This I Believe: Growth and Prosperity

The This I Believe website is a national media project engaging millions of Americans in writing, sharing, and discussing the core values, philosophies, and beliefs that guide their daily lives. Founders Jay Allison and Dan Gediman say “their goal is not to persuade Americans to agree on the same beliefs. Rather, they hope to encourage people to begin the much more difficult task of developing respect for beliefs different from their own.” This project has inspired me to write about my own beliefs, especially within my field of study, and how they were shaped.

I believe in growth and prosperity. As a child, I would frequently visit my Grandpa Max in the small town of Redding, California (see map). Looking back, one of the favorite memories I have of visiting my grandpa was the endless number of stories he yearned to share. Using his experiences of growing up during the Great Depression in the 1930s, a time when jobs, and the money that went with them, were extremely scarce, Grandpa Max used to tell me about how he and his family could barely make ends meet, and the amount of effort it took simply to put food on the table. When the Great Depression ended, my grandfather entered World War II and was in active duty until its end in 1945. After World War II, the United States saw a sharp rise in the economic wealth that lasted throughout the fifties and well into the sixties. I heard many tales from this time of his life too, but these sagas were very different than his hardship stories: these were excitedly told with a child-like giddiness.

For my grandfather, the 1950s and 1960s served as a respite from his previous worries, a time that definitely lived up to clichés like “affluent society” and “American as apple pie.” As Henry David Thoreau once said, “wealth is the ability to fully experience life.” At the end of World War II, that is exactly what my grandfather, and maybe most of his generation, did. He moved from Oregon to California in the early fifties with my grandmother and started his family. Grandpa Max, for the first time in his life, was able to purchase a home, and easily find a job that could support his entire family. I can vividly remember him rambling for hours about the new gadgets that came out during this high time and how, on his income, he was able to purchase them when they were first released into the market. He babbled aimlessly about his new color TV and how CBS’s “Gunsmoke” was perhaps the best TV show to hit primetime; moreover, he would frequently bring out the first rotary phone (pictured) that he owned from the dusty boxes in the garage and allow me to use it as my “play phone” when I visited. As I played telephone, he marveled at how the invention of instant coffee was his “savior” in the mornings when he would awaken for work at 5:00 AM. With his instant coffee, Grandpa Max would joke that he would get up every morning and look through the Forbes list of the richest people in America, and if he was not there, he would go to work!

Economic growth and prosperity are at the very crux of a country’s well-being, and more importantly, they are the vehicle for the satisfaction of its citizens. Growth means prosperity, and, conversely, in the minds of most, no growth means stagnation, recession, and a decline in the standard of living. In that way, economics is not the accumulation of abstract statistics, but rather the reflection of the hopes and dreams of sequential generations. I have taken it upon myself to write in my blog about the economic situations that affect growth and prosperity, for example, a trade deficit. One of my favorite quotations is from American physicist Richard Feynman, “There are 10^11 stars in the galaxy. That used to be a huge number. But it is only a hundred billion. It is less than the national trade deficit! We use to call them astronomical numbers. Now we should call them economical numbers.” No matter how unbelievable these numbers appear, the statement holds a very strong truth. The higher the trade deficit, the less ideal economic growth becomes. I touched on this current issue in my post entitled “Trade Deficit: Record High”.

In essence, I owe my keen interest in economics to my grandfather (pictured) and his endless engrossing stories of the “happy days,” fueled by the growing economy and prosperity he experienced. It is from his stories that my strong belief in growth and prosperity sprang. I was able to see how a healthy economy sets the stage for a life that is happy and rewarding. And that definitely captures my attention.

China Plummets: Theory Almost Proven

In my January 29th post titled “China’s Economy: A Ticking Time Bomb,” I had come to believe that, with China’s incredible growth, its economy will eventually spiral out of control. Well, in the wee hours of Tuesday, February 27, 2007, the Chinese stock market plummeted by nearly 9% (see photo of investor in front of the dismal electronic board in a Shanghai stock trading hall), shaking up other stock markets from New York to London, and reaching literally around the world by the end of the next day. ABC News reported that “the Shanghai Composite Index (the major index in China) tumbled 8.8% to close at 2.771.79, its largest decline since it fell 8.9% on February 18, 1997, at the time of the death of Communist Party elder Deng Xiaoping.” Considering the Shanghai market was up 130% last year, what caused this substantial drop? Was it just a temporary “adjustment,” or was it a sign of a much larger economic failure looming ahead?

