China Beats America in Economic Growth by Using Capital to Build Value
Greece has been ground zero of the eurozone financial crisis. I wrote in March about how the eurozone was fashioning a rescue plan since Greece needed to repay $72 billion in debt in 2010 and had a very high budget deficit and national debt. Ultimately, a $140 billion rescue was fashioned through a combination of lending and guarantees from the EU and the International Monetary Fund.
China Saw Unmet Potential in Greece
While the rest of the world complained about Greece's lax budgetary standards, China looked at Geece and saw something very different. According to the Washington Post, Cosco, the Chinese shipping company, will take over full control of a major container dock in Piraeus, a shipping port just southwest of Athens. Cosco will invest $700 million to construct a new pier and upgrade existing docks.
Why is China investing when the rest of the world sees Greece as an economic basket case? China wants to make it easier for the output of its factories to reach consumers across Europe and North Africa, according to the Post. Moreover, China's investment in Greece isn't a one-shot deal. It has also "plunked down billions from Angola to Peru" to help guarantee China's supply of raw materials and product distribution through "a network of roads, pipelines, railroads and port facilities -- sort of a modern Silk Road -- to boost East-West trade," according to the Post.
It's China that has overtaken the U.S. when it comes to putting capital to productive use. As Theodoros Pangalos, Greece's deputy prime minister, told the Post, "The Chinese want a gateway into Europe. They are not like these Wall Street [expletive] pushing financial investments on paper. The Chinese deal in real things, in merchandise. And they will help the real economy in Greece."
Financial Wizardry Predominates in U.S. Markets
By contrast, the U.S. financial markets are dominated by high-frequency traders who account for 70% of trading volume and exalt the use of technology to outsmart other traders -- rather than using it to create jobs by building businesses. Practices such as latency arbitrage enabled these HFTs, by putting their computers next to the exchanges, to get a 100-millisecond advantage on retail investors.
This use of financial ingenuity to enrich the few to the detriment of the many is the opposite of what the financial markets were intended to accomplish. And that is the essence of why China is beating the U.S. in economic growth: Despite weak intellectual property protection in China, its financial markets are using capital to build value-creating businesses. In the U.S., capital goes to flash traders who flip stocks after 11 seconds.
Until U.S. capital markets start to invest in businesses that create value for customers and hire the millions of unemployed workers, they will continue to be a side show that makes billions for a handful of hedge fund managers instead of making the U.S. economy stronger.
And that weakness will help China gain on the U.S. until we can get our financial markets to serve corporate and public interests instead of being the tail that wags the economic dog.