Commodities and China

The Great Red Hope. We'll get to the commies in a just a moment. First, a question: what happened to Tuesday's big rally?

Yesterday, stocks held steady. The dollar lost ground. And gold rose back over $900.

So, are we at the beginning of a major rally...or did it end in a single day? We wait to find out.

In the meantime, let's look at China.

Yes, dear reader, the whole world turned its lonely eyes to the reds: "Touch us!" "Heal us!"

China, with its bumptious population...its boisterous growth...and its boney-handed politicians...is the world's hope for a fast recovery.

"China will the first out of the slump," says our old friend Jim Rogers. Jim has staked his fortune, his fame and his future on two things: commodities and China.

Of course, the two go together. If China can continue to grow, she will demand more and more commodities. Prices for wheat, iron, tin, coal - just about everything - will rise as China raises living standards. Or not.

China doesn't even need to grow wealthier in order to use more commodities. Like her saffron neighbor to the South, India, her population is so large, and growing by such huge numbers, she struggles just to keep up. One percent population growth is not a lot. But one percent of 1.3 billion is 13 million people - equal to America's entire jobless population. And that, of course, is an increase that happens every year.

The Middle Kingdom, as it is known, is thought to have an advantage in the fight against depression. It doesn't have to argue with Republican lawmakers, civil libertarians, or sensible people of any sort. If the reds want to do something - no matter how inspired or moronic it is - they can usually do it.

But here is a fork in the road. So we will take it. We don't follow events in China the way Jim does. Maybe he's right; maybe China will be the first one out. But we have a feeling that William Pesek might be right too. The idea that China will tug the whole world out of depression is "pure fantasy," says he.

"Chinese exports slump 25% as demand wilts," says a headline in the Financial Times this morning. Not hard to figure out why. Remember, this is a depression, not a recession. In a recession, consumers take a breather...orders slide...and exports decline. But it is only temporary...and not catastrophic.

But let us follow the export trail to see if we can figure out what is going wrong.

Let's see... there's the factory in Quangzhou. Hmmm...it has cut its production schedule. And there's the truck leaving the factory...only 3/4 full. Orders have fallen off... It arrives at the harbor in Hong Kong. And there it finds the shipping schedule has been cut (along with prices) drastically. After the container is placed onboard, the ship hoists anchor and is off. Two weeks later - for it is sailing more slowly than it used to, in order to cut expenses by preserving fuel - it arrives in Long Beach...where it is quickly unloaded and put on a truck that will take it to a warehouse, where the container will be opened and its contents off-loaded onto other trucks for distribution to retailers all over the United States. The whole process takes less time than it did a few months ago - simply because there's less traffic and less back-up at every step. When finally the merchandise gets onto the shelves, it finds fewer shoppers looking it over and fewer buying.

And here we find the source of China's troubles...and the reason it cannot quickly recover. It has set up its economy to provide end products for foreigners. Those foreigners can't and won't buy like they used to; they don't have the money. The credit bubble has popped. It's over.

Well, maybe the Chinese could lend U.S. consumers money? Ah...there lies a trap. U.S. consumers have more than twice the debt they usually carry. The last thing they want is more. They've seen how hard it can be to pay back debt - especially when you lose your job. Unemployment in the United States is already over 8%. It will probably be over 10% by the end of the year. In four states, it is over 10% already. Each percentage point represents about 1.5 million people who aren't buying many Chinese goods.

Well, maybe the Chinese could make stuff for their own people? Yes, they could...and they will. But that's what makes this a depression and not a recession. The whole structure of the economy must change. In the photo accompanying the FT article, for example, it shows a factory in Beijing that makes a third of the world's violins - almost all of them exported. Sure, the Chinese could decide to take up the violin en masse. But that's the sort of cultural change that takes time. Or, the factory could switch to making laundry cabinets. Again, it is possible...but it takes time. And the adjustment is painful. The violin makers need to be retrained. Many will be fired as the factory searches for a new product line. Without revenues, perhaps it will go broke...and then be repurchased at auction by a laundry cabinet manufacturer.

This is the process of creative destruction that Schumpeter described. One industry is destroyed so that another might be created. It is what depressions are good for. It is what we all face now - including China. Maybe especially China.

