Ultra-low, and in some cases negative, interest rates have done many weird and not-so-wonderful things, including giving the Chinese a leg up in the US public transit market. From MN Gordon at economicprism.com:
One of the more remarkable achievements of fake money creation is that it distorts and disfigures the world in odd and uncanny ways. Dow (not quite) 27,000. Million dollar shacks. Over $13 trillion in subzero-yielding debt.
You name it. Any and every disfiguration is possible with enough fake money.
However, when it comes to the full range of ways fake money distorts the economic landscape, asset price inflation is merely a cheap facade. The real, mega disfigurations pile up in the arena of international trade. What’s more, they extend well beyond a gaping trade imbalance.
Currency wars, competitive devaluations, and the race to the bottom are all hazards formed out of the confluence of fake money, foreign exchange markets, and international trade. So, too, the impetus for tit for tat trade tariffs and trade wars ties back to the deceit and deception of fake money. Still, these facets aren’t the half of it.
To better understand what exactly fake money has wrought, a brief detour is in order. You see, a world under the influence of fake money is a strange and curious place. The clearest path between two points is not always a straight line.
Thus, before we get to how Beijing is using fake money to cannibalize the U.S. transit market, we deviate to the fake capitalism of the technology sector. This may be an old and tired story. But it offers important context for understanding the world at large…
The 21st century has brought forth many absurdities. But, perhaps, none is greater than the popular delusion that profits don’t matter. That growth is, somehow, the determinant factor of a stock’s value.
This goes counter to our antiquated conception of capitalism. We still believe that current and future profits are critical to the growth of a company. Yet, according to the voting machine of the market, and the bubble economy of the technology sector, profits mean diddly squat. Technology investors even have a decade of rising portfolios to prove it.
Take Spotify, for instance. During the first quarter of 2019, the music streaming service delivered revenue of $1.5 billion. But, to do so, they produced earnings of negative $142 million.
Nonetheless, investors piled into Spotify like it was gushing cash. Year to date, its share price is up 25 percent. Mind you, this is for a company with trailing twelve month earnings per share of negative $7.63. Somehow, the company has a market capitalization over $26 billion.
Naturally, we’re suspicious of the business model. You can’t make up for negative earnings with greater volume. But in the bubble economy of the technology sector this is of little concern to investors.
What matters to technology investors is that the business has the appearance of innovative growth. Hence, Spotify, and many other technology companies, solely exist off the benevolence of investors.
Without question, this is old news. But it’s important to revisit. For in being rewarded for their losses, Wall Street’s most popular technology companies are able to cannibalize their competitors and control niche markets.
How Beijing Uses Fake Money to Cannibalize the U.S. Transit Market
Perhaps the greatest innovation of the technology sector has been the great lengths it has gone to destroy capital. No doubt, many unique and creative endeavors have been undertaken to this end. The opportunities are limitless.
For example, the technology sector business model is currently being exploited by the Communist Party of China to the detriment of the economic and security interests of U.S. citizens. As further insult, this is taking place on the U.S. taxpayer’s dime.
Specifically, Chinese state owned enterprises (SOE), like China Railway Rolling Stock Corporation (CRRC), have been booking large metropolitan taxpayer funded transit contracts in cities across the USA. As clarification, a Chinese SOE is a Chinese company backed by the Communist Party of China. The Alliance for American Manufacturing offers the particulars:
“CRRC already has won contracts to build rail transit in Boston, Philadelphia, Los Angeles and Chicago — and did so by significantly underbidding its rivals. In Philadelphia, for example, CRRC outbid its next closest competitor, Canadian company Bombardier, by $34 million. Its bid was $47.2 million lower than South Korea’s Hyundai Rotem, which already had a manufacturing presence in the city.
“CRRC can underbid its competitors so significantly because China’s goal isn’t to make money from individual transit contracts, as a company operating in a free market would. Rather, it wants to dominate the entire global transit industry, and is working to do so by entering and quickly dominating markets in other countries, including in the United States.”
Similar to technology sector businesses, which operate at a loss and cannibalize competitors, CRRC and other Chinese SOEs can operate at a loss and cannibalize the U.S. transit market. But instead of benevolent investors backstopping them, Chinese SOEs are backstopped with fake money from Beijing.
From what we gather, Senate Minority Leader Chuck Schumer’s on the case – calling for a federal probe into CRRC’s efforts to design New York City subway train cars. But this misses the point entirely.
So long as fake money’s accepted for goods and services the extreme distortions and disfigurations will continue. Beijing’s use of fake money to cannibalize the U.S. transit market is merely the logical progression of a degraded condition.