This blog entry is largely something I wrote a year ago about the impact of a Chinese rebalancing on the global economy, rx and except for this first paragraph nothing has been changed. The entry on my blog that had been posted a couple of weeks earlier was an attempt to explain why it is important to consider both sides of a country’s balance sheet in forecasting growth. At one point in that essay I discuss the difficulty most economists seem to have in incorporating persistent imbalances into their economic models. There seemed to be among them, I wrote,
… a failure to understand the economy as a dynamic system in which a)imbalances could persist and grow for many years before eventually rebalancing, b)the more rigid the institutional structure of the economy, the deeper imbalances were likely to get, c)the longer they persisted, the more disruptive the rebalancing was likely to be, and the less significant the “trigger” that set it off, and d)there are many ways rebalancing can occur, and the way it actually occurs depends on institutional constraints and rigidities. These economists seem to find it difficult to understand that an economy can have a very unbalanced debt structure, with debt growing at an unsustainable rate, so that there will be a significant reduction in future growth, but a crisis is only one of the ways, and not the only way and certainly not imminent, that this reduction in future growth can happen. It is only when debt is subject to a “sudden stop” that a crisis can be inevitable, but in many if not most cases there is no crisis.
A friend of mine sent me an article a few weeks later from the Financial Observer about the views of someone by the name of Brian Singer, head of the dynamic allocation strategies team at William Blair, in which Singer discusses his outlook for China and makes a passing reference to my views:
“Everyone is aware of China’s horrid debt levels and [Chinese financial markets analyst] Michael Pettis has done some great work, but he is China’s ‘Chicken Little’,” Singer said, referring to his panic-style predictions. “He discovered through his research that China has built up a lot of debt and he is right. China’s debt to gross domestic product (GDP), however, is pretty close to the United States’ and Germany’s.
“If we’re all so terribly concerned about China’s debt to GDP levels, why aren’t we equally as concerned about the US?” In reality, the US would like to have the debt to GDP levels and growth dynamic China had, he said. “The US is growing at 1.5 per cent and would take an eternity to absorb that debt,” he said.
I don’t think Singer is referring to my having long argued that once China began rebalancing, its growth would drop by roughly 100-150 bps a year. I have been very consistent about the timing and this is exactly what has happened, and presumably a Chicken Little would have made the same prediction over and over again and was wrong each time. I assume that Singer is making the same mistake that a number of other analysts who were blindsided by China. He is probably assuming that because I have been warning since 2006-07 that Chinese growth had become structural dependent on an unsustainable increase in debt, in spite of my nearly always adding that I did not expect a financial crisis (which I began to do precisely because Singer’s confusion about imbalances and misunderstanding of China’s growth model was so widely shared), I must have also been predicting an imminent financial crisis.
Singer, like most analysts, doesn’t understand how deep imbalances and unsustainable debt increases can be consistent with institutional constraints that keep the process going on for many years. When he read my work about Chinese debt, at a time when like most analysts he was probably bedazzled by China’s growth model, I suspect he immediately assumed that I could only be predicting an imminent collapse, and so the fact that I very explicitly rejected the idea of an imminent collapse was not something he was able to process.
His confusion about debt is more general. His idea that a debt level which might be problematic for China must also logically be considered problematic for the US suggests, of course, both a poor understanding of why debt matters and very little familiarity with the history of debt across developing and developed countries. I have explained the former many times before, but almost any graph that shows current debt levels for countries ranked according to GDP per capita, or shows debt levels for countries that have defaulted, restructured their debts, or otherwise indicated financial distress, again ranked according to GDP per capita, makes it very clear that wealthier countries can sustain much higher debt levels.
Singer goes on to make growth forecasts for China that are, in my opinion, very unrealistic and which, if they turn out to be correct, would be almost wholly unprecedented in history, and it is not clear to me why something so unprecedented is not considered extraordinary enough to warrant an explanation:
“At the margin, things have slowed down and when you add all these things together, in our view double-digit growth is not viable for China, but does not mean it will grow at 1 per cent like the developed world either,” Singer said. “[We think China’s growth] will be something around 5 per cent, which is a reasonable assumption over the coming 10 to 20 years…Yes [the combined issues creating uncertainty for China] are a concern, but it is not the end of China as we know it.”
The assumption that Chinese growth will average around 5% for the next ten to twenty years is not “reasonable” at all. Given the relationship between GDP growth and credit growth that has been obvious for at least a decade, GDP growth above some sustainable level, a level almost certainly below 3-4%, requires that debt grow faster than debt-servicing capacity, and as the debt burden grows, that sustainable level will itself decline further. Even a decade of 5% growth would require that Chinese debt levels rise from the current 250% of GDP to something north of 400%, which for a developing country would be almost unprecedented (I say “almost” because there may have been cases of developing countries in which debt was higher, but only after a currency crisis forced up external debt).
More importantly, as Singer and most analysts have failed to understand, the only way credit can rise to those levels is if it is purchased and effectively monetized by the central bank, in which case the consequence would be downward pressure on household consumption growth. Simple arithmetic suggests in that case that the only way to keep GDP growth at 5% would require wealth transfers from local governments at probably 5% of GDP or more, and given the political difficulty of even generating wealth transfers of 1-2% of GDP, which I hope to see begin in next year, I doubt this is one of Singer’s assumptions.
I don’t mean to beat up on Singer. The friend who sent me the article included it among several others because he thought it showed the strategies used by analysts who were late to see the Chinese adjustment coming, even though it should have been obvious years ago. But as I explained later in the same blog entry, I am less cynical about the motives of these analysts because I think they genuinely fail to understand how imbalances are created, how they can persist, and how they affect and are affected by the structure of balance sheets. That is why they cannot distinguish between deep imbalances and unsustainable credit growth on one hand and imminent crisis on the other.
What does a rebalancing China mean for the world?
While the chances of a disruptive adjustment – including a financial crisis – are clearly rising, for now I will assume, as I have since 2009-10, that China is able to pull off a non-disruptive rebalancing. In that case I expect GDP growth rates will continue to decline by about 100-150 basis points a year until some level at which during the 2012-22 period growth will average 3-4% at best. Growth in household income and consumption, of course, must be higher as China rebalances and should average around 5-6% during this period. This can only occur as wealth is systematically transferred, either implicitly or explicitly, from the state sector to the household sector.
