O Canada!

Canada has Resources

When someone considers Canada, the first things that pop up in the mind are- maple leaf, harsh winter, and….natural resources!

Canada has natural resources like Saudi Arabia has oil and South Africa has diamond. Its no surprise that Canadian economy is largely resource based. With 1.7 trillion barrels of oil and plenty of gold and timber, Canada’s resource sector is the backbone of its triple-A rated economy.

Not only extracting and utilizing these resources from Mother Nature, the Canadians have taken this resource expertise to global level. They haven’t been content to stay home and ply their trades domestically. They are more adventurous than that. “Canadian know-how” has left few areas of the earth unexplored. Presently Canadian mining companies operate in 350 off-shore mines in different parts of the globe. They search for silver in Mexico and South America, gold in China, platinum in South Africa, diamonds in Namibia, oil in Indonesia, Iron from Sweden…well you get the picture.

Abundance above and beneath the Earth

Natural Resources- categorized as forests, minerals and metals, energy- form the backbone of the economy. These sectors have been engine of economic growth and job creation for generations. In 2009 alone, the sectors generated 11 percent, or $133 billion, of Canada’s GDP and directly employed 759,000 people.

Canada’s considerable natural resources are spread across its varied regions. In British Columbia the forestry industry is of great importance, while oil and gas industry is important in Alberta and  Northern Ontario is home to a wide array of mines. Canada is a world leader in the production of many natural resources such as gold, nickel, uranium, diamond and lead. It also is endowed with mineral resources of coal, copper and iron ore. Several of Canada’s largest companies are based in natural resource industries, such as EnCana (TSX: ECA), Cameco (TSX:CCO), Goldcorp (TSX: G) and Barrick Gold (TSX: ABX).

Gold

Canada is the 8^th largest gold producer in the world. As per 2011 estimate, 101 MT or 3.6% of global production was made in Canada.

The west of township of Timmins, located in the famous Abitibi Greenstone belt in Ontario-Quebec border is the major center of gold play. So far, 180 million ounce of gold have been found and 70 million ounce have been mined. Another prospecful area is the Yukon Territory. Since the famous Klondike Gold Rush in 1897, a new episode of New Yukon Gold Rush is taking place. It’s mainly happening due to the placer gold, washed by water and gravity, originating from a distant source. It is estimated that the amount of placer gold would be around 160 to 180 million ounce range.

Minerals

Many minerals are found within ancient rocks of the Canadian Shield, which is located in Central and Eastern Canada. Canada leads the world in the production of uranium, which is the fuel for nuclear power stations. Modern energy-hungry world will be hell-bent to get access to this precious radioactive metal. Canada is also the leading producer of potash- used for making fertilizers- with 33 percent of world’s supply (in 2005).

Fossil Fuel Resources

A new source of oil- oil sands- is being exploited in places such as Fort McMurray in northern Alberta. This is a mixture of thick oil and sand that is dug up and heated, releasing the oil which is then piped off. Known as Athabasca oil sands, this vast reservoir in Alberta give Canada the world’s third largest reserves of oil after Saudi Arabia and Venezuela, according to USGS.

Canada currently ranks as the world’s sixth largest producer of crude oil after Saudi Arabia, Russia, U.S., China and Iran, according to U.S. Energy Information Administration. Resurging growth in Western Canadian oil production and new oil sands investments drive the positive outlook. Canadian oil production is poised to more than double to 6.2 million barrels per day by 2030, which will put Canada in the top three to four oil producers in the world.

Global Center for Resource Financing

Toronto, Canada’s largest city and commercial center, is generally viewed as the mining finance capital of the world. Toronto is home to the Toronto Stock Exchange (TSX), to more than 400 mining and exploration company offices, over 30 mining company head offices and several hundred mining suppliers, consulting firms and service providers. The TSX is the global destination for financing international projects. During the last five years, 32 percent of global mining capital and 82 percent of financing transactions were handled through the TSX.

Future of Resource Based Economy

Countries with treasure troves of natural resources ordinarily experience currency appreciation during commodity bull markets. It is evident from the U.S. dollar and the loonie (Canadian currency) being in parity right now. And considering the commodity super cycle we are currently in, we suggest the bull market in Canadian dollars still has many years to run. The stocks in TSX and TSX-Venture also have yielded explosive gains during these times. Especially the junior mining stocks have been showing valuable returns.

The Miracle Material

Some key materials have played central roles in the development of human civilization. The discovery of copper and spread of metallurgy heralded the “Bronze Age”. Then came the “Iron Age”, corresponding later to the “Steel Age”. The industrial revolution brought us the “Oil Age”. The later part of 20^th century saw the contribution of “Silicon Age”, brought about by discovery of microprocessor and changing the face of electronics.

