by Sanjeev Kulkarni
In a recent article “The Streaks of Red“, The Economist laments the Chinese Investments in Europe and UK. “Such visible signs of Chinese encroachment will feed the worries of many Europeans”
While the the BRICS seem to be on a roll with the RIC’s targeting towards $300 billion trading among themselves, the Western economies seem to be in shut down mode.Elsewhere, as reported in Silicon India News, President Obama’s prescription for competition is is confusingly simple, “I’m prepared to bring our deficit down by trillions of dollars. But he hastens to add that “I’m not going to reduce our deficit by eliminating medical research being done by our scientists. I won’t sacrifice rebuilding our roads and our bridges and our railways and our airports.”
Wise or Other-Wise Financial Engineering
This is the conundrum facing the Western economies. Decades of “clever” or rather unwise financial engineering at the cost of real engineering has systematically stripped the Western Economies of life reducing the economies to only consumers. Conversely China has been mainly a producer running up huge trade surpluses. Unless the root cause of the distortions are corrected no amount of financial engineering, debts restructuring or currency rate adjustments are going to solve the problem.
Historical Perspective
In a recent article, “Financial Profits Reduce Economic Profits“, Lance Roberts, argues that,
“America was once a country built on the solid foundation of the hard work, satisfaction and pride in the building of stuff…..Beginning in 1980, our world changed as we discovered the world of financial engineering, easy money and the wealth creation ability of leverage.”
What he says about US is also true of Europe. As The Economist observes,
“London’s black cabs are made by Manganese Bronze, which is part-owned by Geely, a Shanghai-based car maker that also owns Volvo, a Swedish company. China Investment Corporation (CIC), a sovereign-wealth fund, has the third-largest stake in Songbird Estates, which controls Canary Wharf Group….”
Theater of the Financial Absurd
The whole financial structure is resembling a macabre theater of the absurd.
China is mainly a producer with limited domestic demand, and wants to find outlets for its huge “currency” holding. It wants to reduce its reliance on US treasury bonds and is now looking at Europe and UK for acquisitions.
The solution seems to be deep digger and deeper into the financial black hole. In an article, Will Greece be Colonized,” Brad Lewis opines that
“It’s a foregone conclusion that the austerity program will never help Greece.”
Perhaps what he comments about Greece might also turn out to be true in the European context. “The Bank of England is not yet Chinese-owned but it is increasingly encircled by Chinese banks” observes The Economist and adds,
” A buyers’ strike in sovereign-debt markets has left several struggling euro-zone countries wondering whether China might be the answer to their prayers. On a red-carpeted tour of European capitals this week, Wen Jiabao, China’s prime minister, said that the country would continue to purchase euro-denominated government bonds.”
When and How will The Financial Theater of the Absurd?
Firstly the consuming and producing balances have to change. This means the leaders in west have to recognize that the problems are not financial but institutional. In the article “U.S. Problems are Institutional,” John Lounsbury has documented how financial engineering has served only the “the world of financial engineering, easy money and the wealth creation ability of leverage” (as observed by Lance Roberts) has benefited the “fat cats” with significantly larger incomes than the bulk of the population.”
The outcome seems ominous as some commentators believe the result may well be a complete break down, as argued in “$15 trillion of Financial Assets Will Go Up in Smoke.”
It is debatable if the world will grind to a halt just because of currency book keeps getting distortions and logjams. But one thing seems certain: if the can continues to be kicked down the road the financial theater will have an absurd and unpredictable ending.
Financial Reset and Back To Basics
First there has to be recognition that no amount of clever financial engineering can fix a broken system without fixing the root cause. The balance of trade must be brought within manageable proportions so that the producers and consumers have a symbiotic economic eco-system, rather then one way flows leading to gross distortions.
Second investors have to look at the effects of resetting the global financial structure. What Brad Lewis suggests for Greece might be true for the entire global system.
Will US and significant part of Europe be Colonized by China?
To paraphrase and adapt Brad Lewis solution in the global context [ with apologies to him]: “So why not the simple solution?” If Euro and US pull out of treasury bonds and restart their currency, they can reset the debt and trade imbalance. Simultaneously they should also address the investment of new currencies in becoming producers of what they need and not just the consumers.
Cynical, perhaps, but no more cynical than the current situation with defacto Euro and US Dollar standards, which keeps their economies dancing to the tune of gold standard Yuan, rather than on their own sovereign fiat currency.
The only long term solution is to replace unwise and kluges which pass as clever financial engineering, with real engineering.
If this unintended game continues, unfortunately significant parts of Europe and the US run the danger of becoming colonies of China.
Perhaps the The Economist article should have been titled…” Will US and a Significant Part of Europe be Colonized?
Just as the fifteeth and sixteenth centuries saw European wealth created by such ventures as the Dutch East India Company and the London East India Company, the twenty-first century may see wealth created in the Far East by global enterprises controlled by Asia. The quest for financial profits in the West could lead to control of profits from production in the East as the dominant economic force of a century. Successful investing in the coming decades must recognize this potential sea change in global economic tides.
Related Articles
Economist Mosler’s Recipe for Greece by Warren Mosler
What Should Greece Do? by Elliott Morss
RIC and the New Silk Road by Sanjeev Kulkarni
Financial Profits Reduce Prosperity by Lance Roberts
Will Greece be Colonized? by Bradley G. Lewis
U.S. Problems are Institutional by John Lounsbury
In Autumn 2011: $15 TRILLION OF Financial Assets Will Go Up in Smoke by LEAP/E2000
Sanjeev Kulkarni is an entrepreneur based in Pune, India. He worked for large organizations in board level position before venturing on his own. He is currently involved as an investor in health care software company and as an investor, mentor in an automation company. Very widely traveled, he has experience of working in different geographical areas with people of varying nationalities. He did his BS from Indian Institute of Technology, Delhi.
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