Because I have explained many times before how this process might work and where it is vulnerable to disruption, the rest of the newsletter will focus on trying to work out the impact of a non-disruptive Chinese rebalancing on various parts of the Chinese and global economy. Before addressing each of the sectors I think relevant, I thought it might be useful to present a table I stole from John Mauldin’s blog, which he takes from Barry Ritholtz, that shows the sheer extent of China’s presence in commodity markets. The table leaves out China’s consumption share of global iron ore production, which I believe was 63% in 2012, but it includes most other major commodities.
| Population | 20% |
| Economy | 13% |
| Concrete | 60% |
| Aluminum | 54% |
| Nickel | 50% |
| Copper | 48% |
| Steel | 46% |
| Gold | 23% |
| Coal | 49% |
| Uranium | 13% |
| Oil | 12% |
| Rice | 30% |
| Corn | 22% |
| Wheat | 17% |
- Effect on metals
The table above suggests why it turned out to be quite easy to make what I think was my only China-related “Chicken little” prediction. In late 2011 and early 2012 I argued that because China’s rebalancing had become difficult to postpone much longer (indeed it began, I would argue, in 2012), the prices of most industrial metals would fall by over 50% within three years and iron ore would test $50 by 2017. This would happen whether or not China’s adjustment happened non-disruptively.
Metal prices did indeed fall as expected, and there is now a pretty substantial debate over whether, as a recent Financial Times headline put it, “mining is at rock bottom”. I am not as confident today as I was in 2011-12 about overriding my basic ignorance of the metals industry and predicting metal prices largely on the basis of my China expectations, but I continue to believe that metals prices will fall – probably to levels not very far from those typical at the turn of the century (adjusting for inflation and the strength of the dollar).
I say this because China has only begun its adjustment process, and investment growth still has a long ways to fall. Global demand is structurally weak, probably because of high levels of income inequality which tend to reduce both consumption growth and growth in private investment. Unless we were suddenly to see roaring growth in India over the next few years, which is not out of the question given how its poor infrastructure guarantees an obvious productive destination for investment flows, I don’t expect any counterpart to China’s continued declining demand for metals.
- Effect on energy
I am often asked how I expect China’s rebalancing to affect demand for energy, but I find my framework not especially useful in answering this question. As China’s growth slows and demand switches from investment to consumption, I assume there will be slower growth in China’s demand for energy because except for automobile purchases, which have probably peaked even in the best of cases, consumption tends to be less energy intensive than the kinds of investment that has dominated Chinese activity in the past.
I have to confess, however, that I am much less certain about this, and given how politics can interrupt the supply side, I am largely mystified by energy price swings. Perhaps the only thing I can say with some confidence is that if China attempts to maintain current growth in economic activity, and with it even faster growth in debt, there is a rising probability of a disruptive adjustment in which economic growth suddenly collapses, in which case I expect energy prices would fall sharply.
- Effect on agricultural commodities
Unlike with the demand for metals, Chinese demand for agricultural commodities is likely to be highly sensitive to whether or not China is able to adjust non-disruptively according to the assumptions I list above. If it does, household income growth in China will remain strong – rising by 5-6% a year – while income inequality stabilizes or even declines. Chinese demand for food would continue to rise sharply, and so would probably support the prices of agricultural commodities, and this is even more likely to be the case if India performs as well as some expect.
In the case of a disruptive adjustment, however, demand for agricultural commodities would not hold up. In that case I would expect growth in demand for food to fall sharply, at least for a few years, because China’s rebalancing would then take the form of a sharp drop in investment combined with a drop in household income – one that is less brutal than the drop in investment, but a drop nonetheless. In that case along with lower consumption we would probably see a reversal of the shift in recent years towards more grain-intensive forms of food (i.e. less meat consumption).
- Effect on labor-intensive manufacturing abroad
A rebalancing China must be accommodated, for mainly arithmetical reasons, by a relative shift of wealth from the state sector to the household sector. If Beijing does not take steps to promote this shift, it will occur more painfully, at lower and even negative levels of GDP growth and household income growth levels perhaps two or three percentage points higher. If Beijing implements policies that accelerate this transfer, both GDP growth and household income growth will be that much higher.
There are many ways, however, that wealth can be transferred, and it is important to remember that the way in which it is transferred is ultimately a political decision more than an economic one. After many years in which it lagged productivity growth, wage growth began to pick up around 2010, and while I expect it will continue, most of the forms of wealth transfers that are implicit in the reforms proposed in the Third Plenum are likely to increase household income indirectly rather than in the form of higher wages. What is more, slower growth, especially in the real estate sector, will reduce upward pressure on wage growth.
For this reason I suspect that we may have already seen much of the relative adjustment that was likely to take place in the form of rising wages. As China continues to rebalance, then, although I think the manufacturing sectors in other developing countries will continue to benefit, especially in countries, like Mexico, that were hardest hit by Chinese competition in the last decade, I believe that rising Chinese wages will no longer provide as much support for low wage economies that compete with China as they had in the past.
I say this without great certainty because, as I want to stress, although we can be reasonably confident about relative wealth transfers from the state to Chinese households, we have to think about the forms in which these transfers take place largely as the outcome of political decision-making, based, of course, on political conditions that hold at the time. A Beijing that is more concerned for example about workers, including migrant workers, than about the urban middle class is more likely to favor wage growth than an appreciating RMB, higher deposit rates, or other forms of transfer that benefit the urban middle class.
The key for any analyst should be to pay attention to political signals emanating from Beijing. For now however I expect that labor-intensive manufacturing abroad will benefit less than it has in the past 3-4 years from China’s rebalancing.
- Effect of capital-intensive manufacturing abroad
The same logic holds for capital-intensive manufacturing abroad, but with different consequences. Nominal GDP growth in China, along with the GDP deflator, began falling very rapidly in 2012, one of the most important and beneficial consequences of which was effectively a collapse in the financial repression tax. This tax heavily penalized households for whom savings in the form of bank deposits and, to a somewhat lesser extent, interest-bearing wealth management products, is an important source of income, and is probably the single most important cause of China’s deteriorating imbalances before 2011-12.
There was a second important and beneficial consequence, and this of course was the elimination of the massive borrowing subsidy made available to borrowers with preferred access to bank lending. It was this subsidized lending rate, negative in real terms for much of this century, that more than anything else explains the wanton misallocation of capital during the last decade.
Not surprisingly, however, as interest rates have risen sharply in relative terms since 2011-12, borrowers who had taken out the most debt and invested in the lowest yielding projects, including most of the country’s provinces and municipalities, are suffering from painful debt-servicing costs, and there is enormous pressure on the authorities to reduce borrowing costs. SOEs that once seemed to be well-managed money-making machines are among the worst hit as we learn, which we always seem to do when the economy shifts into its liquidity contraction phase (the case of Enron, for example), that unexpectedly high profitability was often driven not by brilliant management so much as by highly speculative balance sheets.
