Tag Archives: capitalism

Deja Vu – Part 1, Lessons from the US economy,1950-1973

13 Dec

I remember a conversation with a colleague in the office kitchen one Monday afternoon. The conversation occurred during my first banking job over a decade ago. I asked “How was your weekend?” to which my colleague replied, “My boyfriend took me to the Imperial War Museum over the weekend. They had something on about Musso, Musso, Musso… some Italian bloke.” “Mussolini?” I interjected, “Yes…” she said “…that’s the one. I was never one for history. Don’t understand the point in it. It’s all dead and gone now”. We had a brief discussion about the importance of history giving identity, and the opportunity to learn from trends and mistakes. At the time it struck me that this lady had just as many votes as me in a general election (only kidding!) Nonetheless, over 10 years on I decided to take my own advice and use history to understand some of the dynamics presently at work in global economics, and to use this information to help understand what is likely to happen in the coming years.

Analysts, the press, and even my own blog have been dealing with the issues of the trade imbalance between China and the US, the value of the Yuan vs. the USD (and the potential for a currency war), and the aftermath of the recent credit bubble/crisis. Yet, none of these issues are new. As recently as the past 50 years global trade and economics has played out the same script. The same questions have been asked in the lifetimes of people I sit amongst, albeit between the US on one side, and Germany and Japan on the other. I’ve not seen these precedents referred to by many experts, or by industry colleagues, so the first lesson I’ve learned is that we are very quick to forget, which means are most likely damned to repeat. But let’s not get philosophical yet! Let’s first outline the history.

The “West” enjoyed a long period of boom over the 50’s and most of the 60’s. The boom itself, however, was rooted in a fairly uneven development between the US, Japan, and Germany. Through a combination of “importing” American high-productivity technological advances and domestic low cost elastic labor supplies, Germany and Japan were not only able to catch up with the US in terms of growth, investment and returns but often surpass the superpower.

Until the mid 60’s this was all in the US’s favor. Firstly, it provided new markets for US capital. Secondly, it provided new markets for US goods as Japanese and German consumers prospered (note – at the time it was relatively harder for Japanese and German goods to enter the US market). And thirdly, it was a key component in fighting the cold war.

By 1965 things began to change. The economic development of Japan and Germany presented real competition to the US. Their growth was beginning to become a zero-sum-game (or even negative sum game) from the perspective of the US. During the years 1965-73 Japanese and German exports began to interrupt the easy flow of US goods onto global markets. In addition, their lower cost goods (of equal quality) were increasingly making their way into the US market. The impact was to decrease the return on capital in the US.

The US responded by lowering prices (i.e. lowering their returns to the cost of capital), capping wage growth, and updating plants and machinery in an attempt to produce more efficiently. However, its greatest weapon was the devaluation of the dollar.

Between 1969 and 1973 the dollar devalued by around 50% against the German Mark, and between 1971 and 1973 by about 30% against the Japanese Yen. How?

In the early 70’s the US followed a combined policy of lower interest rates, a policy of easy credit, and eventually the total abandonment of fixed currency rates in favor of a free floating currency by 1973. As the US government pursued a policy of fiscal stimulus in 1970, interest rates fell, and the Fed abetted with a policy of easy credit, I am struck by Nixon’s comment at the time that “We are all Keynesians now!”

Granted the story is a little more complex in terms of which parts of policy were a priori thought out, and which parts were responses. The balance of payments, impacts on the stocks markets, and inflation in Japan and Germany cannot be ignored. Nonetheless, the general picture of 8 years of economic struggle (to borrow a phrase from David S Landes) over 1965-1973, the reduction in the competitive position of US returns, and the Keynesian and currency devaluation responses are clear.

The devaluation of the dollar led to a turnaround in US manufacturing sector that restrained wage growth and productivity growth had blatantly been unable to achieve.  Profits, investments and productivity returned to US manufacturing, and the trade imbalances with Japan and Germany closed. The impact in the Japan and Germany was the opposite, as they sought to keep sales by suffering lower returns.

