. The PR is in a state of economic collapse.

In my area (urban NYC Metro) this place is loaded with technically adept non Americans (a lot of Indians, Chinese, and Turks) who have come here on temporary visas, but have since become permanent residents. This is nothing new.. For example, 20 years back in college (engineering) we had a sizable population of Turks (mainly Christian). I can't recall a single one that went back to Turkey. They all stayed in the USA or went to Canada upon graduation.

Could one of the issues with these countries that "can't" is the issue of their 'talented 10%' seeking better prospects elsewhere outside their homelands?
51 weeks ago
51 weeks ago Link To Comment
Chinese wage is rising, but china also has very high inflation. Real estate price rose 20% in major cities last year. China has low unemployment, but this is achieved by printing money and pay people to build lots of empty cities and mega construction projects.

http://www.marketplace.org/topics/world/chinas-hangover/china-replica-manhattan-loses-its-luster

51 weeks ago
51 weeks ago Link To Comment
"East Asia is faring better than the rest of the world in this great transformation because its culture imposes a merciless meritocracy. The West should be able to do better than this. If we can’t, we can see our future in Argentina."

Meritocracy is a euphemism for naive WASP males giving up power. There isn't a real meritocracy unless more educated people get more votes. The Chinese don't do meritocracy; they put the engineers in charge and make the people obey their authority. They value being Chinese more than being generically "the best".

Another decade or so at this rate, and the Chinese model will be a threat to the current perception of what democracy is.
51 weeks ago
51 weeks ago Link To Comment
You get to be an engineer in China by passing a competitive exam.
51 weeks ago
51 weeks ago Link To Comment
But this has all kinds of protection from the engineering community. A real meritocracy always leads to women who can't do pull-ups becoming marines. You can't enforce standards on your equals! Chinese candidates for anything are virtually always selected first by an authority, in some sense, before examinations determine their exact role.

Argentina is a deeply meritocratic country, with all sorts of handouts and privileges and permitted corruption to "level the playing field". Look at its Gini coefficient. It's what every democracy becomes eventually.
51 weeks ago
51 weeks ago Link To Comment
Argentinian soccer is genuinely meritocratic. If it were not, they would not be doing very well at the international level.
51 weeks ago
51 weeks ago Link To Comment
The termite in the wood is robotics. More and more work that was repetitive, boring, and useless is being performed by computors and robots, and the trend is only accelerating. Look at the surge in manufacturing in the U.S. that is being driven solely by cheap energy (thanks fraking!). It is occuring with little surge in employment. In the future there will be fewer and fewer jobs at the low end. This will be tough for western countires, but absolutely devestating for developing countries. How do you pull youself up, if nothing you can possibly make, as an entire nation, is what anyone would want to buy? Turkey, literally, has nothing to sell. Nothing. Same goes for most of the middle east. Egyopt only had tourism, and now that is gone. Subtract oil out of that equation (thanks fraking!), and dozens more countries start to swirl around the drain. Ukraine can survive as a small manufacturor and farm economy, Spain can survive as a resort, but Saudi Arabia? I suppose a hospitality industry centered around Mecca has a shot, but not much else.

When we invent a human level computor, one that can think and understand the same as an average human, that is literally the end of the our economy. I'd guess 90% of our jobs don't need anything much smarter than that. So we will see a vast legion of unemployed "on the dole" and a few very very rich guys at the top. The cost of everything will fall to the lowest common denominator - basically the cost of atoms and energy. Good news -everything will be cheap. Bad news - most of us will be poor.
51 weeks ago
51 weeks ago Link To Comment
It just came across the wire (I have a slow wire) that Turkey did a monster interest rate rise today. Snapped the currency back to a strong level.

In a developed country, that would cause a nasty recession, which would dry up comsumption and solve the trade deficit. In a not-so-developed country? That will just suck in more hot money and let the game be played a little longer?

