Nicholas Kristof writes in the New York Times April 27, 2011

Great Leap Backward

Excerpt:

Ms. Cheng was arrested on what was supposed to have been her wedding day last fall for sending a single sarcastic Twitter message that included the words “charge, angry youth.” The government, lacking a sense of humor, sentenced her to a year in labor camp.

So I tried to interview her fiancé, Hua Chunhui, but it turns out that Mr. Hua was recently arrested and imprisoned as well. That’s the way it goes in China these days. The government’s crackdown is rippling through the country, undercutting China’s prodigious growth and representing the harshest clampdown since the crushing of the Tiananmen democracy movement in 1989.

The reason? Surprising as it may seem, the government is worried that China could become the next Egypt or Tunisia, unless security forces act early and ruthlessly.

HKO comment:

The required oxygen for capitalism is freedom. Without it economic growth will wither and die. China’s economic miracle will be very short lived until the initiatives that have been top down become bottom up. It will not happen when such freedom is oppressed.

With the dollar weakening, debt growing, and the global and domestic economy still sluggish there is pressure driving up the price of gold, silver and industrial commodities.  Forgive me if it just seems too obvious.  Endless ads selling gold, and gold buyers showing up in vacant strip malls makes me skeptical.  What could reverse this trend?

China.

If there is any significant slowing in the growth of China, the demand for commodities will suffer.  Corrections are often steeper than the increases.  Markets can remain illogical for long periods, as we have certainly learned.

When interest rates climb, the holding costs for gold which pays no interest or dividend, goes up and the value declines.

I recall how many in the late 1970’s bought gold at $800 an ounce, thinking that runaway inflation was inevitable. It wasn’t and many lost 75% of their investment. Depending on whether the new Congress has the balls to truly address our problems, gold may indeed be a worthy investment. But do not ignore factors which could easily drive it in the other direction.

My first post of 2010 was The End of the China Decade, but it focused more on the rise of India.

The New York Times published Contrarian Investor Sees Economic Crash in China by David Barboza seven days later.

The prospect of a crash in China is real.  The banking system is closed and may be covering up severe flaws.  They may be hiding very high non performing loan rates. Some of our brightest bureaucrats failed to foresee the vulnerability of our own financial system and we have substantial disclosure. Any growth rate as strong as China’s is subject to a bubble scenario.

While it is difficult to predict how such a crash would impact us it could have severe consequences. China is way too big for any group of nations to bring financial support to it. Our currency could strengthen relatively as theirs weakens, but we could also be in big trouble if they need to liquidate their holdings of US bonds.

One possible benefit is the final proper alignment of their currency; an objective that has frustrated trade politics for decades. This could make American manufactured goods more competitive and jump start re-employment.

The biggest potential problem is the difference in political culture. High unemployment in America causes big deficits because of our social support networks. High unemployment in China may cause starvation on a large scale and much more dangerous political instability.

The biggest worry the current state of global financial instability renders is that such situations foster belligerence.

At National Review Conrad Black writes “An Awful First Year”.

A Comprehensive rant about Team Obama’s first year,  this passage focuses on an historical perspective of presidential foreign policies:

Dwight D. Eisenhower came into office determined to end the Korean War and begin de-escalating the Cold War. He did both, the latter with a revival of summit meetings and his Open Skies proposal. Richard Nixon entered office with a plan to open relations with China, extract the U.S. from Indochina without bringing down the non-Communist government in Saigon, and pursue better relations with the USSR, arms control, and a peace process in the Middle East. All this happened. Ronald Reagan entered office with a plan to end the Cold War by outspending the USSR on defense, reducing Soviet income by inducing the Saudis to cut the world oil price, stopping Soviet industrial espionage, and working with the Vatican to destabilize the satellite countries, while reinvigorating the U.S. economy with tax cuts. It happened and it worked. George W. Bush protected the nation from terrorists.

The foreign-policy pattern of post-Truman Democratic presidents has been less encouraging. John F. Kennedy and Lyndon B. Johnson abandoned the Eisenhower doctrine of “more defense bang for the buck” and massive retaliation, for the policy to “pay any price, bear any burden” while acquiescing in Mutual Assured Destruction. The Bay of Pigs, Vietnam War, and Soviet nuclear parity resulted. Jimmy Carter renounced “the irrational fear of Communism” until the Soviets invaded Afghanistan. Bill Clinton under-reacted to successive terrorist outrages, and 9/11 was the consequence.

Obama’s pursuit of instant gratification in the most complicated areas – arms control, the environment, the Middle East – and his feckless apologies for great statesmen of the recent past, including Roosevelt, Truman, Churchill, and Eisenhower, have dismayed America’s allies and delighted its rivals. It has been a year of naive amateurism, but it has ended well.

During the 1970’s the sudden and enormous wealth of the Arab World as a result of the oil cartel OPEC, made everyone think they would rule the world. Raising oil prices as a result of the US aid to Israel during the 1973 Yom Kippur War (disproving the myth that we only fight for oil), the oil shieks were reported on lavish shopping sprees at Harrods’s in Great Britain handing out 100 dollar bills as tips.

In the 1980’s the Japanese were in the ascent. They bought the Pebble Beach Golf Club, and management consultants tried to copy the Japanese miracle as Japanese cars spelled disaster to the Detroit auto industry.

In the 1990’s the Japanese bubble burst and they have yet to recover.  We refer to their lame policies to reignite their economy as the lost decade. The 1990’s was the American decade. The dot.com boom, the internet industry, billion dollar hotels in Las Vegas, stunning victory in Desert Storm, and a budget surplus showcased American economic strength.

The first decade of the millennia was the Chinese decade. They discovered capitalism, hosted the Olympics, began to develop a middle class, and began an industrial growth that fueled a boom in commodity prices. But the Chinese economic growth was fed from the top down, not from the bottom up the way an enduring capitalist economy develops. While we saw our banks crash as a result of revaluing inflated assets, such market adjustments are prevented in China and their banking system in more vulnerable than their government allows to show.

Who will dominate the new decade?  India.

India’s capitalism is more bottom up.  British rule has left in place institutions of property rights and law that are essential to developing capitalism.  Like China, India has cultural shackles to grow out of, but they may be more ready for capitalistic growth than the northern neighbor.

My best performing stock of 2009 was Tata Motors, the GM of India (the old non government owned GM); up over 230%. (Suntrust was the second best.)

We are entering India’s decade.