Our Opponents are Vulnerable Too

By Kevin Freeman
September 21, 2011Sep 21, 2011

This blog can certainly be depressing at times as it continues to expose how other systems in the global economy are seemingly strengthening at our expense. Reading the financial press will quickly highlight the weaknesses we see in our debt, the housing market, our banking system, unemployment, regulation, and a whole host of other problems. At the same time, it seems as if the Chinese controlled-capitalist model is working much better. We are told that Shariah-compliant economies of the Middle East are superior as well.

The reality is that other nations are aware that this is a global economic war. We as a nation have yet to realize this. As a result, those nations have intense propaganda efforts in addition to direct and indirect means to enhance their economic position. By contrast, the current mood in America and Western Europe is so depressed and self-reflective that even rare good news seems depressing.

Two news items appeared today that demonstrate that not everything is as rosy in China and the Middle East as we have been led to believe. These nations have serious problems that have been masked by high oil revenues and a dominant export position. Underlying the strength, however are very real problems.

Example one is a report on Bloomberg:

China Endorsing Tobacco in Schools Adds to $10 Trillion Cost 

Essentially, the Chinese have allowed the advertising of tobacco products to minors and this will ultimately come at a high price:

China has more than 320 million smokers, a third of the world's total, and about 1 million Chinese die from tobacco-related illnesses every year. Reducing mortality in the country from cardiovascular diseases, for which smoking is a main risk factor, by 1 percent a year over the three decades to 2040 could generate economic value equal to 68 percent of China's 2010 real gross domestic product, or $10.7 trillion, according to a World Bank report published in July.

By promoting cigarettes now, China is experiencing stronger short-term economic growth. Later, however, there will be a serious cost. This is similar in effect to allowing a current real estate bubble and massive domestic corruption (as demonstrated by recent accounting scandals for Chinese companies). Add to that the "one child" policy which is creating massive future demographic dislocations and it should be obvious that the Chinese prosperity could well run into problems down the road.

Example two comes from a CNBC reported story:

Dubai Nakheel's $1 Billion Sukuk Sits on the Seabed

This story essentially describes how the supposedly safe Islamic bonds are backed in large part by unreclaimed seabed, the Middle East equivalent of "swampland" in Florida:

Much of the land backing a $1.03 billion sukuk bond from Dubai property developer Nakheel is unreclaimed seabed, bank sources said, leaving trade creditors holding the paper with scant recourse to tangible assets in the event of a default . . .

"From a sharia standpoint sea or no sea, there is still a ‘physical' plot of land secured for the sukuk," said Khalid Howladar, senior credit officer at Moody's.

"From a credit risk perspective it is of course a concern. Assuming investors could take security over such an esoteric asset in the first place, the land itself may be valueless without the reclamation/construction efforts of Nakheel."

In the sukuk prospectus Nakheel says it has postponed any reclamation efforts for the near-term, leaving sukuk holders with an investment backed by seabed for the foreseeable future.

The point is that simply because something is "Shariah-compliant" is not a guarantee against economic loss despite the propaganda. At present, high oil revenues have been able to mask potential problems. This is no guarantee for the future.

The bottom line is that our system is not as inferior as we have been told. Other systems have serious problems as well. The difference is that these other nations are regularly competing while we seem to focus only on our failures.

All posts Copyright (c) 2011 Kevin Freeman, All Rights Reserved