Murray addressed a point we've been banging on about here for a month now: when you have to import your capital from the rest of the world, you become dependent on global banks to fund your domestic economy. And if those banks don't like what you're doing with your borrowed money-if they think you are using it to bid up house prices rather than build investments that will generate higher returns-they may decide to invest elsewhere.

What does it mean to be capital poor? "We ask them [global banks] for the money to build larger houses...more square metres per house, year-on-year...and we ask for the money to put less and less people per house at the same time," Murray began.

"Why in Australia is that money not going to fabulous new infrastructure...public goods...why isn't it fuelling great companies?" he asked. We assume the question is rhetorical. The obvious answer is the country is in the grip of a housing hysteria, or at least the belief that everyone-banks, real estate, agents, government tax collectors, builders, and home buyers-can all get rich on houses.

"We're now going to have to invent a corporate bond market because this money isn't flowing right," Murray added. By 'flowing right,' we assume Murray means that instead of funding productive investment and enterprise, Australia's foreign borrowing addiction could eventually threaten the supply of credit provided by foreign banks.

"I think that our friends around the world who have a habit of saving and helping us with it are entitled to ask, 'Is this the best return for my precious savings dollar?'"

Lots to think about. For what it's worth, we think Murray is right on the money. The Chinese are already-and quite rightly-telling American officials to reduce their deficits or jeopardise the flow of credit coming from China.

This is a subject we expect to speak more about tonight. The American fiscal deficit is directly linked to Australia. The more the Chinese are worried about the value of their U.S. dollar assets, the more quickly they will look to diversify those assets or shed them outright.

That probably means increased Chinese investment in Australia's resource and energy sector. Australia is part of China's answer to "the resource question." Also, the Chinese already realise that making a buck of Aussie borrowing is not a bad investment strategy either. Dow Jones news wires reports that, "China's Bank of Communications will open a Sydney office as its first working branch in Australia.

"The move, announced by the NSW government today, underscores the growing ties in trade and business between Australia and China, a major export customer, and is part of a strategy by authorities to promote Sydney as a regional hub for financial services. The Bank of Communications, China's fifth-largest bank, is seeking a licence from the Australian Prudential Regulatory Authority to establish a branch delivering a full array of services."

Selling money can be a good business. China is also branching out with its global investment/expansion strategy, trying to diversify its sources of income. The profit margins in finance are probably a lot higher than the profit margins in making air conditioners (or most assembly and manufacturing industries.) If you want to increase national income, it's a good strategy (although it's not as good for full employment, which is also a big objective of the Chinese State).

Also, when you've accumulated a huge chunk of capital with a mercantilist trade policy based on keeping your currency artificially cheap so you can run a large trade surplus, you have to put that capital to work eventually and not just buy U.S. Treasury bonds. It will be interesting to see if the long-term strategy works.

But you get the feeling there IS a long-term strategy at work in China. In Australia? Murray says that under his direction the Future Fund will meet the unfunded liability of superannuation for public servants by taking a long-term view. He encourages all of Australia to do the same.

He says he is, "Taking a long-term view about saving, which is a critical problem in the Australian economy...taking a long-term view about our next generation, not just ourselves...taking a long-term view about the stability of employment and skills building...whether it's at the Future Fund or anywhere else...and a long term view about the pride in our institutions."

We find those comments quite encouraging actually. One of the big faults in the corporate world in the last twenty years-driven by quarterly earnings analysis and the 24/7 media cycle-is managing long-term institutions for short-term gains. To some extent, this just reflects the compression of time in a globalised world. The business cycle seems to have speeded up.

But shareholders and corporate management alike would both be better served by considering what's best for the long-term interests of the institution...and how to make sure that particular business continues to serve customers well. This goal might not always be compatible with short-term earnings management strategies that allow executives to meet targets which trigger extra compensation.

Essentially, we think Murray is suggesting that we all need to be better stewards of capital. He's also implying that for the last twenty years, we-the institutions of modern capitalism-have NOT been good stewards of capital. If you pursue that line of thinking, it might also mean that the expectation that you can make a lot of money very quickly without really doing any work or adding value is-as a cultural frame of mind-not very healthy for our long-term survival.

We'll have to leave it at that today! Tonight is the big night of the Debt Summit at the State Library of Victoria. We'll be back with a full report on Monday. Until then!

Dan Denning
for The Daily Reckoning Australia

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If China's economy continues to grow at its current rate, it will pass the U.S. as the world's largest economy in 18 years. Of course, it won't grow at its current rate for 18 years - not continuously, anyway. It will grow somewhat slower in spots and sometimes faster. What growth rate comes out in the end is anybody's guess, but the 18-year guess will probably be off.