Many factors provoked the fall of the Chinese market, but two stand out as major contributors. First, investors feared that the Chinese government would soon crack down on speculation that has driven stock prices to record highs. Government officials hinted that a special tax on capital gains may be introduced, thus wreaking panic onto investors as they quickly unloaded Chinese shares as a way to lock in profits before tax changes. Secondly, investors were being proactive; that is, they thought it was simply time for some profit-taking. As Peng Yunliang, senior analyst at the Shanghai Stock Exchange, put it, “People viewed 3,000 as a psychological benchmark. It is understandable they might want to pull back after the market hit that peak after such a long run.” China's Shanghai Index had gained 1.4% on Monday, the day before the plunge, and opened at 3,040.60 (40.60 above the so-called psychological peak). After the fall, it closed at 2.771.79.

Michael Roberts, author of the enticing article “World Stock Markets in Turmoil,” wrote that the “chaos theory applies in the anarchy of world capitalism: when the Beijing butterfly flaps its wings, the snow falls on New York.” The Chinese stock market plunge did not just stay within China; as indicated above, it spread quickly worldwide, causing the stock markets around the world to fall by 3-4% within a matter of hours after the drop in the Shanghai Composite Index. For instance, in Hong Kong, the benchmark Hang Seng Index dropped 1.8% (see photo), while Singapore’s Straits Times Index sank 2%. This "butterfly effect" then reached around the continent to European countries, where major indices dropped similarly: the United Kingdom’s FTSE-100 plunged 2.31%; France’s CAC 40 dropped 3.02%; and Germany’s DAX slid by 2.96%. But, it got worse: the U.S. Dow Jones Industrial Average plummeted with a loss of 200 points in one minute around 3:00 p.m. (see graph); the Dow continued to fall, reaching a loss of 416 points, or 3.3%, serving as the worst one-day drop in the U.S. since September 2001. And, to complete the world picture, Latin American countries were also affected by China’s recent drop. In Brazil, Sao Paulo’s Bovespa Index was off 4.1%, Mexico City’s IPC Index shed 3.4%, the IPSA Index in Santiago was down 3.8%, while in Buenos Aires, the Merval Index dropped 5%.

What is it that makes China’s “butterfly effect” so influential? China is not the only fast growing economy, but it seems to be the one with the most impact: “its contribution to global GDP growth since 2000 has been almost twice as large as that of the next three biggest emerging economies, India, Brazil and Russia, combined.” Jim Jubak, senior markets editor for MSN Money, elaborates on China’s global economic influence in terms everyone can understand: “If every person in China consumed one more tablespoon of soybean oil annually, world trade in soybean oil would double.” China grew on average over 9% in the last 25 years, but trade grew even more, with an unprecedented 12% over the same period. If recent trends continue, China will emerge as the largest economy somewhere between 2030 and 2040, and it will be the largest trading nation before 2020. China serves as a locomotive for the world economy. When China grows, other countries benefit from lower priced goods. Just look at how fast flat-panel TVs are going down in price. However, if growth slows or stops, the people of other countries will feel the pain through higher prices goods, leaving less money for other spending.

Now, back to the original question: was the Chinese stock market drop simply a normal “adjustment” (albeit a strong one), or was it a sign of something more sinister? It is true that as the government denied rumors of such “special tax” measures the day after the plummet, Chinese shares did rebound by nearly 4%. But Barclays Stockbrokers analyst Henk Potts of London confirmed that “there continues to be a lot of nervousness around the stock market.” As a result, world-wide stocks are still closing at low rates as this wave of anxiety (see inset) spreads to investors. In my opinion, Potts is on the right track and there is still much more to come; February 27th was just a small wave hitting the shores of every continent in advance of a huge global tsunami. With the Asian markets still down and the plunging U.S. economy, an emergence of a world crisis will happen. Many people believe that markets will recover. But, the current stock market fall is just an indicator of the future deterioration that will unfold over the next couple of years.