Original Title: Economic Recovery and Sacrifice of a Generation: The Credit Foundation of Debt Expansion Lies in the Young People and Technological Innovation of the Future. If Interrupted, a Generation Will Be Sacrificed.
Original Author: @wangwatchworld Wang Haibin's Economic Talk
Original Video: https://www.youtube.com/watch?v=1SvMDeEHjT4&t
Edited by: @HiCaptainZ
Today's topic is "Economic Growth and the Sacrifice of Young People," or "Economic Recovery and the Sacrifice of Young People." This topic stems from the long-standing debate between free-market economics and government intervention. This issue has been debated by various economies, including the academic, business, and government sectors. The core question is whether decision-making power should be determined by the market or the government. This is a saying in China. Economic schools of thought overseas, such as classical liberalism and Keynesianism, as well as more radical market interventions similar to Keynesianism, have been debating this issue, leading to extreme planned economies. The current consensus is that the planned economy model has failed. However, pure free-market economics has also failed, but this has not been proven. What is the reason? It is because governments have been accustomed to intervening in the economy since ancient times, which is determined by the structure of power, and it is a behavioral pattern. I personally believe that government intervention provides certain safeguards for the market, and it actually provides rules and maintains order for pure free play.
I have studied the economic trends and national security trends in Somalia, a situation that has lasted for 20 years without a federal government. This situation has brought great risks. For example, its waters have been occupied by fishermen from Northeast Asia, forcing local fishermen to lose their own fishing resources. After that, they turned to piracy as a means of livelihood, which is a change. In addition, the internal struggles between various warlords have caused the loss of a unified market and brought great uncertainty, resulting in the complete disappearance of industrialization and only sporadic workshop-style businesses remaining. In the area of essential businesses, including electricity, communication, and transportation, the aviation industry has developed rapidly due to insufficient ground security. Although lacking technology, foreign communication companies have cooperated with local authorities to provide a large number of competitive communication and aviation companies. Some economists who adhere to orthodox market principles view this situation as a successful example because of the rapid development in communication. However, in neighboring Kenya, it takes 12 years or even several years to achieve the same success. The prices of its airlines are also very cheap. All of this is presented as a successful case, but they deliberately ignore the problems of the entire economy, including security issues, the collective cessation of industrialization, and even the expansion of security issues to its coastline, where European companies dump biological and nuclear waste. Greenpeace later seized this issue and, although Greenpeace is an extreme environmental organization, it can also present a corrective effect to some extent. After it seized the issue, it exposed it. Another problem is that after the loss of internal security control, even the United Nations relief teams were attacked, and the death rates of children, infants, and women within the country increased sharply, and various infectious diseases, including cholera that had already been eradicated elsewhere, became prevalent. This represents a completely lawless market economy, lacking public health and public safety measures such as public education, to the extent that industrialization is lost. Therefore, we understand that a completely free market is unreliable.
Among the countries that have developed most rapidly in the past 100 years, apart from the United States, a great economic power that is based on a fully democratic society that has developed from the colonial period, it is also filled with elite government intervention throughout the entire development process. This point is rarely mentioned in my study of economic history. In the past 100 years, whether it is Japan, South Korea, Taiwan, Singapore, or mainland China, the entire development, whether it is latecomer advantages or government intervention, has played a huge role. In other countries in Asia, Africa, and Latin America where the government has not played such a role, without exception, their economic development has been very poor.
However, that is not the topic today. The topic today is about how far modern society has developed. The market in the United States is becoming heavier, especially after the establishment of the Federal Reserve. The adjustment of the Federal Reserve's monetary policy and the intervention of the Treasury Department's fiscal expenditures are becoming heavier. Of course, their fiscal expenditures have a complex mechanism. They need to be proposed by the House of Representatives and passed by Congress, including some laws from the White House, which also need to be passed by Congress in order for the Treasury Department to implement them. Of course, the White House has its own set of rules, such as emergency interventions implemented in emergency situations, such as subsidies during the 2020 pandemic. In the entire modern society, you will find a huge problem, that is, since the Federal Reserve started intervening and central banks around the world started intervening in monetary policy, the series of consequences resulting from the massive intervention by governments, not only in fiscal matters but also in regulation, is what? The size of the government is getting bigger and bigger, but the credit system of this currency is actually getting weaker. The increase in the quantity of this currency actually far exceeds the needs of the real economy. What changes does this bring? The wealth gap in the world and social stratification are becoming heavier, and the wealth gap between the rich and the poor is becoming larger. This includes the collapse of the middle class in the United States.