For all the bellowing by desperate borrowers, China has managed to refrain so far from the easy expedient of slashing interest rates, and rumors are that the PBoC has been especially opposed to doing so. By so refraining, Beijing reduces the overall cost of China’s adjustment and improves the economic outlook for the country over the longer term, but of course this means absorbing the pain today.
I expect that Beijing will continue to use interest rates to force borrowers into better investment decision-making, and while unless there is a jump in inflation, which isn’t likely, we may start to see interest rates drop, I don’t think they will drop sharply in real terms.
If I am right, the implications are clear. One of China’s great competitive advantages for much of the century has been extraordinarily cheap capital, and while SOE managers in capital-intensive industries liked to claim that their success in international trade was explained by superior management techniques, like their Japanese counterparts in the 1980s, in fact in both cases it was more likely that access to artificially cheap capital was far more relevant.
As China continues to rebalance in the ways set out above, in other words, capital-intensive manufacturing abroad will continue to benefit disproportionately as Chinese exporters no longer benefit from heavily subsidized capital. But as in the case of labor-intensive manufacturing abroad, whether or not this continues to be the case is ultimately subject to political decisions about how wealth is to be transferred, and so it is important to note again that we must pay attention to political signals emanating from Beijing.
- Effect on consumption of luxury and super-luxury goods in China
It is almost part of the definition of rebalancing that after three decades in which they received a disproportionate share of growth, the elite and the rich must pay a disproportionate share of the adjustment costs, in favor of the middle and working classes. In the case of a non-disruptive rebalancing income inequality in China must decline. This means the halcyon days of luxury consumption in China are over and will not return under almost any plausible scenario for many more years. Those who think luxury consumption is down only because of President Xi’s anti-corruption campaign, and that once the latter ends we will return to the days of spectacular growth, will be very disappointed.
The exception might be in in the market for super-luxury goods – so that anyone selling $50 million yachts, super conspicuous art, European football teams, etc. might do well. This is because ultimately if China is to rebalance non-disruptively, it is hard for me to work out any scenario that does not involve at least partial privatization of SOEs, most likely those owned and managed by local governments. There are many ways in which this privatization can occur, including ways designed to overcome the inevitable opposition from vested interests. In that case some of these may be especially beneficial to the highest levels among the elite, whose opposition must be bought out one way or another.
- Effect on middle class consumption in China
Again because it is almost part of the definition of rebalancing that after three decades in which they received a disproportionate share of growth, the elite and the rich must pay a disproportionate share of the adjustment costs, in favor of the middle and working classes, in the scenario of a non-disruptive Chinese rebalancing, the growth rate of median Chinese household income is unlikely to slow very sharply. This means that middle class consumption growth in China, in other words, probably will not slow by much unless the rebalancing is postponed long enough for it to disrupt the economy.
- Effect on real estate prices abroad
Unless the PBoC were to impose much sharper restrictions on capital outflows, and this may not be easy to do either politically or technically, it is hard to imagine many scenarios in which capital outflows do not remain high for several more years. Because much of this will be driven by wealthy Chinese looking to acquire secure assets abroad, the demand for premium real estate in places popular with wealthy Chinese will probably remain strong.
- Effect on investment abroad
In the previous issue of this newsletter I explained why declining reserves, and declining purchases by the PBoC of US government bonds, was unlikely to force up US interest rates.
- Effect on EM
I have long argued that the emerging-market decoupling thesis was always patently absurd. EM growth was maintained after the 2008-09 crises undermined US and European demand not because demand had become self-sustaining in the developing world but because China had responded to the crises with massive increase in already excessively high levels of investment and mu8ch of the resulting demand, especially for hard commodities, benefitted EM.
But because the global crisis exacerbated already-high excess capacity, the Chinese stimulus, which only increased capacity further, was always unsustainable and would inevitably result in a more difficult ultimate adjustment for EM. In my opinion we are clearly at the end of another convergence period for developing countries, and historical precedents suggest we should be prepared for a decade or more of both sovereign debt defaults and economic divergence. Developing countries that most urgently recognize the change in underlying circumstances and focus most heavily on institutional reforms that unlock productivity growth, and who pay especial attention to efficient capital allocation, are the least likely fall behind in relative terms and the most likely to be in a position to benefit when global demand finally recovers.
For all the seeming predicting embedded in this issue of the newsletter, the key point I would make is that rebalancing can only occur in a limited number of ways, and each of these has a fairly predictable impact on the various economic sectors described above. What is more, many of the alternative paths Beijing can choose to follow, especially in the way in which it implements wealth transfers to the household sector, are likely to be determined as the outcomes of political decisions.
That is why rather than pay attention to the standard kinds of predictions economists often make, it is far more useful to work through the various rebalancing paths and to try to understand the changing plausibility of each of these paths. Above all we must recognize the ways in which imbalances can deepen or recede according to institutional constraints, and this means at a minimum rejecting the false dichotomies in which imbalances necessarily adjust quickly and disruptively in the form of financial crises. A financial crisis, while always a real possibility in a deeply unbalanced economy in which debt levels are high enough to create uncertainty about the allocation of debt servicing costs, is simply one of the many ways in which debt and imbalances can be resolved.
Aside from this blog, every month, sometimes more often, I put out a newsletter that covers some of the same topics covered on this blog, although there is very little overlap between the two and the newsletter tends to be far more extensive and technical. Academics, journalists, and government officials who want to subscribe to the newsletter should write to me at [email protected], stating your affiliation. Investors who want to buy a subscription should write to me, also at that address.
Another commentator on China is Jeffrey P. Snider, and it’s his thesis that there will be a crisis in China, but limited to the ability of banks to obtain dollars to conduct international trade. A crisis of this kind would effect the financial system worldwide, but would be particularly devastating on an export reliant economy like China. He argues that this is a crisis that China’s central bank is powerless to stop. If there is some kind of bank crisis in China, what options would China have then?
This is clearly the intent of the Bank of China trying to rapidly increase the use of the Renminbi in international trade. I doubt such an increase can be fast enough and massive enough to solve the problem completely, but it won’t hurt to try. In addition, many US financial institutions, esp the large banks, have huge amounts of dollars sitting in reserve, which might be well lent to operations involving actual trade.
I am not sure why Chinese banks would be limited in their ability to obtain dollars to conduct international trade, Unitron and Rustin, given that China’s credit in the international markets is quite good and the markets are flooded with excess savings looking for credible borrowers. At any rate China is not a net buyer of dollars for trade, it is a net seller (it runs a large current account surplus). I haven’t read the Snider commentary so I am not sure why he would think that limited access to dollars would interfere with Chinese trade, but there is often a tendency to defend Maginot lines and fight the last crisis. China’s problems do not involve 1997-Asian-Crisis liability structures.
