Economics

[Rake]

To take an interesting conversation to the offtopic forums where it belongs:

China went from having third-worldly low levels of corporate debt to having European levels in a few short years.

Do you have a source for this? I would be interested to see it. I understand many provincial governments have a problem but I understood that China as a whole was massively in the black.

There is a reason that Canada and Australia are by far the most shorted (expected to take a massive nose dive) stocks in the world right now.

Which stocks? Australia (and I assume Canada) is undergoing massive structural stress right now because of the high currency. Could that not be a factor?

I totally agree that relying too heavily on the construction sector can be a massive mistake. I know it has been a part of the economic problems of both Ireland, Japan and America. However, the source of the problem is the overallocation of resources to a particular area. It can occur in any area with diminishing returns.

[TheEconomist]

I understand many provincial governments have a problem but I understood that China as a whole was massively in the black.

The people are certainly in the black. They save just about every penny they can get because they have no social services. The corporations, however, are nothing short of USSR-worthy debt machines. In fact, the recent debt roll overs of Chinese state-owned enterprises was larger than the European bail out. It's just that China doesn't have to make a poltiical spectacle by asking for it, the banks just do it.

The short version is that China's economic growth is based almost entirely off of construction. About 70% of last year's growth and 87% of this years' growth is generated through construction. Construction that is entirely unneeded and has zero return on investment. When the financial crisis hit, China was hit the hardest of just about any major country. To survive, they launched a massive stimulus plan in which they built shit tons of apartments. They built it but they forgot to make sure that the people could afford them. Now, they already have close to 70 million empty apartments (expected 100 million after this year) and plan to keep building exponentially more. The price-to-income of these cities is triple or quadruple American or European levels at the height of the housing bubbles. Instead of scaling back on this and taking the GDP hit, they keep generating debt. The Premier announced yesterday that they would once again embark on massive infrastructure projects. I doubt this time will be any different than before. But, then gain, the alternative is a Cultural Revolution-esque scenenario.

http://www.mpettis.com/2011/05/25/looking-for-debt/

(Written by the Professor of Economics at Peking University, one of the most important foreign economics in China.)

There's also an unused airport in just about every city (even smaller ones), bridges and trains that go no where. In China, if you build something and it doesn't generate profit. Instead of stopping, you build another, to meet GDP growth targets set by the government.

There's much more going on in China that will inevitability result in a collapse but it would be quite tiresome to go through it all. I would instead suggest that you read some of thees articles:

www.mpettis.com
http://worldhousingbubble.blogspot.c...ch/label/china
http://www.bloomberg.com/news/2011-1...te-alarms.html

Australia (and I assume Canada) is undergoing massive structural stress right now because of the high currency

Pretty much all of the stocks. The gist is that both of these countries are heavily dependent on commodity trade. Commodities are set for a steep drop in the near future as just about every country but America goes into a major slowdown or recession. 2012 is the 2008 equivalent for developing counties such as Brazil and India.

America was hit harder than most countries but only because it began the structural changes the earliest. Europe and everyone else just delayed it through various projects of their own. China will be the last to make changes because of its political climate and economic socialist model. This is covered here:

http://www.mpettis.com/2012/02/22/wh...global-crisis/

[Rake]

Thanks for that. I will read those articles and get back to you.

I should note that while commodities affect Australia's trade balance (and therefore currency) very strongly, the vast majority of economic activty (above 90%) is elsewhere and is being dramatically reduced by the high currency. If commodities drop and the currency goes down they will spring back to life.

That is why I was asking which stocks.

[TheEconomist]

Which is the argument that most people think right before any bubble bursts. "Such and such activity is only X% of our GDP so, when it slows down Y% it will only effect us Z%". However, Australian banks are heavily reliant upon these companies being able to sell commodities at high prices to pay their debt. Similiar to how Chinese banks rely on selling land to construction companies to pay their debts and American companies relied on mortgages, etc. When commodities slow down, companies will start generating massive debts (which has already started and will get worse), which will put major pressure on the banks to pay debts. Australia and Canada are not going to collapse like Brazil, India, and China are going to but they will begin the bust part of their boom cycle. Australian and Canadian banks are only the most shorted because you cannot legally short Brazilian, Indian, or Chinese banks (Must protect the people from foreign devils!!!)