This actually means that wealth is accumulating massively at the top, because in this process, with the flooding of currency, those who own assets, their assets are appreciating more and more, while those who hold cash, their assets are depreciating more and more. For the poor, or even the middle class, they actually do not have much money to allocate many assets. The lower class has nothing at all, except for some government subsidies or the wages they earn themselves. So, we understand that whether it is the United States, China, Japan, or Europe, all of these economies are adopting the same strategy, which is currency flooding, coupled with heavier taxation. This actually leads to a massive accumulation of wealth at the top.
In countries with welfare systems, debt continues to expand. In order to balance the entire society, various welfare benefits have been provided to both the middle class and the lower class. However, this has also brought a problem, that is, whether these welfare benefits can be sustained in the long term.
For China, it has expanded massive debt, mainly invested in infrastructure construction. China hopes that infrastructure construction can generate potential surplus for the entire economy, that is, potential returns. This means that although infrastructure construction is not profitable on accounting statements, it has potential future value in the development process of the entire economy. However, this has also caused the wealth of asset owners to become richer and richer. For example, those who owned real estate in first-tier cities such as Shanghai and Beijing in the early years, and even some key provincial capitals, their wealth has become heavier. But for most people who do not have as much wealth, especially farmers, they have been sacrificed, and the wealth gap has become larger.
China used to hope to solve this problem by borrowing from the future while the entire economy was developing rapidly. This surplus compensates different people at different times. This means that those who become rich first, then the privileged, and urban residents, based on the assets they own, will become richer and richer. But because the entire economy is expanding, this expansion process makes all urban residents, whether they are poor or farmers, richer than before. This allows the social stability of China to continue to exist because the legitimacy of its governance comes from economic growth.
However, what does this process mean? It cannot be terminated, and then borrow from the future. There are two reasons for this. One is population aging, and the increase in young people who can pay higher and more future taxes and meet more future demands provides a credit reason for current expansion. At the same time, based on future technological growth, future technological growth can provide a present value basis for debt, which is future credit.
Now China faces two troubles. One is population aging, that is, changes in population structure, and the other is that even if technological growth is blocked by the United States, another leg is broken. Once this credit value is collectively interrupted, it will be presented on assets because the background of assets is a high valuation based on future credit, and after this future credit is interrupted, the high valuation of real estate, which is China's most important asset, cannot be sustained.
The above is only about China. Now, talking about Japan, why are people suddenly interested in its stock market, from Warren Buffett's investment to the market, investors, economists, and analysts suddenly realize that there is growth? Actually, many people still do not understand one essence of it, which is that Japan experienced a huge bubble, and after the valuation bubble burst, it faced the same two problems as before, one is population aging and structural changes, and the other problem is that its chip technology was blocked by the United States, and its path of borrowing from the future was also cut off, resulting in a loss of 962 trillion yen in asset valuation and more than 150 trillion yen in bad debts for banks in just 10 years from the 1990s.
How did it digest this problem? It relied on the generation of people who bought houses during those few years at the end of the 1980s. They carried it over and carried it over the 30-year process of mortgage loans, which is bad debt. Those who do not have bad debts must carry it over. In addition to carrying this asset during the period of asset contraction, they also have to pay off this debt, which is much larger than the contraction of these assets. In fact, they are a sacrificed generation. They carried it over, and after carrying it over until now, these...
The collapse of the debt bubble has been completely eliminated. After it was eliminated, when the yen depreciated sharply, it began to gain a large trade surplus, especially with the United States, which increased by more than ten percentage points last month.