Now, the first decade of 21^st century can be characterized by this “Miracle Material”. It is one material that would arguably change the face of technology forever. It is called “Graphene”, which is an allotrope (the atoms of an element bonding together in a different manner) of carbon (just like graphite is an allotrope of carbon, as well as diamond being an allotrope of carbon).

Discovery of Miracle Material

Graphene was first separated from flakes of graphite. It is made of single sheet of carbon one atom thick.  So, this is ONE ATOM THICK, making it the thinnest material ever discovered.  It turned out to be the strongest, most elastic and most conductive material on earth. It was such a major breakthrough that, the two researchers were awarded the Nobel Prize in Physics in 2010, just six years after its discovery. It turns out that, this material is 50,000X thinner than a human hair, 230X more powerful than silicon and 200X stronger than steel! And also, it is the most elastic substance on the planet. You can bend, twist or fold it into any shape you like.

No Intrinsic Limits

In February 2010, IBM announced that it had created the world’s tiniest transistor, made not from silicon, but from graphene. This “tiny” it really is- not larger than a grain of salt! Even more important, it is also the world’s fastest transistor, handling frequencies upto 155GHz. To put it into perspective, silicon can operate at a speed of “only” 40GHz! That is, just one tiny clump of graphene transmits electrical information 2.3 times faster than silicon wafer! So, no wonder IBM researcher, Dr. Yu-ming Lin says, “In terms of the speed of the transistor, we currently see no intrinsic limits into how fast it can go”.

Every area of modern technology is catapulted by the miracle properties of Graphene.

·        Electronics

·        Medical science

·        Oil exploration

·        Warfare

 Fun Electronics

Imagine you can roll up your iPhone and put it behind your ear….or watching movies on a television no thicker than wallpaper. Already Nokia and Samsung unveiled their own ultra-thin, flexible electronics (the Kinetic and Galaxy Skin) in 2011. This material conducts electronic information 230% faster than silicon, making it possible to download 3-D movies and charge your smartphone in just seconds. And forget about broadband- get yourself ready for extremeband, as huge chunks of data that once took you minutes (or hours) to download now arrive in just seconds.  And you can forget about waiting hours (or even minutes!) for your Blackberry to fully charge. With much higher frequencies, you will never have to worry about losing a call every time you enter an elevator or parking garage. That’s why BBC comments, “…(it) could spell the end for silicon and change the future computers and other devices forever”.

An artificial implant for the Brain

The new types of prosthetic devices made with graphene promise to be much superior in treating neurological disorders like Alzheimer’s, Parkinson’s, blindness, epilepsy, paralysis and others. These materials also beckon new medical performances like:

Ø  Killing Cancer cells, not healthy ones- New drug carrier made with Graphene oxide which greatly reduces side effects of cancer treatments by killing only the affected cells.

Ø  Synthetic blood- a new blood substitute made of graphene as an ingredient has proven to be effective in restoring hemoglobin that carries oxygen, to maintain blood flow and prevent clots from forming. It proves to be effective against trauma of losing blood.

Ø  Super Strong Tissue- By spinning densely-packed graphene nanoribbons into a tight yarn, researchers at UT Dallas created artificial muscle fibers that exert 100X the force of natural muscles and can rotate objects 2000X their own weight. Aside from staggering potential this technology holds for machines and artificial limbs, doctors also believe it could make possible nonorobots strong enough to propel throughout the bloodstream- delivering drugs, removing parasites and much more.

Ø  New Body Tissue- Researchers at the Air Force Laboratory in Ohio are using graphene to grow new human tissue after watching how cells proliferate when attached to surfaces coated with graphene oxide (one of the major element of our body cells is carbon and graphene is an allotrope of carbon). One researcher says “A material that allows faster and more efficient growth of cells would indeed find many applications in the fields of biomedicine and biotechnology such as tissue engineering or to grow structures that could help heal wounds.” And another researcher at Graphene Labs says he is now “exploring the possibility of using graphene as a membrane in the next generation of artificial kidneys”.

At this point, one might ask, if there’s  any stunning breakthrough graphene wouldn’t be responsible for bringing us!

New Era for Oil Exploration

Graphene could be a key component in uncovering large pockets of oil and gas hidden deep into the earth. One popular method of exploration uses small wireless sensors to wander deep into tiny cracks and crevices, from where they send data on any discoveries back to the surface. It’s a safe and cost-efficient technology. But, the problem is, sensors powered by conventional batteries can be made only so small. And that means the tiniest cracks and crevices are still off-limits for exploration.

