Goldman Sachs Whistles Past EU Graveyard?
By Staff News & Analysis - February 01, 2011

The Eurozone's problems are exaggerated – it won't be the centre of the next global crisis, argues Jim O'Neill … Almost 27 months have passed since the collapse of Lehman Brothers; but judging by what I hear every day, the British public remains in a state of high anxiety about this country's economic future. In the aftermath of the credit crisis, that was understandable – but now that mood doesn't have to persist. The number of countries with lasting credit hangovers is declining. The world's economy grew close to 5 percent in 2010. And this year may see something similar. There are reasons to be hopeful. At the heart of the post-crisis global story is China and its consumer. The more gloomy commentators frequently allude to the fact that the Chinese consumer is only worth just over 35 percent of the country's overall GDP … In fact, to other parts of China's economy booming over the last 10 years. It's hard to get a grip on the scale of this boom. – UK Telegraph

Dominant Social Theme: Frankly it seems a lot worse than it is. Just take a deep breath.

Free-Market Analysis: Jim O'Neill is the chairman of Goldman Sachs Asset Management and he believes the Eurozone is healthy enough (see article excerpt above) to carry on. For us, this may constitute a dominant social theme of sorts. The Anglo-American elite, which helped create the EU and has solidly backed the project, is loath to let it die. Thus, there is obviously an increasingly concentrated effort to "talk up" its prospects. O'Neill, certainly a standard bearer of elite interests, would seem to be doing his best in this regard. In this article, we'll examine his perspective more closely.

Let's start with his optimism about China – which we consider a kind of elite meme of itself. Here at the Bell, we believe China's stated concerns regarding the EU are actually part of a larger collusion with Western elites to usher in closer global cooperation. Part of that cooperation involves ensuring that the EU does not crash and splinter, and thus China has offered to purchase the debt of ailing – failing – European nations.

China is in fact well-equipped to be a Western ally. Its rulers don't seem bound by a specific constitution (or at least the one in force is fairly elastic) and can pretty much do as they please – within certain ill-defined limits. The sociopolitical governor is not a specific written pact with the population so much as a general understanding of vague boundaries that the government has crossed in the past and doesn't wish to test again. Accordingly, the Chinese government has "liberalized" – allowed the average Chinese to earn a living and even to become rich so long as these activities do not threaten government power.

But government power remains robust. Chinese do not own their real estate but lease it from the government. And the government censors at will, using a gigantic force of employees to monitor the Internet for anti-government sentiments. It seems to us that the Chinese government controls most if not all of the larger country's larger financial and industrial institutions, often behind the scenes.

The real free-market is to be found much farther down on the street for the most part where Chinese entrepreneurs compete against each other within a retail context. The ChiComs therefore retain control of the means of production, including the Chinese central bank. Only within carefully monitored parameters, is the Chinese economy a competitive one.

This is actually similar in many ways to the growing EU superstate and to the way America is evolving as well; and O'Neill uses numbers to marshal his arguments. "[Since] I dreamt up the "Bric" acronym nine years ago – shorthand for the economies of Brazil, Russia, India and China – the total value of China's economy has risen by around $4.5 trillion. Given that the UK's economy was worth $1.5 trillion in 2001 that means China has risen by about the equivalent of three United Kingdoms. The worth of the Chinese consumer increased by $1.6 trillion over the same period, approximately one UK."

China is not alone, he adds. Consumers in the other BRIC economies are worth another $2 trillion. The total is over $4 trillion and growing at a 20 percent clip. What does that mean in dollars? About $800 billion dollars of global consumption per decade, he explains. By 2020, the combined value of the BRIC consumer will catch up to the US.

And yet … despite this upbeat analysis, there are obvious problems. Both India and Brazil are already suffering from significant price inflation as we have pointed out. It is China, however, that apparently has the very worst case. The Telegraph reported yesterday on yet another disturbing sign – China's burgeoning underground cities. These are the direct result of China's red-hot property market above ground, apparently. In Beijing, the Telegraph adds, where the average monthly salary is 4,000 yuan, the average person would take 50 years to buy an average apartment, assuming they saved every penny they earned. Working-class Chinese look down, not up. Here's a further excerpt:

There, in the city's vast network of unused air defense bunkers, as many as a million people live in small, windowless rooms that rent for £30 to £50 a month, which is as much as many of the city's army of migrant labourers can afford. In a Beijing suburb, beneath one of the thousands of faceless residential tower blocks that have carpeted the city's peripheries in a decade-long building frenzy, one of Beijing's "bomb shelter hoteliers", as they are known, agrees to show us his wares.

Passing under a green sign proclaiming "Air Defence Basement", Mr Zhao leads us down two flights of stairs to the network of corridors and rooms that were designed to offer sanctuary in the event of war or disaster. "We have two sizes of room," he says, stepping past heaps of clutter belonging to residents, most of whom work in the nearby cloth wholesale market. "The small ones [6ft by 9ft] are 300 yuan [£30] the big ones [15ft by 6ft] are 500 yuan." Beijing is estimated to have 30 square miles of tunnels and basements, some constructed after the Sino-Soviet split of 1969, when Mao's China feared a Soviet missile strike, and many more constructed since to act as more modern emergency refuges.

So Beijing's millions are living underground because they cannot afford the millions of empty apartments above ground that have been purchased as part of frothy speculation that Chinese leaders cannot get under control no matter how hard they try. In fact, despite increasing price controls and other Draconian measures, prices keep rising not only in real-estate for food as well. Inflation is a monetary phenomenon; but instead of trying to drain yuan from the system, the Chinese are putting limits on real-estate purchaser. This merely redirects inflationary pressure without reducing it.

Then there is Ireland – a bellweather for the EU and euro in our view. Even as the Telegraph was reporting on O'Neill's optimistic assessment of the EU, another article in the same paper was providing the news that Ireland's central bankers had decided that growth would be only half as robust as previously forecast. The reports came despite government "austerity" efforts, which included massive budget cuts and predictable tax increases. In fact, the government plans to raise taxes by some 6bn euros this year.

Iceland, it should be noted, refused the ministrations of the IMF and let its damaged banks go bankrupt. As a result, it would seem that Iceland may be on the way back from a terrible but mercifully short "recession." Ireland, on the other hand, a member of the EU in good standing, has stolidly accepted IMF nostrums that inevitably fall on the backs of working people at the expense of banks, which are being reliquified by Irish "austerity."

Ireland's gross domestic product will probably rise by 1pc this year instead of the 2.4pc forecast in October, the Telegraph reports. "The prospects for the Irish economy for this year and next have deteriorated in recent months … Domestic demand will weigh more heavily on growth this year and next than was anticipated." Here's more:

The central bank's October forecast was based on a budget package of 3bn euros. Finance Minister Brian Lenihan unveiled the tougher austerity measures as part of an 85bn-euro rescue package from the European Union and International Monetary Fund. The government aims to lower the budget deficit to below the EU limit of 3pc of GDP in 2014 from about 12pc last year. Including the cost of bank bailouts, the shortfall amounted to 32pc of GDP in 2010.

The Internet has provided a window into the workings of the elite on a global scale. In Europe, the austerity riots have already begun and one would anticipate their resumption in the spring. Promotional perspectives such as the one O'Neill advances need butressing from appropriate manipulations. That will be a harder effort.

After Thoughts

For various reasons, the Anglo-American power elite is finding it more and more difficult to influence events. The point was perhaps to destablize Western society in order to facilitate global governance. But in the era of the Internet, such destablizations are increasingly dangerous and their results unpredictable. O'Neill makes his points, and marshals this numbers, but they may not prove out.