Then again, the guess also assumes the U.S. stays where it is. And that is also unlikely. The U.S. economy shrank last year and looks to shrink again in 2009. Meanwhile, China is one of the few big economies still growing, though at a slower pace. The result is that China will actually make up ground faster in 2009. As Ting Lu, a Merrill Lynch economist based in Hong Kong, notes: "In 2007, the gap between the growth rates of China and other big countries was huge. Actually, in 2009, the gap between will be even bigger."

As the Great Depression II continues to lay siege to the world's economies, China remains a coiled spring of growth. Even though China is now the world's second- or third-largest economy, it still is a relatively poor country. And its resources are barely tapped.

The vast potential of China is hard to grapple with. Already, China has built the world's largest building (Beijing's airport terminal) and its longest transoceanic bridge. It has the world's fastest train and the biggest dam. As John Pomfret, former bureau chief for The Washington Post in Beijing, observes: "It is a nation of builders, of grand schemes, of gigantism." He calls China's engineers "some of the world's biggest risk-takers. Geeks with guts."

The Qinghai-Tibet railway was another engineering feat. Chinese engineers, already considered the best railway builders in the world, built a railway on the complex and shifting permafrost linking Llasa with Golmud in China's western hinterlands. The railway stretches hundreds of miles across a treacherous plateau.

Author Abrahm Lustgarten in China's Great Train describes the area as one of "intermittently frozen marshes, lakes and soggy permafrost that heave and shift more actively than almost any other geologic environment on Earth." In places, the quicksand is deep enough to swallow a tank. It is also higher than any other railway on Earth - at its peak, more than 16,600 feet above sea level. The cars of the train are pressurized as in an airplane, with oxygen pumped in.

After this stretch of the Qinghai-Tibet railway opened in 2006, the riches of Tibet started to come to light. The Ministry of Land and Resources disclosed huge resource finds - big veins of copper, zinc, lead, iron, gold, silver and other minerals.

"The new reserves make Tibet one of the richest regions in China's territory," Lustgarten writes, "and could shift the country's reliance on imports of copper and iron altogether." Tibet could hold 40 million pounds of copper - one-third of China's total. There is more than a billion tons of high-grade iron ore.

Again, Lustgarten: "Among the discoveries in Tibet was China's first substantial rich-iron supply, a seam called Nyixung, which alone is expected to contain as much as 500 million tons - enough to put an expected 20% of Chinese iron importers out of business."

More than just minerals, there is also an abundance of oil. Sinopec estimates some 65 billion barrels of oil will become accessible in Tibet. "A find, that if proven," Lustgarten writes, "would make the region one of the next great petroleum envies in the world."

What makes these projects economic now is the Qinghai-Tibet railway. Many Canadian and Australian companies already have joint ventures in place to mine the plateau.

The economy boomed in Llasa, too, thanks to the railway. The number of restaurants and bars in Llasa increased over 20% within a year of the railroad's completion. More than a million tourists took the train west to Llasa. Where it was once hard to find a hotel room in Llasa, over 660 hotels sprouted up after the railway. One, the Brahmaputra Grand, is a luxurious hotel with crystal chandeliers the size of Volkswagens and 50-foot tall plastic palm trees. A night here set you back $1,100.

Tibet industry up to that time was mostly in trading yak tails, fur and salt. And now, it looks as if Tibet will play the role of China's great western frontier, much like America west of the Mississippi in the 19th century.

There will be and is an ugly side to all of this that I've not talked about - the suppression of ethnic Tibetans and the weakening of a very old culture. China, though, continues to build and build. As Lustgarten notes: "The western outposts are linked by an expanding transportation infrastructure - roads, power transmission lines, pipelines and railways - built at a rate that makes Dwight Eisenhower look lazy."

But as with the rest of world, the pace has cooled. The fingers of depression wander all over the globe. No one can say how long it will take to work out of this mess.

However, some hopeful signs emerged recently. The China Electricity Council reports that electricity consumption rose nearly 7% in December, year over year. If no one has doctored up those numbers, that would be the first such increase since July. And there is some anecdotal evidence that housing prices in China are on the rise again.

Nonetheless, over the long term, China has lots of room and resources to grow. We got a glimpse of the implications of that growth in the last several years - the huge pull on resources such as oil, for instance. At the moment, economic depression has set in most everywhere. But longer term, it seems foolish to bet against the great dragon in the East.

Regards,

Chris Mayer
for The Daily Reckoning

P.S. I mentioned above that China's electricity usage was up. There is opportunity in that. A slowing economy has not stopped China from investing in energy projects. China's power demand is still growing. And China overall increased spending on power grids by 18% last year...

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"I hate flying," said a colleague. "When I was young, I used to look up and see airplanes and wish I was on every one of them. Flying was an adventure. And they treated you so well. I remember flying on PanAm many years ago. They treated you as though you were an important person. But now, it's a nightmare. Waiting in lines. Getting searched...screened...questioned. I'd rather take the train."

In America, taking the train is tough. There aren't many. But James Kunstler is sure there will soon be more. Mass transit, he believes, will be forced upon us by the price of energy.

We're not sure trains really use less energy than automobiles. By the time you get people to the trains, have them wait, build the train itself...and the rails, employ ticket takers and engineers, and so forth, saving energy is no sure thing. Then too, trains do not always operate at full capacity. It may be a waste of energy to have a single commuter in an automobile. But imagine a train with a single passenger!

In a free market, we wouldn't have to worry about such things. The price would tell us all we needed to know. The more energy intensive a form of travel was, the more it would cost. But with so many government subsidies, price controls and regulations in place, price alone no longer gives you a clear picture.

Nevertheless, our guess is that train travel is going to make a comeback in the United States - for other reasons. We suspect that the U.S. government is going to want to spend a lot more money. Already, we're estimating deficits as high as $1 trillion in the coming Obama administration. We're in an advanced phase of empire. The mobs want bread and circuses. That's why Obama is so popular - people believe he is more ready to give it to them than the cranky, old McCain.

But even $1 trillion deficits won't be enough. Here's what is happening: the consumer economy is rolling over...because the consumer is rolling over. As he realizes that he has no money, the consumer must cut back. This will cause a big drop in demand...leading to a big drop in sales, output, earnings and employment. A recession, in other words. And since the consumer has gotten himself so deep in debt over so many years...and since he now faces the stage of his life when he most needs savings...this consumers' strike will go on for a long time.

If the consumer doesn't spend, who will? There are only three broad possibilities. Either the consumer does it, business does it, or government does it. If the consumer turns his back on the heavy lifting, it's up to business or government to spend. Business? What business is going to expand in the face of a major consumer pullback? That leaves it up to government. Of course, the government has no money. And spending more - when you are faced with a $1 trillion deficit already - is almost suicidal. But when the mobs yell for more bread...and more circuses...the government obliges - especially when the pols can hand out juicy contracts to friends and contributors.

What will government spend money on? Health care...certainly. War? Yes, but people are getting a little wary of war. Infrastructure? Of course! Who will want to oppose huge new infrastructure spending? It will put people to work, they'll say. It will make the country "greener." It will save energy and contribute to U.S. independence.

Whether a massive infrastructure-spending program will do any of those things is doubtful. But one thing it will do is sure - it will help bankrupt the nation.

*** Getting back to air travel...the trip over Canada was a pleasure. The sky was clear. We were sitting next to a window and spent hours looking out.

First, we flew over the coastal range...with white capped mountains...valleys and turquoise lakes. It was breathtaking. We wanted the plane to land so we could get out and have a close look - it was so beautiful. We crossed a wide valley, with green fields, some yellowish green - probably rapeseed - and others darker green. Then, the Canadian Rockies rose up like jagged teeth...red in the evening sun, as if they had just eaten raw meat. If a giant meteor ever collides with the earth, we hope it hits here. These mountains will chew it up.

Bill Bonner
for The Daily Reckoning Australia

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But then, we are a ‘deathward going tribe’ – as Aristotle put it – no matter what flag we fly. Pretty soon, the Romans reached their limit...then, roads fell into disrepair...and armies could no longer manoeuvre quite as well as they used to. As the infrastructure goes, so goes the empire. Finally, the empire fell...and vines grew over the Capitoline Hill.

How’s the infrastructure in the United States? A reporter from the Financial Times gives us an update:

“On the pot-holed highway to hell,” to he calls it.

“If anyone doubts the problems of US infrastructure, I suggest he or she take a flight to John F. Kennedy airport (braving the landing delay), ride a taxi on the pot-holed and congested Brooklyn-Queens Expressway and try to make a mobile phone call en route.

“That should settle it, particularly for those who have experienced smooth flights, train rides and road travel, and speedy communications networks in, say, Beijing, Paris or Abu Dhabi recently. The gulf in public and private infrastructure is, to put it mildly, alarming for US competitiveness.

“You might have expected that investing in US infrastructure would be a hot political topic this year. Well, no. Hillary Clinton spent the final week of her Indiana campaign standing on the back of a pick-up truck arguing for a temporary suspension of the “gas tax”, the fuel duty that pays for highways.

“You read correctly. Faced with the emptying of the Highway Trust Fund, established in 1956 as the US entered a period of growth and prosperity, Mrs Clinton suggested cutting its source of funds (which she claimed could be made up by a tax on oil companies). It was more important to give Americans a summer break from $4-per-gallon petrol.

“The US invested 10 per cent of its federal non-military budget in infrastructure in the 1950s and 1960s as it built the interstate highway system – at the time, the envy of the world. While US investment has fallen to less than 1 per cent of gross domestic product, China has been matching its double-digit postwar record.”

Bill Bonner
The Daily Reckoning Australia

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