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08 July 2015

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charly

4 trillion is a lot of money but with a billion people it is only $4000 per person. I don't know what local government is responsible for in China and how far a dollar goes but $4k would mean a city is nearly debt free in the US

Lars

Regarding disasters in the making, I am not sure which is worst: Greece, China or Donald Trump. I guess time will tell.

VietnamVet

Colonel,

The real economic problems are twofold; the debt that cannot and will not be paid off (Greece and Student Loans) and unregulated finance (trillions of dollars of insurance underwriting placed on bets such as if the Euro will fall or rise). In the West the bad debt has been transferred from the banks onto the public. Money has also been thrown at the rich by quantitative easing. Meanwhile the poor are ignored. China has a history of throwing their rulers out if their civilization starts to fall apart. The communist party has been spending money on infrastructure such as high speed rail but they are dependent on their exports and the Eurozone is about to crack apart. The only bipartisan approved stimulus in America is war. Instead of spending on infrastructure, money is going to regime change and homeland surveillance. Unless there is a turnabout and a return to a demand economy; our offspring will be immigrating to Eurasia for jobs; if we survive.

PS

Lot of good comments about the bubble in Chinese assets - both real estate and stock market. Chinese punters aren't the only people taking it on the chin. Look at the drop in major commodity prices over the last few days. Weaker prices will put pressure on Brazil (already on the ropes) and other commodity exporters. Iron ore is down over 15% this week, which is great for GM but bad for Liberians hoping for mining FDI to fuel a post-Ebola recovery.

J

Chinese equities, heavily manipulated.

Ingolf


In Zanzibar's absence, a few thoughts.

First, for a useful picture of what's going on in China, the Naked Capitalism piece already linked to a number of times above is definitely worth a read.

The Chinese equity bubble was extreme with ridiculous valuations and lots of highly geared players. A washout was therefore guaranteed; the only question was when. As to whether it's really over, who knows? The various support measures haven't worked all that well so far, although there's a bit of a rally today. Michael Pettis, one of my favourite sources on China, thinks the odds of another crazy leg up before the fat lady sings are pretty high. Maybe, but as he says even if that's so the eventual crunch will just be bigger and badder.

http://www.valuewalk.com/2015/07/pettis-china-crash/

As others here have already pointed out, ridiculous levels of debt (and what was done with them) are at the core of China's problems too, just as they are for Greece (and, to varying degrees, much of the rest of the world). The McKinsey report liza referred to earlier is brilliant; clear, great charts, informed commentary.

Anyway, China has been the standout, quadrupling its debt to $28 trillion since 2007 (282% of GDP), much of it funnelled into massive investments of all kinds: real estate, manufacturing capacity, infrastructure etc etc. Given the frenzied rate of growth and the degree of force feeding by government at all levels, much of this investment in recent years will have been uneconomic with huge amounts of excess capacity almost everywhere.

As Yves Smith notes at Naked Capitalism, there's long been a near ubiquitous belief that China's leaders will be able to manage whatever challenges come up. For us older types, it's hard not to remember the equally pervasive belief in the late 1980s that Japan Inc would soon take over the world. At best, I suspect China will have to go through a really tough adjustment period, with relatively chaotic markets and extremely painful adjustments to all of those piled up malinvestments. At worst, if this process (whenever it properly gets underway) feeds back into social and political unrest, it could get worryingly ugly.

Greece in itself hardly counts by comparison; it's tiny. However, given its problems are shared to varying degrees by many other European countries, it's may well be a kind of harbinger. Portugal, Spain, Italy and quite possibly France will I suspect before too long to hit the same turbulence that's brought Greece to the current impasse, so the numbers could soon get alarmingly large.

Given that European officialdom seems inclined to take a pretty hard line post the referendum vote and that Greece, having discovered the joys of defiance, is more likely to up the ante rather than back off, it seems to me the chances of a disorderly exit are getting pretty high. If so, will contagion followed quickly, or slowly? So many questions to which only time will provide the answer.

Sam

This sounds like a bunch of gobbledygook to me. I suggest you read some history. For example you can read about the Continental dollar. You should also read about the quadrillion zimbabwe dollar bill and the outcome of printing money by adding zeroes to bills as the government became the economy.