+1 on Unitron’s question. Any comment?
Professor Pettis, if the central government can control all the key levers of the economy, why can’t they keep credit growing forever (or for a very long time)? Since banks create money, there is no intrinsic limit to their ability to do so, since however much they lend, the borrower will have little choice but to put the money back into some bank again. Is it possible, then, if the central government can keep capital outflows limited, that they can keep growing credit at double digit rates for another decade?
Banks may or may not create money, Ruan (its a little more complex than most arguments assume), but that is not the same as creating wealth or purchasing power, which means that if by granting loans they grant one set of entities purchasing power, this must have been transferred from another set of entities within China. The key question is who? This is the part that most analysts miss, but it is the most important part. If it is households or SME’s who pay for the increased purchasing power of new borrowers, China will be condemned to decades of little to no growth. If it is from the very wealthy or from local governments, China can rebalance its economy at a minimal cost.
“If it is households or SME’s who pay for the increased purchasing power of new borrowers, China will be condemned to decades of little to no growth. ”. The recent dramatic leverage up of Chinese households to rush into the housing market is an unfortunate development that the households are transferring their purchasing power to developers who are the borrowers. It will definitely suppress future consumption which makes China end up with very low growth for decades to come. The past two years work of rebalancing has been undone and even gone backwards.
One of the ramifications of the beginning of China rebalancing and its impact on the global economy is the current slowdown in international trade.
Following a slight contraction in global trade volumes in the first half of 2016, the WTO recently lamented that “trade in 2016 will grow at the slowest pace since the financial crisis”. WTO Director General Roberto Azevêdo said: “The dramatic slowing of trade growth is serious and should serve as a wake-up call”.
We can only agree with Mr Azevedo: It would indeed be nice if, after sleeping throughout the great build-up of trade imbalances settled by rising relative debt since the mid-1990’s leading to the 2008-2009 crisis, and after sleeping again for the past 8 years following said crisis while global trade imbalances and global relative debt kept growing even bigger, policymakers in charge of the mal-functioning international trade and monetary system would finally wake-up from their long hibernation…
The misfortune of the delusion perpetuated upon the globe by many commentators of lessor knowledge, given to the masses of the misinformed, who had built their worldviews on the “knowledge” conveyed, is that necessarily, growth over the recent period, and sustainability of this growth, and furtherance of the trends you often comment upon (debt, etc), are further confounded by the fact that China’s policies, following those of history, but on steroids, have forced others to take defensive positions, to lessen the effects of trade diversion, and these have compounded to ensure that demand must lesson, and thus, the sustainability of recent progress, growth, debt serviceability and similar.
Simply, all these trade diversionary tactics, development tactics, and beggar thy neighbor tactics, have ensured massive dislocations, while not creating sustainable vehicles to ensure recent “gains”; (tactics: low-interest loans, surport for industries, free land, tax abatements, export rebates, currency depreciations, etc).
All these, leading to declining consumption dynamics across EM; and I believe largely due to the heft of China, and the malignant stories associated with its rise, and its potential. Problem is, EM needed, en masse to agree to avoid these conditions in the largely open system we have. I can not imagine the way through this, that doesn’t involve a conscious-raising on the part of EM, HNW and AE.
Frankly, when I see the common financial media, and their expressions of what is happening today to this or that market, it seems as if the commentary is designed for crack smoking rabbits who are fond of injecting methamphetamines.
You are being unfairly rude to crack smocking rabbits…
The denial of reality from mainstream media is much more explosive stuff, socially speaking.
The persistent combination of massive under-employment, massive pile of irrecoverable debts, massive and undue income and wealth distortions and massive cross-border imbalances is a social and geopolitical bomb whose peaceful defusing requires an urgent and synchronized awakening at national, regional and international level, of which there is absolutely no sign. On the the contrary, there are many signs of a dangerous digging in of the blind and deaf.
CSteven and DvD,
Your words sound bleak. There have been discussions here before on how declining international trade tends to be more painful for current account surplus countries (i.e., not the U.S.). Given this, and Professor Pettis’ comment on the potential for disproportionate benefit among non-Chinese capital-intensive manufacturing – and a possible (needed) increase in Chinese consumption – might there be reason to be hopeful for the U.S. economy? Funny/sad to think that no matter what, the political parties will find a way to claim credit for “improvements” and blame the other side for troubles.
Random question, do you all have any internet reading recommendations? I’ve made a list of books mentioned here over the past few years, but I was hoping to find other blogs that have interesting discussions on the topics discussed here. Same question for Professor Pettis if you have time. These one-month breaks between posts leave one with big cravings for more.
Deek:
Post the list of books, and then, maybe people can add books they recommend, that would be interesting.
Books mentioned that I have not read:
-Financial History of Western Europe by Charles Kindleberger
-The Deluge by Adam Tooze
-Golden Fetters, Barry Eichengreen
-a history of money and banking in the united states by murray rothbard
-New Lombard Street, Perry Mehrling
-Stablilizing an unstable economy, Hyman Minksy
Books that I’ve read:
-Fooled by Randomness and Antifragile, (Nassim Taleb)
-All of Professor Pettis’ books
-Thinking Fast and Slow, Daniel Kahneman
-A Random Walk Down Wall Street, Burton Malkiel
Internet reading
-this blog
-Project Syndicate
-Levy Economic Institute of Bard College
-Various items from Nassim Taleb’s website
-Peterson Institute for International Economics
-Professor Pettis’ articles in the Observer
-Bronte Capital
I’ve read all the books you haven’t read on that list (except for Golden Fetters). I’ve started to come to the conclusion that Minsky’s vastly overrated. His lack of political understanding is rather telling. Kindleberger is far better than Minsky.
Minsky’s understanding of American financial history isn’t very good IMO. Quite frankly, I think it’s bad. He talks about how the “regulations” imposed on the financial system in the 30’s were good and made the financial system allocate capital better. That’s a bunch of bullshit. He talks about how finance needs to be tightly regulated and the private banking system needs to be kept decentralized in order for the economy to function most effectively while centralizing financial control of the state. That’s, yet again, complete and utter nonsense.
He seems to forget that the most successful development model in world history happened with a highly centralized private system that basically ran the government with rampant corruption. It seems like he doesn’t recognize that what he’s asking for in his ideal financial system is built on what’s “libertarian economics” like most of the “progressive” proposals to “fix” American finance.
