Understanding the Uptrend in Wealth Cycles

The WealthCycles Staff

Two men, Jim Chanos (left) and Jim Rogers (right), are both famous for being very right throughout their careers managing money. So how can they be diametrically opposed when considering the long-term prospects of Chinese growth?

 

Presently it appears that Chanos is winning the long-term growth bet.  The Shanghai composite has dropped 50% from its 2008 high. It is important to know that Chanos runs a $6 billion dollar short fund, which successfully shorted Enron. He states that his fund starts with a top-down approach. He starts with a macro analysis and drills down into individual assets. Here is his slightly sarcastic take on our present state:

“[Stock promoters] find a different investment hype, a story, to get people excited. In the 1990s, it was the Internet, and now it’s China. Unbridled growth.1

Jim Rogers, on the other hand, famous for disagreeing with Chanos on this topic, said:

“Mr. Chanos has never been to mainland China.2

Rogers, the opposing opinion, maintains that China will have its share of setbacks, just as the U.S. did throughout its period of growth. The U.S. growth period started when Andrew Jackson chose not to renew the charter of the second central bank incorporated here in the U.S. When on his death bed, he was asked what he considered to be his greatest accomplishment, he replied, “I killed the bank.”

Like Jackson, Rogers understands macroeconomics. To do so, one needs to understand classical economics thoroughly. The Austrian school of economics, centered in Auburn, Alabama, is the world headquarters for the classical works. This is coincidentally in Rogers’ backyard, as he grew up in Demopolis, Alabama before gaining a scholarship to attend Yale. When co-managing the Quantum fund he achieved a return of 4200% over 10 years, while the S&P500 returned 50% over the same period. Despite a bubble in urban coastal real estate, the real economy in China is growing, by 7% annually.

The big story here is that, with that rate of growth, by 2020--eight short years away--China’s economy will be double the size of the U.S. economy. Imagine, an economy with free, competing currencies and real productivity gains, such as we saw in the 77-year gap from when Jackson put his sword into the “den of vipers and thieves”—the Second Bank of the United States--making way for the gilded age of exponential U.S. growth, innovation and leaps in quality of living. China manages real growth by using a bi-currency system, (see our latest fundamental analysis article).

So what is the basis for this seemingly wild, yet verifiable assertion?

The basis is cycles defined in 1911 by the Austrian economist Joseph Schumpeter a book he authored, describing it as “An inquiry into profits, capital, credit, interest and the business cycle.”Wikipedia:

Schumpeter starts in The Theory of Economic Development with a treatise of circular flow which, excluding any innovations and innovative activities, leads to a stationary state.

This stationary state is where we are now. However, humans invariably overcome. Continuing:

The hero of his story is the entrepreneur.

Schumpeter's theory is that the success of capitalism will lead to a form of corporatism and a fostering of values hostile to capitalism, especially among intellectuals. The intellectual and social climate needed to allow entrepreneurship to thrive will not exist in advanced capitalism; it will be replaced by socialism in some form. There will not be a revolution, but merely a trend in parliaments to elect social democratic parties of one stripe or another.

Does this sound similar to where we are today?

Schumpeter argued that capitalism's collapse from within will come about as democratic majorities vote for restrictions upon entrepreneurship that will burden and destroy the capitalist structure.

The entrepreneur disturbs this equilibrium (the stationary state) and is the prime cause of economic development, which proceeds in cyclic fashion along several time scales. In fashioning this theory connecting innovations, cycles, and development, Schumpeter kept alive the theory of Kondratiev waves.

Wikipedia on Kondratiev:

Some market commentators divide the Kondratiev wave into four 'seasons', namely, the Kondratiev Spring (improvement or plateau) and Summer (acceleration or prosperity) of the ascendant period and the Kondratiev Fall (recession or plateau) and Winter (acceleration or depression) of the downward period.

  

The topics we write about at Wealth Cycles have been focused primarily on the R stage in the chart (above). As we have left recession and entered D, we work to inform and empower our readers to survive the inevitable outcome of our unsustainable, debt-based global monetary system. We may not succeed in changing the policies and practices of our elected officials and economic elite, but we can ensure our readers have the information and resources they need to make sound decisions about protecting their families and preserving their wealth.

But, a white swan appears to be on the horizon. The project is slated for 2020 yielding to broad implementation by 2030. Chanos was wrong to downplay the advance of the Internet age as mere sell-side stock hype. The Internet is presently, literally, the sole advancement with the capacity to bring humans around the world face to face, not only with one another, à la Facebook, but even more importantly, with truth. This next profound discovery will take us beyond today’s most fanciful dreams about global prosperity. Without the Internet, the Chinese would have never been able to download the documents and utilize the research based on the project we began in the U.S. 60 years ago. What is it?

We detail this project more specifically in the WealthCycles Feature, 'Innovation within the Kondratiev Winter.'

We have a new 5-minute video in the WealthCycles Visual Economy page. The video is titled 'New Energy Technology could be Next Big Thing.' This is the what the Chinese premiers son personally came to Tennessee to see with his team. According to the Chinese, the work they are doing is for “internal use only.” Perhaps this is what Rogers knows, which matches nicely with what Kondratiev fleshed out almost 100 years ago.

1: Business Insider

2: Business Insider

Mike,

I will side with Jim Rogers concerning China. It is the next super power and economic power. The internationalization of the RMB will compete with a weak dollar for global supremacy. In my view, the RMB will eventually become the next reserve currency thanks to the Gold and Silver the central bank of China is buying.

Regards,

Rob

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