The great infrastructure boom in China might be slowing, but the automation boom is just starting.
Read more: Credit Suisse Chinese Automation Boom - Business Insider
This is a discussion on Chinese Economics Thread within the Members' Club Room forums, part of the China Defense & Military category; Solving the China puzzle Robert Gottliebsen Published 7:16 AM, 17 Aug 2012 inShare Australia needs to prepare for the new ...
Solving the China puzzle
Published 7:16 AM, 17 Aug 2012
Australia needs to prepare for the new China.
That means selling goods and services to Chinese consumers, who will become the largest middle class in the world.
That was the message Cheng Siwei, chairman of the China backed International Finance Forum, delivered to Australia via his Kailis Oration at the ADC Hayman Leadership retreat and in his video interview with Business Spectator.
Not only is China is about to have a new leader, Xi Jinping, but it is embarking on a new strategy to lift consumer prosperity. Cheng says that only by increasing productivity can China deliver increased prosperity for its people.
It's a message that applies as much to Australia as it does to China. According to Cheng this new approach will dominate China for the rest of the decade and beyond.
At Hayman, the Chinese delegates were very frank in stating that the stimulation that government engineered in the aftermath of the global financial crisis left them with a housing bubble.
Last year the Chinese moved on a number of fronts to slow the economy and limit the damage caused by the bubble. Unfortunately, the slowdown went a little harder than expected and as a result they are now stimulating the economy to bring growth rates back to around the 8 to 9 per cent mark.
In the past, China has achieved high growth rates mostly by capital works and much of that investment has not been an efficient allocation of money. For example, the steel industry has spent vast sums increasing its capacity to a level that is 20 per cent more than is required. In other words 200,000 tonnes of steel making capacity is simply not being used.
And there are other examples around the country of capital waste as part of the desperate attempt to avoid the consequences of the sharp fall in exports that came with the global financial crisis.
The Chinese now aim to achieve their growth via a much higher proportion of consumer demand. But convincing Chinese consumers to spend will require some form of social safety net so that people are not wiped out by medical expenses and other sudden changes to income. China will need higher revenues from taxation to fund this outlay.
In his video interview, Cheng explained how the Chinese hope to do this in the coming decade. It will not be a short-term fix.
The most important measures that Cheng suggests is that Chinese wages should be linked first to growth in the Chinese economy and second to increases in their productivity. In that way extra rewards can be delivered to employees without boosting inflation and creating another bubble.
The concept that Chinese wages should be linked to the growth in their economy and to productivity is one that many nations, including Australia, would like to emulate.
Australia has used the carbon tax and other measures redistribute wealth to lower income people but that does not lift overall prosperity. Australia has not linked productivity to wage increases, although the Fair Work Act does raise this as a goal.
If the Chinese can achieve such a link it would create a massive middle class and prosperity without inflation. The Chinese middle class would be the largest in the world.
The Chinese delegates at Hayman emphasised that Australia is still going to sell vast amounts of minerals to China but the amount required in a consumer society will be less than when you are achieving most of your growth via investment.
And there will be no need for iron ore to erect new steel plants for a long time. Australia’s challenge will be to try and maintain market share in a minerals market that grows less than it did in previous years but has the benefit of big increases in supply from Russia, US, Africa, Brazil and other places.
The easy minerals pickings in China are over.
The new game is adapting to the new China growth plan.
Solving the China puzzle | Robert Gottliebsen | Commentary | Business Spectator
Does anyone have any clue on how far China's come in developing a consumer market or how Chinese savings rates are doing now?
Its hard to get accurate information and the books I've read so far are still at least three years out of date.
The great infrastructure boom in China might be slowing, but the automation boom is just starting.
Read more: Credit Suisse Chinese Automation Boom - Business Insider
Mmegi Online :: Urbanisation in ChinaUrbanisation in China
Industrialisation and urbanisation have fuelled China's rapid economic growth over the last three decades.TITUS MBUYA reviews the urbanisation strategy of China and how it has impacted on its population
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China's urban population surpassed that of rural areas in 2011 for the first time in the country's history after three decades of economic development which encourages farmers to seek better living standards in towns and cities.
Urbanisation has become synonymous with China's modernisation. Urbanisation is the physical growth of urban areas as a result of rural migration and even suburban concentration into cities, particularly the very large ones.
Rural-urban migration describes the population movements from the countryside to towns and cities that usually accompany economic expansion. One of the consequences of the integration of the Chinese economy into the world market is the transition from agrarian society to one based increasingly on industrial production, a phenomenon that has fuelled rural-urban migration in China. China's urbanisation is unprecedented in terms of scope, scale, influence and the number of people involved. American Nobel Laureate in economics Joseph Stiglitz has said that one of the two most important things that will impact human history in the 21st century will be the urbanisation process in China.