Minsky’s ideal view of banking is fundamentally Jacksonian, whether he realizes it or not (I don’t think he does). Minsky doesn’t even have a good grasp on what truly caused the Great Depression. It wasn’t “deregulated” banking or anything like that. It was primarily due to the accumulation of foreign loans by American banks because of an idiot by the name of Woodrow Wilson (who actually wanted a banking system like what Minsky talks about).
Minsky talks about shadow banking like it’s this awful menace that must be stopped, but he fails to recognize that there’s times when it’s not only appropriate but absolutely necessary (unlike Charles Kindleberger, who completely gets what I’m saying).
The fundamental problem with “financial deregulation” isn’t economic or financial really. The problem’s political. It leads to more cronyism cuz of the way it impacts power structures. However, such financial systems’re also very helpful in transferring risk across both region and scale. So if you’ve got industries that need consolidation or you’ve got network effects that you’re seeing in the economy (whether in firms, infrastructure, or whatever else), then a “deregulated” financial system where assets’re concentrated in a few large firms at the top are absolutely necessary.
Hubris always come to communities and societies when humans play gods. The insanity of today’s mainstream commentary and language is matched by the Roman’s emperors claim of having 33 legions at the borders before the barbarian invasions. The elites today are calling an economic depression a recovery, pretend there is no difference between men and women, are predicting the climate 100 years from now when they can’t predict the weather one day from now, removed the intrinsic value of money in order to install an utopian welfare state. We have always lived in a cave full of shadows however today we seem to be living in the basement of the cave. I grew up in a communist regime which used the “wooden language” to deny the reality and I am in shock by the insidious doublespeak and groupthink among the elites in the West. The story of humanity has been written many times before and this time will be no different.
China doesn’t even pretend to hide the reality: they are proudly stating their communist regime is stronger and it can “beat” the reality. It is the ultimate form of hubris, daring the facts and laws of human nature and economy to win over their artificial social and economic debt-based construct. Nemesis is right around the corner and I shudder to think about its manifestations in the future.
The World Bank did just come out and say that not all parts of society have benefited from globalization. I guess that’s a start. Also Trump appears to be such a shock to the US political classes that perhaps they will ruminate on how he can be long enough to realize that something needs to be done to build transparency trust and balance or someone or something else will happen to upset the apple cart.
All they need to do is to wait. Demographics are in favor of the liberal elite. If they beat Trump this year, it basically makes a future Trump near impossible due to demographics. Remember that ~30% of American voters are racial/ethnic minorities and ~60% of white men and women have college degrees, with higher rates of college education among women (especially younger women). So yea, if Trump goes down, such kinda movements are done.
With all that being said, I think we’re seeing a dissolution in GOP right now. Demographics aren’t in its favor and there’s huge rifts within factions of the coalition. It’s just been reduced to angry white people, especially angry white males. It’s not sustainable any more. It’s unfortunate to see the Party designed to curb the influence of angry white males be taken over by angry white males.
it looks like the higher Clinton’s poll number, the more investors fear the market is going to crash.
http://www.bloomberg.com/news/articles/2016-10-12/docile-vix-masks-surging-prices-for-stock-hedges-before-election
If we see a Trump surge, those hedges’ll increase even faster, but that’s still interesting although I wonder if the rise in those hedges just comes cuz Trump all of a sudden looks like a reality.
There’s a lot of populist rage. If Trump wasn’t an idiot who didn’t keep walking into every trap set by Hillary, if he stayed on message, and if he kept it to policy, he’d prolly win. Now, there’s a very small chance he can win. If he doesn’t do well in the 3rd debate (a few hours from when this comment was written), he’s done.
Interesting post prof pettis, as always. While i do not uave the same insight as you do, from my outsider lens, i think chinese real estate prices are perhaps the most important driver of the economy. They give importsnt signals to both consumers and policy makers. Thry absorb much of chinas investment and credit. Any thoughts on the sustainability of chinese realestate markets and or my thesis would be appreciated.
I think China’s property market is sustainable as long as the households are capable of paying back the mortgages. In other words, it will depend on their debt servicing capacity. I will watch closely the interest rate which still has room to go further down. The market may cool down under various macro prudential measures, but it will not show large price drop but a disappearance of liquidity instead. The pressure on property price will be released via RMB’s exchange rate more likely.
Kindly explain more on ‘the pressure on property price will be released via RMB’S exchange rate more likely’.
As the Chinese government controls the banks,
the creditor, I don’t think there will be a large scale of foreclosure under any circumstances of the debtor, the property owners. Without forced sale, it is hard to imagine the property price will drop quickly. In a market without clear direction, anyone who is willing to move a large amount of money out of it must believe there are better value elsewhere. However it is very hard to find inside of China this “elsewhere” which is better than the property market to park one’s wealth. Meanwhile the higher the Chinese property price, the better value the foreign assets will look like. Therefore I suspect many Chinese vendors nowadays are planning to invest the proceeds abroad. Because of tight capital control, the proceeds can only be transferred slowly out of China, hence the reletively gradual decrease of China’s foreign exchange reserve as well as its rate that we have been seeing. As long as the Chinese property price remains elevated, there will always be pressure to move the proceeds of property sales abroad, and therefore the downward pressure on RMB.
Very detailed & logic deducing , totally agree with you.
Do you have blogger? I want to follow your continuing thoughts on this macro scenario
“Meanwhile the higher the Chinese property price, the better value the foreign assets will look like. Therefore I suspect many Chinese vendors nowadays are planning to invest the proceeds abroad…As long as the Chinese property price remains elevated, there will always be pressure to move the proceeds of property sales abroad, and therefore the downward pressure on RMB.”
These “vendors” which are now planning to invest the proceeds abroad have received these proceeds from other local “vendors” with local capital, leading to ever increasing prices, so I don’t really get your entire argument as if that is the reason for the net capital outflows. Not saying that I agree or disagree, just that it seems logically constructed but is not. This would have made more sense if the prices were going down. Or that I’m just wrong, of course.
It offends my sense of fairness that these transfers can be made surreptitiously without acknowledgement by those in power. They are supported by a cohort of advisors and policy makers, analysts and economists who mostly can barely articulate how the transfers are made and instead cheer lead un-fettered globalism. They can do so at least partly because most people have no real understanding of the nature of currency, banking and central banking. Acknowledgement of those who bear the load of the “adjustments” through sweat, care and suffering is never made. As Micheal frequently observes we see the emerging political consequences of this in Europe and America. Lets hope concrete corrective steps are taken by those who properly understand what is happening…
From the beginning of 2015, property sales perk up in 1st tier city due to descending mortgage rate. Afer entering 2016 we can see households in provincial city & other large city are swarming to buy apartment. Residents in these city are taking up loan and this behavior lead M2 yoy rate remain above 10% while lending to enterprise are falling.
