Q&A with Sean Corrigan (Part 2 of 2)

2011-OCT-21

Click here to read Part 1 of GoldMoney's interview with Diapason Commodities' Sean Corrigan.

How dependent on western demand is the Chinese economy? Is “decoupling” a flawed concept?

Sean Corrigan: This is harder to say in absolute terms than many will admit, but, undoubtedly, the economy stands on two main pillars, neither of which is as steady as it might be.

Externally, the West still supplies much of its market and, in terms of its overall trade surplus, the US alone has accounted for more than 100% of the past two years’ total, and for 75% of the past five years’.

Even if we can argue forever about what the ultimate value added component of all this is, China’s exports amount to around a quarter of its published (if highly dubious) reckoning of GDP, so, clearly, a significant numberof livelihoods are dependent both on this and on the import and shipping of those goods that give rise to such exports.

However, such is China’s wayward economic structure that it has distorted all manner of pricing signals internally, too – the cost of capital, of land, of energy and other inputs – so that the second, shaky pillar on which it relies takes the form of ever more, credit-fuelled, higher-order malinvestment to generate its famous 9%+ national income scores.

It is only a little tongue in cheek to say that when we consider that the nation has yielded up a good deal of its comparative advantage (however illusory some of this was) and unleashed a nasty inflation – complete with a boom in what will prove to be either marginally productive, or completely unproductive, property and infrastructure – that it has sucked up into underremunerative ends its people’s savings, even as it purports to offer them a job not otherwise to be had in building more of the same, there are parallels with the mid-90s Asian Tigers.

Back then, their increasing uncompetitiveness and their growing misuse of resources on turning cheap money into expensive real estate was a key signal of the bust to come. The main difference with today’s China is that far less of this present excess is being financed with hot foreign money, given the difficulties in – though not the impossibility of – transferring funds across the current account barrier.

China is indisputably an enormous accident waiting to happen, but the only thing which may prove uncomfortable for the China bears among us is the nation’s unquantifiable, but redoubtable ability to hide the true cost of all this and to shuffle money endlessly from one balance sheet to another – to hide subsidies and support payments in a welter of accounting confusion and soft loan extension. Even the Soviets had their moment in the sun, remember, when Khrushchev’s tentative economic reforms in the 1950s seemed to offer a better way of doing things than either his predecessor or his contemporaneous Western competitors could manage.

When Adam Smith remarked, two centuries before that, that there was 'a lot of ruin in a nation', he was giving cold comfort to those long CDS protection or short Ozzie banks!

American financial analyst Jim Rickards has cited four potential outcomes to the world’s current monetary problems: multiple reserve currencies; SDRs; gold; or chaos. Which of these do you see as the most likely outcome – or is there another possibility?

Sean: Barely-managed chaos is what we have endured for the past 40 years – and arguably for much of the 60 years before that. I’m not sure that does not remain the smart way to bet, whatever the ambitions of the One World Platonic elite for a global Federalist construct to be forged in the funeral pyre of finance corporatism!

What things can ordinary people do to protect themselves from the economic fallout that may result from all these events?

Sean: The goal of the authorities is to make every man a gambler or a wastrel, for that way, it is assumed, the stock markets will rise again and cash registers across the land will ring out a merry peal of renewed Keynesian prosperity.

The sad truth, of course, is that this is a road to ruin along which we are all being force marched by the inflationist intellectuals and the other indefatigable defenders of the Provider State which their policies underwrite.

Hence, we can only offer generalities. Work hard; work longer; pay down all unproductive debt – at least until such time as you are sure that the interest burden and redemption schedule you face will be washed away by the loss of value of the money in which the loan is denominated. Try to acquire as much flexibility as possible in your finances for everything is - and is likely to remain – in a state of flux for a long while to come, with few certainties attached to the path by which we will eventually be forced to recognise the degree of our self-impoverishment. Try to find honest and competent entrepreneurs in whom to invest as these provide the best ‘active management’ of your money of anyone, especially when times are hard. Try to turn soft money into hard value wherever you can identify it.

This is all every well to say, of course, but much, much harder to achieve and meanwhile, there is the awful truth that there is no reward for thrift, no safe haven for one's savings, and that the greater one’s success in managing one’s affairs and the greater one’s moderation in spending the rewards of that success, the larger and juicier the temptation one offers for an increasingly rapacious tax man to siphon off one’s reserve into the echoing depths of the state’s empty coffers.

Sadly, there can be few guaranteed winners in such a world.