Most days we like to give you something actionable, or something useful.
An idea you can take away and – hopefully – use to make yourself a few bucks on the stock market.
But sometimes we get an idea that won’t give you the chance to make a buck. We had such an idea over a year ago.
We didn’t make any money from it. And we don’t think you made any money from it either…well, not yet anyway.
Yet we told you because we thought it was important that you know about it.
And even though you may not have made a buck from it, we’re certain it could have saved you a few bucks. Or at the very least, saved you the stress of investing in a volatile market.
Well, now the idea has gone mainstream. A recent article in the Economist newspaper asked the same question we asked many months ago.
So, what are we talking about? Read on…
Why China’s Economy Should Focus on Innovation, Not Consumerism
Last year critics pilloried your editor for an article we wrote about China’s economy. We simply pointed out that China hasn’t produced one ounce of innovation in the past 100 years…if not longer.
We argued China had simply opted for the lowest common denominator to grow its economy – cheap labour.
In fact, we repeated our comments at the ‘After America’ conference in March. We said China was an ‘innovative desert.’
Now, don’t get us wrong. Everyone needs a competitive advantage. If it’s cheap labour, that’s fine. But cheap labour only gets an economy so far.
What happens when labour costs rise and China’s economy loses its competitive advantage?
Most in the mainstream say that doesn’t matter. They argue that China will just shift to a consumer-led economy…where the Chinese will buy more trinkets and consumables.
That – they argue – will spur the Chinese and global economy further…and the Chinese economic growth will keep coming.
Not so fast.
Sure, the Chinese economy may switch straight from a manufacturing economy to a consumer economy.
But those hoping for that are really asking for trouble.
Think of it this way. If an economy switches from a productive economy to a consumer economy, it’s the equivalent of a person stopping work and then drawing down on their savings.
Again that’s fine. It works well for a while. But do you see the problem? That’s right, eventually the savings run out. For the retiree, they just hope they’ll have enough money to see them through until they die.
If not, they need someone to bail them out (government pension) or they have to go back to work.
Of course, without getting too existential, nations typically don’t have a life expectancy. So when the savings run out, it creates a big problem.
The country either has to go back to work, or it needs a bailout.
This probably sounds familiar to you. The United States is a perfect example. But rather than going back to work, the U.S. took the easy option. It went for the bailout.
The bailout was China, which bought all of America’s debt so that Americans could continue spending, even while they weren’t producing.
And even though the U.S. was still the world’s biggest manufacturer, it was a much bigger consumer.
The U.S. economy had essentially ‘retired’ and was living on the fruits of its past labour. And now it’s all out of savings.
The thing is, if it wasn’t for something the U.S. economy did over 100 years ago, the U.S. economy’s day of reckoning would have arrived much sooner.
In fact, if it wasn’t for this key development during the late 19th century it’s probable the world as we know it today wouldn’t exist.
So, what was it that happened in the U.S. all those years ago…?
Why Punishing Failure Doesn’t Help the Chinese Economy
It was innovation.
The U.S. had a competitive advantage over Europe in that it was an economy that virtually started from scratch. It didn’t have the old rules and practices of Europe to hamper its growth.
It could employ cheap labour because so much of it was arriving in ‘huddled masses’ from the ‘Old Countries’.
But what happened next is the key. The U.S. didn’t switch from providing cheap labour to a consumer economy overnight.
It made an important step first. And that was to innovate. Of course, it had an advantage. The millions of people who went to America were suddenly free (well, the white people were anyway).
They could do what they wanted. They could try out new ideas. And if they failed…they’d try again.
Being a failure wasn’t – if you get my meaning – a sign of failure. People saw an opportunity to make money and so they grasped it.
Competition thrived. And it was the competition to make it to the big time that brought on more innovation.
Now think of China. Unless you move in the right circles within the Communist Party, you don’t have the freedom to try new ideas. And if you fail, odds are you won’t be asked to try something again.
As we pointed out at ‘After America’, the Chinese state controls everything:
“[the State-owned Assets and Administration Commission - SASAC] appoints and removes the top executives of the supervised enterprises, and evaluates their performances through legal procedures and either grants rewards or inflicts punishments based on their performances…”
Those words aren’t ours. We lifted them directly from the SASAC website.
Anyway, you get the picture. Innovation isn’t encouraged. Getting it right is encouraged. But that’s not how entrepreneurialism works.
Why Embracing Failure Would Benefit the Chinese Economy
Entrepreneurialism is about failure. It’s about getting things wrong and trying again.
We don’t believe China can be innovative, simply because it’s a brutal and authoritarian dictatorship.
In order for innovation to prosper there must be civil unrest and the overthrow of the violent government. If that happens then we’ll get onboard and back China’s economy.
But without it, it will just follow America’s path to a consumer-driven economic nightmare…with one exception: it will miss the key ingredient that for a time made the American economy the envy of the world – innovation.
The bottom line is, don’t expect China to provide Australia with the 50 years of economic growth that most in the mainstream predict.
If that’s your only reason for buying stocks, we suggest you think again…and reduce your timeframe.
Because if the American experience is anything to go by, the life expectancy for a consumer economy is a lot shorter than most think.
Disruptive Technology Stocks For Smart
Powered By DT Author Box Kris Sayce is Editor in Chief of Australia’s biggest circulation daily financial email — Money Morning. (You can subscribe to Money Morning for free here). Kris is also editor of Australian Small-Cap Investigator, his small-cap stock research service, where he provides detailed analysis on some the brightest, smallest listed companies on the ASX. If you’re already a subscriber to these publications, or want to follow his financial world view more closely, then we recommend you join Kris on Google+. It’s where he shares investment insight, commentary and ideas that he can’t always fit into his regular Money Morning essays.
Written by Kris Sayce
Powered By DT Author Box
Kris Sayce is Editor in Chief of Australia’s biggest circulation daily financial email — Money Morning. (You can subscribe to Money Morning for free here).
Kris is also editor of Australian Small-Cap Investigator, his small-cap stock research service, where he provides detailed analysis on some the brightest, smallest listed companies on the ASX.
If you’re already a subscriber to these publications, or want to follow his financial world view more closely, then we recommend you join Kris on Google+. It’s where he shares investment insight, commentary and ideas that he can’t always fit into his regular Money Morning essays.