Professor , What do you think of the consequence of this process? Will this cause deleveraging government and enterprise side ?
Thank You Prof to remind us to focus on the rebalancing paths. For China to balance, what is perhaps most imminent is to embrace more free market forces. The free markets will allocate the rebalancing costs across the sectors and with the creative destructions that are needed. However, this is a stretch for the Beijing Bureaucrats who are not about to be Umpires rather then Players in all their directives that spawn even more unintended consequences/deformities. (Not suggesting a big shift to free markets immediately but the determined guidance to transit with more props to the workers and SMEs to adapt and be productive).
There has been no precedent that the cost of imbalances will not be dumped upon the lower economic class and in protection of vested interests. The present administration is not up to the task for any such radical reforms with the President unfocused and shooting in many directions. He is no Deng Xiao Ping.
Global markets are not benign and not impressed with the ‘fits and starts’ that emanate from Beijing. This leads to the diminishing credibility of PBOC and others. The tussles with global traders that they cannot contain and silence continue. The fact that China can limp along lies with its competitors (EC,US) in the same or worst states.
good grief! Even Nicholas Lardy is sounding pessimistic; see panel 2.
https://piie.com/events/chinas-economic-situation-and-financial-reform-stabilization-or-stalling
The current thinking is that Trump will be elected and income tax rates will be cut. Will be interesting to see how much of the money will flow into trade (eg China). Cash flow may be used to reduce debt. (humorously) Plenty of debt is available to be reduced. China may follow Trump’s example if things work out well for the US.
The current thinking’s that Trump’s gonna be elected?! He’s set up to get slaughtered right now. I’m skeptical he can win. Demographics alone doom him and polls aren’t in his favor. It looks like the GOP could be facing an electoral wipeout. There’s no way they actually think Trump’s likely to get elected. If they do, they’re foolish and delusional IMO. It’s very unlikely at this point.
Hell, the entire GOP and the Trump campaign are currently a dumpster fire. Not a single poll has him up and most have him down by ~7-8% nationally. His campaign has little money and all of their get-out-the-vote (GOTV) effort is in the hands of the RNC. Why does it matter that the GOTV operation is in the hands of the RNC? Cuz the RNC has decided to take all of their resources (their money, their staff, etc) and spend all of it on down-ballot races, which means they’re leaving Trump out to fry.
It is not wise to assume Trump’s gonna win. This election’s starting to look more and more like LBJ-Goldwater than any I’ve ever seen. There’s a real chance the Democrats could take not only the Senate, but the House as well.
More taxes, less revenue, more debt is the status quo choice in the US. Trump is change just like Obama. Obama was a change from Bush. Trump is a change from Obama.
Yea, I was wrong on this. It’s still interesting to see how the GOP lost the popular vote in 6 out of the last 7 elections. It’s another Bush vs Gore scenario.
Trump crushed Hillary. Proven by the fact that Hillary conceded. Election results weren’t a surprise to knowledgeable people on the ground. All the irregularities were slanted to give Hillary a victory and she still lost by over 1%. Now we see if Trump can work his magic some more and how China financial markets are effected. The great majority of US people are out of cash and credit. That is a big reason that trade with China is slowing. Debt has grown to the point that knowledgeable people know that it must be reduced by some means. The current guess is inflated away. If true that method will not make the US popular with trade partners. (humorously) Time will tell.
Hillary won the popular vote (and they’re still counting). She’ll end up winning by ~1-1.5 million votes nationally. She didn’t get crushed (not even close).
Prof. Pettis,
Thank you for another insightful post going again over the various technical possibilities of re-balancing. As others that you have quoted, I have to say that I’m somewhat confused as well about your reluctance to clearly note the possibility with the higher probability. You have written books about this and countless blogs and it does seems to be that there is one obvious path which has the highest [and significant] probability to manifest itself. Isn’t it time to call it out, of course keeping in mind that if there are some ways to delay the inevitable and make things worse that’s to be expected, so timing is difficult. On the accounting identities post you had the wonderful example about keynes and the various paths following the reparations. Correct me if I’m wrong, but didn’t he also state the path most likely in his eyes?
Of course I have my own views on the more likely outcomes, and I do often state which outcome I think is the more likely, but I am not that eager to make standard predictions for two reasons. First, the choice among scenarios is often, although certainly not always, a political choice, and in a country like China the political decision-making process is much less transparent and is subject to much higher variance (because it is driven by a much smaller group of decision-makers). In that case any economic prediction that derives from a political prediction is a little foolish unless you understand the politics far more deeply than I do. I am much more comfortable making predictions when the decision is less political and when conventional thinking is so widely off mark that simply noting how wrong it is likely to be is in itself a pretty powerful prediction.
Second, the real point of my writing is to try to explain logically what are the possible scenarios and to suggest that it is far less difficult than people think to list these scenarios. I think economists use math very poorly and do a terrible job of following their own logic. That’s why I think the best contribution I can make is simply to work through the logic. At any rate I find that my most sophisticated clients, and most of my clients are pretty sophisticated, don’t look for predictions from me or anyone else. They want to understand the underlying story as logically and consistently as possible and then to make their own predictions based on their own global views.
But this doesn’t mean I don’t make predictions. In 2009-11 when the whole world was talking about EM having decoupled I said this was nonsense and that EM would soon be in even worse shape than the developing countries. In late 2011 and early 2012 I said that metal prices would drop by more than 50% within three years and iron would test $50. From 2009 onwards I warned that peripheral countries in Europe could talk all they wanted about reform, but that until the debt was reduced they would never grow out of the debt burden, and I also predicted that peripheral Europe would restructure its debt only once German banks were sufficiently recapitalized. From 2007 I insisted that Chinese debt would rise at an accelerating pace as long as Beijing targeted high levels of GDP growth, and so ultimately either GDP growth targets would be abandoned — excoriated as a “Western” concept that is applied only foolishly to a country like China — and expectations lowered dramatically, or GDP growth will come crashing down once debt limits are reached, although to the seemingly utter confusion of most economists I also suggested that it would be many years before we reached debt limits (perhaps 2017-19) and I never thought a banking crisis was likely. At that time I also argued that ultimately local governments would be forced to absorb China’s adjustment costs, which I think now is pretty widely accepted. But while these “predictions” all seemed like very anti-consensus predictions at the time, in fact they were just the inevitable consequences of the balance-sheet models I used, so even predictions for which I get most credit for having gotten right I don’t really think of as predictions.
