Tuesday, November 17, 2009

A Little 'Counter-Intuitive' Economics on PRC


...While some fret about liquidity-driven inflation, Justin Lin, World Bank chief economist, said the greater danger is that record levels of idle plant almost everywhere will feed a downward spiral of job cuts and corporate busts. "I'm more worried about deflation," he said

By holding the yuan to 6.83 to the dollar to boost exports, Beijing is dumping its unemployment abroad – "stealing American jobs", says Nobel laureate Paul Krugman. As long as China does it, other tigers must do it too.

Western capitalists are complicit, of course. They rent cheap workers and cheap plant in Guangdong, then lobby Capitol Hill to prevent Congress doing anything about it. This is labour arbitrage.

At some point, American workers will rebel. US unemployment is already 17.5pc under the broad "U6" gauge followed by Barack Obama. Realty Track said that 332,000 properties were foreclosed in October alone. More Americans have lost their homes this year than during the entire decade of the Great Depression. A backlog of 7m homes is awaiting likely seizure by lenders. If you are not paying attention to this political time-bomb, perhaps you should.

Well, there are also a helluvalotta more Americans now than during the Depression, meaning that that "foreclosure" stat is un-contexted.

Quoting Krugman doesn't make Pritchard's case; on the other hand, the PRC's problems are significant:

The reality is that much of Beijing's $600bn stimulus has been spent building yet more plant and infrastructure so that China can ship yet more goods, or has leaked into property and stocks.

Credit has exploded. Allocated by Maoist bosses for political purposes, it has become absurd. China is rolling as much steel as the next eight producers combined. It is churning more cement than the rest of the world. Fixed investment is up 53pc this year. Once you know that Hunan authorities have torn down two miles of modern flyway so that they can soak up stimulus by building it again, or that the newly-built city of Ordos is sitting empty in Inner Mongolia, you know what must come next.

Pivot Asset Management said l
ending has touched 140pc of GDP, "well beyond" levels that have led to crises in the past. With the revolution's 60th birthday out of the way, the central bank has begun to tighten. New yuan loans halved in October. So be careful. Pivot said a hard-landing in China could prove as traumatic for world markets as the US sub-prime crash.


HT: Big Picture


J. Strupp said...

Thank you for the counter-intuitive take Dadster. I wish you would post more of these from time to time.

Real quick: I was at a small business owners meeting the other night and all the talk was regarding the government's "inflationary" policies and how we somehow should be taking lessons from Zimbabwe (of all places).

I'll say this again: you cannot have inflation with a collapse in aggregate demand the size of which has ocurred globally in the last year. You cannot tell me that inflation should even crack our top 10 list of "shit that we should be really worried about" right now. We have oil tankers sitting off the Gulf coast with no where to go. We have the PRC dumping steel on the global market because they're overshooting production by a landslide. You can't tell me the world changed so much in the last 2 months that $1,150 oz. gold prices are justifiable in a world with massive excess capacity. You think maybe the trading desks of the major banks in this country have a bit to do with this sudden rise in commodities? They gotta park their free money somewhere. Might as well bet on a quick snap-back in economic growth considering that the contrary scenario will leave them out on their asses anyway.

In terms of core CPI, do we really think the business owner is going to "pass along" his cost increases to the consumer who isn't buying his stuff to begin with? What about at the wholesale level? The answer is no. We have much more to worry about than inflation right now. Get it out of your head America. Lin is RIGHT.

neomom said...

The concern over inflation comes in when the economy actually begins to recover. The Feds have more than doubled the money supply,but it is mostly sitting on bank balance sheets. The inflation and the subsequent rise in interest rates will hit when the banks start lending and putting that cash out into the public. The money supply was only increased by about 13% during the Carter recession causing interest rates to go up to 20% or more.

Dad29 said...

The price of gold is affected by the value of the USD...

Yah, zero demand brings about zero inflation.

J. Strupp said...

"The price of gold is affected by the value of the USD..."

Not always.

"The concern over inflation comes in when the economy actually begins to recover."

Agreed. Which is why you institute a PAYGO system effective sometime around 2013 to keep the debt to GDP ratio in check. Easier said than done I know.

now is not the time to worry about inflation was my point. One problem at a time thank you.