China surpassed the United States in the mid-1970s to become the nation with the largest number of urban dwellers in the world. Ironically, this happened at the end of a period in which China's public policy was intensely anti-urban. Much has changed since then. China's "opening up", and the introduction of market oriented reforms in the early 1980s, accelerated urbanisation across China, such that, today, 600 million urban Chinese constitute 44 percent of the country's population.
China launched its urbanisation programme at the beginning of its reform and opening-up policy in 1978 in a bid to accommodate rural labour and achieve development in rural areas. After the reforms in 1978, rural productivity was greatly increased, resulting in a large number of surplus rural labourers. The government proposed the strategic policy of transferring rural labour into non-agricultural sectors. From then on, the surplus labourers began to move into towns and cities.
In the last three decades, China has experienced the largest rural-to-urban migration the world has ever seen.
Worldwide it took the United Kingdom 120 years, France 100 years, the US 40 years and Japan 30 years to achieve 40 percent urbanisation, while China needed only 22 years to achieve the same level by 2003.
China's population urbanisation rate, which reached 51 percent in 2011, will further climb to near 60 percent in 2020 bringing the country's urban population to around 850 million, according to the China Population and Development Research Centre. China reached a historic point in 2011, as the number of people living in the nation's urban areas passed the number living in rural ones.
The country's urbanisation rate will hit 52 percent in 2015 and grow to 65 percent by 2030, the annual report on urban development by the Chinese Academy of Social sciences (CASS - a top Chinese think tank), shows. The urbanisation rate during the country's 12th Five Year Plan (2011-2015) will grow by 0.8 to 1.0 percent each year.
That means more than 10 million rural residents will move to cities and towns annually - a process that is expected to contribute 4 percentage points to the country's GDP growth each year. The latest McKinsey & Company study shows that about 1 billion people will be living in the country's urban areas by 2025, and more than 200 cities will have a population of 1 million or more. The firm also predicts that about 90 percent of China's GDP will eventually come from the country's urban economy.
China is now at the stage of industrialisation and urbanisation, with each promoting development of the other.According to the country's development road map, industrialisation will be basically achieved by 2020. By that time, the urbanisation ratio would rise to 60 percent. Such a high level is expected to a big boost to much-needed consumption and promote sustainable economic development.
There have been two main drivers of urbanisation in China. There is rural-urban migration. But contrary to popular impressions of a massive wave of migrants to coastal cities from poor central and western provinces, the major driver of urbanisation in China has been in situ suburbanisation of formerly farming populations into urban economies.
The impression that many have of a China of megacities teeming with people is not accurate. A large share of China's urban population is located in small and medium size cities.The assumption is that a rural-urban shift will transform poor farmers into industrial and office workers, raising their incomes and creating a massive consumer class. In other words urbanisation will create jobs for rural folks. Secondly, it will create a big market for rural areas, as farming products can be sold in towns and cities. More jobs and bigger markets mean increasing income for farmers. This will in turn ignite rural consumption and eventually promote overall economic growth.
The major threat of development under rapid urbanisation and economic growth in China is increasing socio-economic inequalities, especially between rural and urban areas. Due to a long-standing dual economic structure, economic development in rural areas has lagged far behind urban areas. Incomes in China's cities are three to four times higher than in the countryside. The current 12th Five Year Plan wants to stop the deterioration.
Since 1997, farmers' income has stayed at a low level, with the income gap compared to their urban counterparts continuously widening. In 2008 the annual net per capita income of farmers accounted for only 4,761 yuan ($679), equivalent to urban residents' income level in 1996. In 2009, the disposable income of the urban population stood at 17,175 yuan ($2,453) per capita, but the net income of the rural population was 5,153 yuan per person.
In China, urbanization is seen by policy makers and planners as a formal strategy to closing the rural-urban gap.
According to the 12th Five Year Plans, specific interventions to improve the standard of living in rural areas are expected to focus explicitly on increasing rural urbanisation, agricultural modernization and intensification. The goal of urbanisation is to create jobs and improving people's standard of living through economic development.
At one level the urbanisation strategy seems to be working very well for the country. Construction of skyscrapers and high rise buildings, wider streets and huge squares have changed the look of almost all Chinese cities.
In terms of industry, the migration of surplus rural labourers to towns and cities provides local industry with an abundant cheap labour force. Millions of jobs are being created every year across all sectors of the economy.
