"A debt bubble, yes. But a consumption binge…?"
IT’S A COMMON-PLACE of political, investment and bar-room debate that the Anglo-Saxon economies enjoyed a debt-fuelled consumer boom over the last decade or so.

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It’s amazing but true. Even after all we’ve been through and all we have supposedly learned about the danger of being over leveraged and borrowing more than you can pay back, we are still piling on debt.

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By Charles Hugh Smith, OFTWOMINDS
Our latest Sacred Cow to gore: Higher education.

Just this week I’ve demolished the housing “recovery” (was it in a 12-step program?) The Pareto Principle and the Next Wave Down in Real Estate (August 24, 2009), torched the fantasy that Medicare is sustainable The health care elephant in the room: Medicare (Daily Finance) and also deep-fried network/cable TV Television, Symbolic Capital and Empire (August 25, 2009) now… good golly, is nothing sacred? Short answer: not here. The next sacred cow dragged up to be gored: Higher Education.

Correspondent David C. summarized the Medicare-like trend in higher-education costs– double the growth of inflation–and questioned the value of all those “must-have” degrees. David recommended this thought-provoking article: M.I.T. Calls Academia’s Bluff (Gary North) and added these comments:

According to this web site, Financial Aid.com, “A good rule of thumb is that tuition rates will increase at about twice the general inflation rate.” I went to Dunwoody College of Technology, AKA private votech, for about $4,000 a year in the early 90s and now it costs about $16,000 a year! After all, in our culture, parents are expected to pay the full cost of college. As if one must get a higher education or they’re screwed to a lifetime of crappy low-paying jobs. Then there’s the snobbish view if you don’t have a college education you’re a moron. Academia pushes the “lifelong learning” dogma as if the only place you can properly learn is in school, they do this of course to increase their customers… I mean students.

I’ve always wondered why the cost to get a “higher” education goes up so much. Is it a conspiracy by the elites/rich to keep poor people ignorant? Or maybe to keep the middle class in debt servitude? Or maybe greedy teacher salaries? Or maybe too much bureaucracy? Or maybe schools that think they need state of the art facilities in order to provide a quality education.

Whatever the reason the increasing costs are going to make a “higher” education from academia impossible for more people. Maybe that’s a blessing in disguise, for what is the real value of a college degree these days?

With the average student $20,000 in debt it seems to me a college education is overrated especially in the current depression, few students will find the good paying jobs they are entitled to… I mean want.

The link above is a provocative article on the future transformation of academia in the Internet age.

A while ago I came to the conclusion that most schools aren’t really interested in giving a well-rounded education; they’re more interested in money and prestige. I see the ads on TV for the Votechs that say: be a graphic designer, be a video game designer, be a photographer and travel, be a videographer and shoot music videos, etc. (see some of the glam jobs here: msbcollege.edu)

Well, these ads are misleading, they imply that it’s easy to get these jobs, just go to our school and spend lots of money and we’ll give you a degree and then you’ll have a glamorous job. I know that it’s hard to get an art-related job because I tried. There are few art related jobs to begin with and even fewer that pay well. The reason the schools run these ads is because these are glamorous jobs that attract more students and more money.

Thank you, David. We might recall at this point that Andrew Jackson (among many others) studied law on his own and passed the bar exam. That may seem like an outlier from the distant past, but if MIT is offering much of its curriculum on line, then what’s to keep a motivated student from studying a subject on their own and learning it well enough to practice it as a profession?

I want to make it clear I am not suggesting a university or vocational degree has no value. But we need to look at the issues David has raised. If it puts a family or a student in essentially a lifetime of debt, exactly what is the value of that education? Precisely why has education skyrocketed in cost?

My brother-in-law graduated from M.I.T., promptly earned a Masters from that institution and then went on to earn a J.D. degree from another prestigious university as well. Yes, these three degrees put you in a superstar class which practically guarantees you a high-paying corporate-America or government gig.

