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Hunger for natural resources in Tibet

Sunday, April 26th, 2009

Last month, in Nations will rise against nations, we mentioned that

Therefore, outwardly, the world may be at peace. But inwardly, we believe there will be jostling for power, influence and resources between the major nation blocs. Bigger nations will use smaller nations as pawns, international armed non-state groups will intensify their activities and inter-ethnic conflicts will arise.

Tibet is a political hot potato issue for China. Passions are hot on both side of the political divide. Tibetan-independence activists are present in many countries, with numerous accusations of human rights violation and holding demonstrations all over the world. The common Chinese people on the other hand, cannot see what the fuss is all about. In fact, many of them are genuinely surprised at the anti-Chinese passion regarding the Tibetan issue.

Here, we do not have any opinion regarding Tibet because we do not understand the issues enough to comment about them. But we have this to say: China is most likely to hang on to Tibet at all cost. The reason is simple- Tibet holds a vast reserve of natural resources that have yet to be exploited. Given that Tibet is one of the world’s least habitated, remotest and most untouched area in the world, it is one of the few ‘virgin’ areas on earth that can still yield massive rewards for nations who can tap into its vast natural resources. Since China is clearly going to need vast amount of natural resources in the decades to come, it will defy international opinion and hang on to Tibet.

As this article says,

In 1999, the Chinese embarked on a secret, seven-year geological survey that found 16 major deposits of copper, iron, lead, zinc and other minerals. Tibet is believed to hold as much as 30m-40m tons of copper, 40m tons of lead and zinc and more than a billion tons of high-grade iron ore.

What is the catch for China?

The commodities are there, under the ground, but to dig them up in this vast inhospitable region is not going to be easy. As we mentioned in Real economy suffers while financial markets stuff around with prices, producing metals is a highly capital-intensive activity, which include

Construction of nearby infrastructure (e.g. roads, railways, power stations, development of water supplies and townships) due to the remoteness of mining projects.

These developments will take many years. The Chinese may even need foreign expertise and investments to do so. Therefore, there is little wonder that China is developing Tibet (including the engineering feat of constructing a rail link to Tibet). Whether that’s good for Tibetans or not is not for us to say.

For us in Australia, if Tibetan natural resources are fully exploited by China, there will be less demand for our iron ore.

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Posted in Commodities, Geopolitics & Politics, Looking Forward, Market Observations | No Comments »

Can government create jobs?

Thursday, April 2nd, 2009

Recently, one of our readers wrote,

I recently voted against Anna Bligh who?s govt has sent QLD into some $74B debt. Her plans are to keep spending. I found it horrific. The other party reckoned they wouldn?t spend as much and would cut govt spending by 3%. Well, I?m not sure I believed it but voted against the emcumbant anyhow – along with some 40+% of other QLDers. Anna was returned though and now feels that she has a ?mandate? to spend spend spend. It?s an horrific state of affairs. Most QLDers like me wouldn?t have been aware of the extent of govt debt built in in the ?good times?.

If you notice, this “spend, spend, spend” slogan is very strong in United States, Britain, Japan, Australia and maybe China (Premier Wen recently killed off the idea of a second stimulus spending). But Europe are cool about such an idea. Particularly, France wants more regulations in the financial system and threatened to walk out of the G20 Summit if their demand is overshadowed by the “spend, spend, spend” brigade (see France is threatening G20 walkout).

Back in our Queensland, State Premier Anna Bligh promised to create 100,000 jobs over the next 3 years. The State Opposition was so motivated to keep her accountable that they set up a Jobometer web site to monitor her ‘progress’ in her promise. Politicians, in order to win elections, will promise anything and everything even if the promise is dubious in merit. Can the Bligh government really create jobs as they promised? We suppose they are going to achieve that by the slogan of “spend, spend, spend.”

