Long ago my father used to tell a joke that went like this –
What is the definition of heaven? To have an American salary, a British house, a Chinese cook and a Japanese wife.
What is the definition of hell? To have a Chinese salary, a Japanese house, a British cook and an American wife.
Even at the time, I found this unconvincing. Our own modest dwelling hardly qualified as celestial. Likewise, the King Prawn fried rice available from the Chinese takeaway was not obviously superior to fish fingers and chips at the transport caff.
American womanhood – as exemplified by Charlie’s Angels & Debbie Harry – seemed highly competitive with the trainee nurses in the local discos. On the other hand, the image of adoring, submissive Japanese women did not survive a viewing of Oshima’s “In the Realm of the Senses.”
Things have moved on subsequently. China now has second most billionaires in the world, and salaries – at least in the coastal regions – have risen so much that some Western companies are considering “re-shoring” their operations. Meanwhile median incomes in America have been stagnant for decades.
British food has improved at all levels, but after two decades of asset inflation British housing offers some of the worst value for money anywhere. British courts – by granting huge divorce settlements, but refusing to accept pre-nups – have made the British wife a worse deal than the British house.
There is even a new breed of assertive, independent Japanese women known as “carnivores”, in contrast to the docile “herbivores” into which the once proudly macho Japanese males have devolved.
Convergence has happened; sometimes in a good way, sometimes not.
So what would be the contemporary equivalent of the old national stereotypes? An economic version might look like this.
Economic heaven = Chinese GDP growth, Japanese currency, British social safety net, American central bank
Economic hell = British GDP growth, American currency, Chinese social safety net, Japanese central bank
This configuration too will almost certainly be erased by the passage of time. Since the global financial crisis erupted in 2008 the imbalances that characterized the global economy for so long have become subject to forcible and unpredictable change. In fact the long build-up of imbalances was one of the causes of the crisis. One of the “jobs” of the subsequent period of wrenching economic adjustment is to unwind them.
CHINA: at first sight, seemed to be the big winner of the post-Lehmans era, as GDP growth picked up steam while most of the developed world s into sank a debt-raddled funk. The reality was a lot more complex, as reality tends be. The price for that growth may turn out to be very high.
Edward Chancellor points out here the extent to which China’s already excessive reliance on fixed asset investment has intensified even further in the last few years. The Chinese authorities proclaim that they plan to shift the economy to a consumption-driven model with a growth target of 7.5%. Such a transition is unlikely to be smooth. There has never been an investment boom of this scale without a bust.
For consumption to rise consistently as a share of GDP, wages and salaries will need to grow faster than the economy for a sustained period of time – which means a long-tem squeeze on profit margins. In such a scenario FDI would cease or even reverse, and the interaction of declining investment, employment and financial sector trouble could drive GDP growth well below the new target.
This is more or less what happened in Japan as it moved from labour surplus to labour shortage at the end of the double digit growth era. The urbanization ratio rising over 50% was the tipping point for supply-and-demand in the labour market. China today appears to be where Japan was in 1969-70. After that Japanese GDP growth did not glide smoothly to a lower trajectory. It abruptly halved.
Recent political shenanigans amongst the communist party elite is a timely reminder of the pressures inherent in the system, pressures that will be far stronger in the case of a severe recession.
US – Shale gas and oil is the game-changer, offering the prospect of energy independence for North America, a turnaround in the trade account and the dollar. Every $1 increase in retail price of gasoline is equivalent to a $120bn tax on the American consumer. Put this into reverse, as the oil price falls back to (or maybe well below) the marginal cost of production (around $ 80), and you have a huge boost to incomes as well as job growth in energy infrastructure & transportation.
JAPAN – has spent the last fifteen years trying to shrink its way out of its financial problems. This is impossible. Countries can only deleverage by generating nominal GDP growth above the overall interest rate in the economy, as the US is now successfully doing. Japan ‘s interest rates may look low, but nominal GDP has been falling consistently at 1-2% per year, which means debt necessarily compounds up. It will only start to decline when nominal growth rises above the interest rate, which requires a 180 degree reversal in monetary policy and a weak yen. The Japanese establishment has always refused to accept this solution, but in fact it is the only one available.
BRITAIN – the policy of ramping up economic growth through asset inflation and mass immigration has reached its limits. The public sector and public services have become unaffordable and a deadweight on the economy. As Warren Buffett noted, the financial crisis was as much the fault of politicians, regulators and, yes, the general public itself as it was of the greedy bankers. The financial sector remains vital to Britain’s prosperity; the idea of creating masses of new jobs in manufacturing is a fantasy. It remains to be seen if any politician can articulate this and get re-elected.
Slow growth China, a sustained pick-up in the US, a weak yen, a sobered-up Britain. Seems unlikely, but not more so than Chinese billionaires & carnivorous Japanese women would have a few decades ago. Stereotypes exist to be subverted and replaced by new ones, which get subverted in turn. Convergence continues.