Scientists in Rensselaer Polytechnic discovered that they could generate small amounts of electricity just by letting water and other fluids flow over materials coated with graphene. In fact, their tests demonstrated that one sheet of graphene just .03 mm by .015 mm can generate 85 nanowatts of power.  Which means that by using graphene as a “smart skin”, tiny, self-powered microsensors could soon find oil and gas in previously undiscovered locations. The oil and natural gas shale boom currently underway could go several times over, because of previously undetected reserves now able to be found with graphene technology.

Battlefield of the Future

Graphene presages to be the material used for making the impossible.  Scientists in UT Dallas have discovered that with sufficient electrical stimulation, a sheet of graphene heats up so much that the difference in temperature between it and the surrounding area causes light rays to bend, cloaking the object that is right behind the graphene. Imagine what this could mean for tomorrow’s battlefield…as invisible tanks and fighter jets quickly overwhelm their bewildered enemies. A company called Nanoflight has taken this discovery to the next level by creating a graphene aerogel for the Israeli army to “paint” on their missiles. In tests, they discovered this aerogel absorbs radio waves emitted from radar systems and scatters them as heat…making the missile invisible!

Industrial Demand

With such huge industrial applications of graphene, there is no doubt the future belongs to it. In fact, price of carbon-rich sources of graphite have gone up 300% during last five years, with price being in $2500-$3000 per ton now. That’s why, BCC research believes that commercial sales of graphite are set to explode from $67 million in 2015 to $675 million by 2020. And according to Futures Inc., demand for grahpene-based ink, photodiodes, high-frequency transistors and conductive coatings has already increased by 4,000% since 2010.

So, how can you position yourself to profit from this meteoric trend about to explode?

Actually, the answer is in graphite- because graphene is made from graphite. As mentioned above, the price of graphite is exploding during last few years, with the trend to continue in coming years.

So far, graphite has been mined in only five countries, with China currently controlling 70-80% of world’s graphite production.  That puts graphite in a rare earth materials-type position, in that China has a near stranglehold on the market, as graphite’s dominant future creeps upwards.

That’s what set off the rare earth boom in 2009 and 2010, sending any company with access to rare earths outside of China soaring thousands of percent. And its exactly what is happening with graphite right now. China’s production facilities and mines are old and may be nearing depletion. And they are trying to get top dollars for what they have left. And small supply that comes outside of China is typically used in full by the country where it is mined for traditional steel and automotive applications. The situation has become so alarming that, Britain, EU and U.S. have declared graphite a critical supply material.

As seen from the graph below, all of these have an impact on the carbon-rich sources of graphite:

So, this trend gives other companies outside of China bomb-shell opportunities to profit from soaring demand of graphite. In fact, some Canadian mining companies which are in development stage, are set to gear up huge growth potential with their mining resources. Their stock prices are to go up multiple times.

Futures Ahead

As quoted by analyst Larrain Vial, “the attributes of graphene- transparency, density, electric and thermal conductivity, elasticity, flexibility, hardness, resistance and capacity to generate chemical reactions with other substances- harbour the potential to unleash a new technological revolutions of more significant proportions than that ushered in by electricity in the 19^th century and the rise of the internet in the 1990s.”

What graphene-based technology has shown so far is just tip of the iceberg. We have only scratched the surface of how graphene will impact the electronics, medical science and energy industries. New elements of technological inventions will SURELY impact the world in times ahead.

Towards A New World Currency

We have seen an interesting digression in world monetary trend. China and Japan have announced last month (26^th December) that they are going to start trading with each other in their own currencies, OTHER THAN U.S. DOLLAR. So they have formed a powerful currency union.

Japan previously used its massive foreign currency reserve of U.S.  dollar to artificially devalue its currency- by pegging its currency to USD and expanding its money supply- thus undervaluing its currency and boosting its exports. China presently is doing the same. They currently hold world’s largest foreign currency reserves- China has about $3.2 trillion, while Japan holds $ 1.3 trillion- and any move to reconstitute the makeup of those holdings could change the global currency map.

Over the short run, the agreement is likely to lead to continued weakening of the dollar against the yuan (on the contrary, strengthening the yuan). That should help the U.S. to lessen the trade deficit with China, increasing American exports while weakening imports from China. On the other hand, the strategic advantage that the U.S. used to enjoy through the world dominance of its own currency, like getting all the products and commodities (mostly OIL) by importing in its own currency, would surely diminish. The seemingly unending American prosperity manufactured by way of manipulating its currency and money supply has started showing its diminishing returns.

The present fate of the dollar can be compared with the waning of the British Pound a century ago as the most prominent currency for international trade. And in all likelihood, the Chinese yuan will increasingly play an important role in Asia. So that U.S.  dollar would be less important as currency for transactions in Pacific Rim trade.

