Robert Mueller. Rare Earth. Big bad China.

Robert Mueller. Rare Earth. Big bad China.

Robert Mueller RIP

Robert Mueller just died. The former head of the FBI led the Russia-Trump investigation (hoax). The president, his usual companionate self said “I’m glad he is dead.”

Rare Earth

All this talk about rare earth reminded me of the band of the same name which was one of the few white acts on Motown – “I just want to celebrate”.

Speaking of rare earth (the collective name for 17 essential minerals used in modern technology) the US led the world in the production of rare earth minerals until the 1980s. All of a sudden the government started piling on regulations of all sorts from EPA to safety and now it takes 10 years to get the permits necessary to operate. It now takes a whopping 29 years from discovery to production. No wonder rare earth mining went elsewhere. Jumping through all the government hoops adds $1 billion to the costs in the development of the mining project. There is one mine project started in 1980 slated to open in 2028. This is ridiculous. 

The government is now investing in companies that operate mines. There are abundant supplies of rare earths in the western states and Alaska. Why not just waive all the rules and impediments in the way of opening the mines? Then rare earths won’t be that rare at all.

Speaking of China

It is getting so now that I am skeptical that much of what I read is the truth. Two cases in point are information on Trump’s war on Iran and anything about China. I don’t believe any data reported by the Chinese on China. Much like I doubt the data now coming out of the Bureau of Labor Statistics and the Commerce Department, the Chinese have an incentive to lie. It is in the Chinese best interest to puff itself up to the rest of the world. And sure there are those in the western media who love to put down the west and thereby amplify all the propaganda from China. But much of China is a Potemkin village.

This is nothing new.  What about all the stories that the Chinese economy was going to surpass the US? What about all the stories that the Chinese yuan was going to supplant the dollar as the world’s reserve currency? Well those stories were just that – stories. BTW, when I was growing up for some reason my parents forbade us from saying the word “lie” instead we had to say “story.” Well then we have been told a continuing stream of stories about China’s economy. I have not bought any of it. I have been saying for years, that with a population four times that of the US (1.4 billion to 343 million), the Chinese economy should be labelled an embarrassment. Its GDP is a paltry $19 trillion while the US is $31 trillion. In nominal terms the US is 63 percent bigger with fewer people. And to think we have fools that want to emulate China.

China is the poster child of the failure of socialism, state planning and industrial policy. Its real estate sector is a drag on the economy and much of its productive capacity is dependent on state subsidies. This cannot go on forever. Those chickens are going to come home to roost and the results won’t be pretty. Its disastrous one child policy is causing its population to shrink. Its economy is shrinking despite its trade surplus now over $1.2 trillion. That trade surplus is a byproduct of China subsidizing its export manufacturers. China is a world leader in EVs, ship building, robots, solar panels and a bunch of other stuff. But subsidies essentially are another way of saying “producing and selling at a loss.” We all know that you can’t make that up on volume. 

The Chinese have always produced lofty statistics on its rate of growth. They are saying their economy will grow 4% but in reality the Chinese economy is shrinking. China’s share of world GDP peaked at 18.5% in 2021 but is 16% now, despite the trillion dollar trade surplus. DOES DONALD TRUMP KNOW ABOUT THIS? If China is growing at 4 percent and the US is growing at 2 percent, the Chinese number is bigger because its base is smaller. For instance, would you rather grow at 100 percent or 5 percent? Most would say the former. But if you start at one and grow to two, you grow 100 percent. But if you are at 10 and grow to 15, wouldn’t you be better off at the slower rate of growth? The same is true when comparing the Chinese numbers to the US.

I am waiting for the Chinese asset bubble to explode. Its real estate market is on life support. There are enough empty apartments to house its entire population of 1.4 billion people. I doubt if they have an “affordability” issue in housing! In fact, some localities are demolishing new buildings. Can you imagine the financial burden of having to finance empty buildings? The truth of the matter is that there are not enough investments in the Chinese economy that produce what we in finance call positive net present value. That is, net present value measures the value of a series of cash flows over the investment horizon, discounted back to the present. If you sum all future cash flows adjusted by a discount rate it gives you the NPV. If positive, the project is expected to be profitable. If negative, it suggests a loss. Much of the investments in China are negative NPV and would not even be undertaken here.

As a result, investment money flows out of China not into it. Last year net foreign investment fell by around $170 billion. In contrast net foreign investment in the US was $292 billion. Don Boudreaux constantly points out that the positive net foreign investment is also a result of our trade deficit – that is our dollars spent abroad flowing back into the country. Isn’t it weird that Trump wants as part of his tariff deals more foreign investment in the US when we get precisely that because we run a trade deficit? BTW, foreign investment increases the trade deficit. Trump envies China’s trade surplus. Why?