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Affluent Investor | May 28, 2017

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China’s Change from Psychotic to Neurotic is an Improvement

Photo: Samuel Jeffery

Photo: Samuel Jeffery

Reuven Brenner predicted in an article last March that China should continue to prosper, but there may be more than a few speed bumps along the way. He pointed out two major issues: first, there is an absence of both institutions that can enforce contractual agreements and societal trust. Second, China’s one child policy has created hundreds of millions of Little Emperors who will develop neurotic tendencies as a result.

Brenner’s second point, while not untrue and certainly worthy of consideration, pales in significance to the periods of genuine psychosis that China has endured for the past century.

To begin, China experienced more than one hundred years of humiliation from the time of the Opium War. The Western powers forced opium into the market and then won a war to continue the project. Further degradation worsened during the turn of the century, with civil war and chronic famine. China reached its lowest point with the Japanese invasion and the ghastly Rape of Nanking.

If China was a patient on the therapist’s couch, the therapist may conclude that the bizarre paroxysms of Mao’s Great Leap Forward and Cultural Revolution were a byproduct of China’s long-held feelings of shame and rage, and it turned inward on itself.

Once the deepest wounds began to heal with time, aided by more exposure to air and light, China came out of Mao’s shadow. In its place, Deng Xiaopeng offered traditional pragmatism to be tied to traditional entrepreneurialism. Furthermore, China’s leadership realized that its period of degradation was tied to its isolation from the global order. This mistake will not be repeated this century or for a long time after that.

Is China neurotic? Sure. Brenner’s points are well taken. Moreover, Brenner is on point when he says that currency stability would be a massive boon. But China was essentially a tormented soul for a long time, and then a raving lunatic. Now, China is increasingly a measured, self-confident nation that knows that the tides are turning in the right direction.

The United States grew so much in the late-1800s that it was a matter of time before it became the world’s most powerful nation. Now multiply the number of people involved in that wealth creation by ten. Then add the Internet revolution along with the industrial revolution. That is what’s happening in China today, so it can afford to be a little neurotic.

Investment Action Point: Invest in China for the long-term, in spite of the inevitable volatility.

Scott Gillette’s conversion to supply-side economics began in in the 1990s when he concluded that poverty alleviation both here in the United States and abroad requires a dynamic and growing economy that encourages production. This conversion deepened when he learned how Robert Mundell predicted the oil shocks of the 1970s, even while Keynesian economists cannot explain why this phenomenon occurred even today.

Scott went to work at Polyconomics from 1999 to 2001, which was the firm founded by Jude Wanniski, who coined the term supply-side economics. While there, Scott organized Jude’s lessons about supply-side economics into a distinct website page called Supply-Side University. Jude’s informal course can be enjoyed here.

Scott also served as a Research Analyst at Polyconomics, and examined numerous economies in both Latin America and Asia. Scott focused specifically on China, and promoted the view that China’s ongoing reforms at the time, while uneven, were conducive to long-term growth.

In the past five years, Scott spent extensive time in China, the Middle East and India as a consultant for Bretton Woods Research and for a book project. Scott’s book about his travels, If These Shoes Could Talk, will be published in 2013.

Scott received his undergraduate degree from Rutgers University and his master’s degree in Comparative Politics at Arizona State University. He currently resides in Freehold, New Jersey.

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