The first time I heard an economy called “Goldilocks” was in 1999, right before the dot-com bubble burst in 2000. I heard it again in 2005 and all the ways to 2007, right before the meltdown started. And it is happening again! JP Morgan just put out a report saying China is a Goldilocks Economy. Can the end be far away?
I have earlier cautioned on Chinese statistics. They count GDP differently than we do – when budgeted or shipped, not spent or sold. Much of their apparent demand for commodities is stockpiling not production. It was not that hard to call the end of their secondary top last August.
I hear wistful Liberals decrying how hard our Democracy is and wishing we could just make things happen like China does! They wonder why China can stimulate and we can’t. Well, Obama could have gotten the stimulus he wanted through, so there is no one to blame for than bad one passed than him. And he could have focused on fixing the financial sector rather than chasing progressive fancies like healthcare reform for free. Even SNL is laughing at that, now. No one is talking of bending the cost curve anymore. Instead, they are saying his political fortunes would be better served if the travesty of a bill were to fail.
Maybe the problem lies in our fantasies about China, not our bitches about the US. Barry Ritzholz first laughed off the bogus Chinese stats, but now he is not so sure: “China expert Gordon G. Chang (author of The Coming Collapse of China) is more than skeptical — he has the data to question much of China’s growth miracle.” In sum, real stats like gasoline sales are flat, belying the claimed 8%+ growth.
The amount of stimulus by China is huge as a percent of GDP compared to the US, and they may not be getting that much for it. Those wistful Liberals may think it is ok to slosh around excess money, since it adds to an abstract “aggregate demand” and should help fill the gap of a drop in private consumption and investment. Where the excess ends up matters, however, especially if it lands in a whole passel of malinvestments, such as Ghost Cities being raised in China with nothing productive in them. Or, the US favorite for malinvestment, a horrific housing bubble, which may be emerging in China again. Eventually the piper has to be paid.
Now the cracks have begun to form. The Bank of China is over-extended, giving it no safety net from a hiccup. The hangover from binge lending may apply to all the top Chinese banks. Their plans for bolstering their balance sheet sent Asian markets tumbling at the same time as Dubai defaulted. Ouch.
I suppose wistful Liberals think it will be easy for the command economy to bolster their banks, but one of the best analysts of the China scene argues otherwise:
The low deposit rates mean that Chinese savers are effectively being taxed to replenish bank capital. … Chinese households are bearing a pretty hefty share of the cost of China’s investment-led boom, and it is these same households whose surging consumption will be necessary to absorb the increased production resulting from the investment boom.
Given the increased financial burden being placed on them, I doubt that they will be able to do so. After all, it is because of lesser versions of these same policies in the past that the enormous gap between production and investment exists in the first place. And if they cannot raise their consumption sharply to absorb all this additional excess production, the banks will be stuck financing rising inventory and unprofitable companies. It’s a vicious circle.
There is no easy way to resolve this problem … .
The Big One for China may be an entirely unexpected Black Swan: the Chinese going into a trade deficit. The argument is that the US will go into a double-dip next year, reducing the pull of exports out of China, and China will begin to tip over into a trade deficit as their consumers choose spending over low-rate savings to bolster the banks. Compounding this might be Japan hitting the point of no return, where they no longer can fund their out of control public spending deficit without raising rates and also sliding back down. China may be forced to devalue their currency, an event so contrary to expectations it will confound markets and drive the US Dollar up.
Before then, a continued weak Dollar would also undo the Chinese stimulus. Karl Denninger reports that a 10% drop would reduce the value of reserves by 3x (Y1.5T) that China is spending on the stimulus (Y586B). Ouch again.
Whens something cannot go on, it won’t. The assumptions of the Goldilocks Chinese Economy seem doomed to be shown to be as false as such claims were shown to be in prior bubbles.
What is it about a bubble that the pundits miss, and instead of seeing what is really happening, causes them to gush over the very conditions that are driving the bubble just as it is about to burst?