Thursday, May 15, 2008

The Mandate of Heaven: respectfully disagreeing with Jim Rogers

Although you may not find anyone who will talk about it openly, Chinese culture--along with other Asian cultures--is superstitious in very non-Western ways.

Please go to to see photos and charts.

Superstitions in the West are largely relegated to habits whose roots are lost on most of us (saying Gesundheit, etc.) and "old wives' tales" such as 13 being an unlucky number, beliefs which rarely impact everyday life.

But in much of Asia, superstitions are taken seriously enough to impact ordinary life. For instance, you don't choose a wedding date based on work schedules or the weather--the date must be astrologically propitious.

Omens are taken seriously in Asia, and the belief that natural disasters are not random but reflections of profound disharmony runs deep into Chinese history. The political elite of any dynasty ruled with the "Mandate of Heaven;" just rulers maintained harmony between Heaven and Earth and among their subjects, while unjust/corrupt rulers could lose the Mandate of Heaven and be replaced.

Natural disasters (earthquakes, floods, famines, etc.) were seen as evidence of a divine repeal of the current rulers' Mandate.

Whether anyone is talking about it or not, the huge storms which swept China in early March and the horrendous earthquake which struck central China last week are very bad omens--for the upcoming Olympics and for the current Communist Dynasty.

You don't have to see these natural disasters as omens to wonder if expectations for the Summer Olympics in Beijing have been set so high that there is no way mere mortals of any nation could meet them.

Successful Games tend to begin with low expectations. The 1984 Summer Games in Los Angeles were widely anticipated to be a complete disaster: famously congested L.A. traffic would bog down the athletes and fans, the smog would hinder the athletes' performance, the widely dispersed venues were too difficult to reach, and so on.

None of this came to pass, and with a giant sigh of relief came the assessment that the Games had been a success: low cost, efficient, etc.

But what about the Mandate of Heaven? Could the rumblings of the Earth be foretelling a disharmony within society, and a furtive recognition that the Communist Party's mandate to rule is in danger of being divinely repealed?

Few if any would go so far as to give this voice, but nonetheless the thought is present even if unspoken as this remains the cultural context and interpretation of major natural disasters.
One of the biggest Bulls on China's future is legendary investor Jim Rogers, who moved to Singapore (not the People's Republic of China, we note, but a tiny well-governed city-state with strong rule-of-law) to embed himself and his family in the heart of Asia. Jim Rogers: China’s Economic Advance is All But Unstoppable.

Mr. Rogers is always well worth reading, and he raises many cogent points in this interview. Nonetheless, when somebopdy trumpets a multi-decade cycle of unending prosperity and "unstoppable growth," it's usually an excellent signal to sell, get out, leave town, etc.
The time to get in is almost always a decade before these prognostications, back when nobody was issuing glowing predictions. The books issued right at the top of the dot-com bubble had titles such as Dow 100,000 and the like, and they too predicted decades of sustainable, "unstoppable" growth.

The list of China's ills are well known--and to many, environmental ills top the list. But even here, pundits such as "nice American guy travels to places he knows nothing about and makes polite inquiries" James Fallows sees positive developments as evidence China can turn the corner on its environmental problems: China’s Silver Lining Why smoggy skies over Beijing represent the world’s greatest environmental opportunity.

Mr. Fallows' thesis is simple: China's environmental problems present easily picked "low hanging fruit;" all China has to do is institute the most basic efficiencies and conservation techniques, and the environment will improve markedly.

Now this is certainly true, and perhaps he's right. On the other hand, the U.S. is not a very hopeful example; "low hanging fruit" abounds in the U.S. (low mileage vehicles, etc.) yet no efficiencies or conservation progress of any scale has been accomplished since the early 1980s.
With that in mind, let's turn to trends/issues which will tend to undermine the "unstoppable" progress and environmental amelioration Rogers and Fallows foresee.

1. It's too late; there aren't enough resources left on the planet for 1.2 billion people to acquire and sustain a Western lifestyle of energy-dependent consumption. This chart illustrates the reality that Mr. Rogers seems to be be aware of but doesn't connect to his prognostication: there isn't enough oil for China to build and operate 500 million autos, and even his vaunted nuclear energy option is limited by Peak Uranium:

There is a startling cognitive disconnect between Mr. Rogers enthusing about China building hundreds of millions of vehicles by 2020 and his seeming recognition of Peak Oil; just what fuel are those 200 million vehicles going to burn in 2020? He doesn't address that rather critical issue.

As noted here again and again to the point of tedium, the world currently consumes 85 million barrels of oil a day, a quantity which is set to decline regardless of how much water is pumped into Saudi oil fields. Yet demand for oil is projected to climb to 480 million barrels a day as China and India strive for middle-class Western consumption levels.

There is simply no way to create 500 million equivalent barrels of oil with switchgrass or gasified coal or nuclear power.

It's over, fini, gone. Even if China buys enough farmland in Africa, etc. to feed its 1.2 billion citizens, there isn't enough oil for the 800 million vehicles already on the roadways of the world, never mind another 300 million in China.

For even the most bullish optimists like Mr. Rogers, the future inevitably becomes a race against the clock: can China, or the U.S. or indeed any nation build a sustainable energy complex before the cheap oil runs out? (And by cheap I mean under $300/barrel).

Mr. Fallows flits about, finding good folks tinkering with good ideas and technologies, just as he could find tinkerers and researchers in the U.S. industriously working on autos which get 200 miles per gallon and artisan breads and sustainable agriculture and a thousand other good ideas and technologies--yet that does not make the scaling up of all those good ideas to 300 million or 1.2 billion people inevitable.