Accelerated urbanisation enables the country to invest more in infrastructure construction, which will drive domestic demand and economic structural adjustment. At the same time, rising urbanisation means that the government will be able to offer well-developed education, medical care and housing networks for more people, a move that is also expected to help people to be more willing to spend.
As for agriculture, those who have moved to the city contracted their land to those who stayed in rural areas. With the scattered land put together and the introduction of intensive farming, the land productivity is raised.Nationwide, per capita rural incomes after inflation rose 14.3 percent in the first quarter (2011) from a year earlier, double the increase in urban disposable income, thanks to higher farm prices and bigger remittances by migrant workers. So, China's vast rural economy, home to over 700 million people, seems to be doing well. But urban China is doing much better, and the resulting inequality continues to be a nagging concern for the ruling communist Party.
However, concerns have been raised about the unfolding urbanisation that is engulfing China. In most cases, the rural urbanisation process is accompanied by land dispossession and forced migrations of the population from rural areas to new cities or towns. Some town municipalities are acquiring farmland by force from farmers, with little compensation, and selling this land to real estate developers as this provides an important source of revenue for local governments. Some local governments are financially dependent on land sales and use all sorts of methods to turn farmland into construction land. Statistics show that between 2006 and 2010 an average of 440,000 acres of land was transferred every year. Some argue that industrialisation since China's reform and opening up has meant exploitation of farmers.
The exploitative process involves multiple participants including state-owned capital, private capital and foreign capital. Huge numbers of migrant workers have been sucked into the process of industrialisation, which should in theory mean progress. But the degree of exploitation to which they have been subjected is extreme. What enterprises depend on for survival and development is the unlimited supply of migrant workers. In the meantime, the migration of rural workers to urban areas is draining rural areas of their valuable human resources.
There is also the problem of unemployment in respect of the rural migrants as more and more farmers are being deprived of their land with neither jobs nor effective social security to cover their loss. Excessive supply of labour has left big cities staring at the ghosts of unemployment and expensive housing which cannot be afforded by farmers.
One Chinese scholar warned that radical urbanisation might harm farmers' welfare and create "urban slums". He says if the country's urbanisation moves too fast, the cities might not be ready to provide proper public service for newcomers, who have lost their farmlands at hometown.
Urbanisation will continue at an unprecedented scale and speed in China. The country has adopted it as the way to further modernise itself and improve the livelihood of its citizens. Urbanisation will hopefully help the country convert its enormous consumption potential into a strong propulsive force for sustainable economic development.Cities are major areas of consumption. And urbanisation is key to consumption.
As China looks inward for growth, the 12th Five Year Plan emphasises the importance of shifting to consumption-driven growth for several hoped for outcomes; reducing income disparity, moving away from foreign asset investment because of overcapacity concerns, as well as reducing China's dependency on exports and thus reducing its current account surplus and need to maintain an artificially weak currency. In order to enable consumption to grow quickly, the government plans to increase social safety nets, such as health care and social welfare payments.
Over the long term, the health and vitality of China's rapidly growing urban areas will be central to continued growth. Cities are strong engines of growth. They permit economies of scale and scope in production and distribution, and facilitate technology spillovers. And because of higher population densities in cities, private and public investments are more cost effective and yield higher returns.
For everyone's viewing pleasure, here is a map showing GDP per person for 2010 in China. Data are in 10 000RMB. Please take this rather as an illustration on distribution of wealth rather than critical numbers on each county. Data is show on prefecture-level for almost all provinces except Xizang (Tibet AR), Xinjiang and Nei Mongol (Inner Mongolia), who have their data on county-level (simply because prefecture-level divisions are so large..).
PS: Of course, this is my own work, based on my own web research, and not something pulled off any official website. The data credibility must thus be taken into account.
Last edited by Maggern; 08-19-2012 at 06:16 PM.
What is easy to forget is that the richest people in China are not along the coast, but are mostly in pretty much non-inhabited areas that happen to sit on a ton of rare earth minerals. The fact that noone live in these areas are the reason the average GDP for China whole remain in the lower part of the spectrum.
Looks like Australia is starting to feel the pressure as China's economy rebalances itself, anyone want to comment on this.
Well I already know that the steel sector is reforming itself as over a 1000 firms are being restructure into 10 megafirms. The crash of this bubble could mean good things like housing prices going down and people being able to afford more stuff. Australia will however have to wait until India starts some serious growth before it can recover with the current strategy.
7.30 - ABCAustralian Broadcasting Corporation
Reporter: Stephen Long
Is BHP Billiton's announcement of a 35 per cent fall in earnings further evidence of the resources boom moving to bust and what could that mean for Australia?