But not too many of us reach those heights. Most of us are mere mortals. And the truth is that there are not unlimited positions open for super-qualified technocrats. The winds of change blow all the time and PhDs in chemistry and other fields have found themselves very unemployed.

As a mere mortal, I earned a B.A. in 1975 in four years, and paid for it myself with no loans. (I did receive a $250 scholarship one year; don’t laugh, that paid a full semester’s tuition, fees and books.) As I paid for everything myself, I recall tuition was exactly $89.25 per semester (the University of Hawaii was a two-semester system), and student fees were $27 a semester.

Books were horrendously expensive (another needless rip-off), about $100 a semester. so the total cost of my 4-year university education (3.5 GPA, woo-hoo, even with my work scehdule to support myself) was about $1,800.

Adjusted for inflation (BLS calculator), that comes to around $8,000 in today’s money–yes, for the entire four-year degree at a large, well-funded state university. (My one-room hovel was $120 a month and I got by with a used car and cheap food I made myself.)

Today, it’s not unusual for students to exit college with debts exceeding $80,000 or even $100,000. That’s ten times’ what I paid in the 70s-era recession (the 1974-75 recession was brutal, and the 1981-82 one was even worse).

The dirty little secret of higher education is that most graduates are not qualified for any particular job, nor do they have life-skills for starting their own own self-employment/ independent living-by-whatever-means-are-necessary.

If you can’t get a job, scrape by with experiential moxie or have the skillset to start self-employment, then precisely what is the value of a college education? Basically, it boils down to clearing the hurdles. That’s good, but what about that crushing $120K debt?

I know this will raise all sorts of ideological hackles, but here’s the European system (yes, there are variations, but this is it in a nutshell so please don’t quibble): most people are not “college material.” They are funneled into apprenticeships and vocational programs which teach them real live skills in baking, mechanics, medical technologies, etc. which enable them to step into a job they have learned from the bottom up.

The “elite” students who are academically ready for university are admitted and most of the expenses are paid by the government. In many nations such as Denmark, students are paid a stipend while attending the university. (Don’t have an envy-triggered coronary.)

Once you’re in and you do your coursework, then you can usually go to graduate school, even if the subject has no bearing on real-life jobs. The government also pays you to study abroad–nothing’s too good for their young academic hotshots.

Compare that to the U.S. system in which votech and university students alike are saddled with debt-serf loans, many of which are not paid off until the “student” is in her/his 40s or even 50s.

Is this “worth it”? In certain technical fields such as stem-cell research and network security, it certainly pays off. But for the average B.A. or B.S., it provides very little training or qualification for a job market which is undergoing structural changes. Please read Endgame 3: The End of (Paying) Work (January 21, 2009) for context.

Clearly, the entire cost structure of higher education is totally out of control. Please read Lowering the Cost Structure of the U.S. Economy (August 29, 2008) for context.

Given these forces–the web, the end of (paying) work and the high-cost structure of higher education– the viability, sustainability and even utility of an incredibly costly university/votech system is in question. Yet all we hear is endless propaganda that “education is the only hope for our nation.” Perhaps, but what if every student is indebted for life? How many of us will be qualified to engineer higher-efficiency solar panels, etc.? How many video editors will be paid a living wage?

In sum: by all means go to college if you can afford it, for your own fulfillment; as for becoming qualified for paying employment at the cost of a lifetime of debt–think it over. A degree certainly won’t hurt but it may no longer open doors to paying jobs as it once did.

If you want more troubling/revolutionary/annoying analysis, please read Free eBook now available: HTML version: Survival+: Structuring Prosperity for Yourself and the Nation (PDF version (111 pages): Survival+)

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More articles from Charles Hugh Smith….

The Daily Reckoning

It was a good night for oil stocks in New York and a bad night for all stocks in China. China’s benchmark index in Shanghai fell 4.3%. The index has now fallen almost 20% since early August. Bubble? Popping?

Meanwhile, oil stocks in New York surged along with crude oil. The Department of Energy in the U.S. said crude stock piles were down. This, among other things, sent front-month crude futures up 4.7% to $72.72.

