Paul Kedrosky's Infectious Greed
Finance & The Money Culture
Good talk by China skeptic Michael Pettis:
Thank you Paul. There is a great exodus of workers from New Zealand (where I live) to Australia. Most of my relatives work in the Perth mines. I cautioned them about buying homes because I didn't think Chinese growth was sustainable; and following Steve Keen made me aware of the still inflating property bubble there. I have been telling folks that the decline in copper demand is a harbinger of a major slowdown in China. Me thinks 'The Lucky Country' is about to join the rest of the 99%.
This is a truly fantastic lecture. A keeper.
Where is the venue/occasion (Australia where/why)?
I think Pettis overlooked a very easy means to China increasing consumption (the answer is right across the border in India):
Kill the one-child policy. There will be an Instant boom in domestic consumption (but also lower productivity growth too). Anecdotally, other diaspora populations also control population in favor of productivity: Singapore is also population "controlled". Hard to get state subsidized (HDB) housing if you have too many kids (you have to earn a big flat) but trust me the desire is there throughout the diaspora for large families especially among traditional or lower income households. The educated elite, not so much, as expected. But this is something Pettis ignores.
This is the most insightful, thought-provoking talk on global economics that I've heard in the last year. Pettis methodically lays out the problems inherent in China's growth model — infrastructure investment exceeding the China's per capita GDP relative to the rest of the world, strong incentives to invest as real interest rates are negative 2-3%, transfers of wealth from the household sector (savers) to state owned-enterprises and real estate developers (borrowers) and the massive growth in loans, which have for now hidden the costs of today's projects into the future.
His key point is that the household sector at 34% of GDP (I didn't realize it's so low!) must grow faster than China's overall GDP in order for the household sector to comprise a larger portion of the economy. In order for this to happen he estimates that we will see an AVERAGE growth in GDP of only 3% for China in the next decade. This will allow consumption, one of the three drivers of demand (the others being domestic investment and net exports), to play a more important role in the economy.
Not to spoil the ending, but the implications are bleak for anyone leveraged to global non-food commodities (i.e. Australia). Infrastructure investment in China must be curtailed and made up with an expansion of household wealth in excess of GDP growth. Otherwise a major financial crisis, perhaps larger than the sub-prime crisis in the U.S. (recall the total cost of write downs was $1.5 – $2T) will ensue as loans by Chinese borrowers become unserviceable.
It heralds the end of communism as we know it! The question is will they allow it?
I see the Chinese mindset as that of a five year old bully, that is stubborn and refusing to change. Given the situation described, they need to act fast and that would be akin to shock therapy. That may not be all that bad if they do it right. Everybody agrees they have to increase their local consumption. That requires putting more money into the hands of the people. They have to do the following:
1. China is one massive forced labour camp where wages are repressed and that is why they are able to export so cheaply. That has to change. Wages have to rise fast.
2. The repressed interest on savings is another factor that has to be rectified.
3. China can go on a buying spree using their $ 1 Trillion plus cash hoarding, with goods that will give people work. This is their biggest problem, They are so proud that will probably hold onto this surplus. And as time goes on it will be worth less and less.
4. Their current local debt is not a problem. They can write it down as the US and Europe has done and doing.
5. Kedrosky talks about privatization. Maybe that will happen since there is a phenomenally rich minority, some of whom are buying property worth over a Buck in the US and getting their green cards. These folks will join the group that I call Magic Carpet people, who fly around wherever they want and have assets in multiple countries such that they weather the problems of any one or a few countries.
Interesting…..Roger you say they need to rectify the savers interest rates in China, don't most countries need to do this and are not doing so because governments wish to force savers to throw there money on investing in the economy. Everyone practising ludicrous Keynesian policies which are actually destructive to society. Nutters who adopt these policies create awful boom / bust cycles whilst regurgitating mantras of targeting 2% growth when in reality inflation is usually 5%+ and real stats hidden from phoney inflation baskets. This steals from the savers, the youth and drives excessive prophets to the already wealthy. We can see this from directors pay rising 50% in the UK this year (2011). Not only does China have a problem, we all know the west does too. In fact most people with a modicum of interest in economics (a growing community), will realise that the only way to break the back on these problems is for the majority of people to start campaigns (democraticlly) against the governments, in effect to remove them and the people to take control. The root causes as we know are the banks, a Usury Bank which makes money off money…and then some from their global casino funded by central banks. I modern slavery is effected which was started by the Roman empire and hopefully some day decade century or whatever the system will change back to normal rebalanced form of capitalism. Protected by what should never have been removed (the Volker rule and the like) by corrupt politicians!! I support the 99% from my armchair at the moment….maybe one day I'll stand up and do something
Here’s a similar outlook:
TV Host says Regime is Nearly Bankrupt
The Epoch Times is operated by the Falun Gong. All their news is very anti-PRC, so take it with a grain of salt.
The first thing I noticed about this lecture is that Mr. Pettis refers to China as "it," rather than "they." Finally! Someone who analyses China without emotionalising it into a matter of "Us vs. Them."
Paul Kedrosky‘s Infectious Greed
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