It would be interesting to observe the reaction of the U.S.  It has so far opposed every effort to deveiate away from dollar as world reserve and trading currency. Now that world's top 2 economic superpowers are going their own way, what the U.S. is going to do about it? It is already beleaguered with its own debt and other economic problems, and it counts so much on the economic strengths of these two giants! The global economy is taking on its inevitable course, with new players dominating the arena.

Fall Of The Dollar: Part-II

A Look Back

U.S. dominance occurred from the early 20^th century, when the country cemented its position as the dominant world political and economic power. The U.S. pursued an aggressive policy of expansionism, exerting its political and economic influence around the globe. After establishing herself as the world super-power, it employed all-out campaign to control everything-ranging from political, cultural, economic and monetary aspects. The whole world has been Americanized systematically.

Classic Gold Standard

Throughout the years gold has been accepted as money and the preferred currency or medium of exchange. The classic gold standard began to take shape in 1871 in Europe and elsewhere. From 1871 to the beginning of WWI, the currency of all the major trading countries of the world was pegged to gold. Gold coins circulated as medium of exchange daily. Gold was deposited in commercial banks and lent out. These commercial banks created credit by lending out more than the original amount of gold deposited. But they were always forced to keep sufficient reserves of gold on hand in order to meet demand of their depositors’ withdrawals.

The gold standard prevented imbalances in trade accounts between countries. Gold acted as an independent automatic adjustment mechanism. This prevented a country to drift away too far from the balance of trade (export/import).

The gold standard also stopped governments from acquiring large budget deficits. With a limited amount of credit available, government borrowing would drive up interest rates, making it more difficult for the private sector to borrow and invest. And if the private sector cannot borrow and invest profitably, the economy suffers. Government budget deficits spilled over into trade deficits leading to more gold flowing out; leading to eventual return to balanced trade.

The undesirable side effects of deficit spending made governments to strive to maintain balanced budgets.

Bretton Woods System

In July of 1944, delegates of 44 nations gathered at the United Nations Monetary and Financial Conference in Bretton Woods, New Hampshire in USA. In that historic meeting, among other economic landmarks, came the Bretton Woods Agreement, which ESTABLISHED U.S. DOLLAR AS THE WORLD’S RESERVE CURRENCY. The Agreement pegged the dollar to gold at $35 per ounce and all other major currencies were pegged to the Dollar at fixed rates. The critical point here that, the value of dollar was BACKED BY GOLD RESERVES OF U.S. GOVERNMENT, and foreign governments were able to exchange $35 U.S. Dollar for an ounce of gold on demand.

Dollar As Reserve Currency Of The World

Thus US Dollar became the reserve currency of the world. This meant that the dollar became the currency used by other governments and institutions as part of their foreign exchange reserves and it also became the international pricing currency for products traded on the global markets, like OIL.

By virtue of using its own currency, the U.S. has run tremendous trade deficits without repercussions simply because the dollar is the reserve currency of the world. The truth is, between 1945 and the early 1960s, the world enjoyed relative monetary stability thanks to the Bretton Woods Agreement. However, the arrangements put in place in 1945 became strained in the second half of the ‘60s.

U.S. Dominance And Aftermath

During the 1960’s the U.S. became the undisputable world power by virtue of several factors,

• Military supremacy over all its rivals.
• Strength of the U.S. economy and the production method of America being far superior to any other nation. As told by Calvin Coolidge, 30^th President of the United States, “The Business of America is Business”.
• With the dollar now the global reserve currency, America had control over global financial markets.

At these times, the US governments implemented the GUNS AND BUTTER POLICIES. At one end, it operated its imperialistic ploy of controlling the strategic places of the earth, especially which have much holding of oil reserves. So it raged the war in Vietnam. At the same time in internal arena, it funded such mega schemes like Great Society Programs, fighting the War of Poverty and notably, Putting Man on the Moon. All these resulted in gigantic budget deficits, that were monetized (financed by in increase in money supply) by the Federal Reserve. All these put enormous pressure on dollar.

Other countries, beginning to realize that they were holding increasing amounts of US Dollars, began redeeming the dollar reserves for gold. At first there was not a lot of concern, because the amounts were relatively small. But, in the second half of sixties Washington became very worried.

By 1971, the trickle of gold leaving U.S. Treasury turned into flood. As a consequence, in August 1971, President Nixon decided not to exchange dollars for gold at the agreed upon rate.

Nixon Shock

Historically the governments have been incapable of maintaining the value of their currencies. Political leaders always face the dilemma of need for enormous funding to finance large schemes, at the same time pressure for keeping the taxation lower. Desperate to appease all the constituencies, they inevitably resort to “borrow to finance some new spending without raising taxes”.

Back to the context, President Nixon in 1971 decree repealed the Gold Standard i.e. keeping physical possession of gold against the physical currency (dollar); thus making the “real money” into “fiat currency”. This paved the way of unbridled expansion of dollar without any real asset behind it. This may be construed as the root of Fall of the Dollar.

Thus America truly entered the age of paper money: MONEY BACKED BY NOTHING! The Dollar was officially a “fiat” currency. By fiat currency, it means a common type of currency whose VALUE is based on issuing authority’s “guarantee”, not on any intrinsic worth or extrinsic backing.

The Dollar Tsunami

After President Nixon “closed the gold window”, the U.S. leadership worked feverishly to develop a new system of international monetary management. Due to super-heavy spending by U.S. government, such as in Vietnam War and Great Society Programs, the dollar was greatly overvalued. The American economy was also under serious inflationary pressure. The Nixon action effectively paved the way of monetary expansion,i.e. devaluation of dollar. The U.S. government then entered negotiations with its industrialzed allies to appreciate their own currencies, in response to this change. In December 1971, a meeting at the Smithsonian Institute by a group of 10 countries (G10), all industrialized, created the Smithsonian Agreement.

This Agreement effectively ended the fixed exchange rate system established under the Bretton Woods Agreement. This Agreement:

• Reestablished an international system of fixed exchange rates, without the backing of gold or silver.
• Allowed for the devaluation of the U.S. dollar; in other words appreciation of other currencies.
• Was the first time in which currency exchange rates were negotiated.

The Smithsonian Agreement, which President Nixon hailed as “the greatest monetary agreement in the history of the world”, led to an approximately 8% devaluation of the U.S. dollar and revised the price of gold from $35 to $38 per ounce. However, the Agreement failed to impose discipline on the U.S. government and with no other mechanism in place, the pressure against the dollar on gold continued. The result was, gold became a FLOATING ASSET. Towards the end of 1971, it reached $70.30/ounce of gold and has kept on rising.

This is when the industrialized nations of the world started to abandon the devalued peg against the dollar (BUT: it is still being done in case of Chinese currency, Renminbi, i.e. pegged with U.S. Dollar). By end of February 1973, all resemblance to the Bretton Woods currency exchange or the Smithsonian fixed rate of exchange system was closed. It was when the major currencies began to float against each other, as governments still had difficulties maintaining the exchange rates within +/-2% band, as stated in the agreement. It essentially brought into effect the FLOATING exchange rate system, which determined the exchange rates based on the market forces of supply and demand.

The Flood Gates Are Opened

When the U.S. abandoned the gold standard, it hampered an orderly economic policies that the entire world was bound to. This is very significant. All of the barriers to keep the U.S. in check just disappeared. The country was no longer required to pay for its imports with gold, or even dollars backed by gold. The U.S. could pay for its imports with dollars with no backing at all or with dollar-denominated debt instruments. America had the unlimited freedom to expand its monetary bases at own desire.

This created a surge in the central banks around the world holding U.S. dollars as reserve assets, due to the ever growing trade imbalances between the America and rest of the world.

Fall Of The Dollar: Part-I

Legacy of Jobs

Steve Jobs has become immortal upon his death. His wonderful creations, his passion and his uncanny drive- all have made him a superstar reigning in stratospheric heights.

Jobs showed an “unconventional” path to life. The urge to run by the heart, instead of the brain. Chase after what the heart desires, instead of conventional establishment. This is THE difference, the “Road Not Taken” approach of Jobs. In Job’s own words, “….Don’t be trapped by dogma-which is living with the results of other people’s thinking. Don’t let the noise of other’s opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else in secondary.”

It takes radical determination, it takes hell of a courage to come out of comfort zone, come out of convention. It takes brimming tenacity of mind to pursue the inner-most urge and stick to it. You should be dead serious to stick to that hardcore urge. It’s like follow “What the Heart Says”, instead of what convention, or establishment tells you to. He was so radical, he made his own rules. He judged the world in binary terms. Products are “insanely great” or “shit”, one is facing death from cancer or “cured”, subordinates are geniuses or “bozos”, indispensable or no longer relevant. His outrageous comment about Microsoft, in the tele-documentary “Triumph of the Nerds”, was, “The only problem with Microsoft is they just have no taste……I have a problem with the fact that they just make really third-rate products”. This statement is quintessential Jobs: arrogant, frank, insightful and perhaps more than half right, though brutally overstated. One of NeXT executive commented, “Being around Steve is a reality distortion.” It is this Radical Mind that created the difference- in his own life and in his works.

