US + China = Friendly Success?

Hello All, I’ll be travelling till next week - we’ll revisit the economic situation then.

Two-4-One…
Already this week, major developments from the world’s two most important economies during this global recession – both the US’s and China’s financial leaders making bold new announcements.

Brave Bernanke…
In the US, Bernanke is playing a dangerous game. Back in June 2008 he mused to congress “Despite a recent spike in the nation's unemployment rate, the danger that the economy has fallen into a substantial downturn appears to have waned”. A month after that, he sat alongside then Treasury Secretary Paulson (co-architect of all that is happening before us still) saying they were witnessing “greenshoots” of the economy blossoming all around them– hmmm. Fast forward a year on, where we are arguably still deeply in the midst of one of the most painful and global of all recessions, and we now have more declarations to congress that the slowdown is, well, “slowing down”.

That’s great, but the reality is that we’re still in the middle of a contracting economy, where the danger of unemployment continuing to hinder any recovery is very viable and the recovery process itself is potentially system damaging (i.e. more political machination will have to be endured to deal with the so called “exit strategy”). The last few months have seen a dramatic revival as investors stepped back from the edge. Were they really shuffling back towards the warm glow of economic confidence, or being pulled from the edge by the sheer brute force of unparalleled government spending and some of the loosest financial monetary policy in history?

It is no surprise that investment banks like GS and JPM have been able to post such strong financial results in the last couple of weeks – apart from only having a few competitors left, the Fed and Treasury initiatives have not only cleared the playing field for record profits but essentially tilted the entire pitch in their favour and provided a five goal head-start. The most dangerous part of Bernanke’s long-standing plan (again, he has been playing straight out of his rulebook first published in 2002) is how to avoid the scarier of two possible situations:
One conclusion being the US entering a Japan-style “lost-decade” (albeit with the famous extra dynamism and political re-invention) as extra capacity and a failure to accept the pain of natural unemployment rates overrides common sense, leading to permanently-low interest rates and falling prices. The second, a sign of optimism on its own, the risk of inflation as the US economy does indeed recover and the abundance of money flowing through the system starts to prematurely increase prices and creates that dreaded word – inflation – just as the economy needs all the momentum to continue its faltering resuscitation.

Bernanke and the US are undoubtedly doing what they believe is necessary to influence market sentiment, from media-manipulation to pandering to the always reliable short-term memories and gullibility of the lowest-common denominator within the investor community – those that always seem to buy at-the-top. By admitting the greatest worry remains unemployment, a veritable get-out-clause now exists, but even the exit strategy itself is causing concern.

Reserves about China…
Copying has always been frowned upon. Whether at school, in artistic creations, movies and writing, he that is caught or deemed to have copied is often outcast as someone devoid of intelligence and clarity as well as the dreaded curse of unoriginality. In this cookie-cutter, Facebook/Twitter-world, where it is cool to be the same rather than different (is it just me or does everyone seem to be holidaying in the same location when witnessed through their photo-shopped postings?) the copying stigma probably really only holds true in innovative production processes now rather than anything else.

The fact that the Chinese are often accused of only copying and then attempting to improve upon a product design, process and/or belief even, is not a sign that should be taken as an expression of weakness or lack of future potential – after all, most of the technologies that have allowed the US to first rise as and then remain the world’s sole superpower through the conclusion of the second world-war, were gleamed from “copying” and then improving upon a variety of technologies originally conceived of by their fallen enemies through their war machines. Were it not for the foresight of some of the leaders at the time, a lot of what was being planned for “evil purposes” may have gone to waste rather than eventually securing the future of the modern western world.

So what will the world now make of the news that China, looked upon in the last quarter of a century as the world’s largest photocopier, wants to deploy its vast foreign reserves (estimates at $2.13trn) for the purpose of “investing and acquiring” international assets, in order to “support and accelerate” overseas expansion by domestic Chinese companies? Some will worry that China wants to make the most out of a bad situation for the rest-of-the-world, taking advantage of depressed asset prices and for all intensive purposes purchasing as much as possible for as little. Others will only watch with some weariness though, pointing to the mistakes China made in the past with high-profile acquisitions (i.e. Blackstone – let’s be honest, not quite the best result there). The reality may be closer to China exerting greater influence on those areas flush with natural, and essential, resources. Nothing seems to influence more potently than a couple of trillion dollars.

An outsider would say that the US and China, two “friends” in this globalised world, are on very different and distinct economic/political paths. Both acknowledge the difficulties they are facing given these extremely arduous and testing economic times, struggling to re-invent (or copy) themselves to adapt to new challenges. Both are looking to succeed. Both need to succeed to ensure their bright futures.

One tiny problem here, human emotion – human emotion is a paradoxically simple and irrational function of everyday behaviour and ambition– it wants to succeed and watch others fail – there is an awful, but ultimately true saying, that “success is sweetest when accompanied by the failure of a friend”. Not nice hearing something so cuttingly true is it? The parallel announcements and ongoing attempts to thrive through these challenging times by China and the US may first represent a comforting, almost co-ordinated attempt, to prop-up the global economy, but really convey the uncomfortable truth of human emotion.

Those of you not on holiday please do reply with your thoughts so that we may discuss further…