Hard to tell what will happen, but I'd vote for the nasty recession. Interesting if the Islamists in Turkey can keep hold of things as the coming recession bites.
51 weeks ago
51 weeks ago Link To Comment
Although China appears to be going from strength to strength, that isn't necessarily a good thing – even for China. China and Japan are heading toward war. The most likely result is military stalemate with both sides losing economically and diplomatically. That would be bad for China and Japan, but it would be disastrous for Israel. A war between China and Japan would leave Iran with a free hand in the Middle East.

A Sino-Japanese war wouldn't hurt israel so much were it not for the policy of the American Left – apparently supported by most American Jews, may I add! – to handcuff Israel while acquiescing to Iran's nuclear ambitions. Not only is Iran going nuclear, but the Obama administration is doing everything within its power to prevent Israel from doing anything about it. With the United States, Europe, and Russia taking the side of Iran against Israel, a Sino-Japanese war would be the best thing to happen to the tyrants of Tehran.

In the long run, Israel needs allies along Islam's eastern periphery. These include (but not be limited to) China, Japan, India, Sri Lanka, Korea, Thailand, Burma, Vietnam, and the Philippines. I hope Israel – and the Jewish people – could play some role in the resurrection of Nalanda University. Someday, there may be a grand alliance in East Asia – perhaps the Buddhist League – that would be a great ally of Israel. Because of this, it would be in the interests of Israel to find some way to calm down the South China Sea so the allies it will need in the future don't wind up tearing each other to shreds.
51 weeks ago
51 weeks ago Link To Comment
Spengler, interesting thoughts as always. The convergence of the low end of the Spanish labor market and high end of the Chinese is a particularly shocking point. I have seen the same trend in the U.S.--but with India on the side of the gap. Something to consider the next time someone's parents send him to college so he can learn something about the world and he decides to major in, say, puppetry.

I think I speak a lot of other people on here when I say we'd love to hear from you about the economic situation in the U.S. and also what you make of the market's current Shiller P/E of 25. (The Shiller P/E is the only metric I know of which roughly predicts long-term--though not short-term--market returns in every developed and emerging market over the last 50 years).

If the Shiller were to revert to its mean of 16, that would suggest a nominal return of 3% a year for the next 10 years and 2% of that would be from dividends. A prediction like this will be precisely wrong of course, but it highlights a major risk and a highly probable future.

Would love to hear your thoughts if you ever decide you have the interest in writing about it in this forum.
51 weeks ago
51 weeks ago Link To Comment
I don't do mean reversion in equities. I don't understand why the concept should apply. Maybe I just don't get it.
51 weeks ago
51 weeks ago Link To Comment
That's exactly why I'd love to get your take on equities.

By the way, I don't mean to suggest everything revolves around the Shiller P/E, just that there is a good argument the market is moderately overvalued. Either the fundamentals justify that valuation or not. There need not be mean reversion per se in equities, but I think you would agree generally that valuation matters and that there are no bad securities, only bad prices.

Either way I've enjoyed your macro commentary.
51 weeks ago
51 weeks ago Link To Comment
As always, I find your analysis' to be useful and accurate. However, there is one factor I am not sure that you are factoring in...
Without markets, China's economy does, indeed, collapse.
If the US and other economic consumers stop consuming, China stops selling, and then, 700 million Chinese become unhappy. And we all know that 700 million Chinese can't be wrong, right?
51 weeks ago
51 weeks ago Link To Comment
China can sell more to itself. E-commerce (cheaper distribution) and e-finance (real-time credit reporting) and so forth help make this possible.
51 weeks ago
51 weeks ago Link To Comment
At that juncture, they simply get pointed at the Spratley et al., Islands and Siberia. And then things get ugly.
51 weeks ago
51 weeks ago Link To Comment
The lack of brainpower is genetic and incurable. Third World countries are stuck where they are forever.
51 weeks ago
51 weeks ago Link To Comment
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