By “other things” we mean that the market realises not enough money has been invested in new energy projects to meet new demand. The International Energy Agency reckons the credit crunch led to the cancelling of over $170 billion worth of oil and energy projects worldwide. This explains the feeding frenzy around LNG projects in Australia.

And speaking of that, Pluto is catching up with the Gorgon. The energy story is dominating the resource sector at the moment. Yesterday it was Woodside Petroleum saying it would triple production from its Pluto LNG plant by 2014. Pluto is scheduled to enter into production ahead of the Gorgon project, which was all over the papers yesterday.

Woodside’s shares reacted to the favourable production schedule yesterday. They were nearly up 3.5% while the rest of the market stagnated. And there was movement in the eastern LNG projects too. You may have seen earlier this week that Origin Energy selected a site for its LNG terminal in its LNG joint venture with Conoco Phillips.

The final investment decision won’t be made until next year. And if it’s a go, the project won’t begin production until 2014. Kris Sayce reckons his small cap tip is a better bet for making punters money now. It will enter production much sooner. The only big difference is that the share Kris has recommended in his Small Cap Letter is involved in a smaller project.

“The project will deliver 1.5 million tonnes of LNG per year,” says Kris. “But it’s going to be the first project that actually produces LNG in the region. It’s located closer to the coast. And it’s scalable. The LNG terminal it’s building can take production from other players in the region. And it will already be up and running when other trains get into production.”

Does the surge of Asian and especially Chinese interest mean a new source of strength for the Aussie dollar? Robert Gottliebsen thinks so. He made an interesting point yesterday over at Business Spectator. He wrote that, “The Chinese now know that they can invest in Australia and not face a serious currency risk. We are going to see them buy property in the eastern states and they will support our debt markets on a much larger scale.”

He added that, “There is enormous concern in China about the US currency and the fact that there could be huge losses ahead for China if the American dollar falls…HSBC research shows that China does not face that risk in Australia. Global investors who want to invest in China can do so via Australia with far less risk. Accordingly, our share market is set to follow China.”

He may be right. It’s certainly true that trading U.S. dollars for Australian real assets (be it LNG, coal, iron ore, or real estate on the east coast) is probably a good trade for China. It has several trillion in foreign currency reserves, the bulk of which are denominated in U.S. dollars. There are going to be heaps more dollars printed in the coming years, given the reluctance of the U.S. government to either increase taxes or reduce spending in order to tame its deficits. Inflation is the way out.

Here in Australia, that apparently means more debt is acceptable. Treasury secretary Ken Henry says that because of Australia’s privileged position relative to the China boom, the country can run higher current account deficits without having to worry about a run on the dollar. Henry has said Australia “might attract an even greater share of global capital flows, and quite possibly even larger capital flows in aggregate.”

Because the Aussie dollar is not the U.S. dollar, let us add more debt!

There are many factors that might make Australia a desirable place for foreign capital. It has a stable political system, a fairly sensible regulatory framework, a commodity currency, and a whole lot of beach front property. But we’d be wary of using that as an excuse to run higher current account deficits, importing more than you export. It’s a bad habit to get into. Just ask Warren Buffett.

Buffett wrote an op-ed in the New York Times pointing out that America’s Federal deficit of $1.8 trillion is not just 13% of GDP. It’s “unchartered territory.” “Because of this gigantic deficit,” he wrote, “our country’s ‘net debt’ (that is, the amount held publicly) is mushrooming. During this fiscal year, it will increase more than one percentage point per month, climbing to about 56 percent of G.D.P. from 41 percent.”

Australia’s net debt, by the way, is around 56% of Aussie GDP. This growth of that figure indicates you owe more and more to foreigners and that your own domestic growth is financed by foreign borrowing. It also means the income from your national assets may increasingly go to foreign bond holders. A high net-debt to GDP position is not a good one to be in.

“Admittedly,” Buffett adds, “other countries, like Japan and Italy, have far higher ratios and no one can know the precise level of net debt to GDP at which the United States will lose its reputation for financial integrity. But a few more years like this one and we will find out.”