We believe it is not the job of governments to create jobs. Yes, they may employ civil servants to work on the administrative bureaucracy, legal enforcement, national defence and so on. Beyond that, governments cannot produce goods and services. For example, the Federal government’s NBN project has to be contracted to the private sector. Also, governments often end up outsourcing some of their services to the private sector. Given that governments’ general track records on running business enterprises are either non-existent or abysmal, the private sector is still the one that keeps the economy alive and  dynamic, create jobs, innovate and produce goods and services far more efficiently than any governments can do.

How is the Bligh government going to create jobs?

Are they going to employ surplus civil servants for the sake of ‘creating’ jobs? No, that is not a way to keep the economy healthy. If they do that, Queensland will end up with a huge and cumbersome government sector that crowds out and stunt the private sector. A stunted private sector will retard the economy’s potential to innovate, produce goods and services and keep the economy alive and dynamic.

Or are they going to spend it on goods and services produced by the private sector? Well, if there is a structural flaw in the economy (as we said before in Are governments mad with ?stimulating??), then the initial impact of such spending will only serve to primarily bid up the wages of the sectors that receive the government spending and will not solve the root of the unemployment (plus over-employment and under-employment) problem. For example, a redundant financial engineer is not going to be civil engineer overnight to work in the government’s outsourced infrastructure project (structural unemployment). He/she may end up working as a checkout chick/bloke to serve the cashed-up civil engineer at say, Woolsworth (under-employment). The civil engineer, on the other hand, may end up being overworked from the flood of engineering service demand from the government (over-employment).

One day, government expenditure on that sector (e.g. infrastructure) will subside. What happens next? Will the government have to come up with another stimulus spending program to keep the economic jig running? In the previous recession, the Japanese government had to keep the economic ‘stimulus’ pumping to the extent that they were said to have ended up building roads to nowhere.

Thus, even if the government end up boosting employment in the short-term through their “spend, spend, spend” program, it may end up counter-productive in the long run. If “spend, spend, spend” is their only strategy, then many years from now, the government will end up with very little to show for and citizens will be wondering where have all these money been wasted on.

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Posted in Economics/Finance, Geopolitics & Politics, Looking Forward | 10 Comments »

Gold and the strong state

Thursday, March 19th, 2009

Have you walked into a shop that specialises in selling paper money from the past and present from all over the world? Indeed, when holding a Riechmark (the German currency from the 1930s) on our hands, we felt a sense of nostalgia from the past. At some point in time, that piece of paper was used as money by another person to buy his/her daily essentials. Or if you want to be a billionaire, you can easily buy one of Zimbabwe’s currency at a price of say, AU$10.

Alas, all these paper money (currency) met their end and became of value only to collectors. Perhaps as an exercise, you may want to immerse yourself in one of those paper money shops and get yourself acquainted with the history of some of these currencies. Who knows, perhaps one day, the currency that you hold in your wallet will find its way into that paper money shop?

As we explained in our previous article, the whole idea of gold is money. The proper way to understand gold is to see it as money that is not currency. The fundamental reason why you accumulate gold is that (as we said before in What should be your fundamental reason for accumulating gold?) you want it as a hedge against loss of confidence in currently legal tender currency. On the other hand, if you have supreme confidence in currencies, then you will have no reason to hold gold.

As one of our readers, Pete, astutely pointed out before, there are many ways for currencies to lose the people’s rejection as money. Hyperinflation is only one of them. To illustrate this point, we have a story…

In 1940, as the German tanks rolled down to France, many French citizens hopped on to their cars to flee Paris. On the way to somewhere, some had to stop by petrol stations to refuel. It turned out that petrol stations did not accept the French currency as payment. After all, who will trust that the French currency will still be money once the Germans took charge? But if you had some gold coins in that situation, then you are in luck. Of course, when the Germans took over, they issued their own occupation currency and gold went underground.

The point we are trying to make is that gold as money is anti-thesis to a strong state. A strong political state may seek to ban gold on pain of death. That was what happened to China during the Mongol occupation of the 13th century. Marco Polo marvelled that the Mongol Khan had mastered the art of alchemy because paper currency issued by the Mongol empire became money on pain of death. It came to the point that gold, silver and other treasures were exchanged for the Khan’s paper money. Thus, Marco Polo remarked that the Khan was the richest person on earth. Thus, from this perspective, we can see that gold is a symbol of resistance against tyranny, subversion against state power and freedom.

But if you look at history, gold wins in the end because the strong state eventually falls (but the catch is, they may not fail within your lifetime). The Mongols, in enforcing their expensive occupation of China, printed money until there was hyperinflation. It was at that time that the Chinese rebelled against the Mongols and eventually drove them out of China. The subsequent Ming Dynasty continued the Mongol’s monetary policy of using paper as money. But by 1455, China had to revert back to commodity money.

Thus, the major risk of holding gold is that you can be up against the strong state (assuming that strong centralised political power will be the future) who may want to ban gold. But yet again, who knows? For example, Zimbabwe, for all the despotism of Robert Mugabe, has not or were powerless to ban gold.

But if the future turns out to be one in which political power is weak, de-centralised and rivalled by non-state power, then gold is a better bet than pieces of paper called the US dollar. This is the thesis of a strategist in the US Army War College (see From the New Middle Ages to a New Dark Age The Decline of the State and U.S. Strategy).

So, in summary, there’s risk in holding gold. But there’s also risk in NOT holding gold. So, what’s the alternative? Hold real asset (farm land, timber land, barrels of oil, food, guns, etc) instead? Well, there’s also risk as well and furthermore real assets serve a different function from gold. We will talk more about holding real assets later.

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Posted in Economics/Finance, Geopolitics & Politics, Gold, History, Looking Forward | 28 Comments »

Nations will rise against nations

Sunday, March 15th, 2009

A few days, as reported widely in the news media, Chinese Premier Wen Jiabao said at a press conference that

We have lent huge amounts of money to the United States. Of course we are concerned about the safety of our assets.

To be honest, I am a little bit worried and I would like to … call on the United States to honour its word and remain a credible nation and ensure the safety of Chinese assets.

Those words, when translated into English in writing, sound bland. But if you watch what he said in full video in the original language, then you will be able to appreciate the immense gravity of the situation from the tone of his voice.

But dear readers, you must understand that Premier Wen was just stating the obvious. There’s nothing new in what he said. All you have to do is to turn back to what we wrote in December 2006 and read Will the US dollar collapse? and Awash with cash?what to do with it? to see the big picture of what’s going on for years. As we wrote back then,

Lately, we are again hearing that central bankers are murmuring about diversifying their foreign reserves away from the US dollar. Does it mean that there is an imminent liquidation of their US dollar reserves? Well, this is not the first time they murmured about it and it is definitely not in their (including the Federal Reserve?s) interest to see a collapse of the US dollar. The Chinese, with their US$1 trillion of reserves, would not want to see their stockpile of US dollars to lose significant value.

That paragraph was written in the final days of 2006. Today, China’s US dollar reserve had doubled from they had more than 2 years ago. The major difference between today and back then is the emergence of the Global Financial Crisis (GFC).

Thanks to the GFC, the status quo, which had been running for decades, is stressed towards a breaking point (but who knows, perhaps that inevitable  breaking point could still be delayed for longer before an almighty snap happens). There are far too many contradictory and conflicting interests among nations.

For the US, as we said before in How is the US going to repay its national debt?, is facing a situation in the coming decades of having to pay a colossal amount of public debt. The public sector is facing a massive debt many times its GDP from the unfunded Medicare and social security liabilities. With the GFC, the US government is transferring more and more private debt to the public sector through bailouts, handouts and stimulus. It is either the US mobilise its monetary printing press to massively inflate away (i.e. print copious amount of money) all these debts or they face up to the reality that they are bankrupt and go through the cold turkey of an almighty deflationary collapse (read: almighty depression). If the US chooses the former, China will be furious because that will be doing the very opposite of what Premier Wen called on the US to do, namely to “honour its word and remain a credible nation and ensure the safety of Chinese assets.”

