Investors have watched as China's economic engine has powered it to become a significant player in global economics. What was once a closed-off communist nation has now accelerated to a high place near the top of the global economic ladder. And, as other countries struggle to make ends meet, China's financial success has some people alarmed.
Among the alarmed is Dr. Stephen Leeb, Chairman and Chief Investment Officer at Leeb Capital Management. He's also the author of several books. Dr. Leeb recently published a new book, entitled Red Alert: How China's Growing Prosperity Threatens the American Way of Life. We spoke to Dr. Leeb about his book and he had a strong warning to our readers about the rise of China.
We started by talking about how he got the idea of his book. He said: "I think the two points that got me really thinking about this was the amount of infrastructure spending that was happening in China and my own belief that hydrocarbons are in short-supply."
He clarified his first point by describing the anticipated decline in resource production in the next 10 to 15 years, and he said if resources like hydrocarbons do peak and decline, "you're going to have trouble trying to run a society on the basis of hydrocarbons – like coal and oil."
Referencing an article by Stanford professor Mark Jacobson, Dr. Leeb said the world's energy needs could be satisfied with a combination of wind, solar, and water. "China is aware of this," Dr. Leeb added.
Dr. Leeb believes that the decline in hydrocarbons and the opportunity for alternative energy sources has led China to ramp up its infrastructure to be ready to rely on these energy sources. "If [China] is going to transition in a meaningful way from hydrocarbon-based economies to an economy of alternative energy (including nuclear, hydro, etc.), they are going to need a massive amount of resources to do it… It struck me that China has become aware of this. They built up massive amounts of infrastructure, which will allow them to build up alternative and renewable energy."
It's one thing to be prepared, but Dr. Leeb is more concerned about the American response (or lack thereof) to this transition. "Here we sit watching this happen in front of us." Later he added: "China is spending as much money (or more) in Afghanistan as the US is… but the US is spending it on the war and China is spending it to mine copper."
According to Dr. Leeb, China has taken control of alternative energy. Of solar and wind, Dr. Leeb said: "Right now, China controls about 60% of solar energy. They are the primary manufacturers for the world and they did it by underbidding everybody. They've gone from being nobodies in the solar energy market and are now 'the big guys'. No country other than China has the ability to harness wind because they have 90% of rare earths, which are critical in scaling wind turbines. We're shut out from two critical new energy sources!"
And then he mentioned China's growing interest in water: "As reported in the New York Times, China is making a bid for the fresh water market because they are underbidding everybody in desalinization. If you're going to make energy, you need a lot more water than you have. China appears to be on the cusp of gaining control of desalinization and gaining additional fresh water. And since the world population just popped above 7 billion, [water is essential]."
The consequences are dire, warned Dr. Leeb. "We're approaching the peak of MANY critical commodities… not just oil or water but also rare earths and even copper. Copper is something we take for granted but it could be a scarce metal. Goldman Sachs recently came out with a review on copper in which they said 3 years from now, copper's price could be 'unimaginably high'. Now imagine a world where copper is extraordinarily scarce. How do you build pipes? How do you build an electric grid? How do you build a house? How do you build an electric car?"
Dr. Leeb's warning became even stronger: "The way I look at the situation right now is: We are in a war with China. We don't know we are in this war. We don't know it because we're not aware of the stakes. China is keenly aware of it and they've been preparing for it for the last 10 or 15 years. We've got to get 'on the horse' really quickly." Then he concluded: "The greatest country that's ever existed on the face of this earth could collapse."
Making matters even more difficult for Americans is the economic conditions right now. "High commodity prices have created such massive headwinds in this economy that it is almost impossible to grow," Dr. Leeb said. "It is going to get worse and worse as we go forward unless we do something dramatic."
So, what can Americans do? Dr. Leeb provided a few ideas at a national level and at an individual level.
His first suggestion was to take an aggressive, proactive stance: "We need to confront China and say, 'we're in this world together. We know what you're doing and either we can do it together or we can do it as enemies'."
Plus, he advised that the US shift its focus. "We need to declare the fact that we're fighting a war. It's not a shooting war but the stakes are just as high or higher. If we lose this war, we lose our civilization."
Next, he said that American innovation needs to step up: "We have to spend money to create ways to get resources from the bottom of the ocean. Develop rare earth deposits that exist in Canada but no money is being put into them to develop them. There's lots this country could be doing but we're not."
Then he urged individuals to take action: "[Each American should] write his or her Congressman. Tell them to go to the library and read my book. Tell them these are desperate times. Describe to them the potential horror of not doing something about this. This is an issue that transcends politics. It doesn't matter what your political persuasion is… it only matters that you're American. Write as many letters as you can to as many people as you possibly can."
And finally, he asked people to discuss the problem openly: "Talk about it with your friends."
China's growth is undisputable and it appears that they will play a large role in global economy in the years to come. Exactly what that looks like – particularly in light of Dr. Leeb's warnings – is not known at this time. Dr. Leeb asserts that Americans need to take a stand to protect their way of life and to ensure that the America we know is preserved.
REFERENCE
Bio: http://www.leeb.net/content/dr-stephen-leeb
Market commentary & blog: http://www.leeb.com