LEIGH SALES, PRESENTER: They once called it the big Australian, but its profit are shrinking.
BHP Billiton today announced a 35 per cent fall in its earnings and shelved plans to expand its mining operations at Olympic Dam in South Australia.
It's more evidence that the resources boom has peaked.
Now, some leading analysts fear the cycle will shift from boom to bust, as China's economy grinds down.
The fallout for Australia's economy and the federal budget could be severe.
Stephen Long reports.
STEPHEN LONG, REPORTER: The red ore from the west and the black coal from the eastern states has been gold for Australia.
The richest resources boom in history has boosted the nation's income, filled the Government's coffers and helped Australia achieve a record 21 years without recession. But the peak has come and gone.
STEVE JOHNSON, MD, INTELLIGENT INVESTOR: I think we are seeing the beginning of the end.
CHRIS RICHARDSON, DELOITTE ACCESS ECONOMICS: A strong bit of Australia's two-speed economy will weaken over the next couple of years.
STEPHEN LONG: BHP Billiton's profit slump, announced today, is a sign of the times, down a massive 35 per cent.
GRAHAM KERR, CFO, BHP BILLITON: Weaker commodity prices and cost pressures have presented a challenge for the industry.
STEPHEN LONG: The shelving of its Olympic Dam mine expansion is a major blow to the South Australian economy.
MARTIN FERGUSON, RESOURCES MINISTER: Look at the drop in commodity prices, look at the earnings of BHP Billiton. Ya know, Olympic Dam was competing with all the other BHP Billiton projects around the world in terms of potential investment funding.
STEPHEN LONG: The coal industry is already shedding jobs.
NEWSREADER: It's the end of an era in the tiny town of Dysart in central Queensland, where mining giant BMA has closed one of the town's two coal mines.
STEPHEN LONG: In iron ore makes up a fifth of Australia's exports.
As China's economy cools and supply increases, prices have slumped in recent months to a two-year low.
STEVE JOHNSON: We may well see a Chinese stimulus over the next six months, but we've seen the start of a slowdown there that I expect to last quite a long time, and that's happening at the same time that we've got an incredible amount of supply coming on stream. So, I think we're going to see much lower commodity prices for a long time.
STEPHEN LONG: The question is: is this a commodity price correction or the beginning of a bust? The answer lies in China.
PATRICK CHOVANEC, TSINGHUA UNIVERSITY, BEIJING: The Chinese financial system is a closed system, but very serious cracks are emerging that are sending up some real red flags.
STEPHEN LONG: Professor Patrick Chovanec is based at Tsinghua University in Beijing. This respected analyst fears China's economy is spiralling down in a vicious circle of unsustainable investment and bad loans.
PATRICK CHOVANEC: You've had an explosion of shadow banking, a proliferation of risks, generating the kind of credit that's been necessary to keep the investment boom going year after year. All it takes really is one or two medium-sized companies to go bankrupt for a domino effect.
STEPHEN LONG: With the dominoes falling as far afield as the Pilbara and the Bowen Basin.
PATRICK CHOVANEC: Australia has been riding China's investment boom. It's been feeding China's demand for iron ore and other raw materials. The fact is that investment boom was a windfall. It's not sustainable and it's starting to break down.
STEPHEN LONG: Steve Johnson shares these fears. His Intelligent Investor fund recently issued a report predicting the China bubble will burst.
STEVE JOHNSON: They have a bubble in infrastructure. They've been building apartments that no-one can afford to live in, they're building roads that no-one has a car to drive on, they're building airports that people can't afford to fly out of. The infrastructure spend in China has got way ahead of its level of economic development and that's where we're going to see a significant slowdown and the Chinese authorities know it.
STEPHEN LONG: The official numbers say China's economy is still growing by more than seven and a half per cent a year, but can we believe it?
PATRICK CHOVANEC: My guess is that the Chinese economy right now is probably growing at about four to five per cent.
STEPHEN LONG: What a slowdown means for Australia depends on how bad it gets. If it merely cools the mining boom, it's far from a disaster.
CHRIS RICHARDSON: A rebalancing of Australia's economy is not necessarily a bad thing. There are a whole bunch of people on the wrong side of the two-speed troubles of the moment. And if you start to get that combination of a lower commodity prices on the one hand and a slowdown after the next year or two in the pace of mining investment in the other, you get a lower Australia dollar, and relative to the rest of the world, you get lower interest rates in Australia.
STEPHEN LONG: The Reserve Bank has squeezed consumers with high interest rates to make space for the mining boom. Retail trade and housing construction might rebound if a slowdown in mining investment leads to lower interest rates and frees up skilled labour. Manufacturers and other exporters could also get relief if falling commodity prices eventually push down the Aussie dollar.
