Big Dog in the Pac
US President Obama is in da house! And he’s received a pretty warm welcome since stepping through the door. (Although China isn’t over the moon about his trip to Australia) it’s a nice change for the president. He’s not too popular at home.
That’s because he’s, err, presiding over the highest unemployment levels since the great depression. Obama’s level of spending makes FDR look like a tightwad.
Since Obama assumed power in January 2009, total US government debt has grown by $4.4 trillion. It just crossed another moving line in the sand – the $15 trillion mark. It’s now just $200 billion below the recently increased debt ‘ceiling’.
At the rate the US government is spending money to prop up a structurally deficient economy, the old debt ceiling debate will be back in the headlines within a couple of months.
But Australians (we don’t mean you, dear reader) are largely ignorant of Obama’s failings. He appears to be a good bloke so we take him at face value. Perhaps we (like the people who voted for him) want to believe that good guys can succeed in politics.
But in politics, good guys who try to make a difference are dangerous characters. They try to shape society based on how things should be according to them. And because they get to spend other people’s money to do so, they rack up enormous debts in the name of trying to make things better.
As the saying goes, the road to hell is paved with good intentions.
What is Obama doing here anyway? On the surface, it’s a symbolic visit to deepen military ties on the 60th anniversary of the defence treaty between the US and Australia.
At another level, it’s about the US reasserting its power in the Pacific. It’s a direct show of intent to China that the US intends on being the big dog in the region for decades to come.
This is an important point for Aussie investors.
US Speaks Mind to China
US President Obama has displayed some pretty strong language towards China recently. He’s told China it must play by the rules and grow up. He’s committed to building up a small but symbolic military base in the Northern Territory over the next few years.
This suggests a change in US perception of China’s strength. A few years ago the US would never have used such language. Now, in a post-credit-crisis world, the US is by default looking relatively strong, while the fragility of China’s centrally planned economy is becoming more evident.
The US knows it too. China’s inflation problem, while subsiding, is directly related to its loose peg to the US dollar. Bernanke’s QEII policy exported inflation to China and forced it to tighten monetary policy. These tightening steps have now pricked the property and fixed-asset investment bubble.
China’s economy has historically unprecedented imbalances. While the central planners will try to sustain these imbalances for as long as possible – and therefore provide an illusion of growth – the reality is that most of China’s growth is uneconomic. That is, the returns on investment are less than the cost of capital. When that happens, assets turn ‘bad’.
This is happening at the same time as China’s famed export powerhouse weakens. Its largest customers are tightening their belts. In the three months to September, China’s current account surplus came in at U$57.8 billion, a 43.5 per cent fall on the previous year.
In more signs of overcapacity in China, Bloomberg reports of low hotel occupancy rates:
China’s occupancy rate was 61 percent in the first nine months of this year, the same as the year-earlier period and the lowest in Asia after India among 15 countries tracked by STR Global, a consulting and research group. In Shanghai, only about half of hotel rooms were filled, compared with more than 80 percent for Singapore and Hong Kong, it said.
But everything is ok according to a recent report from the IMF…sort of. The organisation said a recently conducted stress test of the 17 largest banks in China suggested they would be ‘resilient to isolated shocks.’
Actually, isolated is the important word here. The following is from the IMF’s explanation of the stress tests in the executive summary.
Such shocks included a sharp deterioration in asset quality, a correction in the real estate markets, shifts in the yield curve, and changes in the exchange rate. If several of these risks were to occur at the same time, however, the banking system could be severely impacted
What are the chances of just one of these things occurring? Exactly.
But the China implosion is a story for 2012. In the meantime, we have the Eurozone implosion.
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