I admit that I don’t predict things like China’s 4th quarter GDP growth rate, or where the US stock market will end this year, mostly because I think these kinds of predictions are pretty worthless. If there are specific combinations of scenarios among which you want me to suggest are the most likely outcomes, please indicate which and I’ll try to do so, or at least explain my reluctance.
Prof. Pettis,
“This means the halcyon days of luxury consumption in China are over and will not return under almost any plausible scenario for many more years.”
It is true that luxury brands have seen recent reduction in sales recently, however, how does your argument hold considering the rise in “luxurious” real-estate pricing? Isn’t it obvious that capital or speculative capital is now directed, more so than before, into RE in places like Shenzhen, Shanghai etc.? So one luxury is replaced by another. If I understand your argument, either the rich have less free capital and the non-rich have the same, but then, how do prices rise with liquidity in such a huge sector? Or, somehow already the capital has been distributed to the less rich, but even then, how can they afford these prices, unless they are now also rich (which can’t be). Is it ALL debt. It seems some of it is, for sure. But is that the whole picture? Maybe I unnecessarily complicated things and it’s much simpler… (OK, what I am saying that there’s no re-balancing and there ain’t going to be one if at this point nothing changed, in connection to my previous comment.)
As a side note, a huge part of the population benefits form the Party so I would not underestimate the impact of the the anti-corruption drive (which is very, very serious) on the reduction in luxury goods sales.
Maybe, but I don’t really think buying expensive real estate is a form of luxury consumption. It seems to me more likely to be a form of savings.
Prof. Pettis,
Thanks for another great piece.
Would you mind telling me more on the recent rise of real estate price in China? I am would like to know if you would regard this rise as a transfer of wealth of household to SOE(paying their debt) or vice versa (purchasing power of those households owning flat increased). Mind sharing a thought? Thanks in advance.
Dear Professor Pettis, I am not an economist but read your column regularly to attempt to understand how the world’s economies are linked. I have some basic questions–but perhaps since your discourse is at a higher level, you won’t want to bother to answer my query. I haven’t been able to find the answers to these questions anywhere else:
1. Chinese investment in the USA is often headline news, but not the other way around. It looks like there is roughly $30 billion of the former, $74 billion of the latter–is this amount counted in China’s GDP and BOT?
2. A recent headline said Chinese bank loans surged 30% last month–does this figure include loans to American companies in China?
3. Apple took out ($17 billion? in) loans to avoid repatriating profits to the US–was some of that from Chinese banks and if so, how does a potential banking crisis in China affect Apple and other large cap American companies doing business there?
4. Tangentially, China’s holdings of US Treasuries has fallen to a 4 year low. How does that fit into your article above?
thanks so much!
Hi Michael,
Hope to hear from you about Trump presidency in your new blog post
Hello everyone! YEAIIIYY TRUMP WON!!!(I’m happy because i’m not located in US….)
So a lot of you where thrilled about the grab them by the p** candidate..? We will see…
To me he will be a major disaster if he really takes in action policies that’s destroy trade unstead of dealing with current account with a deal with China Japan and Germany. If he really build his wall wage will probably sky rocket and then small business is gonna go south ASAP.
What do you thinks still thrilled ???
Prof you were wrong!!! Jacksonian win at the end now!!
You are getting the causality backwards: if an amateur politician like Trump wins against the best CV of US politics, with half campaign funds, reluctant support from the leaders of his party, despite adverse demographics and against a systematic barrage from the media, it is precisely because all is not well in the US right now. That’s the only part that is for sure. Whether Trump will makes things worse, unchanged or better is not for sure at this point and remains to be seen. And yes, it’s not without risks. In the meantime, failure of his predecessors to recognize and address the issues is the only established fact. You are indeed very lucky if you live in a country where established politicians are succeeding because they are not so many countries like that in the world right now.
Two things are already very clear at this point:
– The discredit of established politicians and media is very deep.
– The usual tactic to bully and treat as “racist, sexist, populist, deplorable, redneck, backwards, unfriendly to the environment” and other niceties anyone not in tune with the established politically correct wisdom is no longer enough.
5 month after Brexit, that’s another big wake up call. Now, the hard part starts. Who knows, perhaps it is not too late to start reversing 40 years of weakening growth trend, rising under-employment and rising debt loads.
DVD, would it be fair to say that there are two kinds of analysis right now about the election of Trump?
First, you have the group that focus on Trump first. They listen to what he says, analyse his past and conclude that he is unfit for the job, therefore anybody who voted for him is at least half moronic. This group is really discouraged and cluless right now, they simply wonder how there can be so many stupid americans.
Second, you have the group who consider trump as a symptom of a deep and large illness. This group is less surprise about the result and they don’t talk much about Trump, they prefer to focus on the underlying problem. This group is not monolithic though, because there are many perceived problem : people on this would focus, I think, on the current account deficit and its consequences; others would focus on the uncontrolled latin immigration; some would pinpoint the lack of a proper welfare state; rampant racism…name it! So there will be a fierce debate in the next month about which group is right on the underlying problems in the States.
Another thing about the first group : I think they are prone to slip in a mental trap. Criticising Trump can make you feel really really good about yourself, “I criticise the bad, therefore i’m good” kind of mentality. That kind cloud your view for a very long time…
And DVD, you are really good at simplifiying complex subject related to economics, if it’s not too yuge task for you, what would be your simple-around-a-beer-in-a-bar answer to somebody who don’t perceive the current account deficit as a problem?
Michael Pettis said it best: the current account deficit is an exorbitant burden for the US because, by absorbing production from the rest of the world at the expense of its own production and producers, the US is transferring economic development and jobs abroad and has to make up for the lost purchasing power by going deeper and deeper into debt, which ends up making things worse.
First, I did not vote for Trump and this is not an argument for him. I am not optimistic about the future.
As Professor Pettis has warned, if imbalances are not dealt with by one means they will be dealt with by another. If the US allows the use of domestic energy sources (fracking, coal) and encourages domestic consumption of domestically produced goods, that will begin to address our massive trade imbalances that have accrued since the 1970s.
As he has also said, the use of our dollars as the reserve currency is a burden, not a privilege. IMV, Mr. Trump should be understood as nature taking its course as surely as a rock thrown in the air must fall. Mr. Trump’s policies might not be the least painful way to address the imbalances, but do you really believe that any other candidate was offering a wiser path that would address the imbalances?
Edit: I do understand that it is the internal debt that we have run up to prevent unemployment, not the trade imbalance, as such, that is the load on the US.
The US economy has become increasingly fragile as we displace workers producing tangible goods and replace them with baristas serving lattes.
Most of the stuff reported as going on in the US is AstroTurf for the gullible. Trump was and is the most rational politician in years.