You are correct that Chinese banks have grown loans by trillions each year. China has reportedly added $20 trillion of credit since 2008. And you are also correct that China has used this debt to build millions of apartments including several tens of millions that remain vacant. Indeed entire cities have been constructed with no inhabitants. So too gigantic malls with no stores and many a bridge to nowhere. As well as enormous capacities in steel, shipbuilding and photovoltaic cells. Of course many of them losing money. And you are correct that Chinese banks are the most profitable on paper since they never have to recognize losses on non-paying loans. They just keep rolling over existing loans and increase them to keep the loss making zombie businesses alive.

All these theories you present as truth will be tested in the next few years. If China can increase its credit by another $20 trillion in the next 6 years and add even more vacant apartments and loss making steel capacity and keep the party going, then Hell, every country should do it as the economic perpetual motion machine has been discovered. But reality is that when it comes to economics there is nothing new. Its all been tried before. The free lunch ideas of printing money has been tried many a time before. Usually by profligate governments that fought too many unnecessary wars and did not get enough loot to cover the costs. And in every case it failed, impoverishing the peasants who never got to participate in the asset inflations.

I've got a question for you - why are so many of the top communist party officials in China taking their billions and fleeing to the west if China is the next Utopia of free wealth creation at the behest of a politburo?

Sam

EE

Instead of preventing executives from selling stock the Chinese government should buy all the stock in listed Chinese companies at a 10x return to existing shareholders. After all growing Chinese government deficits is the new wonder in economics. And then those who made those capital gains can turn around and start new companies and sell their shares again to the Chinese government. And these companies can borrow increasing amounts from banks to pay all their employees high wages and benefits without ever having to repay any of it.

http://www.bloomberg.com/news/articles/2015-07-08/china-bans-stock-sales-by-major-shareholders-for-six-months

Medicine Man

Ha! That is cynical. Yep, maybe someone built a save/load switch into the stock market.

different clue

Economics Expert,

It is true that "money makes the monkey jump". But only if the monkey has something to jump from, or somewhere to jump to, or legs to jump with, etc.

If the issuer/emitter of money issues/emits more money that what the goods and services economy can issue/emit more goods and services at the same rate, then the unbalanced amount of more money is spread out over the not-as-much-more amount of new goods and services. If the amount of goods and services remains the same but the number of money-units becomes twice as high, then each money-unit will be worth half as much as before the issuance/emittance of all those new money-units. When the partisans of Modern Monetary Theory forget that, they slide over into Magical Monetary Thinking in the wishful belief that issuing an infinite number of money-units will make the monkey jump an infinite distance.

And when such a magical-thinking government pushes the currency to the outermost limit of reductio ad hyperinflatum, then each individual money-unit approaches infinitely close to zero in exchange-mediating value. We saw this happen with the Interwar German Weimark, and the Zimbuck, too.

different clue

Ingolf,

I sort-of have the feeling that the Euro authorities are trying to torture Greece into Grexiting itself from the Euro. Meanwhile the Greek authorities are trying to torture the EuroZoners into overtly Grexpelling Greece from the Euro. It looks like a game of "reverse chicken" to me.

Ingolf


Yes, nice take, although I'm not sure how easy it would be to expel a Euro member.

As I understand things, there's no inbuilt provision for doing so. In practice, of course, the EU could make things unbearably uncomfortable if they really wanted to.

William R. Cumming

The Chinese government blocking of major stock trades for six months by major shareholders will have major fallout IMO!

The rush to exist China will accelerate!

pbj

Sorry for the late reply to this, but perhaps someone will find it interesting.

I'm a fan of Steve Keen, mentioned by another commenter I think. Keen is the australian economist who is known for promoting a system-dynamics approach to macroecon. (using what to me looks like 1980s era engineering math, that works well for gaining isights into stability and instability in control systems). His blog here -- technical... http://www.debtdeflation.com/blogs/

He observes 2 things that are of interest vis-a-vis China.

1. for an economy of a major country, year-over-year % change in GDP is a near perfect negative correlation to % unemployment.

2. the bubble tends to burst when a country's ratio of private dept to GDP passes the 175% - 225% zone. Japan did this 20+ years ago, most western economies in the mid 2000's. Thereafter the private debt falls back down and re-stabilizes at a lower level. during the time when the private debt falls from its peak, there are problems such as significant unemployment.

China is just passing 180% private-debt/GDP now, still rising. If the patterns Keen observed for Japan, Euro, and US economies also apply to China, then China is just now entering the danger zone, by Keen's reckoning at least.

Also, and I'm making this last part up myself, maybe a less controversial way to look at it might be to say that Japan was way ahead of the pack in terms of what their economy went through, and China was substantially behind the pack, but accelerating the whole way and catching up fast. Also they're way bigger.

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