The terrible irony is that had Mao chosen to begin integrating China into the global economy and energy complex back in 1966 instead of destroying the best and brightest of his nation in the chaos of the Cultural Revolution, China would now be at the stage where it could conceivably transform itself into a sustainable economy. But Mao threw away an entire generation, 20 years, on his "permanent revolution," and instead of moving forward in 1966, it was 1986 before the first small steps were made to awaken China's economy.

2. The demographic clock is running against China. What few want to acknowledge, at least in China, is how "The Great Helmsman" Mao Tse-Tung steered China into future ruin, setting a course which burdened the nation with a stupendous Baby Boom which it cannot afford to support with retirement entitlements.

In the 1950s, Mao encouraged large families, insuring a demographic "bulge" of hundreds of millions of citizens. Realizing the unsustainability of such massive population growth--from 800 million to 1.2 billion--the leadership after Mao instituted the draconian "one child per family" rule to brake the runaway demographic train.

But the train is still moving, and the smaller generation behind Mao's Baby Boom cannot possibly support its teeming elders. The same is true, of course, in Japan, U.S. and Europe, but those nations don't have the burden of 800 million poor residents who aspire to the good life being enjoyed by their 400 million fellow citizens on the coast.

China still needs to raise 700-800 million people out of poverty; to manage that Herculean task even as it sets aside enough wealth for hundreds of millions of retirees is simply impossible. Mao set the course, and the shoals are just ahead.

3. The cultural contradictions of Chinese Communism cannot be bridged. A book published in 1988, The Cultural Contradictions of Capitalism brilliantly laid out the contradiction at the heart of capitalist U.S. culture:

This classic analysis of Western liberal capitalist society contends that capitalism-- and the culture it creates--harbors the seeds of its own downfall by creating a need among successful people for personal gratification—a need that corrodes the work ethic that led to their success in the first place. Do you have any doubt about the veracity of that analysis as you look over a U.S. economy which depends on rampant, debt-based spendthrift consumerism to even keep a pulse?

The cultural contradictions of Chinese Communism are two-fold:

A. Though the central government rules policy and the media with an iron hand, economic development and its environmental impacts are controlled by local Party cadres. The locals, of course, want to get rich like everyone else, and the way to line their pockets is by allowing or even encouraging runaway economic growth and by borrowing billions of renminbi (yes, they can) to build sports complexes, malls, etc. regardless of the need for such large-scale facilities.
To task these same people with shutting down the lead smelters and coal-fired plants they just had built is to ask the impossible. You just convinced the lead smelter to build in your province/city (and took a nice chunk of change for arranging the permits), and now you're going to insist he install millions of dollars' worth of scrubbers on his smokestacks or you'll shut him down?

As a result of this structural contradiction, the central government's environmental policies, no matter how well intended, are essentially toothless in the real world. And if local officials are supposed to improve efficiency to keep their jobs, well, then the numbers will magically come in as needed, whether the mandated efficiencies have been made or not.

B. To keep food and energy and water (what I call the essential FEW resources) affordable to its populace, the central government subsidizes all three, thus creating and sustaining widespread waste of those same resources.

It's simply human nature that when something is basically free, you waste it. And so this cultural contradiction has enormous consequences. China is still a "command economy" in which the central government can set the price of water, heating and energy, but in so doing it has sown the seeds of its own massive, unstoppable inefficiencies and waste.

IF you live in Beijing, for example, in a fancy middle-class tower, you pay a one-time fee for your winter heating. Whether you hardly use the heat or leave it on 24/7 and open the window when you get too warm, the cost to you is the same.

What are the consequences of such unmetered consumption? Waste, on a grand, government -mandated scale. These built-in inefficiencies and invitations to squander resources are immune to government pleas, as they run in direct contradiction to pricing policies.

So what happens if the government allowed the market to set prices? They will skyrocket, creating the potential for explosive social disorder. And rather than face political demands, the Communist leadership has elected to subsidize the FEW resources, guaranteeing waste and inefficiency--and future shortages as these resources cannot be "grown" as fast as waste and consumption.

4. Maintenance is not a strong cultural value when everything is new. Buildings from the late 1980s which would be considered "broken in" in the U.S. are being broken down and hauled to the landfill in China to make room for newer, taller, more glamorous buildings. When everything is new, there is little regard or interest in maintaining what already exists. Thus you will see condominium towers built a mere decade ago which are already rust-streaked and looking seedy because there is no plan or money to repaint them every 10 years.

It's a nice idea to install multi-million dollar filters on water-supply facilities and high-technology scrubbers on smokestacks, but those technologies only work if there is a cultural, governmental and organizational will to maintain those technologies: the filters have to be changed regularly or the fancy scrubbers don't work.

This kind of institutional interest in long-term maintenance is not much in evidence in China, where the cultural assumption, built up over the past two decades of runaway growth, is that if the roadway cracks and the railings are rusty, well, it will be torn down and rebuilt soon enough. But once the infrastructure has been built, no nation has enough money to tear it down and rebuild it every few years; what's there has to be maintained.

Thus the future may not be one of runaway growth forever, but one in which trillions of dollars of rapidly constructed infrastructure slowly goes to seed. That inattention to maintenance is another cultural contradiction which may well haunt the Communist leadership for decades to come.

Thank you, Michael R. ($30), for your very generous contribution to this site. I am greatly honored by your on-going support and readership.

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