"If we assume that China will have no problem sailing through its economic rebalancing, the European crisis, and everything else, then clearly we don’t need to worry about anything. But if China’s rebalancing is accompanied by a sharp slowdown in economic growth, or if it occurs during a worsening of the European crisis – both very likely scenarios – then we need to think about what the debt burden will be under those conditions.
So, for example, will commodity prices drop? I think they will, perhaps by as much as 50% over the next three years, and to the extent that there is still a lot of outstanding debt in China collateralized by copper and other metals (and there is), our debt count should include estimates for uncollateralized debt in the event of a sharp fall in metal prices. Will slower growth increase bankruptcies, or put further pressure on the loan guarantee companies? They almost certainly will, so we will need again to increase our estimates for non-performing loans.
Will capital outflows increase if growth slows sharply? Probably, and of course this puts additional pressure on liquidity and the banking system, and with refinancing becoming harder, otherwise-solvent borrowers will become insolvent. Will rebalancing require higher real interest rates, a currency revaluation, or higher wages? Since rebalancing cannot occur without an increase in the household income share of GDP, and since these are the biggest implicit “taxes” on household income, there must be a net increase in the combination of these three variables, in which case the impact on net indebtedness can be quite significant depending on which of these variables move most. Since I think rising real interest rates are a key component of rebalancing, clearly I would want to estimate the debt impact of a rise in real rateshttp://bubblesandbusts.blogspot.com/2012/08/bubbling-up8912.html
This would prove prophetic too quickly as the markets went red over night due to some disappointing China data:
"Much weaker-than-expected trade data from China on Friday suggests the world’s second largest economy is slowing faster than anticipated and could prompt Beijing to take action in days rather than weeks to boost flagging growth, some analysts say."
"China’s July exports rose just 1 percent from a year earlier, the weakest reading since January and well below forecasts for a rise of 8.6 percent. Imports meanwhile rose 4.7 percent in July from a year ago, the weakest pace since April and also well short of forecasts for a 7.2 percent rise."
"The numbers followed weak numbers from China on Thursday that already had investors betting on further monetary easing soon."
"The data was definitely a surprise and it will raise pressure on Beijing to ease monetary policy sooner rather than later," said Donna Kwok, Great China Economist at HSBC in Hong Kong."
"The easing may well come through in days rather than weeks," she said, adding that Chinese authorities were likely to respond to the weakness in the economy, not just with monetary easing but also fiscal measures such as financial support to households and exporters."
"The easing may well come through in days rather than weeks," she said, adding that Chinese authorities were likely to respond to the weakness in the economy, not just with monetary easing but also fiscal measures such as financial support to households and exporters."
It seems a long time ago since China had the luxury of worrying about growth that is too high while planning a "soft landing." Indeed where have the soft landings gone? In the U.S. we did used to have soft landings but that's a long time ago now-in the 50s and 60s the Fed would deliberately bring about a recession that would not be very deep.
We haven't seen too many of these lately-I guess there are people who might argue they happened in Canada, or Australia, or maybe Switzerland. But they aren't the rule. Still if you think China's trade numbers look rough you should take a whiff of Britain's.
Vicky Redwood of Capital Economics:
The latest UK trade data are pretty dreadful.
"Although it is tempting to blame the euro-zone crisis, the deterioration was driven by a widening in the deficit with non-EU countries. Exports to the US fell particularly sharply."
"Meanwhile, it looks like net trade played a significant role in the 0.7 percent contraction in GDP in Q2."
"Admittedly, the extra bank holiday in June may have had some temporary adverse effect. The fact that it was trade in goods that drove the deterioration might support this (the services surplus in fact rose)."
"That said, if the bank holiday halted work at ports, it should have affected both imports and exports. And previous extra bank holidays have not had that big an impact on the overall deficit. What's more, the sharp fall in the CIPS measure of export orders in July points to further weakness to come."
Good work by David Cameron and Osbourne. You got to admire the way they "stick to their guns"-and don't lef failure talk them out of it. Too bad the gun is pointed at the British economy.
Regarding "soft-landings", I'm unaware of any that were engineered in order to combat high inflation. The more typical occurrence would probably be a shock to the system combated by fiscal/monetary policy. This is one reason I've been expecting a "hard landing" in China for quote some time.
ReplyDeleteI think in the 50s and 60s U.S. the Fed routinely induced recessions to prevent the economy from overheating.
ReplyDeleteThe case can be made that in the postwar era all the U.S. recessions were deliberately unduced by the Fed until the 1990-91 receesion under the first Bush
I'm not disagreeing that someone could make that case (many monetarists likely would). I, however, don't find that reasoning compelling.
DeleteTaking a quick look at CPI during the 50's and 60's, there is a burst around 1950 but after that inflation remains between ~0 to 3% until the very end of the 60's. The effective Fed Funds rate was also rising most of the period, yet didn't reach 5% until the second half of the 60's. As for NGDP, it was fluctuating pretty heavily between 0-10% during the 50's and then 5-10% during the 60's.
Last point, during that time the US was still on the gold standard. This likely held inflation in check during most of the period.
China's inflation was well above 5% and rising when it began trying to engineer a soft-landing. I don't know of any scenarios where a country successfully lowered inflation to ~0-2% without creating a more severe recession. Only time will tell...
(Here's a link to FRED graph I created: http://research.stlouisfed.org/fred2/graph/?id=CPIAUCSL)
Hey Woj. I'm not really sure that we disagree or if we do where the disagreement is.
ReplyDeleteI'm aware the inflation was not a problem in the 50s and 60s though they usualy say it started rising in about 1967, though even then it was quite mild.
I tend to agree with much of Galbraith's analysis of the period. He claims that beninning in 1970 the Fed begun to change it's demand management style.
That was with the Nixon Presidency and Milton Friedman had his ear.
This was the start of the Fed's Holy War against inflation. The Fed decided that low inflation was more important than low unemployment.
It seems to me that all the recessions between WWII and the 1990-91 reession were Fed induced. Would you agree with this?
It's an interesting theory of yours that the end of teh gold standard was a big cause of the 70s inflation.
I heard someone suggest that the big reason for Japan's sudden big drop in GDP in the early 70s-it went from 16% in 72 to 3% in 73 and never came close to its old levels-was the Nixon Surprise as well.
For Japan, the premise goes, it was particualry bad with their depedence on the U.S. dollar.
Again, my point is to learn not to prove I'm right-a lot of these tings I haven't decided on yet and need more knoweldge of. It's a fact finding mission.
Not saying you don't understand that just clarifyng it.