George Soros is right on China and late on Theory of Knowledge

Posted on November 26th, 2012 by admin in Investing, Political Economy, Scenarios

It’s worth pointing out to my readers that George Soros is controversial, smart and is a very successful investor and thus commands respect from those who rely upon understanding economies to support their own investing. Here is his delightfully concise description of the current state of the Chinese economy and his predictions for it. The quotes are from a report of an interview of him by Chrystia Freeland in  Foreign Policy Magazine.

“China has been the tremendous beneficiary of globalization and now is at the end of the road as far as the growth model they have employed, which is based on exports and investment,” he said in our interview, in comments that are more bearish about the world’s second-largest economy than Wall Street conventional wisdom.

“The share of consumption is just one-third of GDP, and that is now reaching the limits of what is sustainable,” he said. “So they have to change that. But it will be rocky. It involves a hard landing. To increase consumption, you need to increase household incomes. But the economic slowdown is creating unemployment and people are scared, so their propensity to save increases. So all three segments are falling: exports, investment, and consumption.”

In Freeland’s article, he continues:

“The great gimmick that was helpful in maintaining economic growth was having an undervalued currency, which was the equivalent of a tax imposed on Chinese labor,” he said. “But people did not feel taxed. Since the economy was growing so rapidly, even though the share which accrued to labor was less than appropriate, during this period of rapid growth everyone was satisfied.”

At the time, the winners were the Communist Party’s elite, whose members personally benefited and saw the economy take off. This political dynamic, however, is breaking down along with the slowdown, he says, as “the willingness of people to accept a regime which is a dictatorship is greatly diminished.”

The result, Soros predicts, will be conflict and crisis in China.

As for his ideas expressed in the same interview about the fact that humans have a finite capacity to understand the world, it appears he has not embraced the ideas associated with the Black Swan, nor those of Prof. Herb Simon.

What we don’t know we don’t know yields Black Swans, events that are exceptionally rare, have huge impact, and are not imaginable in advance. N. Taleb, the strongest advocate of the Black Swan concept of knowledge, has made some recent distinctions that begin to help us defend against that which we cannot, by definition, specifically anticipate. See this article in Wall St. Journal for a good exposition on the concepts of fragile, stable/robust, and antifragile systems.

The fact that human cognition is finite (“bounded rationality”) was first analyzed by economist Herb Simon. He pointed out that humans “satisfice“…they accept good enough solutions, and cannot get optimum ones. Simon got a Nobel Prize in economics for his ideas.

George is always interesting in any case.


One Comment on “George Soros is right on China and late on Theory of Knowledge”

  1. jollydog

    This is a great piece. Throughout China’s history similar events have played out as predicted by the great Billionaire Socialist and there is no reason to believe that it will be different this time. The tragedy continues.. Back to my lovely Brunello.

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