I will return with a second installment of this story in the coming weeks, and a closer of analysis of the meaning of these events for today’s economy and global trade. Nonetheless I want to end with a couple of points to consider already:

  • We don’t need all of the subsequent history to begin to see parallels with the state of the US economy in 2010 and the early 70’s, as well as parallels between modern US and China relations, and historical relations between the US and its trading partners in the 60’s.
  • I want to leave you with an additional question. Why did the capitalist system result in such a decline in US productivity and returns over the period we’ve discussed? Is the capitalist dynamic insufficient when it comes to ensuring the rejection of waste and barring the entrant of excess? We will return to this issue as well.

Yasheng Huang lectures on Chinese capitalism

16 Aug

The video is a worthwhile lecture given by Yasheng Huang from the Sloan School of Management Massachusetts Institute of Technology October 23, 2008.

“The year 2008 marked the 30th anniversary of Chinese reforms. It is high time to take stock of and assess where the Chinese economy is today. This presentation will show that much of the foundation of China’s miracle was laid down in the 1980s and experienced substantial reversals in the 1990s. Even after 30 years of reforms, the reforms are far from complete.”

We’ve discussed Huang’s thoughts a number of times in this blog so please excuse me mentioning him again – its a sign of how much I believe his thoughts and opinions should be listened to.

Foreign firms to list in Shanghai

5 Aug

News reports say that in a July meeting the China Securities Regulatory Commission (CSRC) discussed setting up a board to allow overseas companies to commence trading on the Shanghai exchange.

This news will be of particular interest to ‘red-chip’ companies.  Those companies based in China, but incorporated overseas. China Mobile’s (0941 – the worlds biggest mobile operator by SUBS) parent company is domiciled in Beijing, but the operator itself is listed in Hong Kong.  There are rumors that the company is planning to list A-shares (mainland shares) once a framework is in place.

One other company expected to follow suit is CNOOC (HK: 0883), China’s third largest oil company.

For consideration:
1. For companies planning to expand in China, this move will help bring local cash on-board, as well as increase the awareness of  local investors.
2. Sources say that the minimum market cap for overseas companies planning to list will be US$7.3bn.  Opening the market to large corporations will have a potentially stabilizing effect on a market in which some are concerned about the appearance of bubbles.

Chinese Capitalism
In a previous post on Yasheng Huang’s capitalism with Chinese Characteristics (https://ravendragon.wordpress.com/2009/07/23/hello-world/) we discussed the professor’s opinion that there is nothing magical about Chinese growth.  He explains that access to capital is one of the essential ingredients for a company’s growth.  In his first chapter, Huang spends a lot of time describing Lenovo.  He says that despite its Chinese roots, the company’s growth was underpinned by a foreign incorporation, and access to Hong Kong’s capital markets.

Capitalism with Chinese characteristics

23 Jul

I do believe that buying China in 2009 is like buying America in 1909.  So it was with some trepidation that I began reading Yasheng Huang’s Capitalism with Chinese Characteristics, expecting to have my bullish beliefs shattered.  Why did I expect as such? A number of fellow China enthusiasts had warned me off the book, claiming it would be nothing but anti-Sino propaganda.  As far as I was concerned their claim was like a red rag to a bull – I love having my assumptions challenged.  However,  Huang’s detractors were simply wrong!

If anything Professor Huang has provided a subtle, intelligent and nuanced account of Chinese growth since 1978.  The book’s subtitle says it all: “Entrepreneurship and the State”.  Throughout his work, Huang stresses the grass roots entrepreneurial spirit of the Chinese population as one of the main drivers of Chinese economic development.

The author dispels the myth that growth and entrepreneurship can be nurtured without protection of property (and body), and ease of access to capital. He highlights the 80s as the decade in which these characteristics persisted and allowed rural entrepreneurs to grow their businesses in China, as opposed to the commonly held myth that Chinese growth was primarily driven by the mass urbanization of the 90’s, and directed from above.  If anything, there is nothing ‘magical’ or unique about the framework surrounding China’s success – those years in which the state provided breathing space for individuals and their businesses together with ‘hints’ of legal protection were the most fruitful.

Huang considers China’s current leadership more likely than any since 1990 poised to foster policies and rhetoric likely to re-kindle the spirit of the 80’s grass root growth.    However only time will tell.

One more thought – as a professional equity research analyst I appreciated the imaginative, innovative, and non-dogmatic approach with which Huang approaches the data and subject of Chinese market reforms.  In addition, I believe one must question the impact the Government’s stimulus package is likely to have in the long-term if policies are not in place to capitalize on such spending at the grass roots.

Link to the book on amazon: