Closing Time?

Here’s Citigroup, with 10 mega-themes that spell the end of Western dominance

On the other hand, here’s Joel Kotkin: Complaints of China’s ascent and the U.S.’ collapse are overly pessimistic

I’m reminded of a point that was made in a 1930s book on military strategy (edited by then-colonel George C Marshall: The enemy always has problems of his own of which you are unaware.

Not that China–still less India–is the enemy. Surely the economic development of the Far East is a good thing…indeed, it is wonderful that so many hundreds of millions of people have been rescued from desperate poverty, and surely it is good for us to have millions of more creative contributors to global economy. I’m more concerned with our own level of economic growth, and whether it can be sustained at a level necessary to deal with our problems without declining living standards and permanant long-term unemployment than I am with scorekeeping vis-a-vis China and India. Economically-dynamic countries should indeed be viewed as competitors, but also as customers, suppliers, and sources of knowledge and ideas. (For military as well as competitive reasons, relative position cannot be totally ignored, given the nature of the Chinese regime.)

So what say you? Who is more convincing, Citi or Kotkin?

(Kotkin link via Newmark’s Door)

32 thoughts on “Closing Time?”

  1. George Freidman, of, has a book that disagrees on China. There is a very interesting map in that book of China with population density plotted. The prosperous part of China is the costal rim. The interior is still very poor and primitive. My daughter was there a year ago, staying with friends who had lived in Shanghai for four years. The pollution was amazing. The friend had married a Chinese girl and they came back here last summer to go to grad school. He had been teaching English and met her when she was a college student. I had a young woman as a student several years ago from China. She had married a young man from South America, Chile I think. It’s interesting that in a country with millions more young men than women, the educated girls are marrying foreigners. My student was very dismissive of China’s economy. I think their demographics are worse than ours although not worse than Europe’s or Japan’s.

    I think India has great potential but many huge problems to overcome.

    Our problems are political and maybe they will be solved beginning this fall. We will see. We have a large share of the population that does not produce much. They do vote and that is the problem.

  2. I am paraphrasing here but Sam Huntington said something similar to Kotkin back in the day when he predicted that China’s ascension would bring about a chorus of people praising the Chinese “model” just as the chorus was praising the Japanese model during the 80’s.

    Good times always seem like they will never end. China’s economy is driven from its massive trade surplus. That surplus is a combination of US debt and Chinese currency manipulation, both of those will come to an end in the very near term. I don’t see how China can continue growing its GDP at +10% for the foreseeable future.

  3. One especially irritating feature of the Citi analysis is the assumption (charts 5 and 6) that “innovation” can be measured by counting “money spent on R&D” or “number of researchers.” There are of course plenty of other factors that matter *a lot*, such as how capital allocation decisions are made, how innovative work and the commercialization of that work is structured, and the state of intellectual property law.

    Xerox PARC (Palo Alto Research Center) had many brilliant scientists and engineers, and contributed many innovations that were key to the PC and Internet revolutions, but Xerox never made any significant money off of them. In retrospect, they would have been better off if they had had a few less “researchers” in Palo Alto but had instead had some top-notch business development people and creative/hungry sales reps attached to the place.

  4. There are two very good books about Xerox PARC. One, “DEalers of LIghtning,” is by Michale Hiltzik, a lefty LA Times reporter which is marred by an anti-business theme. The other, better, book is “Fumbling the Future,” by business consultants. One of their themes is that the financial people who got Ford into trouble did the same with Xerox. When you stop concentrating on the products and spend more time fiddling with money, you lose ground.
    The reviews (other than mine) are very interesting, as well.

  5. In 1921 Lenin adopted the New Economic Policy for the USSR. The NEP was unregulated capitalism. Banks sprang up and investment money flowed. Railroads were built. Coal and iron mines were opened. A steel industry was built. In less than 10 years the USSR caught up with the rest of Europe and even surpassed it. Then in 1928, Stalin nationalized everything. He never said thank you. Everyone who invested lost everything they invested unless they had sold out in 1927.

    Remember the NEP if you invest in Asia, Africa, South America, North America, or Europe. Paper profits are meaningless. The government is not your friend. However, as a foreign investor you have a powerful advantage over the natives. You can leave the country. Always keep your investments liquid or, if liquidity is impossible, keep them portable. For example, invest in international shipping or trucking but not in railroads. Ships and trucks can leave the country but rails cannot. What does Google have in China that cannot be disappeared tomorrow?

  6. As my high school baseball coach said, “You’re never as good as you look when you’re winning nor as bad as you look when you’re losing.”

    Citi makes lots of references to the West. But the fates of the US and Europe are not bound together for eternity. In 2050 the US will be younger than China or Europe. And it will make a difference.

    When will someone bring out a book titled China as Number One ?

    The world in 15 years will look as different to us as the world of 1787 looked to those in 1773 or as 1869 to those in 1854 or as 1945 to those of 1929. Interesting times are upon us. If enough of us pick winners and losers, some of us will be correct.

    China has been around 4,000 years. 500 years ago they were the dominant economy in the world and lead it in technology. Today, after watching the Japanese example, twice, they are doing a reasonable job of catching up to those who had less of everything 500 years ago, except for what? Have we lost it? I think not. Have the Chinese really changed? I think not. When China goes off the rails again, as it has time after time, I anticipate the biggest train wreck in history.

  7. China’s economy will grow in spurts and fits until it reaches parity with Japan and the West around 2045. India’s economy will reach the same level around 2060. The growth of both regions will help pull up Latin America, S.E. Asia, and Africa. The muslim middle-east will always be the cess-pool its always been, except that it will undergo the same demographic implosion that Iran is entering right now. The world as a whole will be largely developed and with a European like population decline by 2060.

    I think the optimists are correct about China in the long run, but it will undergo nasty corrections in the process. Same with India.

  8. His book itself is a little dated (The Coming Collapse of China, written in 2001), but Gordon Chang has some very interesting hypotheses. Basically he argues that there are six factors that will eventually catch up to China. If more than one comes to fruition at the same time… I can’t remember them all off the top of my head, but coming up is:

    – China on the verge of a major environmental catastrophe. Whether manmade or natural, the coping/prevention mechanisms don’t exist on a wide enough scale.
    – The Chinese Communist Party has made as many political reforms as it possibly can. Any more and they risk reforming themselves out of existence. The tension between economic openness and political openness will only get worse.
    – China’s coming demographic crunch (Citi really gave that short shrift). Not only will China see the same aging numbers as western European countries are looking at now, that will be coupled with the ridiculous gender disparity. And it will happen even sooner – between 2030 and 2035.

    If I can find my notes from a talk he gave, I’ll try and post the rest. But yeah, I’m with Kotkin.

  9. China is a Communist loser hell-hole where freedom has no future. And America is a nation founded on freedom and Christianity. And because freedom is one legacy of our savior, Jesus Christ and G-d’s gift to humanity, China will have to do a 180 or it will limited by its own lack of vision.

  10. America’s fortunes will ebb and flow. It is self-correcting.

    China will benefit from increasing liberty but will have unexpected growing pains as the coming middle class demands more freedom from the controlling elite. They may face a revolution of sorts… we can hope that their internal reforms come peacefully and slowly enough not to shock their system and culture too much.

    China’s leaders are rightly more afraid of their people than of the US. The US has just been for them, like every other totalitarian regime, a convenient boogey man upon which to blame the devastation of their failed policies. There will come a reckoning as US type policies are vindicated in their own economy. Adam Smith has come first to their world. Locke will not be far behind.

  11. A political leadership that is terrified of its population having uncensored access to Google is not a stable, strong country.

    “You see these dictators on their pedestals, surrounded by the bayonets of their soldiers and the truncheons of their police. Yet in their hearts there is unspoken–unspeakable!–fear. They are afraid of words and thoughts! Words spoken abroad, thoughts stirring at home, all the more powerful because they are forbidden. These terrify them. A little mouse–a little tiny mouse!–of thought appears in the room, and even the mightiest potentates are thrown into panic.–Winston Churchill”

  12. Seconding “Realist”, I’d like to provide a first-person anecdote from this last weekend.

    I was in a (US) bookstore when a group of young Chinese (15 – 25 years, I’d guess) tourist/students entered. While I was there, they bought a stack of Dalai Lama books, saying they were not available in China. They also bought several recent histories on China, saying that they liked to be able to compare with the histories they got in China, to keep track of what the government was changing/denying. Additionally, they said they were getting in less sight-seeing than they had planned, as they were enjoying the web w/o government filters, especially on searches.

    There are a lot of implications there.

  13. Stephen H….the source of the quote is “Infantry in Battle,” a textbook developed (I think at Fort Benning) during the 1930s and making heavy use of case studies from WWI. It contains a lot of strategic wisdom which I think is applicable to business as well as warfare. I can’t find my copy–when/if I do, maybe I’ll post some additional excerpts.

  14. Stephen H and David F: not to be obvious, but the CARL hsa a .pdf of Infantry in Battle.

  15. China will not be able to allow its economic might to fully develop until it reforms politically. The centralized bureaucracy will eventually drown out innovation as it has done in every similar political system in the past. Current problems for China that are in danger of becoming fatally catastrophic that were mentioned in this thread such as environmental degradation (the World Bank has reported that 16 of the 20 most polluted cities in the world are Chinese), censorship and ill-advised demographic controls.

    Until China faces the music with these issues they will remain yet another example of why communism and socialism don’t work.

  16. Byron Wien (Blackstone) in today’s Financial Times:

    “The biggest problem the US is facing is the productivity of capital. After the end of the second world war it took less than $2 of investment by government, corporations and individuals to produce $1 of GDP growth…In the single decade of the 1980s, the productivity of capital declined…to one where about $3 was needed…by the end of the first decade (of the 21st century) it took $6 of capital to produce $1 of growth.”


    “It is hard to put together comparable information but, based on the data I could gather, Europe was still getting $1 of growth for $2 of investment and China was getting at least $1 of growth for each dollar of investment.”

  17. It is Deja Vu all over again :)

    An American traveling in Japan around
    the turn of the _last_ century observed
    workers earning a dollar a day, and
    saving a dime, and predicted a great
    future for the Empire; He was right. :)

    China may not go to war for economic
    reasons, at least not with us, though
    our coming default on our debt will
    give them reason, but China will wage
    economic war, and Corporate Colonialism,
    as and when necessary; They are not our
    friends, but our necessary competition,
    and we need to start preparing for the
    Real-world Olympics, which will not be
    games played for fun but for keeps.

  18. We recall the era of “Japan, Inc.” touted as a so-called Third Way navigating the shoals between free-market entrepreneurial capitalism and stultifying collectivist Statism espoused by “social democrats” with the goal of re-distributing risk-takers’ proceeds to layabouts of an entitlement mindset.

    Japan’s Nikkei Dow 225 index of domestic equities peaked at approx. 47,000 on December 31, 1989, and fluctuates today around 10,000 from a low of 6,000– a drop near 80%, persisting over twenty years.

    Despite outstanding product improvements, Japan’s systemic problem was and remains a fundamental “innovation deficit”, meaning that due to well-known socio-cultural factors risk-enterprise is actively discouraged. In this respect, America in thrall to Banana-istas’ crypto-fascist Corporate State agenda is her own worst enemy. Shucking off these toils, returning to Founders’ enlightened libertarian principles, may yet redress the damage done by this administration’s ranting demagogues.

    Arguably the most self-destructive president in U.S. history was James “Old Buck” Buchanan, elected 1856, who froze completely on the verge of civil war. Now comes Frank Dunham/Barry-O/Barak Hussein Soetoro (whatever) with his dull-eyed visage of pulled pork, equally polarizing, beyond incompetent. Buchanan at least was not bottomlessly corrupt, acting in bad faith under false pretenses; but how would outcomes have been different if he was?

    This administration is as much an artifact of media malfeasance as is Global Warming, never honestly reported, never subjected to meaningful public examination to this day. So long as radical extremists hold this card, so long will America’s potential falter before Luddite sociopaths’ nihilistic sabotage. But we are not of Japan’s ilk; when an informed populace rises up to take matters in hand, Banana-iste subversives like plague bacilli will have to infest new rats. We know already who those are.

  19. One disruptive issue not mentioned is religion. China’s Christian community is growing at between 10 to 20% a year. The Protestants are estimated at over 120 million and the Catholics at over 18 million.

    This great awakening is underground for the Protestants and partly so for the Catholics. Being forced underground and officially ostracized has never hurt the Christian religion. It may be a benefit since the hypocrites are minimized and there is a price to be paid for faith.

    Link 1

    Link 2

    The reason that this is important is that, like the Western Roman Empire in the second and third Century, the Christians are becoming the backbone of the economy and society. They are the people with fortitude and principles while the rest of the population morally deteriorates. Socialism, Materialism, Hedonism and Atheism are spiritually vacuous, so they undercut a person’s morality, work ethic, hope for the future and a will to procreate.

    The older religions, Confucianism, Taoism and Buddhism, have not survived well. Islam is common in the Western China, but not along the coast. The people pay lip service to communism, but not even the leadership believes.

    Christianity presents major problems for the government as the movement grows, because their most competent leaders in the economy and military are secret Christians.

    There are economic ramifications for such a secret movement as the official economy becomes ever more corrupt and counter productive. An underground religious movement often spawns an underground economy, because the Christians can trust each other. This movement is urban, rather than rural, so it is hidden among the mass of Han Chinese where it is often an open secret.

    The official economy wanes and this undercuts the government. Nor does it help that the Christians are disposed to be proWestern in outlook while disparaging our Socialist corruption.

    The Chinese have fallen back on the family as a bulwark against the totalitarian state; The Christian religion will add to that bulwark. This means that a social upheaval is in progress which is not based on class. This movement is decentralized, so there is no head for the government to take out or corrupt. The government will find itself out maneuvered or co opted.

    (links edited to resolve whitespace problem–DF)

  20. Kotkin is right. China is ageing too fast, and does not have the infrastructure to deal with it. I do think concerns about the sex ratio are overblown. Due to a tradition of female infanticide and polygamy, China has always been something of a bachelor culture.

  21. China’s economy is an example of the communist love of the Potemkin Village school of public works.

    The Generals build entire cities that no one lives in and call it growth.

    There are so many boarded up stores in malls that Shanghai looks just like Michigan.

    If you think that Enron had opaque books, they could take lessons from The Party.


  22. In the 80’s. the CEO at the medium size data comm company I worked for was fond of telling us at company meetings somehting along the lines of “sure, we are screwed up. But we are doing well because everyone else is even more screqed up than we are!”

    Eventually, though, they became less screwed up with us and the company became just a footnote in the dotcom bubble era.

  23. Also, let’s not forget this latest news from todays WSJ-

    “China Unseated as Top U.S. Debt Holder”

    Japan Takes No. 1 Spot Among Foreign Owners of Treasurys Amid Beijing’s Record Sale of T-Bills and Other Holdings


    WASHINGTON—China sold a record amount of its U.S. Treasury holdings in December, ceding its place as the world’s biggest foreign holder of U.S. debt to Japan.

    The move triggered concerns about China’s continuing appetite to loan money to the U.S. amid a mounting budget deficit here and tensions between Washington and Beijing.

    China pared its Treasury holdings by $34 billion to $755.4 billion in December, placing it second behind Japan, with $768.8 billion, according to U.S. Treasury estimates. For the first time since August 2008, Tokyo took over the top spot after steadily increasing its purchases over the past several years.

  24. The Marshall quote might have been taken from Grant’s autobiography. He tells the story of his first battle experience in the Mexican War. As his troops marched up a hill, he became progressively more anxious until they reached the crest where he saw that the Mexicans had run away. He made a very similar comment at that point.

    My Chinese medical student told me that her father, who was educated as a physicist, had worked as an auto mechanic because he was Christian. He was denied the opportunity to work in any educational field. Her mother, who was a professor at Beijing University, had been advised not to marry him because of that fact.

    I agree that Christianity is a powerful underground force in China, possibly in reaction to the abysmal family policies of the state.

  25. Interesting post at B. Raman’s Strategic Analysis (one of the many wonderful sites I discovered from the gloriously heterogeneous Chicagoboyz blogroll):

    “The US will continue to be a pre-eminent power of the world. Despite its growing economic and military strength, China will not be able to challenge the pre-eminence of the US. The pre-eminence of a nation is not derived only from its GDP growth rate, foreign trade and military modernization. It is also derived from its intellectual, technological, moral and cultural strength and its ability to constantly innovate and evolve. China is nowhere near the US in respect of these factors. It is unlikely to be in the short and medium terms.”

    – Madhu

  26. I used to be a Citi employee (I once worked for Smith-Barney as a system’s programmer). These are the same people who;

    – Once grandly announced that, forthwith, fresh fruit would no longer be available in the Executive Dining room, and that any Executive entitled to a limosuine should make arrangements to share it with another Executive as cost-cutting measures. The very next day, Smith-Barney fired 8,000 IT workers world-wide, and endorsed a policy wherein the remaining IT workers would be *required* to work 50-hour weeks (despite the fact that many were already working in excess of 70 hours a week), and proudly presented it a “productivity” measure.

    The policy was in effect for several months before Management was, finally, forced to admit that it was illegal.

    – Made a promotional video four days after 9/11 to extoll the virtures of their ‘disaster recovery systems’ — the ones that were never used because Smith-Barney’s main data center (3 blocks north of the World Trade Center) happened to be on a separate power grid and was unaffected by the destruction of the WTC — and because the lockdown on transportation in New York City prohibited them from getting key employees to the recovery site — in New Jersey. Oh,and they also bragged about being the *ONLY* major firm to have turned a profit on trading that day. That video was shown 24/7 for the better part of a week in the Main Lobby — intended as a “Rah-Rah, Yay Team!” morale booster — while the dust of the WTC was thick in the streets, the smoke was still rising from the burning and twisted metal at the end of Greenwich Street, and many employees were mourning the loss of friends and relatives.

    – Had managers stop employees who had just been ordered to evacuate the building on 9/11 at the front door — and sent them back to their desks to work. The Markets had opened, and a trifling thing like two airliners knocking down the tallest buidlings in New York City and killing 3,000 people was not going to interfere with trading! Some of those employees, because of the travel restrictiosn in NYC spent FIVE DAYS at their desks, scrounging food from the abandoned cafeteria while many of those managers somehow managed to sneak out of the city and go home. But they got a nice “Thank You” letter.

    – Paid $32 million in “contractual obligations”, i.e. Hush Money, to Jack Grubman. Who had both, allegedly, committed crimes and then conspired to cover them up — just so his kid could go to a tony daycare center. Investors lost tens of millions in the scheme.

    – Decided that Argentina and Russia were good credit risks, and extended them nearly a billion dollars in loans…which was subsequently defaulted upon, and which will never, ever be recovered.

    – Paid employees in stock options granted under arcane rules in lieu of 401(k) contributions which weren’t even worth the paper they were printed on, and became even less-valuable than that after the real estate bubble broke. In the meantime, there is a pension fund shortfall that wcan be measured in the hundreds of millions.

    And those are the least of their sins.

    I would tend to take anything Citi has to say on anything with a) a huge grain of salt, and b) in the knowledge that the company is run by clueless, oblivious, insensitive, greedy, obnoxious, mouth-breathing, knuckle-dragging idiots. If they are advising teir clients to invest in India and China, it’s because many of the top executives just happen to be Indian and Chinese, not because it’s good business.

  27. You are right to point to Chinese Christian believers as being the (a?) hidden factor, though it is strongest actually NOT in the cities, but in rural regions where the community “church” does not have the same pressures of money, moral corrosion, and life-velocity that distract westerners from spiritual matters.

    The Chinese house-churches have spent a great deal of additional effort in bolstering urban church communities to withstand these secular pressures, even while it is easier for those urban churches to hide from an increasingly apathetic enforcement regime.

    The Communist Party was highly concerned even a few years ago at what it viewed as infiltration by Christians, yet at the same time it is stuck: the spread of Christianity has been identified–by the Party, as the #1 factor in reduction of crime and corruption and increase in social harmony and productivity in the places it has spread. These of course are exactly the cultural elements that the Party has sought to encourage. Furthermore, Party studies on the success of the west identified Christianity and applied Judeo-Christian principles as the single factor explaining western preeminence.

    The gold ring, if China can seize it, will come from smoothly transitioning from the “secular religion” of Communism (which the people ignore except as a social club, anyway), and to the fruitful exercise of the best qualities of Christian faith. Oddly enough, repression and lack of official recognition for the Chinese house-church movements has been the best possible thing for that genuine expression of faith/values: only the most-serious apply, since there are no social benefits for being a Christian. Compare this to what happened to western Christianity when Constantine made it “his” favored religion–flooding the church community with BINOs (Believers In Name Only).

    Whether this faith-based foundation in the populace is enough to prop up China economically is an entirely different matter, but regardless, we won’t recognize the place in a generation at this rate.


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