STEVE JOHNSON: Well the thing that gives me some encouragement is that the exporters that are still around are very, very lean and they've been cut to the bone to try and compete in a market where the currency's making things very, very difficult for them. I think if you see that currency come off, you'll see some very, very efficient Australian businesses start to grow quite quickly and start to employ people, which is what we're going to need. So, I think that will be a benefit of the dollar coming off.
STEPHEN LONG: But even short of recession, a major slump in Chinese growth could be calamitous.
PATRICK CHOVANEC: The risk for China is not so much a Lehman's style meltdown as what happened to Japan in the 1990s where banks sat on bad debt for years and it dragged down the Japanese economy.
STEPHEN LONG: For a Labor government that's promised to maintain a budget surplus, even the minor slowdown we've seen so far is a worry.
CHRIS RICHARDSON: If the Treasurer were bringing down this year's budget again tomorrow, it would be back in the red.
PATRICK CHOVANEC: Whether China has a soft landing or a hard landing, the boom that Australia has been riding in terms of iron ore and other commodities is not really a sustainable boom.
STEPHEN LONG: Australia's had mining booms before.
MALE PRESENTER (archive footage): To the Western Australia Cinderella, Prince Charming is iron ore. Mount Tom Price is a mountain of iron ore.
STEPHEN LONG: But the unwavering lesson of history is: the boom always ends.
LEIGH SALES: Stephen Long with that report.
Big Outflow Trouble In Not So Little China?
Big Outflow Trouble In Not So Little China? | ZeroHedge
China has two problems... well more than two we are sure, but these seem critical.
First, there is a significantly slowing economy that 'desperately' needs the hand-of-god Central-Banker to stimulate it with free-money - but is hand-cuffed by the huge disconnect between 'apparently' low CPI and extreme highs in food and energy prices which will only exaggerate spending retrenchment should any money-printing be enabled.
Second, it seems for many investors the writing is on the wall as money is flowing out of the world's growth engine faster than oil from a wok. While at the surface USDCNY appears to be doing its 'stable' thing - the PBOC is soaking up unprecedented amounts of CNY as the market 'sells' out.
China's economy is slowing but it's way better than any other major economy. Just look at the European economies, Japanese economy, Indian economy and the US economy. Europe, US and Japan are in ultra easy monetary policy and they are in contraction. Not only that but Europe, US, Japan and India all have debt and deficit problems. Their fiscal situation is dire. So they have shrinking growth even with ultra loose monetary policy and massive debt problems.
China's economy is bad, but compared to the others, it's doing well. First, china don't have a debt crisis as the fiscal situation in china is very strong. Second, china is still under tight monetary policy with the RRR at near 20% and interest rates at 3% for deposits and 6% for lending. So china has alot of room for easing. And with a strong balance sheet, china is not burdened by chronic debt problems. The only time china went into debt was at the height of the financial crisis, it was a one off event, not annual debt issues like in Europe, US, Japan and India
Every economy in the world is doing poorly.
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America’s Exceptional Fiscal Conservatism
Monday 27 August 2012, 14:16
update: Monday 27 August 2012, 14:19
In most countries, to be “fiscally conservative” means to worry a great deal about the budget deficit and debt levels – and to push these issues to the top of the policy agenda. In many eurozone countries today, “fiscal conservatives” are a powerful group, insisting on the need to boost government revenue while bringing spending under control. In Great Britain, too, leading Conservatives have recently proved willing to raise taxes and attempted to limit future spending.
The United States is very different in this respect. There, leading politicians who choose to call themselves “fiscal conservatives” – such as Paul Ryan, now the Republican Party’s presumptive vice-presidential nominee to run alongside presidential candidate Mitt Romney in November’s election – care more about cutting taxes, regardless of the effect on the federal deficit and total outstanding debt. Why do US fiscal conservatives care so little about government debt, relative to their counterparts in other countries?
It has not always been this way. For example, in 1960, President Dwight D. Eisenhower’s advisers suggested that he should cut taxes in order to pave the way for his vice president, Richard Nixon, to be elected to the presidency. Eisenhower declined, partly because he did not particularly like or trust Nixon, but mostly because he thought it was important to hand over a more nearly balanced budget to his successor.
The framework for US macroeconomic policy changed dramatically when the international monetary system broke down in 1971. The US could no longer maintain a fixed exchange rate between the dollar and gold – the cornerstone of the postwar Bretton Woods system. The arrangement collapsed because the US did not want to tighten monetary policy and run more restrictive fiscal policy: keeping US voters happy was understandably more important to President Nixon than maintaining a global system of fixed exchange rates.