“The Treasury will be obliged to find another $900 billion to finance the remainder of the $1.8 trillion of debt it is issuing. Washington’s printing presses will need to work overtime. Slowing them down will require extraordinary political will. With government expenditures now running 185 percent of receipts, truly major changes in both taxes and outlays will be required. A revived economy can’t come close to bridging that sort of gap.”

So Buffett has admitted that you can’t grow an economy out of that much debt. That is bad news for America and the U.S. dollar. But what does it mean for Australia? Well, that’s a good question.

It might mean that U.S. creditors (like China and Japan) would be happy to fund Australia’s modest debt levels, given the higher yield on a stronger currency. That might lessen Australia’s vulnerability as a capital importer. It might even mean that interest rates have to go up less fast than Glenn Stevens currently thinks.

But does it also mean Australia is slowly becoming a vassal state to China? The economy is dependent on Chinese trade. The funding of government deficits and a larger net debt position will be dependent on Chinese capital. If the government has little leverage in the Stern Hu case now, how much more will it have in ten years if these trends continue? And is there anything that can be done about it? More on this tomorrow.

Dan Denning
for The Daily Reckoning Australia

Similar Posts:

• BHP Billiton: The Oil Company That is Not an Oil Company
• Foreign Investment in Australia, How Much is Too Much?
• Wage Pressure in China to Drive Up Cost of Goods in Australia
• Energy Debate in Australia Needs to Get Serious
• Big-picture Case for Energy Stocks is Pretty Bullish

More articles from The Daily Reckoning….

I am still working on my piece on the global savings adjustment and will probably post it in the next week or so. The main point is to discuss what the implications are for China if we see simultaneously over the next few years an increase in US savings and a reduction in global investment. For today I wanted to discuss some of the economic data coming out of China as well as a couple of debt-related issues.

US debt and the dollar

But first, a quick digression. Today’s Financial Times has an article titled “Fears over US sovereign debts unfounded” which, as the title implies, argues that “Fears of a crisis of confidence in the US sovereign debt market – and a subsequent dollar collapse – are unfounded.” On a related note Bloomberg has an article today which notes that “Russian Finance Minister Alexei Kudrin said the dollar is in ‘good shape,’ further affirming that there’s no substitute for the world’s reserve currency.”

It’s great that commentators are coming back, however temporarily, to a sense of reality and common sense. There never was likely to be a crisis in the ability of the US government to fund its deficits, and all the pleading to foreign governments to continue purchasing dollar assets was based on very fundamental misunderstandings of both the form of the global adjustment and the functioning of the global balance of payments. For the former, the problem we are facing is that as Asian savings soared over the past decade, they were accompanied by a collapse in US savings. This is not a coincidence. An increase in savings in one part of the world requires a reduction in another, and causality can work either way, so please dear readers spare me the whose-fault-is-it outrage – it is not relevant here. The point is that without a marked increase in global investment, one requires the other.

The collapse in US savings was unsustainable, and it is now reversing. This creates a problem of excess global savings, which means financing deficits for creditworthy governments is not going to be a problem and will not result in soaring real interest rates. In fact Paul Krugman has a brief piece, based on numbers from Brad Setser, that shows the explosive rise in US government debt is more than matched by the contraction in household debt.

This is just another way of saying the same thing. Of course I will add my by-now-tiresome point that we do not have to worry about discretionary decisions by foreign governments as to whether or not they will continue financing the US fiscal deficit. Foreigners do not finance fiscal deficits. They finance current account deficits, and one (the current account deficit) cannot occur without the other (the financing). As long as the US runs trade deficits with China (or Russia or anyone else), those deficits will be financed, and the only thing that will stop that is a contraction in the US trade deficit, which is actually expansionary for the US economy and will reduce the need for fiscal expansion.

Remember, the US can force foreigners to invest $2 trillion a year in the US by the simple expedient of running a $2 trillion annual trade deficit. But this cannot possibly be a good thing. If we want the trade deficit to go down, we must also want foreign financing of the US to go down by exactly the same amount. This is not high-falutin’ economic theory, it is rather an arithmetical necessity. (By the way I tried to explain something related this Saturday when, on CCTV9’s Dialogue, two points were made – that the contraction in the US trade deficit was causing great pain in China, and that Chinese officials were warning the US government sharply to reduce its fiscal borrowing. China cannot ask both that the US slowdown its contraction in consumption and that the US government slowdown its fiscal expansion. It is precisely the growth of the US fiscal deficit that will cause a slowdown in the contraction of US net consumption.)

The second point, that the dollar is still in “good shape” as the world’s dominant reserve currency, should be obvious. I have not gotten around to writing why all these spectacular (or spectacularly reported) moves by China and others to “undermine” the reserve status of the dollar – announcements by Putin, currency swap arrangements between China and a host of countries desperate for cash, the announcement by a major Chinese banks that it will make the RMB available for international transactions, and so on – are all of almost no consequence except to the paranoid. At some point I will write more about it.

Debt and risky debt structures are rising

Let me turn to debt. Last week Andrew Batson had a very interesting, and very important, I think, article in The Wall Street Journal, discussing the impact of the stimulus on the government’s real debt position. “The cost of China’s stimulus program,” he writes, “is turning out to be much larger than official figures indicate, raising the stakes for the government’s attempt to restart high growth through massive borrowing.” He points out that a lot of the spending is being funded by provincial and municipal borrowings and by corporate borrowings, “virtually all of which are indirectly backed by local governments.”

He concludes: “As the central government is ultimately liable for those hidden debts, China’s total state debt is closer to 35% of GDP than the 18% shown by official figures.” In fact I have always argued that other not-yet-recognized liabilities, such as hidden municipal and government debt, the bankrupt AMCs, and other non-recognized debt, probably means that real government debt levels are higher than the official numbers by at least 15-25% of GDP, which suggests that, correctly counted, government debt levels may now be approaching 50-70% of GDP. If we throw in the possibility that the current bank-lending spree is also likely directly or indirectly to add to government debt burdens in the future (contingently, through a rise in NPLs), I would not be surprised if policy-makers are already starting to consider the possibility of a debt problem at the central government level. I am not saying that this must happen, but only that it is easy to construct some fairly plausible scenarios, involving the continuing global adjustment and the concomitant Chinese adjustment, that can easily suggest a debt problem.

My concerns of course were not made more palatable after I saw a very interesting article in last week’s Caijing (and what other magazine would have reported this?), with the unsettling subtitle “The property market bubble burst last year, but developers are still afloat thanks to governments, banks and a ’subprime’ solution.”

The article notes how unlikely it is that the massive contraction and the difficulties in last year’s property market were not accompanied by high-profile failures among property developers. This is because, they explain, “local governments and banks have intervened to prop up Chinese property developers following last year’s sharp contraction in the real estate market,” and they show how this has happened.

Focusing on the case of Greentown China Holding Ltd, a large property developer that nearly went bust, they write:

Greentown faltered in the fourth quarter 2008 and stood on the brink of liquidation early this year. But it survived after a bank agreed to refinance foreign debt and a local government approved a grace period for land payments. Moreover, trust funds that use what at least one expert called a “subprime” scheme offered flexible financing for development projects.

Shou said his company has dodged the crisis. But he admitted that pulling through 2008 was extremely difficult. Indeed, Greentown saw a 10 billion yuan gap between its 2008 sales target and actual results. And debt payments loom for 2009.

The article’s authors, Zhang Yingguang and Gong Jing, go on to draw the unwelcome conclusions:

Industry executives think similar, short-term rescues for major property developers have occurred more frequently in recent months than generally acknowledged. For evidence, they point to the absence of high-profile failures in the industry.