Won't the Chinese able to do it faster - since the commies are still in control?

Oh dear reader...you are treading on our soul when you ask a question like that! If we learned anything in the last 100 years it was that command economies don't work very well. Compared to the free market - with its elegant intelligence and infinite information - central planning is clumsy, ham-fisted and ultimately unproductive. The commanders are invariably morons. And the commanded spend their time and energy not doing their bidding, but finding ways to avoid doing it.

Keith Fitz-Gerald at Money Map Report believes China is the main engine of world growth, and that role seems likely to continue - in spite of the current difficulties the emerging Asian giant appears to be facing.

*** Meanwhile in the West...the parasites and wealth destroyers are angling for other peoples' money. Jamie Dimon, head of JP Morgan, urged lawmakers not to behave like a "dysfunctional family." Instead, they should get behind the president, he said. 'And start shoveling out the money,' he didn't say.

Yes, the president is asking for 'shovel ready,' projects...and everyone seems to have a shovel now. Browsing the Internet, we found an ad:

"Trillions in Government Grants Available...here's how to get yours."

There, you discover that the government is giving away "grants," and all you have to do is apply for one. Following the headlines is a series of testimonials from people who've actually gotten money "you don't have to pay back" from Uncle Sam.

"Maybe it's just a scam," Elizabeth suggested when we described it to her.

"That's the sad thing...it's probably real. The feds are so eager to give away money that people probably can get a 'grant' if they put their minds to it.

Rarely have the leeches had so much public support. "This is an emergency," says a typical headline in the financial press, "government has to get its act together."

And so the fix is in. Too bad it only makes things worse.

*** Earlier this week, Obama overturned the Bush-era policy that limited the federal tax dollars for embryonic stem cell research.

This is big news for scientists and investors alike. Breakthrough Technology Alert's Patrick Cox explains:

"Egyptian scientists have announced that adult stem cells can prevent diabetes-associated heart dysfunction. I've already written about the successful treatment of multiple sclerosis by rebooting the immune system with stem cells. Within a week of that news, a similar procedure was shown to successfully treat AIDS.

"The stem cells used in the AIDS therapy came from a donor with a rare genetic resistance to the disease. It worked so well, in fact, that the patient no longer takes AIDS drugs. The donor stem cell transplant also cured his leukemia. This is reality, not science fiction.

"The success of the AIDS SC therapy has huge implications. The most important is that it demonstrates the potential of genetically engineered stem cells to give individuals new immunities and biological capabilities.

"This is critical because humans are born with a broad range of genetic strengths and vulnerabilities. Now, we're seeing that those strengths can be transferred via stem cells. These donor cells will give your body the ability to knock out diseases you would not otherwise have the ability to fight. Eventually, designer stem cells will be used not only to cure, but to enhance our physical states. Immunities to cancers, Alzheimer's and other diseases will be routinely delivered via GE stem cells as a new form of inoculation.

"The company I'm recommending to my Breakthrough Technology Alert readers this month, in fact, is on the cutting edge of the convergence between genetic engineering and stem cell technologies. Fortunately for early investors, it has been largely ignored by the financial media. However, there are indicators that this is about to change."

The company Patrick is referring to controls an entire branch of stem cell science and patents. Moreover, it is far closer to market than many of the "big" SC companies that are getting so much old media attention.

*** Alan Greenspan rose to his own defense this week. It's not his fault the world economy is a mess, he said. The report from Bloomberg:

"Given the decoupling of monetary policy from long-term mortgage rates, accelerating the path of monetary tightening that the Fed pursued in 2004-2005 could not have prevented the housing bubble," Greenspan said.

It matters "a great deal" to understand what caused the bubble in the real-estate market, he said.

"If it is monetary policy that is at fault, then that can be corrected in the future, at least in principle," Greenspan wrote. "If however, we are dealing with global forces beyond the control of domestic monetary policy makers, as I strongly suspect is the case, then we are facing a broader issue."

Keep reading for today's guest essay by Ron Paul, who has famously stood up time and time again to the Sir Alan about his monetary policy and the move away from sound money when he was at the helm of the Fed.

That does it for us today. Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

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