Ironically, however, rather than undermining the predominant international role of the US dollar, the end of Bretton Woods actually boosted its use around the world. Much has been written, and many hands wrung, about the dollar’s decline over the last four decades, but the fact remains that holdings of US dollar assets by foreigners today are vastly greater than they were in 1971.
This turns out to be a mixed blessing, because it has allowed the US to become less careful about its fiscal accounts. Foreigners now hold roughly half of all US federal government debt, and they are willing to hold it when it yields a very low return in dollars (and even when the dollar depreciates).
In fact, whenever the world looks unstable, investors want to hold more dollar assets – even when the US is the cause of the instability. When big US banks are in trouble or Americans are having another debilitating political fight over their public finances, global investors scramble into US Treasuries. Last year’s congressional showdown over the federal debt ceiling may have cost the US its AAA sovereign rating with Standard & Poor’s, but the federal government’s borrowing costs are actually lower now than they were then.
What has America done with this opportunity – arguably the lowest-cost funding in the history of humankind? Not much, in terms of productive investment, strengthening education, or maintaining essential infrastructure. But the US has done a great deal in terms of adopting tax cuts that boost consumption relative to income and lower government revenue relative to expenditure. This is the lasting legacy of the “temporary” tax cuts adopted by George W. Bush’s administration in the early 2000’s.
And Americans have shifted greatly toward political philosophies – on the right and on the left – that regard public debt merely as a distraction. Or, as former vice president Dick Cheney put it, “Reagan taught us that deficits do not matter” – meaning that Ronald Reagan cut taxes, ran bigger deficits, and did not suffer any adverse political consequences.
Ryan and members of the Tea Party wing of the Republican Party undoubtedly want to cut the size of the federal government, and they have articulated plans to do this over several decades. But, in the near term, what they promise is primarily tax cuts: their entire practical program is front-loaded in that direction. The calculation is that this will prove politically popular (probably true) while making it easier to implement spending cuts down the road (less obvious). The vulnerability caused by higher public debt over the next few decades is simply ignored.
For example, Ryan supported George W. Bush’s spending spree. He also supports maintaining defense spending at or near its current level – resisting the cuts that were put in place under the Budget Control Act of 2011.
The assumption here – unstated and highly questionable – is that the US will be able to sell an unlimited amount of government debt at low interest rates for the foreseeable future. There is no other country in the world where fiscal conservatives would want to be associated with such a high-stakes gamble.
Simon Johnson, a former chief economist of the IMF, is co-founder of a leading economics blog, The Baseline Scenario, a professor at MIT Sloan, a senior fellow at the Peterson Institute for International Economics, and co-author, with James Kwak, of White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.
© Project Syndicate 1995–2012
A nice extension of the previous article, this from Martin Hutchinson and Asia Times on line:
Asia Times Online :: Into the monetary vortex
THE BEAR'S LAIR
Into the monetary vortex
By Martin Hutchinson
Last week's revelation in the US Federal Reserve minutes for its August 1 meeting that another quantitative easing - "QEIII" - government bond purchase is almost inevitable has intensified the recent upward trend in markets. With fiscal and monetary policies more extreme than any in history, now entering their fifth year, and equally unprecedented advances in communication and computing enabling ever-faster trading, it's not surprising that market behavior is anomalous.
Only the almost total absence of inflation is strange. Soon, however, that anomaly will be explained, as the immense supply of negative-cost money causes the global economy to spiral into a vortex of hyperinflationary collapse. The Mayan calendar, in which the fourth world ends on December 21, leading us to a Fifth World of greater enlightenment, may be only too accurate, economically speaking - but that enlightenment will have been purchased at a fearful cost.
Probably the central puzzle of monetary policy in the past two decades is that of velocity. Money supply, however measured, has increased consistently more rapidly than nominal gross domestic product (GDP), so we are told that monetary velocity has declined. The non-appearance of the expected inflation in the past several years of negative real interest rates is explained by monetary velocity having declined even further. This variable, which had increased consistently in every decade since the Industrial Revolution or even before, has now mysteriously turned tail and is heading steadily downwards. Yet nobody can explain why.
Ludwig von Mises was scathing about the velocity concept; he called it "a vicious mode of approaching the problem of prices and purchasing power". When you examine the concept more closely, you can see what he meant. Since the invention of the Internet, our ability to transfer money through means such as PayPal, both within single economies and around the world, has increased geometrically and our need for physical cash has declined. Credit cards also allow us to spend money in advance of receiving it, thus further increasing its velocity.
