Showing posts with label China. Show all posts
Showing posts with label China. Show all posts

Saturday, June 9, 2012

Bad News for China

Chinese industrial output and retail sales are slowing as reported by Bloomberg. Note that faulty Keynesian analysis by the report also sees lower price inflation as bad sign. In fact, the Chinese are in the same Keynesian position between a rock and a hard place with not much they can do via stimulus. So says the Financial Times. Previous government inflation has fostered massive malinvestment. Now China's business cycle is turning from the inflationary boom phase to the bust and its government is trying to prop up the boom by lowering interest rates for the first time since 2008. It is following the same path of the United States. There is good reason to expect the same dismal results.

Thursday, October 20, 2011

It's the Fed

Heleen Mees in Foreign Policy gets it. . . at least partly. In her article "The Perils of Loose Living," she explains how too much debt fueled our economic crisis and that the Fed bankrolled the whole thing. (Thanks to my friend and colleague Sam Stanton for alerting me to this article). As she correctly notes:
The real culprit was the Federal Reserve. With its ultraloose monetary policy in the early 2000s, the Fed single-handedly created the refinancing boom and ushered in the housing bubble. The record-low interest rates not only fed the boom that had to go bust, but also favored that sector of the U.S. economy that is predominantly financed with debt, i.e., the financial sector, at the expense of sectors that are more reliant on risk capital, such as manufacturing. That might explain why, by the mid-2000s, bank profits accounted for 30 percent of all profits reported by S&P 500 companies. In other words, Americans stopped making stuff and relied on paper earnings instead.
Mees also rightly understands that the Fed pushing for even more monetary expansion will not solve our problem.

Unfortunately, her prescription is not nearly as insightful. She plays our ailing economy off against that of the Chinese and the Germans. She asserts that both of their economies of booming and implies that the secret to their success is government spending on research, development, and innovation. That is what they used to say about Japan's economy before it took a nosedive back in the early 1990s. If the Chinese have to "cool down" the economy, that is an indication that the boom is a product of monetary inflation and, hence, unsustainable.

No, government spending of any kind is not the solution either. The only thing that will put our economy back on a firm footing is to free the market: stop increasing the monetary base, cut government spending, and reduce business regulation. This will allow for more saving and investment in productive activity, which is the true job creator.

Tuesday, June 7, 2011

China Learns from the Fed

It sounds as if the Chinese government is taking a page out of the Bernanke play book. Reuters reports that 2 to 3 Trillion yaun (308-463 billion dollars) worth of local debt will be even more socialized by taking it off municipalities' books and shifting it to state banks and newly created companies. I see this as more evidence that China's economy is on less than secure footing. Unless the Chinese government halts the credit expansion machine, China could be in for a Great Recession of its own. As it stands, slowing inflationary credit expansion will result in a necessary recession, but the longer the Chinese government puts it off, the worse it will be when the inevitable bust comes.

A government simply cannot will economic expansion into existence by government spending and monetary inflation. It is a classic Keynesian mistake for the state to confuse GDP growth for economic prosperity.

Friday, April 22, 2011

GDP Growth through Economic Waste

Last December I blogged about malinvestment in China manifesting itself in ghost towns. Now, thanks to Isreal Curtis, I've been made aware of a stunning and revealing news report documenting the same phenomenon.

You may have already seen this, but in case you haven't, this fascinating report is definitely worth watching. SBS Dateline, an Australian news program went to China and explained how the Chinese state, in an effort to continually expand GDP, continues to build building complex after building complex, even though several are virtually uninhabited.

In the report, real estate analyst Gillem Tulloch is interviewed and reports that there are 64 million empty apartments in China and they are still building!

Important takeaways from this story:
  • GDP is merely a measure of net income and spending flows, not wealth.
  • Productive investment is investment on goods people actually want, not wasteful government spending on whatever boosts GDP.
  • Central planners can waste a tremendous amount of scarce factors of production (I know this is not exactly news, but it something to see it so starkly portrayed).

Saturday, December 18, 2010

What Malinvestment Looks Like: Chinese Edition

Back in October I blogged about aerial photos of unfinished and abandoned real estate developments in Florida.  They are a pictorial manifestation of capital malinvestment undertaken in the housing bubble.

It appears that similar activity may have been taking place for awhile in China. A few days ago Business Insider published photos of, at most, barely occupied developments in various regions of China. Below is a picture of a residential apartment complex in Zhengzhou New District. It is completely empty.

Banks in China have now been told by banking regulators to cease lending to companies for the purchase of fixed assets, including real estate. It sounds as if Chinese authorities are beginning to suspect a bubble.

Monday, November 22, 2010

Don't Polticize the Fed?

I remember from a review (having never seen the film) that at one point during Madonna's documentary Truth or Dare, she get's a telephone call from her father asking her not to be so immodest during her live concerts. She replies into the phone, "But Daddy, I have to keep my artistic integrity." When I first read that story, the first thought that came to mind was a question. In order to maintain something, doesn't one have to possess it first?

Treasury Secretary Tim Geitner recently provided a similar thought only in reverse. No doubt aware of the growing skepticism toward our central money printing machine, the Federal Reserve, Geitner has warned Congress not to remove the Fed's mandate to pursue full employment. To do so would be to politicize the Fed, which is a definite no-no.

Again a question comes to mind. Can we prevent something from happening after it has already happened? The fact is the Fed, by its very nature is politicized. It is chartered by the United States Congress, which Geitner surely understands, is filled with politicians. Whenever Ben Bernanke is asked by Ron Paul what in the Constitution gives the Fed the authority to create dollars, Bernanke appeals to the Fed's Congressional charter and says, in effect, we serve at the pleasure of Congress.

Bernanke has also recently began carrying water for the Obama Administration in criticizing China's perceived currency policy. The idea that the Fed is fiercely independent strains credulity. The Fed is already politicized up to its eyeballs. In fact, as Murray Rothbard showed over a decade ago in his Case Against the Fed, it was the product of politics from the beginning. The quickest and surest, indeed only, way to de-politicize the Fed is to end it.

Tuesday, September 7, 2010

China and Mercantilism

My colleague Tracy Miller has an excellent post, contra Paul Krugman, refuting the notion that a trade war with China would be a good thing for the U.S. economy. Among other things, he points out that China's policy of devaluing its currency actually harms the Chinese and benefits American consumers (i.e. all of us). Miller also notes a link between Krugman's Keynesianism and his mercantilism.
Mercantilism and Keynesianism have much in common and represent a faulty understanding of how an economy works. The large US trade deficit is not the cause of high unemployment in the US. Trade deficits mean that instead of buying US goods with the dollars they obtain from trade, foreign citizens or their governments are purchasing US financial assets. The Chinese government uses the dollars it accumulates from trade surpluses to buy US government securities. This increases the supply of savings in the US, which, by reducing interest rates, should lead to more investment. Krugman argues from the paradox of thrift, that in a time of mass unemployment, if anyone (including the Chinese government) tries to save more, demand and investment fall because there is excess capacity in the economy.
I've often found it ironic that American politicians and even some economists get overwrought about the Chinese government purposely devaluing its currency. These same people embrace the Federal Reserve and which has been devaluing the dollar since 1913.

The mercantilist mindset is driven by a conflict mentality. It assumes when one party benefits from trade the other party must be a loser. From this ideological perspective mercantilism appears reasonable, because there are no trade partners, only trade rivals, so why not stick it to the Chinese. Doing so, however, does not exactly promote loving thy neighbor.