Originally Posted by Denny Crane
* As an aside, again, you haven't demonstrated that China actually could buy meaningful amounts of things. Just because their cash reserves are greater than the market value of a company doesn't mean you can organize a purchase on those terms.
- Rather obviously, "China" is a conglomeration of many different people, interests and institutions that hold reserves. Even if they're still only halfway out of a communistic dark age, they're not a monolith. The same sorts of arguments were made against the much less monolithic Japanese decades ago.
- These folks have to maintain reserves for all sorts of purposes. Putting it all in one pot would be disastrously risky and stupid.
- Pricing is a dynamic process. You can't go out and buy 5B (or even the 2.5B or so necessary for a majority) shares of XOM at once because they're not all for sale. On the average volume day, typically under 0.5% of XOM shares change hands. To purchase more, a buyer would inevitably have to raise their bid price to induce more current holders to sell.
- All of this makes the underlying idea you're getting at, that the Chinese could somehow easily go buy up the entire US (produced) oil industry pretty cartoonish. It's the sort of thing that makes for good movies, but only because reality is both safer and more boring.
Now, moving on, let's suppose the Chinese government did somehow do this even though it's an impossibility.
* I, as an American owner, or a Brazilian owner, am certainly willing to "starve" other Americans for fuel if they are not willing to pay what Chinese pay. Not only would most of Exxon's current shareholding ownership be pissed if their company didn't charge the best price it could get, they'd have rightful grounds to sue the directors. They're not running a charity, and neither would Chinese owners. Believe me, I've seen many of these guys in action, and they're not in it for their fellow countrymen. I don't get the logic that simultaneously says these guys are undemocratic and unaccountable to their countrymen, but they will sell the asset they've cornered at less than market price to their countrymen.
Doesn't make sense. They'll behave like other owners of scarce assets and sell to the high bidder.
* If the Chinese are willing to pay more, let them have it. I'll buy less gas and make a killing investing in high mileage vehicles. Which, clearly, would be very profitable here.
* They'd also be very profitable in China of course, because to make any sort of profit on their cornering of the world's oil prices, the Chinese owners of oil will have to charge the Chinese a lot too. And as they charge more, economizing technologies and alternative means of transportation will become relatively cheaper. Even oil has substitutes, and as prices increase, the profit opportunities to creating substitutes will increase.
* That is, there's no escaping the scarcity problem in general. At best, if the Chinese (or we, for example) bought all the world's oil, it probably only gets a few extra years of consumption. Instead of wasting money cornering the market, folks would be better off investing in better, more efficient ways of doing things. Which is generally what they're doing. They buy lots of lots of stuff with the wealth they've accumulated. Nothing wrong with that, and nothing blameworthy or worrisome about that.
* Thus, I continue to conclude that a particular country, like China, owning a bunch of oil or another resource is a red herring. It's doubtful "China" could actually corner the market on a resource like this, and if it did, it would not be in the owner's interest to sell their resources much differently than the current owners do.
* Insofar as their are problems to come, the "enemy" is not China, but scarcity of oil. It's going away one way or another, and converting to other power sources will be costly. But it also represents a tremendous profit opportunity. Trying to corner the market on a dwindling supply seems like a retrograde approach to the problem to me, and likely to end in failure.
Originally Posted by FatJerry
Again, that's not a reason to fear or worry per se. It'd be pretty backwards, as you acknowledge below, to say this would be a reason to "crack down" on China, no? From any sort of humanitarian perspective, China is still a much poorer, more backward place than the developed world. They're growing quickly, and we should be thankful, for their escaping poverty, not concerned and secretly considering whether we should be bombing them back to the stone age to prevent competition and keep oil cheep for an extra two or three years.
And because , as they complete their transition from a principally Agrarian Culture to a more Industrialized one , with all the socio-economic stratas attached to that they really won't need their Export markets as much as they've pimped them over the last 20 years or so, which, make them less inclined to keep current terms of trade ( because they won't need to ) and may make them more inclined to insist on getting paid back leading to increasing pressure on deleveraging ( against a possible aggressive inflationary back ground - more later as to this sub risk.)
This is because the real story with them moving forward will be more about domestic demand
Completely agree with this. But you agree, do you not, that this just recasts the issue of resources in more market friendly terms. Which, like I say, is a better way to look at it, but there's nothing special about the Chinese in particular then. Every big developing market (eg Brazil, Indonesia, India also) are doing the same things. As their internal demand increases, there will be higher prices for scarce resources.
But... this doesn't make China that unique or dangerous. And it certainly shouldn't be that the developed world should seek to punish the developing for buying resources at market prices.
So at face value you've got an emerging overt influence on key world energy markets that will become increasingly signficant , coupled with , a cultural transition where they are internally focused in production and consumption.
There's a lot of interesting stuff to consider here. There's "overt influence" whether they own the resource or not, by virtue of their high demand. Culturally, one thing that's so far been left out of the discussion is that the Chinese (along with the Japanese, Koreans, Vietnamese and several other Far Eastern nations) have cultural preferences for higher savings rates than we do. We see all that money sitting there and think it's some sort of ominous power play. They see it as not venture capital but security for aging populations still trying to catch up to the West in terms of creature comforts.
On a per capita basis, for example, it's pretty crazy to talk about the Chinese holding, effectively, 2.5x the reserves of the Japanese, but having 10x the number of people. From even the roughest numbers perspective, the $1850/person that the Chinese have banked from the rest of the world doesn't seem any more alarming than the $8300/person the Japanese have banked.
The portents of all this lead to signifcant inflationary pressures in the States and Europe over the course of the next 5 to 10 years , where the fuel to the fire , is the inevitable debasing of the USD and the Euro currencies driven by the current account deficits/ sovereign debt issues that ultimately have to be taken into account.
Denny is right when he says he references debt addiction.
Indeed... which is sort of my point entirely. The worry about what the Chinese are doing, and the ham-fisted calls to "do something" about the "problem" they pose is like bitching about your neighbor's dog shitting in your yard while your house is burning down.
And just like an addict the first step is to admit the problem.
And this is the problem in the lack of political will and leadership in the US and in Europe.
Basically , fuck the political inconvenience and the ugliness that ensues and the inevitable casualties that come from letting the Free Market do its thing without the Interventionists trying to hold an artificial market.
Western Economy must
let the market find its natural level, at which point , capital will find that point when deleveraging and asset deflation has found its natural point.
You can't have a free market only when it suits you when you're inflating the bubble and everyone feels wealthier then what they actually are.
Hank, Ben and the all the other intellects who have studied what Andrew Mellon did and have tried to outmodel what essentially was and is a more simple and honest function of a market.....are spending billions more dollars only to arrive back at a point ( ultimately in my belief ) that you've got to take the pain.
And the real pain hasn't stared yet because the flip side of the free market hasn't been truly allowed to occur that would enable a quicker recovery.
And if Interventionists and Intellects are allowed to hold sway they will continue to bequeth debt for your grand children and their kids in the long slow progressive ineffcient decline , and possible death , of our social, economic , and possible legal institutions we take for granted. This is the risk in not addressing the realities and the structural issues of Western society that over politicise the efficient workings of an honest economic model.
I agree with the diagnosis (recognizing we're living beyond our means), but not necessarily the cure WRT financial markets. One thing the intellects are right about is that a full-fledged banking panic ought to be stopped because it burns the good along with the bad. There's some value, a lot, actually, in preventing what could be an orderly retreat from becoming a full on rout.