by Simon Black
On Friday morning July 23, 1982, news broke around the world that a consortium of Japanese companies was acquiring Rouge Steel… which until that point had been a wholly-owned subsidiary of the Ford Motor Corporation.
It was unthinkable: the Japanese were buying up an American steel company??!?
But it was just one of the first of many, many more acquisitions to come. Within a few years, Japanese companies and investors had bought up large chunks of prime US real estate, major companies, and just about any US asset they could get their hands on.
Sony bought the iconic Columbia Pictures (which had recently released cinematic gems like Ghostbusters and The Karate Kid). Japan’s Bridgestone Corp. snapped up the legendary Firestone Tire & Rubber Co. Mitsubishi bought 51% of the world famous Rockefeller Center in New York City.
Japanese automakers and technology manufacturers were beating the pants off of their US counterparts. And Japanese cultural phenomena from Nintendo to Transformers swept America’s youth.
Even popular movies from the late 1980s like Die Hard and Back to the Future 2 showed how the Japanese were taking over America.
All of this resulted in major public frenzy.
Corporate executives rushed to learn Japanese, and newspaper columnists railed against this ‘economic Pearl Harbor’. I was just a kid at the time and had no idea what was happening, but I do remember feeling unsettled as I heard about the rise of Japan in elementary school.
But then something happened that very few of the ‘experts’ anticipated: Japan had an epic financial and economic meltdown.
It turned out that much of Japan’s meteoric rise during the 1980s had been the result of a massive and unsustainable financial bubble. The country’s central bank had been shoveling cash into the Japanese economy, and the national government was heavily subsidizing its corporations.
While interest rates were incredibly high in the US (mortgage rates in the mid-1980s were well over 10%), rates were dirt cheap in Japan, creating a boom in paper money.
And with so much money in their financial system, Japanese investors went on a shopping spree, both at home and abroad.
In addition to buying up trophy assets in America, Japanese assets also went sky high. In fact it was rumored at one point that Tokyo’s Imperial Palace was worth more than all the real estate in California combined.
And Japan’s Nikkei stock index surged six-fold during the decade, peaking at 38,915 on December 29, 1989.
But then Japan’s epic financial bubble burst… and all the fears of them taking over the world vanished.
The Nikkei plunged more than 82% from its peak, and more than 33 years later, the Japanese stock market still has not fully recovered!
History is not an absolute road map… but it is a useful guide and cautionary tale. And personally I see a number of parallels between Japan in the 1980s and China today.
China certainly has a lot of things going for it, from a vast economy to a rapidly growing military. And as a major power it has to be taken seriously. But it’s becoming increasingly difficult to see China and the CCP becoming the world’s dominant superpower… and here are just a few reasons why:
1) Food and Water
China has 22% of the world’s population, but just 9% of the world’s arable land and just 6% of the world’s fresh water. Both are shrinking rapidly. China lost 6% of its arable land due to erosion and climate change from 2009-2019, and its water supply has been in astonishing decline.
By comparison, the US has 4% of the world’s population but 11% of the arable land. And with respect to water, Lake Superior alone constitutes 10% of the world’s fresh water supply. The Great Lakes combined are around 20%.
So if you view water as the ultimate critical resource, China has big problems.
Can they fix it? Sort of. It’ll be expensive. Desalination plants can create more water supply, though they are extremely inefficient at the moment. I wouldn’t be surprised to see China trying to tow icebergs from the Arctic.
2) Energy
Ditto for proven energy reserves. North America’s energy reserves (coal, oil, natural gas, shale) blow China away, especially on a per-capita basis. This is especially problematic for China, whose energy demands are growing rapidly. It means they’ll have to import more and more over time.
Is it fixable? Yes. The US was a major energy importer for decades. But it’s really expensive and damages your economy.
3) Debt
I’ve written extensively about America’s gargantuan debt problems. The US is obviously not alone; many European countries, for example, also have enormous debt challenges. And so does China.