Unfortunately, the big problem is that the US (along with countries like Australia and UK) has been de-industrialising and hollowing out its economy for a very long time, while the China has been doing the opposite. To put it simply, the US is consuming more and more while China produces more and more. This gross imbalance has been playing out for too long. With the GFC, the US consumers are effectively bankrupt and cannot borrow any more to buy from China. China has lost its biggest customer and is in trouble too.

The coming G20 Summit will be filled with countries with conflicting agendas. The US (and UK) wants more stimulus (and of course, bailouts when required), which can only happen if they print money (i.e. devalue the US dollar), which is as good as spitting on China’s face. Europe (headed by Germany and France) wants the focus to be on regulations and prevention, which means they are less keen on stimulus and bailouts. This is because the latter will involve the tax-payers of countries like Germany rescuing the tax-payers of other EU nations. China, on the other hand, wants an overhaul of the current world order so that they can have more power and say to better reflect their status as America’s creditor. Obviously, the US will not like that because that will mean they have to voluntarily descend for an ascending China.

There are plenty of temptations to take the easy way out. For example, if the Chinese expect the US to inflate away their debts by printing money and thereby, devaluing the US dollar, they will be likely to devalue their RMB in order to continue the process of hollowing out the US economy. The US (and the Europeans), in response, could impose trade barriers on Chinese imports. The Chinese could retaliate by dumping their holdings of US Treasuries. Remember, these are just examples of what may happen and they are by no means predictions. But we trust that you get the idea here.

Therefore, outwardly, the world may be at peace. But inwardly, we believe there will be jostling for power, influence and resources between the major nation blocs. Bigger nations will use smaller nations as pawns, international armed non-state groups will intensify their activities and inter-ethnic conflicts will arise. We have no doubt that there will be plenty of Black Swans appearing in the days to come.

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Posted in Currencies, Geopolitics & Politics, Looking Forward | 14 Comments »

Fighting for resources in the Caucasus

Thursday, August 14th, 2008

As we know, on the day of the Beijing Olympics 2008 opening ceremony, a war was brewing between Georgia and Russia. We do not know what the quarrel between Georgia, Russia and the disputed provinces of South Ossetia and Abkhazia was all about. Claims of genocide by Georgia on South Ossetia were made by the Russia, while Georgia claimed that Russia was trying to bully its tiny neighbour. Who is in the right?

We do not know.

But as we said before in Are we in a long-term inflationary environment?,

The implication is extremely unpalatable: some nations will have to rise at the expense of the others, which may result in armed conflicts (touch wood, heaven forbid!).

We believe the conflict was at the root about jostling and pushing for the influence and control of natural resources. Russia is an energy rich nation- much of Europe is dependent on Russia for its gas supplies. It also has abundant reserves of oil too. And disturbingly, Russia has shown to have no qualms in using energy to bully its neighbours and settle disputes.

In terms of natural resources, the Caucasus is a very strategic region. As this map in the Wikipedia shows,

Detailed map of the Caucasus region (1994), including locations of economicaly important energy and mineral resources: South Ossetia has reserves of lead and zinc, Abkhazia has coal, and Georgia has oil, gold, copper, manganese, and coal.

In terms of oil, this article from The Age explains,

While Georgia does not produce oil itself, US and European energy firms have counted on the pro-Western country – sandwiched between Russia and Iran further south – to host a conduit for oil and gas exports from Azerbaijan.

…

Since President Mikheil Saakashvili took power in 2004 two new pipes have been built, and the explosion of violence between Georgia and huge northern neighbour is threatening those, notably the Baku-Tbilisi-Ceyhan (BTC) pipeline.

…

Transporting oil through the Caucasus is designed to make the West less dependent on supplies from Russia, which has shown worrying willingness to close the taps in disputes with other ex-Soviet states in recent years.