This is the biggest change. At the same time, it is possible for its domestic national income to start growing again, so, at the same time, it is inevitable that the current generation and even part of the next generation may have to sacrifice like Japan for the next 30 years.
Japan sacrificed the past 30 years, and China may have to sacrifice the next 30 years. This is the central point of our topic today. Let's go back to the United States and European society. The United States and Europe are also facing the process of population aging, but the United States is healthier than Europe. The aging of Europe is as serious as Japan, weaker than Japan, and it has reached more than 20%. The United States is not so serious because of what? Including the United States, Canada, Australia, New Zealand, etc., they are immigrant countries. In addition to legal immigrants, countries like the United States also have a large number of illegal immigrants entering, which is intentional.
The United States also faces this problem because the Federal Reserve intervened in the market economy. After its intervention, its asset bubble became heavier and heavier, and at the same time, its capital outflow became a currency tax position. After the capital outflow, a large number of U.S. industries, including U.S.-controlled capital, were manufactured overseas. After the capital was deposited, it was used for overseas investment. This profit earned by the interest rate difference has benefited the United States itself. Its capital deficit and surplus can offset the deficit in goods, and it also provides a large amount of cheap capital to its own enterprises, especially those overseas investments. Therefore, this is a surplus for the United States.
Another one is the high-tech field of the United States, including medical care, chips, aerospace, etc. American cultural products enjoy a leading position globally, which has brought huge impetus to its economy. Therefore, the United States can provide a large number of medical benefits, etc. However, the United States is not a high-welfare country. It does not have as much high welfare as Europe, so its economy is in a healthier state, especially when a large number of low-paying and hard-working jobs are provided by illegal immigrants.
Secondly, the United States is not borrowing from the future, but borrowing from the future in the field of technology. In this regard, it has no obstacles because it is the leader. It is also not borrowing from future young people, but borrowing from a large number of immigrants. These immigrants, especially the young and skilled or those with capital, do not bear the cost of nurturing the entire society, so their burden is very light. This is the market advantage that the United States has won.
In fact, including Australia and Canada, they are also winners. Europe, on the other hand, has made efforts only in Germany to convert illegal immigrants into legal immigrants. It has accepted millions of refugees and turned them into its own citizens, providing it with a new tax base. If it wants to cultivate a young person from scratch, it may cost 50,000 euros, but if it cultivates those refugees who come from outside, it starts to cultivate them at the age of 18 or 19 and can start working formally and contribute to the tax burden and provide labor. This only costs about 15,000 euros. So it is successful.
However, other countries, because of their ideology and domestic conservatism, actually accept very few. Except for France's heavy acceptance of its own colonies, such as Algeria, etc., its transformation process seems to be less successful than Germany. Then Europe as a whole, it actually faces the problem of old Europe, that is, it is also an aging population. Of course, its technological development also has its own unique aspects, but it has not been curbed in the future. There is also its population aging. It is not possible for it to continue to obtain a large number of young people in the future. Its birth rate is actually declining. At the same time, its acceptance of refugees and immigrants is far less than that of the United States. Europe, as a whole, is not an immigrant society.
Of course, Europe also has its opportunities. For example, if the European Union can include Ukraine after the failure of the Russo-Ukrainian War, and if it can expand to the entire Central Asia, where Central Asia used to be controlled by Russia, after Russia's control weakened, can the European Union expand to the entire Central Asia? Can it obtain a large population dividend or a new market? This remains to be seen.
So today, the topic we are actually discussing is very clear. It is about the problems that all these economies will face. Modern society is a model of debt expansion, and this debt expansion model is based on young people in the future and technological innovation to provide credit. When an economy is interrupted, it will easily produce what? It will present a sudden "delay" in time, and it will present all assets, this valuation bubble will burst. In order to return to economic growth and avoid the middle-income trap, it is necessary to restore population growth and technological development. At the same time, it is inevitable that the current generation of people, including part of the next generation, may have to sacrifice like Japan for the next 30 years.