In addition, there's also a fairly sizable housing bubble. The horrible housing market in China has led to many Chinese traveling to AU and CA to buy housing which had pushed the housing prices far beyond free market levels. Canada is much worse but Australia is in the same boat. In summation, if/when commodity prices fall, it will be because China can no longer support the demand. That will be because China is going into a recession. A Chinese recession will make it so commodity prices fall and housing prices can no longer be supported by foreign investors. This will make mining companies, commodity traders, housing market companies and the banks have a debt crisis of arguable severity. Remember, America's housing market was only ~5% of GDP (depending on estimates) at the height of the bubble and look at the havoc it wrecked on the financial and industrial sectors. By comparison, China is expected to be 87% of GDP growth this year and AU/CA % is 2-4% more than America's, depending on the estimates. This will lead to less confidence in the housing market which will begin a quick spiraling descent and the public will wonder when in the hell of this came from. Meanwhile, bankers will already have sold any stakes that had in these areas and come out smelling like a rose. If I have interpreted this correctly, than large companies such as JPMorgan, Merryl Lunch, Goldman Sachs, etc. should have began selling assets months ago. Did they? Ooooooh yeah.

http://www.theglobeandmail.com/globe...2347630/print/

I wouldn't worry though if you're Australian. Compared to the other countries mentioned, Australia will be better off than them due to increasing economic activity from America, Japan (the two fastest growing developed economies right now) and other smaller Asian countries. It'll be a bust, but you're not going to lose your ass like China will, who is in the worst situation.

[TheEconomist]

Taken from another topic:

My comments on socialism were related to DSquid's post; not Canada by itself. He totes his free health care as if it was actually free and not becoming a huge burden on all of the countries that have it.

That being said, in order to not sound so negative, I will say that Canada being more socialist than America makes sense because of the reliance on resources which almost inherently require natural monopolies. Since only a few companies can control natural resources, there has to be some redistribution. America's economy is based on tech start ups, etc., etc. which requires less socialism. Canada minus socialism wouldn't make sense or else a few mining companies would be making exorbitant amounts of profits, as is happening in China, pure socialism. As you can see, Canada is not pure socialism. It's actually liberal capitalism; far from Socialism. Europe started the trend in the 90's when they wanted to differentiate EU's economy from American capitalism so they called themselves socialst; despite actually being far from it. On a reasonable scale, Canada is far from the Socialism of Europe, which isn't even Socialism

Lastly, Canada is projected to become a Japan-like economy/society sadly (stagnated growth and dying population).

The entire world is. America is lucky in that it will be the last developed country to go through these problems. China was the last great population explosion but thanks to the one-child policy they will quickly become one of the oldest. All that's left is the Middle East and South America, both of which are losing their population explosion very quickly, especially South America which is Westernizing very quickly. And India's never been able to take care of their people and I doubt they will in the foreseeable decades to come. If they somehow were though, they'd have somewhat a population explosion for a time being. But, for that to occur, they'd need to be increasing instead of decreasing consumption and start spending more on health care than fighter jets. All in all, populations everywhere are stabilizing. Which is necessary for any of us to survive past the century.

I don't know why people love comparing US and Canada, it's like comparing Belgium with France.

I've tried to explain this to DSquid many times. If it weren't for him, I'd never make the connection. They're actually very similiar. Both are very open economies with the highest in "ease of doing business" rankings. Methinks he thinks Canada is something it is not. Or, perhaps, that is he simply sees things how he wants them to be.

No. Unlike China, our government does not force or subsidize construction companies to make giant commercial lots for no reason.

Allow me to rephrase. China did these things to prevent social instability due to a recession. Canada did it to avoid having to cut back on social programs, which is a sensitive political subject in Canda I'm sure. Either way, both are designed to avoid painful recessions like what America had but they also prevent a switching of gears for the economy, which is all a recession is. Recessions force the population to adapt to new circumstances which is why, when left alone, there is always a boom afterwards equal to or greater than the recession. Canada generated debt to save its social programs (DSquid's beloved "free health care") and therefore did not adapt to new circumstances like America and Japan have but China is far, far worse. In fact, in many provinces, they've started to force employees to buy bonds of their bankrupt employers. Similiar to America bailing out the banks in 2008, except the Chinese have zero money to spare for such nonsense and the burden is placed on a smaller group of people. For the reasons you mentioned, China is speedily driving itself into the ground for a USSR like collapse.

