Playing the Indian Card

Wednesday, July 12, 2006

Is There Anything Inside the Chinese Box?

A friend currently living in China reports that, to his eyes, things are not all skittles and beer there. He estimates 15% unemployment, and reports a lot of empty real estate. He suggests China might be a bubble about to burst.

Another case of that sure axiom, whatever everyone knows is true, is probably not.

It makes me think of that other "economic miracle": Hitler’s in Nazi Germany in the 1930s. It was every bit as dramatic, at the time, as China's today. Hitler did a lot better than FDR at pulling Germany out of economic morass and making it boom.

But it seems to have all been based on a Ponzi scheme. Hitler's government was more or less just printing money, according to William Shirer, and absolute lack of transparency was letting them get away with it for a time. Over the long term, though, there was no way Hitler was able to sustain it.

Hitler frankly told his generals on the eve of World War II that he had no economic choice but to invade Poland. Without more booty, the economy was going to crash. And this soon after the looting of Czechoslovakia.

This probably also explains his otherwise seemingly reckless invasion of the USSR. He looted France thoroughly, imposing reparations far greater than those of Versailles. But within a year, it seems, the money was running out, without fresh conquests. The USSR was the one obvious target that was big enough to keep the machine running. But in the meantime, he invaded Yugoslavia on the thinnest of pretexts, an act that made little or no political or military sense. But perhaps brought in some needed plunder.

So too, perhaps, the ultimate explanation for the persecution of the Jews. They had money. Seizure of their assets might have been necessary. Up to and including gold teeth, slave labour, and trying to make soap from their body fat. Conquered countries were also milked for slave labour.

He seems to have had an economic tiger by the tail. As Albert Speer himself points out, in his autobiography, the Nazi system and Hitler’s personal ruling style were in fact massively inefficient. The whole thing took smoke and mirrors.

This also explains Italy's poor showing in WWII. Mussolini had been in power longer than Hitler. He had, famously “made the trains run on time,” and was credited with a similar economic miracle. But without Hitler’s conquests, his little show was falling apart. He admitted to Hitler on the ever of war that he had reached the point of bankruptcy. His government no longer had any money for strategic materials or armaments. Their token contingent for the Battle of Britain was still flying ancient biplanes.

Authoritarian governments seems to get away with “economic miracles" for a while, by sleight of hand and by seizing the assets of enemies or scapegoats. Stalin was given similar credit in his day; he pulled it off mostly by carting factories and equipment back to the USSR from conquered territories in Europe, following Hitler’s methods. And his Potemkin Village remained standing for another 35 years or so. But it all tends to collapse eventually—and rather suddenly.

Chinese Communism has had a good run. But perhaps we should be very suspicious by now of what seems to have been a charmed life. That may only be a measure of how bad the collapse will be when the real bills come due. There is no transparency in the Chinese economy. It too may be a Ponzi scheme, or partly a Ponzi scheme. There do seem to be massive inefficiencies, as my friend has seen.

So it could all crash tomorrow, almost without warning.

If it does, there will be hell to pay not only in China. China’s economy has grown large enough that it is a major customer and supplier to the rest of the world. If China collapses economically, it is going to be tough for the rest for the world to avoid recession or depression.

But there’s more. Contrary to popular belief, the Chinese government does not hold its citizenry in an iron grip. Quite the reverse: the challenge in China is to maintain some semblance of order at the best of times. My friend claims that there are already an acknowledged 74,000 to 90,000 violent demonstrations in Mainland China annually. I strongly suspect--and Chinese friends have agreed--that if the Chinese economy stalls, let alone collapses, the Communist government will lose all support. That's the current social contract.

Unfortunately, there is no obvious organized opposition available and ready to take over. It may be a very hard landing. Political chaos seems the most likely scenario.

I expect it to happen. In the foreseeable future.

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