Make no mistake about this: in the years to come, countries that own and control energy reserves (and natural resources in general) will be the ones calling the shots. As we said before in The Problem that can throw us back into the age of horse-drawn carriages,

… supplying environmentally sustainable energy indefinitely at a rate fast enough is a colossal global problem that must be solved. If not, the latter generations will not live better than the current generation.

Many of the oil fields located in US-friendly oil producing nations are in decline. The implication is that as the years goes by, more and more of the world’s energy are produced in nations that are not so receptive to the US and its Western allies.

It is no coincidence that we are seeing conflicts in such regions of the world.

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Posted in Geopolitics & Politics, Oil | 10 Comments »

Faint drumbeats of war

Monday, October 1st, 2007

Back in January this year, we expressed our concern for a possible Israeli strike on Iran. Recently, we have been noticing an increase in the media’s news speculation on a US plan to strike Iran. For example, we just saw ‘US plan to bomb Iran’ in the Sydney Morning Herald (SMH).:

Australia, Britain and Israel have “expressed interest” in a US campaign to launch “surgical” bombing raids on Iran targeting the Revolutionary Guard facilities, one of the US’s leading investigative reporters, Seymour Hersh, reports.

The Israelis may have a reason poke their nose into Iran, but we wonder what business does Australia have in bombing Iran? In any case, politics aside, a bombing campaign against Iran is an example of a Black Swan event?one that is highly improbable but has colossal impact. When that happens, oil and gold will surge, the jumpy stock market will tank and the dysfunctional credit market will get worse.

Given the advanced military technologies of the US and Israel, we guess they will be immediately effective in stopping (or at least temporarily delaying) the Iranians from acquiring nuclear weapons. But we doubt they can control the effects of what comes after?once the genie is out of the bottle, it is very hard to put it back. Much will depend on how the Iranians react. If they meekly back down with their tails between their legs, then this will just be another skirmish. But if they decide to unleash the full extent of their fury, then the outcome will be unpredictable.

Anyway, since geopolitics is outside our area expertise, we cannot say much. But as investors, it may be useful to top up our cache of gold, just in case.

Posted in Geopolitics & Politics | 4 Comments »

China threatens economic nuclear bomb

Thursday, August 9th, 2007

Back in March, in China unwilling to hoard US dollars?what?s the implication?, we mentioned that:

Of course, it is unlikely for the Chinese Central Bank to go berserk [in liquidating their US Treasuries]. It is not in their interest to see their accumulated US$1 trillion of reserves go up in smoke. However, it is also not in their interest to further accumulate increasingly overvalued (maybe ?worthless? is a better word) US dollars (see Will the US dollar collapse? for more on this dilemma that China faces).

Today, we saw a news report that China is threatening to go berserk: China threatens ‘nuclear option’ of dollar sales.

Alas, politicians can often be trusted to make popular but stupidly disastrous decisions.

Posted in Geopolitics & Politics, Looking Forward | No Comments »

Begining of trade war?

Monday, July 16th, 2007

In Using fear as a proxy for import controls?, we reckoned that the US was firing the first shot in a possible trade war with China. Today, in this news media article, Beijing suspends US meat imports, China looked to be firing the retaliatory shot.

Posted in Geopolitics & Politics | No Comments »

Election vote buying can fuel further inflation

Monday, April 16th, 2007

Today, this article, Budget surplus at risk, caught our attention.

This year is an election year and we would not be surprised if the government will entice the electorate with tax cuts or some other form of bribes. Let us see how inflationary it will be. If so, it will give the Reserve Bank a stronger case to raise interest rates.

Posted in Geopolitics & Politics | No Comments »

Is Venezuela going the way of Zimbabwe?

Tuesday, February 27th, 2007

Today, we saw this news article: Venezuelan Bolivar Falls as Chavez Bolsters Spending (Update1). Sad to say, it looks to us that Chavez is leading his country along the same path as Zimbabwe.

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Posted in Geopolitics & Politics | No Comments »

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