The Passions 2 – The Interests 0 #USElection2016 #Brexit
Dang DVD,
I wish I had written that. Beautifully written.
I would simply add two things:
as for Cédric’s assertion that “If he really build his wall wage will probably sky rocket and then small business is gonna go south ASAP,” you can’t say that. America’s press corps and some academics have worked hard to pretend that the “Law of Supply and Demand” don’t apply to unskilled labor markets in the US, but that is nonsense. All the employers’ groups know better and want open borders for that reason. Yes, if Trump built his wall, wages would go up, unemployed Americans and labor-market dropouts would take many jobs, and some jobs would be lost due to higher labor costs. But higher wages wouldn’t wipe out all small businesses because someone has to pay those higher wages. When enough jobs are eliminated and the rest are paid a higher wage, the labor market will be in equilibrium again. BUT FOR GOD’S SAKE DON’T ADMIT THAT EVERYONE SHOULD KNOW THAT IMMIGRANTS DEPRESS WAGES. That would be admitting that Trump’s people are right about immigration depressing wages and not just mindless bigots.
If you want to read a great analysis of Trump’s victory read “Jim Tankersly’s “How Trump won: The revenge of working-class whites” from the Washington Post’s Wonkblog. The West’s elites need to face up to their own culpability in Trump’s victory. He didn’t deserve to win and probably won’t fix the problems. But America’s economic and cultural elites deserved to lose because they created the problems for their own economic self interest and vanity.
Trump won because a lot of people in the US are feeling economic pain. Such things happen all the time all over the world.
This blog and Michael’s books and new letters have put me in a position to understand what is going on. Back in 2009 when I started reading this blog it was the one place which clearly and logically explained in highly readable language the ways in which counties could achieve growth by importing demand and what the ultimate consequences of unbalanced trade were. It was here that I got the first inklings about the negative effects of income inequality and how that can affect investment and capital movements.
It was due to this blog that Brexit came as no big surprise and legitimized my concern that Trump was a real threat. Due to my understanding of current imbalances and the fragility of economies that are dependent on imported demand that I realize how dire the current situation could rapidly become. Thanks Michael.
I note that Steve Keen has recently been published in Forbes magazine but his article was quite vitriolic towards members of his profession. People who can articulate the dangers, their causes and possible ways to resolve them are more important then ever now. People who have been constantly and articulately right are the ones who should be allowed to come forward and be listened to at the highest levels.
Although I hope we get a new blog post soon it seems to me we should all be able to figure out for ourselves what some of the scenarios going forward may be.
Thanks, Simon
Can Brexit and Trump be understood as the rebellion of deficit countries consistently subsidizing economic development of the rest of the world for decades at the cost of burdening themselves hopelessly under increasing debt load?
Frankly, who can possibly be surprised that accumulated imbalances have consequences? Of course, they do. Still, the hard part starts now. Are Theresa May and Donald Trump able to articulate a new diplomacy of prosperity to convince foreign public opinions and foreign governments to cooperatively design a more sustainable international trade and monetary system?
Exactly, didn’t like political correctness in the 80’s, and watch how the morons marched themselves into their own anger, and the interest pundits delude their groups into supporting that which inevitably undermines their interests. As usual, DvD, well said. Besides Michael, the clarity of many commentators is why, I find this blog, the best on associated topics that I have come across in my 20 years of web-surfing.
Actually, for the circus that is the thought that Trump got elected, I am happy that Liberal Cosmopolitans have gotten whacked on their nose; the enabling of the structure that is used to build oligarchies, while not creating the demand dynamics globally that rationalize our openness, our support of the project, need be dealt with forcefully. Enough of this post-Modern, Critical theoretical, value-infused doublespeak, and the mere do-near-well, of those who heighten beliefs and feelings above logic and structure. Trump’s astuteness, is that his clown-like figure could manipulate such to elevate himself to the position. Now, let’s see what he can do. While not having voted for hi myself, I can’t say I am disappointed he won. The first era past the post Cold War is ending, and I think we can find we have far more many tools, than the military and mere cajoling of others to carry their weight.
Trump’s key strategist is Steve Bannon, who was the CEO of Breitbart (which I actually don’t hate). He’s a really smart guy who says Trump’s “movement” is in the line of Andrew Jackson and William Jennings Bryan, which isn’t bad in and of itself. My biggest concern is the impact Trump’ll have on the environment. I voted against him cuz I think he’s gonna gut the EPA, pull the US out of the Paris Climate Accords, thinks climate change is a hoax (which is utter nonsense), is actively against renewable energy, and he’s also pretty left-wing on many economic policies.
With all that being said, Trump still lost in the popular vote. And yes, it is nice to see the “globalists” (coastal liberal cosmopolitans) get their ass kicked. Think about this: the “globalists” almost set up an oligarchy to run the country for effectively the next decade or two and the only thing that stopped them was a rather old system of electing leaders that many consider to be arcane. If we had a pure popular vote, Hillary’s margin would likely go much higher (she’d prolly win by >5% nationally).
Ensuring that production takes place close to where it is consumed, as opposed to on the other side of the planet, is of course very good for the environment as it means these daily long-distance transport for gigantic volumes will decrease and with them their ecological footprint.
That’s the way I see it. There could be a lot of good that comes out of this (there could also be a lot of bad, but we’ll see).
Hi Michael,
I remember you once wrote about how you knew the property bubble in Spain was systemic when a lot of your friends and family started to draw money out of the property sector.
It’s just becoming so apparent in Australia that the same thing is happening. My brother in Law is a accountant administrator for a big 4 bank and has become a part time developer, building 3 townhouse on a block, 2 other developments and wants to quit his job and become a mortgage broker next year. My other brother in law owns 5 properties (some interest only), my uncle is doing a course now to become a property auctioneer and my Dad (ULTRA conservative-semi retired) is taking a loan against his house to build more bedrooms and extend the house. Almost like my entire family is connected into the property sector. My father in law (owns 4 properties) said to me the other day that the property market is predictable and always goes up.
Surely these signs are similar to what you experienced in Spain and am interested to know your thoughts?
That definitely seems like an unhealthy fixation on property, which is very typical of a bubble. This, of course, is the worrying thought if it is widely held: “the property market is predictable and always goes up”.
So I’m gonna go short the Australian banking system at some point in the coming year or two.
Thanks for the comments. Yes, the general feel when I’m in the lunch room at work or at a Xmas party is that the stockmarket is volatile (true) but with a 80-100% increase in Sydney and Melbourne property prices since 2008 property is a safe investment that predictably goes up. Only rising interest rates or China hitting debt capacity can stop it in my opinion. Might happen..