Above all, there is the phenomenon of "fast trading". More than two thirds of the volume on the world's stock exchanges results from computers flicking buy and sell orders at each other, trying to make a tiny profit through insider knowledge, for a millisecond or so, or these days even less, of the other guy's trades. Every week or so one of these systems malfunctions, losing its owner several hundred million dollars, causing the year's largest initial public offering of shares to go up in flames, maybe one day causing a planet-wide catastrophe - who knows? - certainly not the owners of these computer systems and their laughably misnamed "risk managers". There's monetary velocity for you!
Yet for two decades reported monetary velocity has declined. The concept is self-contradictory.
The explanation lies in the rise in the last two decades of immense stagnant balances, earning near zero interest rates, which are never spent but simply build up idly. The largest of these is international central bank reserves, increasing at 17% annually since 1998 and now at a level of some US$10 trillion. The chairman of the Bank of Thailand said this week that Thailand's $176 billion of official reserves "should be spent on boosting the economy rather than on doing nothing useful" and was vilified by orthodox economists, but really he has a point. (Unlike the Argentine government, which has persistently found endless unproductive ways to waste their currency reserves, the current Thai government might spend the money on useful infrastructure.)
A second vast pool of useless liquidity is that of the US banking system's free reserves at the Fed, currently some $1.6 trillion. The Fed pays interest on these, so since there are no other uses for the money that don't involve risk, it's not surprising that the banking system keeps them high. It is however surprising that, four years after the crisis, the system has not found a way of deploying this pool of money more efficiently.
A third pool of useless money is the "Target 2" balances of the European payments system. This pool is somewhat different, even chimerical. Even though the head of the Bundesbank may go to sleep each night happy that he has $850 billion of short-term central bank obligations sitting in his vaults, in reality these obligations are derived from such as the Bank of Greece, and not worth the paper that, being virtualized, they are not written on.
Then there is the $2 trillion of cash sitting on the balance sheet of US non-financial corporations. This can best be explained by thinking of all the prudent corporate Treasurers, seeing interest rates at record low levels, who have borrowed next year's capital spending plan in the long-term markets in order to avoid tapping them at next year's higher rates.
Of course, since this has gone on for several years, there are many corporate Treasurers who are now working on the capital spending plan for 2043. Still at least this avoids actually returning some of that cash to shareholders - perish the thought! After all, at some time in the next couple of decades there may come an opportunity for a truly value-destroying acquisition on which the cash can be spent.
The result currently is a situation in which a small part of the world's money supply is rushing around like a blue-arsed fly, carrying out transactions at a rate of several terabits a second, while most of it sits idly polishing its fingernails and earning its owners a measly 0.0005%. Needless to say, this is not a stable situation.
It's difficult to specify precisely what will be the outcome of all this, since neither theory nor past experience offer much guidance - indeed we are in the area of wild, unsubstantiated guesses. Mine, for what it's worth, is that the small portion of the money supply that is doing all the work is now redoubling its efforts, given additional verve by "quantitative" easing by the Fed next month and a further massive bond purchase program by the European Central Bank.
Asset prices are once again headed to the skies and the glorious, celestial gold bull market for which gold bugs have yearned for the last decade is at last in progress. From July 1978 to January 1980, the gold price soared from $175 per ounce to $850; we may well see such a rise again, from a base almost 10 times as high.
This will not last, of course; indeed its most obvious terminus is already in sight, in the form of November's election. Whichever candidate wins, time horizons in the market will shift in early November from the next six months to January 2017. On that time horizon, the market picture is clouded. Another $5 trillion on US Federal debt, which will be incurred in the next four years, puts it at an Italian or Greek level (though still short of the lofty heights reached in Japan).
What's more, 2017 is the year that the Social Security system, which since 2009 has been running an unexpected deficit instead of the anticipated surplus, tips over finally and starts running sizeable deficits, with the cash outflow increasing until the Baby Boomers start dying off in large numbers in the 2030s.
This could lead to two possible outcomes (again, remember, we're guessing here, but anyone who says they are not is a liar!). One would be a bond panic, in which US real interest rates rise because risk premiums soar, much as has happened in Spain and Italy, where 10-year rates are in the 6% range.
European monetary policy, as here, attempts to be ultra-sloppy, but in Spain and Italy it can't be because anyone wanting to borrow in those economies must pay a premium over the local governments, ie, a substantial real interest rate. Such a rise in real interest rates, which might happen quite suddenly, would cause a crash in stock markets and gold prices, and a substantial recession. Since the recession would worsen the budget deficit, the Fed would be powerless to alleviate it, and "stimulus" would be out of the question. This would be very unpleasant, and is rather the outcome our political class deserves. On the other hand - look on the bright side - we would probably avoid major inflation.