His trademark is intensity, intuition-driven and radicalism. He had vision, he had the insight to exercise “think different” approach, which contributed to put Apple’s designs a head above the competition. He was intensely focused on his vision. In pursuing his heart’s urge, he was relentless. “….I’m convinced that the only thing that kept me going was that I loved what I did. You’ve got to find what you love….Your work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is great work. And the only way to do great work is to love what you do. If you haven’t found it yet, keep looking. Don’t settle. As with all matters of the heart, you’ll know when you find it.”

He had unconventional ideas. The thinking of death and get yourself done before you are gone-both are unconventional by western standards. The norm is to think of everything else other than death and get going as usual. The unusualness is evident in his behavior. He would park his Mercedes in handicapped spaces, didn’t put license plate on his car, offered stock options to his employees by backdating the option’s value.

He was visionary by the super-most standards. That’s how he became pioneer in his every endeavor. He is without a doubt top pioneer of computer generation. His uncanny creativity is obvious. He was the clear visionary to see technology to be designed and sold as consumer product, which was the revolutionary idea in early years of computers. His leadership in innovative products like Macintosh personal computer (the dominating Windows Operating System being modeled from Mac’s point-and-click system), computer animation (with Toy Story being the first fully computer-generated feature film by his company, Pixar) and series of wildly successful products of “simple elegance” like iMac, iPod, iPhone, iPad and other gadgets. Very few human souls invoked such immense repercussion in contemporary world like Jobs did. This “alternative” philosophy, this alternative approach to life, this intensity of heart’s passion, this mountain-like determination to materialize one’s own vision- are the true legacies of Jobs.

China Economy: Miracle or Bubble?

The problem with economic consequences is that, they are not visible before long long time. As we have seen the effects now unraveling in different parts of the globe, like the debt and demographic crisis in Japan, or the sovereign debt crisis in Europe or the Budget & Trade Deficit in the U.S., they occurred and impacted the economies within long span of time. There are also some symptoms that have evolved in China, which are just tantamount with Economic Bubbles.  Edwin Chancellor, a foremost authority on Economic Bubbles that occurred throughout history, has identified some classic symptoms of economic bubbles in case of China. Surely these have far-reaching consequences.

China has roared the most in the contemporary global economic arena. But its reputation as an unstoppable giant- as a country with an unending supply of cheap labor and limitless capacity for growth-masks some serious and worsening economic problems. China’s labor force is aging. Thanks to its brutally-enforced “one-child” policy, China’s population is actually set to decline in 2015, and its worker participation rate will peak this year- after which the numbers of people joining the work-force will fall off rapidly. If you would look at the real future of China, look at Japan, whose own aging population is the hidden cause of its continuing decline. Apart from that, its consumers save too much and spend too little. Its political and economic policy tools remain crude.

CLASSIC SYMPTOMS OF ECONOMIC BUBBLES IN CHINA

·         The biggest is the staggering dependence of its economy on government-fueled investments boom: No major economy has had investment as a percent of GDP at 50% for a sustained period. No country can be productive enough to take that proportion of GDP and re-invest it into new capital stock without eventually facing massive over-capacity and a staggering non-performing loan problem. In a free-market economy, investments fall during periods of uncertainty. Yet in 2009,Chinese investments in fixed assets jumped by 30%, rising to a record 58% of GDP. Roughly a quarter of this investment was state-directed, with many projects serving solely to meet local GDP growth targets. One commentator says, China is following the “Asian growth model on steroids”- i.e., the pattern of the Asian Tiger economies, boosting growth through ever-increasing investment, which led to the Asian Crisis in 1997-98.

Most likely, as per the wizard forecaster economist Nouriel Roubini (who first correctly predicted the American Housing Crisis), after 2013, China will suffer a hard landing. China needs to save less, reduce fixed investment, cut net exports as a share of GDP and boost consumption as a share of GDP. China is rife with over-investment in physical capital, infrastructure and property.

Roubini further added that the economy is overheating here and now, but in the medium term, China’s overinvestment will prove deflationary both domestically and globally. Once increasing fixed investment becomes impossible-most likely after 2013- China is poised for a sharp slowdown. Continuing down the investment-led growth path will worsen the visible glut of capacity in manufacturing, real estate and infrastructure.

Roubini says, “I was recently in Shanghai and I took their high-speed train to Hangzhou”, referring to the Maglev line that has cut travelling-time between the two cities to less than an hour from four hours previously.

“The brand new high-speed train is half-empty and the brand new station is three-quarters empty. Parallel to that train line, there is also a new highway that looked three-quarters empty. Next to the train-station, is also the new local airport of Shanghai and you can fly to Hangzhou” , he said. “There is no rationale for a country at that level of economic development to have not just duplication but triplication of those infrastructure projects.”

