Posted on Friday, October 8, 2010
Having worked in financial news for more than 15 years I understand well why reporters and columnists regularly develop narrative arcs to explain complicated economic issues.
After all, these storylines often are the easiest way to get people to comprehend esoteric topics like gyrations in the global stock markets.
The trouble is sometimes the premises behind these stories are dangerously wrong. And the mistakes can have catastrophic consequences.
For instance, in July 2007 I wrote an op-ed for the Los Angeles Times that said the U.S. economy was in a bubble. Since this was before 2008, the concept of a bubble was not part of the financial media's narrative. So I was pilloried, particularly in this appearance on CNBC (and here, and here.)
Today these clips are like horrific time capsules. Watch as the so-called experts explain why the U.S. economy was poised for growth as it was teetering on the brink of disaster. Of course they look ridiculous now. But that's what the financial world believed back then.
The reason I bring this up today is during my conversations promoting my recent book The Shadow Market I've come across some dangerously pervasive narrative myths about the global economy. And if these stories take hold the results could be disastrous.
The first myth goes something like this: China really can't hurt America because it owns so much of our currency and debt that it will only be hurting itself. The term most commonly used to describe this phenomenon is "codependency."
The theory seems logical. The trouble is it's not based on reality. The fact is China can do all sorts of damage to us without it having any impact back home.
This was proven during an economic war games exercise the Pentagon held in March 2009. The U.S. repeatedly lost the games to China for a number of reasons, but chief among them was that China could get the U.S. to what it wanted just by tightening the financial screws a bit. If China shifted the maturities of some of its Treasury holdings to more short-term debt it would set off chaos in our stock markets. If China sold a small portion of its U.S. holdings and signaled to the markets that it questioned America's stability all hell would break loose.
The point is the relationship between the U.S. and China is deeply intertwined and complex. But it's hardly codependent when one side has most of the authority. Yet that's the state of play today.
The other myth relies on the power of a historical analogy. The basic line of logic is: Remember when Japan supposedly was taking over the U.S. back in the late 1980s and early 1990s? Well that didn't pan out, and China is just another overhyped threat from the East.
This myth is so pervasive that a reviewer for the New York Times actually led her review of The Shadow Market with it this past Sunday. (I've received better reviews in my time, but if you're curious you can find it here.)
The problem is the two situations couldn't be more different.
First, even at the height of its influence Japan never was considered a threat to become a bigger economy than the U.S and its gross domestic product remained a fraction of ours. This gave the U.S. enormous advantages. The dollar faced no pressure as the world's currency. Companies and countries still HAD to have access to the U.S. market since it was by far the largest in the world.
Today, however, we know that China eventually will pass us and become the largest economy on earth. It's only a matter of time. And to presume that we know what this will mean is ludicrous considering America's never faced this challenge since it became the world's dominant economic power.
Second, and more importantly, China is playing by a completely different set of rules than Japan or anyone else ever has.
This is crucial to understand because it seems so few people do. You see, Japan didn't buy Rockefeller Center. Mitsubishi Real Estate did. And Japan didn't buy Columbia Pictures. Sony did. These were publicly traded conglomerates buying assets they considered to be undervalued. Were the companies close to the Japanese government? Sure, about as close as major U.S. companies are to the U.S. government. But were they PART of the Japanese government? Absolutely not.
This is not the case with China, which practices a form of state capitalism, where most of the country's businesses are somehow tied to the government. So when the Chinese oil company Sinopec invested $7 billion in Brazilian oil last week it WAS the Chinese government doing the buying because Sinopec is state-owned. Or when the Chinese mineral company Sinochem enters into a bidding war for a Canadian potash producer it IS the Chinese government doing the bidding.
This is a fundamental change in the way the global economy has traditionally operated. All of a sudden geopolitics and finance are intersecting in ways that we never considered possible. And to not understand this will lead to some wildly ill-informed conclusions. The fact is China's government IS trying to buy up the world, or at least the parts it deems necessary to fuel the country's growth. That makes this a whole new ballgame.
So where does this leave the average American or the typical investor? Unfortunately, it leaves you not knowing whom to trust when it comes to interpreting what's going on in the global economy. My best advice is to trust your eyes and the numbers from sources you believe in. But please, leave the narrative stuff to the fiction writers.