China’s debt problems are a bit more hidden, more subtle. But to give you a sense of the problem, the total state and local government debt burden in the United States is around $3 trillion according to Federal Reserve data. In China, local government debt is north of $10 trillion.
And total debt in China (as estimated by groups like Goldman Sachs) is now similar to total US debt at around 280% of GDP.
China has a dangerously high level of debt, and this is starting to create serious problems.
The US had its recent banking crisis earlier this year (which in my view is still ongoing).
China is having its own financial and economic meltdown… including corporate and municipal defaults, a looming real estate crisis, and major problems at the central bank.
The People’s Bank of China has had to slash interest rates, inject hundreds of billions in liquidity to prop up asset prices, and they’ve even cut commercial banks’ reserve ratios… which makes Chinese financial institutions MUCH riskier.
Is this fixable? Sure. The US had plenty of financial challenges during its rise to power, including the Great Depression. But it’s going to be extremely painful for China.
4) Economic momentum
China is rapidly losing is global manufacturing and export dominance. Some of this was a self-inflicted gunshot wound with the country’s insane zero COVID policy. Much of the Chinese economy shut down, forcing companies around the world to either re-shore, or find manufacturing partners in other countries.
More importantly, China’s economic growth over the past several decades means it is no longer a cheap place to produce; other countries (like Vietnam) are now far cheaper, and China can’t compete. This trend could really slow down their economic momentum.
Is this fixable? Yes. But it will take many, many years for China’s economy to fully pivot.
5) Demographics
Decades of China’s idiotic One Child Policy have left the country’s demographics totally upside down. There are too many old people, and not enough young people in the work force to support them.
Western nations have this problem too. But over the next decade, China’s demographic problem will become MUCH worse than the US or Europe. This is a social and economic disaster in the making.
Is it fixable? Difficult. China would have to bring in LOTS of immigrants. But can they find 100+ million young people to move there? Between the language barrier, heavy pollution, lack of personal freedom, and blatant racism, that’s probably a tall order.
It wouldn’t surprise me if they simply tried to kill off their elderly population. Perhaps that’s what the Wuhan researchers were figuring out. Or they solve their problems by cloning young people in a laboratory. Who knows– the Chinese government has zero ethical boundaries.
6) Health
Much has been written about the pitiful state of US health. Obesity. Heart disease. Mental disorders. Drug abuse. Well, China has its own severe health issues, including an alarming rise in heart disease and hypertension prevalence. Plus the country is suffering an unbelievable diabetes epidemic.
There’s also a serious trust deficit with China’s healthcare system, and problems with quality and affordability.
Is this fixable? It’s difficult. Xi has been trying to toughen up China’s youth by putting restrictions on video game usage and curbing lazy behavior. But this is a daunting task.
7) Reputation
This is a really tough one. Very few countries (if any) trust China.
Think about it this way: the Federal Reserve Bank of New York presently holds several thousand tons of gold in its vaults on behalf of foreign governments and central banks.
Is there any country in the world that is willing to store their gold in China? No chance. No one trusts China’s Communist Party.
And fixing that reputation issue will take decades of good behavior and rehabilitation.
So in total, China has major, major problems.
I’ve written before that it’s easier to fix problems when your country is on the rise (versus being in decline). But that’s no guarantee that China can pull it off… and certainly no guarantee that China will become the world’s dominant superpower.
And it’s for this reason that my wife and I decided to teach our children Spanish from birth, rather than Mandarin. Mandarin is obviously a useful language, but I don’t feel the need to prepare my children for a future in which China is the dominant superpower.
None of this takes away from America’s laundry list of problems. The national debt. The dollar. Social chaos. Pitiful leadership. The rise of socialism. Etc.
Like China, America’s problems are also fixable. For now. But let us not forget that the country is still led by a guy who shakes hands with thin air, plus a Congress full of morally bankrupt idiots and cowards.
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