·         Lack of domestic demand: Too few people in China had the discretionary spending capability to support its economy domestically. Analysis has shown that it took a per-capital gross domestic product of about $5,000 to have meaningful discretionary spending power in China. About 110 million Chinese had that much or more, but they constituted only 8 percent of the population and accounted for just 35 percent of GDP in 2009, while exports accounted for 27 percent. In contrast, in advanced economies, about 70% of economic output is attributed to domestic consumption! Even China’s middle and upper classes had only 6 percent of Americans’ purchasing power.

·         Easy Money and Risky Lending: China today is keeping interest rates artificially low to promote investment and subsidize state-owned companies. For the past 40 years, the interest rate that major U.S. companies have borrowed at has been, on average, 1 percentage-point higher than the rate of GDP growth. In contrast, the Chinese prime borrowing rate has been on average 9 percentage-point below GDP growth over the past two decades!

What’s more, Beijing responded to the 2008 financial crisis and the resulting collapse in its exports by ordering its banks to lend.  In 2009, new bank lending grew by nearly 10 trillion renminbi ($1.5 trillion), or around 29% of the country’s GDP.

“The size of this credit expansion is worrying in itself”, obereves Edwin Chancellor. “It beggars belief that lending could have expanded so rapidly without some decline in underwriting standards”. Indeed, much recent bank lending in China resembles the lowered underwriting standards that led to America’s subprime-mortgage meltdown of 2007-08. For instance, up to half of 2009’s bank loans went to local government funding vehicles that appear to have little or no current cash flows. Instead, local governments are now depending on asset prices for revenue-much as they did in places like California during America’s housing bubble.

·         Real Estate Bubble: Chinese authorities are pursuing massive commercial and residential real estate construction despite lack of perceptible demand. Among the results: the newly constructed “ghost town” of Ordos in Inner Mongolia-with housing for a million, and virtually no residents. “Build it and they will come”- or maybe they won’t.

In addition, for Chinese households, artificially low rates of interest on their savings are also driving them into speculation in real estate-just as Americans did the years leading up to the 2008 crash. As a result, in China today, residential real estate is averaging between 20 and 40 times average household income-compared to roughly 10 to 12 times household income at the height of the U.S. housing bubble in the most overvalued neighborhoods. “This has to qualify as the most dramatically overvalued real-estate bubble in world history”, writes Steven Jon Kaplan of Truecontrarian.com.

·         A Surge in Corruption: “All great speculative manias have been accompanied by rising levels of fraud”, observes Edwin Chancellor- and it’s only after the bubble bursts that the Madoffs and Enrons come to light.

Here, of course, is where the closed nature of Chinese society is especially worrisome: China recently earned a dismal 3.5 (out of 10, for “very clean”) in Transparency International’s 2010 Corruption Perception Index, giving it a rank of 78…just below Tobago.

More worrisome: the real estate boom and infrastructure spending that are driving Chinese growth are especially susceptible to corruption. As evidence, the New York Times reports, half of all those luxury sales are estimated to be bribes.

·         A Fixed Currency: “Fixed currency regimes often produce inappropriately low interest rates, which are liable to feed booms and end in busts”, cautions Chancellor.

China’s currency, the renminbi, is pegged (fixed) to the U.S. dollar-leading to an undervalued exchange rate that boosts exports, keeps interest rates low, and encourages massive inflows of foreign capital.

And get this: The Bank of China is printing as much as $ 2 billion worth of renminbi per day in order to buy dollars and maintain the currency peg. The money supply skyrocketed 26% last year in China, creating an artificially booming economy that cannot last and will eventually cause a collapse.

CONSEQUENCE?

China avoided a hard landing during the global credit crunch but faces a downturn after 2013, as it will struggle to keep increasing fixed investments, Roubini said. He said, investment was already 50 percent of gross domestic product. Sixty years of data had shown that over-investment led to hard landings, citing the Soviet Uniion in the 1960s and 1970s, and East Asia before the 1997 financial crisis.

“A significant slow-down in China, or even negative growth, would likely reverberate throughout the world economy, including that of the United States”, warns Banning Garrett, Director of the Asia Program for the Atlantic Council of the United States. “The end of China’s role as an engine of growth would be a blow to global economic growth, affecting investors in China, purchasers of Chinese goods, and exporters to China”.

Bloomberg’s David Lynch agrees (1/26/11): “Any Chinese financial emergency would reverberate around the world. The  total value of the country’s exports and imports last year was $ 3 trillion, with about 13% of the trade between China and the U.S. As of November (2010), China also held $ 896 billion in U.S. Treasuries.