This suggests that there are a lot of very dodgy debt deals out there that are based on nothing more than hopes and prayers. This doesn’t imply, of course, that all these deals will go bad. What I am worried about is something a little different – the highly pro-cyclical nature of these deals. If China recovers, these deals will probably do fine and will be repaid, and so will never show up as contingent debt, but if economic conditions deteriorate of course that is precisely when they will go bad.

And of course that is precisely when we most desperately don’t want them to go bad. Throughout history credit bubbles always end up, in their later stages, with these kinds of highly pro-cyclical structures (read about investment trusts in the 1920s for example, or the Japanese real estate and lending markets in the 1980s, or, in case you’ve already forgotten, the sub-prime market not so long ago). As long as economic conditions and liquidity-driven asset prices continue to improve, these highly unstable structures survive and prosper, but just when you most desperately want to avoid their breakdown, when conditions turn nasty, they come crashing down on you. These kinds of structures are what I call in my book (The Volatility Machine) highly “inverted” structures and they systematically increase volatility by reinforcing both good times and bad times.

Recent economic data

Finally, as everyone knows by now, a number of economic indicators were released last week, some good some bad. Some of the good news, according to an article in the South China Morning Post, was:

The National Bureau of Statistics said in Beijing that annual industrial output growth rebounded to 8.9 per cent in May from 7.3 per cent in April, outpacing a median forecast of 7.5 per cent. Annual growth in retail sales rose to 15.2 per cent in May from 14.8 per cent in April, slightly ahead of forecasts, partly due to a moderate pace of deflation.

For all of last year, retail sales were up 21.6 percent. Together, the two read-outs suggested a 4 trillion yuan (HK$4.5 trillion) government stimulus plan, allied with consumer spending, is starting to overcome weak global demand for the exports that powered the country’s breakneck growth in recent years.

Accompanied by the rise in US retail sales, this indicated to many that the Chinese stimulus package is working and that the global and Chinese economies may have bottomed out. In the author’s words, “A growing conviction that the global economy is starting to claw its way out of the deepest recession in six decades has seen stock markets rallying strongly from the depths plumbed in March, while hopes of burgeoning demand have driven prices of oil and industrial metals to multi-month highs.”

The next bit of good news was mainland investment levels. According to another article in the same paper:

Mainland investment surged in May on the back of government pump-priming and a recovery in the property sector, providing fresh evidence that the world’s third-largest economy is leading others on the path to recovery.

Investment in urban areas in fixed assets such as apartment buildings and roads rose 32.9 per cent in the first five months from a year earlier, compared with a 30.5 per cent rise in the first four months, t he National Bureau of Statistics said on Thursday.

Economists said that translated into a 40 per cent leap in May alone. Adjusted for inflation, the increase was even greater because mainland prices have been falling for several months.

Actually I think this is not good news at all. To me it indicates nothing more than that if you pump enough money into investment, investment will rise. A much more important question, and one of course not addressed by the data, is whether pumping money into investment is the best way to force the necessary adjustments in the Chinese economy, and whether this does not represent a ‘doubling up” of china’s bet on the global recovery. That is something only time will tell, and I have written about this enough times elsewhere to leave it at that.

The bad news is that, according to a release today by the Ministry of Commerce, foreign direct investment in the mainland dropped 17.8% year-on-year in May for the eighth straight monthly fall. Honestly I don’t think this is such a big deal except to the extent that it gives us a “businessman’s” view of economic prospects in China that is very different from the economic-recovery view so popular in the Chinese (and foreign) press, although of course it may simply reflect the desire abroad for cutting exposure and cutting capacity.

Much more interesting to me is the trade data. According to an article in Thursday’s People’s Daily:

China’s exports and imports shrank for the seventh month in row in May, the General Administration of Customs said on Thursday. Exports fell 26.4 percent in May from the same period a year ago to 88.758 billion U.S. dollars. Imports were down 25.2 percent to 75.36 billion U.S. dollars. The trade surplus was 13.39 billion U.S. dollars.

The decline in exports and imports in May were worse than the 22.6% fall in April’s exports and the 23.0% drop in April’s imports, although Goldman claims that the decline is more or less flat if measured on a seasonally-adjusted basis.