The other possible outcome would be a further surge in optimism about the economy, without a bond panic. In that case, stock markets would continue to rise, gold would soar to the moon, and all the idle cash balances in the US banking system, corporations, central banks, and so forth would be put to work. Since at this point we would have active money supply far larger than before, and today's elevated level of tech-induced velocity, the result would be burst of inflation, not 4-5% as in the 1970s, but Weimar-style, reaching 20-25% very quickly and soaring thereafter.
The good news - we would not necessarily experience another major recession, at least not immediately, and the federal debt problem would become much less onerous. This is the outcome that Fed chairman Ben Bernanke deserves, and would provide a useful lesson to future Fed chairmen not to get drawn down his path.
Both outcomes are possible with either party winning in November, but if you asked me to guess, I'd say the first outcome is more likely with a Barack Obama victory and the second outcome more likely with a Mitt Romney victory. Either way, the denouement will not be pleasant, and we will emerge from the Mayan apocalypse wiser about economic cause and effect.
Meanwhile, until November, we are caught up in the vortex. Enjoy the ride!
Martin Hutchinson is the author of Great Conservatives (Academica Press, 2005) - details can be found on the website Great Conservatives - and co-author with Professor Kevin Dowd of Alchemists of Loss (Wiley, 2010). Both are now available on Amazon.com, Great Conservatives only in a Kindle edition, Alchemists of Loss in both Kindle and print editions.
(Republished with permission from PrudentBear.com. Copyright 2005-12 David W Tice & Associates.)
Things are not as rosy in China as some here would think...
China's 'Non-Performing Loan' Nightmare
China’s credit risk is rising, probably much more rapidly than the official non-performing loan (NPL) statistics indicate. SocGen is concerned as they think we are only seeing the beginning of the end of this NPL cycle. While they do not anticipate an outright banking crisis, as the government will certainly keep intervening at each turn on the way to avoid such an outcome, this is no reason to feel relieved. The reason being a major structural element in China's NPL cycle as many industries have massive excess capacity - after years of aggressive expansion that ran way ahead of demand growth - which eventually has to be eliminated. This process will take some time, during which faster depreciation in the form of deleveraging and consolidation will be unavoidable; and while expectations of an imminent hard landing may be overdone, the landing will nevertheless be multi-year and bumpy in their view.
Societe Generale: The NPL issue is rearing its ugly head
According to the China Banking Regulatory Commission (CBRC), total NPLs at China's commercial banks reached CNY 456.4bn at end-Q2, 4.2% qoq and up 11.9% (or CNY 48.6bn) from the trough in Q3 11. The NPL ratio was unchanged at 0.9%, due to a similar pace of loan growth. However, special-mention loans that are doubtful but still performing increased to CNY 1.5tn, while the total loan loss reserves set aside were CNY 1.3tn.
Heres a couple of articles from "zero hedge" to mull over
China Has Become One Big "Stuffed Channel" | ZeroHedge
Why Chinese Inflation Risk Is Over Three Times Greater Than In America | ZeroHedge
If China does a good job in cleaning up the NPL, then it's lying.
If china has high NPL, then it's about to collapse.
I think SocGen should worry about itself before lecturing others, it's a bankrupt bank propped up by the ECB. Its balance sheet is full of useless Greek government debt. It's stock was plunging due to investor worries that Greece might default and banks like SocGen would go out of business.
As I said, china is slowing due to lower demand for Chinese goods from overseas markets, and property is tight to bring down prices, but the fundamentals in the Chinese economy is very strong. Strongest in the world imo. NPL have risen as admitted by Chinese banks due to some businesses going bankrupt due to no demand for their goods.
But as usual the western media propaganda machines take a problem in china and exaggerate that multiple times to say how bad things are in china and how china is about to collapse and then at the end of the article they add china is faking its numbers.
Rinse and repeat.
Happened every time china has slowed (1989-1990 slowdown, 1994-1995 high inflation, 1997-98 Asian financial crisis, 2008 GFC).
If you want to see a real crisis, wait till you see what happens when the US government bond bubble bursts. Amazing none of the western media are discussing this. Bonds are in a bubble just like NASDAQ bubble in 1999 and housing bubble. Bubbles are formed from cheap money, it happened to china in the current property bubble. It happened to the US when they added liquidity in 2000 to fight the bursting of the NASDAQ bubble and following recession, that cheap money blew up the housing bubble. When that burst, the fed added staggering amounts of liquidity, guess where that went.......government bonds!