If China’s growth falls to less thn 5% in 2011 (from the targeted 8%), global commodity prices could plunge by as much as 20%, warns Fitch Ratings (11/30/10). Shares of U.S. and other Western commodities, steel, energy, manufacturing, automotive and chemical firms- which have come to rely on China as their biggest customer-would tumble if the country’s construction and capital-expenditure booms abruptly ended.

“A bursting China bubble would be a massive deflationary shock to the world economy”, says Chen Zhao, Chief Global Strategist and Managing Editor for Global Investment Strategy, BCA Research Group. “With China in growth recession, global saving excesses could surge and world aggregate-demand would be vastly deficient.  Bond Yields could move to new lows and stocks would drop, probably precipitously-in short, investors would face very bleak and frightening prospects.”

Like we have said at the beginning, it takes long for economic consequences to become visible. But, as symptoms often presage ominous outcome, this might be the case for the bubbles foaming in Chinese Economy over the years. And, if they burst, it will have far-reaching consequences.

Who Gains What- Out of Synthetic Debt Deal?

As suggested by us, the U.S. was able to cut- through a last minute Debt Deal on August 2 to avert possible default, after almost 2 months of haggling over the issue, and pressing over priorities of each other parties. Most of the proposed rise of debt ceiling ($900 billion in this year and subsequently $1.2 to 1.5 trillion) would be ploughed-back by deficit reduction of $2.4 trillion over the next 10 years.

The bill tilted heavily on the Republican agenda- not raising any new revenues by NOT incurring new taxes on American corporate, WITHOUT reducing any significant Defense budget. It only focuses on deficit reduction by cutting expenses. The common objective of achieving a balanced fiscal condition could not be met without instituting an increased revenue earning (by higher taxation mostly from rich corporates and individuals), vis a vis curtailing onerous budget spending. The cumulative deficit reduction of $2.4 trillion, proposed to be made within next 10 years, is less than the figure $4 trillion that bipartisan groups and political leaders had more or less agreed was necessary to put the debt on a meaningful downward path relative to GDP. It’s also the number that Standard’s and Poor, the credit rating agency, had suggested necessary for America to avoid a downgrade to its AAA credit rating.  Between American battle of conflicting priorities- maintaining fiscal balance as well as maintaining political and military supremacy - the latter clearly prevailed. The current reduction of defense budget proposal, in inflation adjusted dollars, kept Defense spending higher than it was at the height of the Cold War. Adjusted for inflation, the U.S. spent at most $580 billion a year on defense at the height of the Cold War. In the 2011 fiscal year, the Pentagon’s baseline budget is $549 billion, with another $159 billion allotted for the wars in Iraq and Afghanistan, for a total of $708 billion. That total figure drops slightly to $670 billion in the 2012 budget proposal.

The cloudy process of deficit reduction has lots of catches within it. The budget employs a BASELINE that automatically adds an upward adjustment for the rate of Inflation. And then, on top of this, the budget is automatically adjusted upward by another 7.5% each year! So, every year, the budget increases by 7.5% plus an adjustment for inflation!

So, the bottom-line is, the U.S. budget would be increasing by $10 trillion over the next 10 years. Now, if the planned deficit reduction materializes, the budget will only increase by $7.5 trillion! So, it’s no surprise that S & P on August 5 had downgraded America’s sovereign rating for the first time since the U.S. won the top ranking in 1917. This entails even higher costs on top of debt-behemoth that is on the economy’s shoulder, translating in higher interest rates. Projections are that the higher interest rates triggered by a downgrade could knock 0.4 percentage points off U.S. growth. That’s a big deal when the economy is growing at just 1.3 per cent (as per second quarter GDP data, annualized). And it’s worth noting that now that GDP is revised to be growing insignificant, debt is larger as a share of GDP (with gross debt ratio to be 96% of GDP, as of June 2011). This massive debt repayment program would have to be met by further monetary expansion.

Where will this extra money come from? Clearly, the Fed will continue its “money-pumping” program, by buying out massive amounts of Treasury Securities which are beyond purchase demand by investors. It will continue to erode perilously the value of money i.e. U.S. Dollar further and further.

So, if Republicans are the clear winner from this deal, the economy is the loser. An ideal deficit-reduction package would have coupled near-term stimulus with long-term consolidation, that at first stabilized and then reduced the debt as a share of GDP. As it transpires, this deal certainly doesn’t do the first and it’s unclear that it will do the second. So, in the final count- as political eventualities have shown- the fiscal chaos in the U.S. goes on. It’s like a spiral the continues unbroken. And, as mentioned, it does have monetary implications, which erode further the U.S. Dollar value.