April’s and May’s trade surpluses ($13.1 and $13.4 billion) were substantially below the equivalent numbers last year ($16.7 and $20.2 billion), so from that point of view we can argue that China is finally starting to reduce the negative net demand it provides to the world. Two caveats are in order, however. First, for the first five months of the year, China’s trade surplus is still up more than 13% compared to last year – $89.1 billion in 2009 versus $78.6 billion in 2008.

Second, imports would have fallen much faster except for the surge in commodity imports. Jamil Anderlini at the Financial Times gives one, benign, explanation for the surge:

Chinese import volumes of many commodities and natural resources surged in May, indicating a rebound in infrastructure building. That supported figures on Thursday showing fixed-asset investment was 32.9 per cent higher in the first five months of the year, compared with the same period in 2008, an implied rise of 38.7 per cent in May alone from a year earlier.

Keith Bradsher, in an article in Wednesday’s New York Times gives possibly a very different explanation:

Strong buying by China has helped lift commodity prices around the world this spring, but growing evidence suggests that a sizable portion of this buying has been to build stockpiles in China, and may not be sustainable.

At least 90 large freighters full of iron ore are idling off Chinese ports, where they face waits of up to two weeks to unload because port storage operations are overflowing, chief executives of shipping companies said in interviews this week. Yet actual steel production from that iron ore is recovering much more slowly in China, and Chinese steel exports remain weak.

Commodities and shipping executives describe Chinese stockpiling in recent months of a range of other commodities as well, including aluminum, copper, nickel, tin, zinc, canola and soybeans. Starting in April, China began stockpiling significant quantities of crude oil.

There have been rumors and some evidence of stockpiling for months, and if this is the case, and of course if the stockpiling is not sustainable, then the import numbers are likely to have been artificially boosted. Real demand by China for foreign goods will have actually been much lower.

Of course all of this has a trade impact. Regular readers don’t need me to rehash the arguments. Suffice it to say that the Chinese fiscal stimulus, rather than an adjustment to the new economic realities, in my opinion, is still based on boosting production and investment and constraining consumption, in spite of statements to the contrary (for example today’s People’s Daily has another front page article in which Premier Wen “stressed the importance of promoting domestic consumption”).

Unless the world recovers rapidly and sustainably and, more importantly, US consumers return to the heady days of financing their consumption by binge borrowing, we are going to need to see a greater trade adjustment in China. Trade tensions are not improving. Last week I had dinner with a very senior China manager at a large German company and he told me expected anti-dumping suits to surge in the first quarter of next year. As if to beat him to the punch yesterday’s Financial Times came up with this story (“China accused of predatory pricing practices”):

India’s small and medium enterprises have warned that they are suffering because of cheap imports from China. They are urging New Delhi to accelerate anti-dumping investigations and impose tougher safety and quality checks on Chinese products.

The appeal for greater government protection came amid rising tensions between New Delhi and Beijing over trade, after a high-profile dispute over an Indian ban on Chinese made toys. India’s Federation of Chambers of Commerce and Industry said on Sunday that a survey of 110 small and medium-sized manufacturers found that about two-thirds had suffered a serious erosion of their Indian market share over the past year, because of cheaper Chinese products.

In its statement, FICCI said the Chinese imports were between 10 and 70 per cent cheaper than comparable Indian products, a price differential that it said was “huge and difficult to explain”. Amit Mitra, the FICCI’s secretary-general, said Indian industries were being hurt by “typical Chinese predatory pricing” intended to drive rivals out of business so that Chinese companies could capture the market – and then raise prices to more normal levels. The bite was felt by companies in a range of sectors, including processed food, light engineering, building materials and heavy engineering, chemicals and textiles, FICCI said.

The fact that Indian wages are lower than Chinese wages is probably not enough to compensate for China’s much better infrastructure, but there are other reasons for the price differential. I discussed some of these reasons in an entry earlier this month.

Read more….