“The flaw of the Asian business model is that at the center of it is a craving for power as opposed to profit”


Hugh Hendry @ 55:00: “I don’t know if there is a confucius saying [now] but I certainly know that in the future there will be a confucius saying ‘the wise man not invest in overcapacity’ – the flaw of the Asian business model is that at the center of it is a craving for power as opposed to profit. We have spent centuries dictating their affairs – they want to dictate our affairs. They achieve that through current account surplus – they get to tell us what to do, but that is brought about by the subjugation of profit, the socialization of bank lending. In calling upon history and its portents, I am concerned because there are two previous episodes which cast a shadow over today – there are periods in time which we describe as economic disequilibrium, when a country becomes a creditor to the world and continued to run consistent trade surpluses – that is not meant to happen, trees are not meant to grow to the sky, there are meant to be countervailing forces, mainly the currency rises – that happened in America after the first world war, it became a creditor nation, Europe was bankrupt and America lent the money, and America was the economic powerhouse, the engine, and America liked it, and there was a fixed exchange rate called the gold standard. What happened was that the gold standard was pro-cyclical, and it created liquidity which went into assets and what happened was that first became last – economics is an unkind profession. It took 50 years, but then it happened again – Japan became a creditor nation – Japan ran and continues to run a series of trade surpluses but what happened? The liquidity went into the Nikkei, and Japan has gone from being number one to pretty much last over the last two decades. So I see the Chinese model, and I see its creditor status, and I see the reality of these persistent trade surpluses which are nothing but mechanisms which create credit that goes into asset prices – I fear the consequences, China could go from being first to last – consider that when you look at your portfolios”

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