Please read the fine post from immobilienblasen about price control in China. I want to dig a bit more into this topic.

Let start from the basics again. To simplify the things the world economy works as an entity that extracts natural resources from the Earth and process it into consumable goods. If you divide this entity into countries that are essentially sub-entities unified by some policy and other common properties of business units located in that country.

Each country has a particular competitive advantage in certain fields of processing natural resources and the logic of the world economy pushes those resources into this country. For example, Japan is very good in converting oil and silicon into flat panel televisions. So those countries who extract oil and silicon from Earth are sending them to Japan and then Japan sends those flat-panel TVs to the rest of the world. In case of Japan this advantage is in technology, patents and know-how.

In case of China the competitive advantage is the abundance of extremely cheap yet relatively qualified labor, concentrated along navigable rivers and backed up by business friendly government. There are many countries in the world with cheap labor but few of them are stable, qualified or accessible. The output from China is pretty much anything that is labor-intensive and can be easily outsourced from the West. Like plastic toys.

Now more about cheap labor. In the market economy there is a certain proportion between luxury, durable items and staples. For example, one day at ski resort will cost you the same as 10 bags of rice. The basket of consumable items will include the mix of staples and luxuries, both rice and ski resorts. The feedback loops between consumption of all those items creates this typical basket and the typical cost of labor in Western countries. Every kid in USA once in a while comes to Disneyland and this is a part of the basket.

Now very clever Chinese authorities came to a very clever idea (used in all Eastern European countries before) that they can subsidize the staples and change the proportion between various items. So the day at Disneyland (or ski resort) will cost not 10 bags of rice but 50 bags. So the typical consumption basket will include more rice and less Disney, overall supporting all the life necessities at cheaper price. The idea is that only a fraction of the country output is sufficient to be used for subsidies but overall it will make the labor artificially cheap and thus supporting the big trade surplus.

In the completely free market economy the China market would quickly adjust itself, the basket would be more expensive and include more luxury items and services, the price of labor would go up and the trade surplus shrink quickly. But this doesn’t happen.

So what is the conclusion? The world economy is in market equilibrium based on certain price of all goods. But the big player China is distorting the market mechanisms. First, they consume more natural resources than they would otherwise. Second, they produce more artificially cheap goods than they would otherwise. And this disproportion is widely based on subsidies that are coming from large trade surplus.

If anything in this artificial, non-market structure will start breaking the results may be disproportional the the cause because the market usually adjusts itself much better than any government structure. It looks to me like a big house of cards which is much more stable flat rather then tall


Today I want to post something completely different. 75 years ago there was the biggest battle in history of humanity – the Battle of Stalingrad. A rough estimate is for 2 million of total military deaths, maybe a bit less. For 199 days of fighting it would be about 10,000 soldiers killed daily, i.e. if you take our total losses in Iraq since 2003 of 3,923 soldiers – back then that kind of casualties would happen from morning till noon of one day.

I think I saw about 50 different movies about WWII, but if you want to get a complete feeling about that war I would recommend to see “Enemy at the Gates“. No other movie I saw would give that much of understanding of that war, in my opinion.

Essentially the battle of Stalingrad was all about oil (the same Greenspan said about Iraq war – that’s oil, stupid). Germans tried to get access to oil fields of south of Russia and they failed. From that point the Nazis were doomed and the rest of the war was just finishing the inevitable.

Today I just want to say two things. First, I want to wish everyone that humanity stops fighting for resources. I understand that the war can happen when neighbors are trying to dispute some land, that happens all the time. But when a powerful country attacks someone to get its oil it’s outright disgusting. Are we not strong enough to just buy what we want? Why should we kill?

And second I want to celebrate the German soldier. It was so many flowers for the right side that I think we need to pay some respect to those who were sent to fight for the wrong side, and they were fighting like tigers. They were not criminals, they were just good soldiers.

Look at the casualties. I will list only those countries that were the most furious fighters, and I list only military deaths:

Axis side

  • Germany 5,533,000
  • Italy 301,400
  • Romania 300,000

Allies side

  • Soviet Union 10,700,000
  • Yugoslavia 446,000
  • USA 416,800
  • UK 382,600
  • France 212,000
  • Poland 160,000

It makes 5,930,000 for Axis and 12,316,000 for Allies. In other words, it took a life of two Allies soldiers to kill one German. I think the Germans were the real heroes! I’m paying my respect to both sides…

P.S. In the light of those numbers please recall the movie “Saving Private Ryan“. There a group of 15 American soldiers was fighting against the similar group of Germans and the fight was pretty much equal. Think a bit. You take American rookies who are at real war for the third day in their life against German commandos that were fighting non-stop for the previous 6 years and they can fight at equal foot! Total nonsense! In real life it would take 40 or 50 Americans to have an equal fight against 15 Germans. You can’t learn history on movies like that…

McCain wants more of our troops in Iraq. I think that’s wrong.

We already had over 400,000 troops in Vietnam and we’ve spent 13 years there. And we lost. Iraq is different, but not that different.

What complicates the situation is not only that forces that we fight wear no uniform, do not display arms and do not speak English. The civil war in Iraq is a proxy war between Iran and Al-Qaeda. After the elimination of Saddam and destruction of Iraqi economy Iran remained the most powerful and influential country in the region. But unfortunately Al-Qaeda, which was almost finished after Tora Bora, got a new fresh battleground and resourceful sponsors in Iraq. Initially, when Al-Qaeda was founded by anti-Soviet forces during the war in Afghanistan, they were a pan-Muslim force. The blend of Egyptian and Pakistani fighters with American money and training created a powerful force that eventually won over Soviets. Bin Laden was working with both Sunni and Shia.

But now Bin Laden is dead. Al-Qaeda got new sponsors, Sunni and arab states, to fight against the raise of Iran. From pan-Muslim force they became Sunni and there is no way back. Probably that’s one of the biggest accomplishments of Iraqi war.

What to do? First of all we should not try to stand in between Al-Qaeda and Iran. That’s just stupid. We should pick sides. I understand that U.S. has long history of positive relationships with Al-Qaeda, but after 1998 and especially 9/11 they are no friends to us anymore.

Which leaves us to work with Iran. I think we have good bargaining chips on the table. Iran should stop its nuclear efforts, after all the bomb is no help against Al-Qaeda anyway. And we will help with their fight. After all, we need a stability in the region, and for this to happen one side should win. It’s better that we pick the winner ourselves and get something in exchange for help.

Unfortunately we can’t expect Bush to make anything positive. Not just what I propose – anything. Bush is very un-diplomatic person and also stubborn and “intellectually incurious”.  We should eye the next prez. So far McCain is proving to drifting us the wrong way. He is no good.

CNN called Rumsfeld “an obnoxious jerk” but later apologized.

Let me also call  Rumsfeld an obnoxious jerk and I will not apologize 🙂

US invasion in Iraq, by Christophe Vorlet

Former chief of staff Andrew Card tried but failed to convince Bush to fire Defense Secretary Donald Rumsfeld. Maybe he didn’t find the right words? Let me try:

Mister Bush, please do me a favor, I know you can. Just get out of your presidential chair, take your big foot and give Mister Rumsfeld a big nice kick into his stupid fat ass.


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