Again, have a great deal of respect for Canada. I just always seem to come across as anti-Canada because I have to counter DSquid's anti-American/pro-Canada uninformed nonsense.

[hyde]

Taken from another topic:

My comments on socialism were related to DSquid's post; not Canada by itself. He totes his free health care as if it was actually free and not becoming a huge burden on all of the countries that have it.

That being said, in order to not sound so negative, I will say that Canada being more socialist than America makes sense because of the reliance on resources which almost inherently require natural monopolies. Since only a few companies can control natural resources, there has to be some redistribution. America's economy is based on tech start ups, etc., etc. which requires less socialism. Canada minus socialism wouldn't make sense or else a few mining companies would be making exorbitant amounts of profits, as is happening in China, pure socialism. As you can see, Canada is not pure socialism. It's actually liberal capitalism; far from Socialism. Europe started the trend in the 90's when they wanted to differentiate EU's economy from American capitalism so they called themselves socialst; despite actually being far from it. On a reasonable scale, Canada is far from the Socialism of Europe, which isn't even Socialism



The entire world is. America is lucky in that it will be the last developed country to go through these problems. China was the last great population explosion but thanks to the one-child policy they will quickly become one of the oldest. All that's left is the Middle East and South America, both of which are losing their population explosion very quickly, especially South America which is Westernizing very quickly. And India's never been able to take care of their people and I doubt they will in the foreseeable decades to come. If they somehow were though, they'd have somewhat a population explosion for a time being. But, for that to occur, they'd need to be increasing instead of decreasing consumption and start spending more on health care than fighter jets. All in all, populations everywhere are stabilizing. Which is necessary for any of us to survive past the century.



I've tried to explain this to DSquid many times. If it weren't for him, I'd never make the connection. They're actually very similiar. Both are very open economies with the highest in "ease of doing business" rankings. Methinks he thinks Canada is something it is not. Or, perhaps, that is he simply sees things how he wants them to be.



Allow me to rephrase. China did these things to prevent social instability due to a recession. Canada did it to avoid having to cut back on social programs, which is a sensitive political subject in Canda I'm sure. Either way, both are designed to avoid painful recessions like what America had but they also prevent a switching of gears for the economy, which is all a recession is. Recessions force the population to adapt to new circumstances which is why, when left alone, there is always a boom afterwards equal to or greater than the recession. Canada generated debt to save its social programs (DSquid's beloved "free health care") and therefore did not adapt to new circumstances like America and Japan have but China is far, far worse. In fact, in many provinces, they've started to force employees to buy bonds of their bankrupt employers. Similiar to America bailing out the banks in 2008, except the Chinese have zero money to spare for such nonsense and the burden is placed on a smaller group of people. For the reasons you mentioned, China is speedily driving itself into the ground for a USSR like collapse.

Again, have a great deal of respect for Canada. I just always seem to come across as anti-Canada because I have to counter DSquid's anti-American/pro-Canada uninformed nonsense.

No worries man, I think I misread you two since I basically butt'd in. I agree with what you said here, and I didn't know it was that bad in China -about the junk bonds.
Btw, just very curious, I think you mentioned you were in college right? What are you studying, just curious.

[TheEconomist]

What are you studying, just curious.

I haven't decided whether I'm going to go into Finances or Economics. Economics is more interesting but Finances goes with stocks which is perfect for my risk raking nature.

[mikill]

Yes finally a good topic, I can get into.

First of all, I would like to raise the fact that I have completely different views than Dsquid.

The entire world is. America is lucky in that it will be the last developed country to go through these problems. China was the last great population explosion but thanks to the one-child policy they will quickly become one of the oldest. All that's left is the Middle East and South America, both of which are losing their population explosion very quickly, especially South America which is Westernizing very quickly. And India's never been able to take care of their people and I doubt they will in the foreseeable decades to come. If they somehow were though, they'd have somewhat a population explosion for a time being. But, for that to occur, they'd need to be increasing instead of decreasing consumption and start spending more on health care than fighter jets. All in all, populations everywhere are stabilizing. Which is necessary for any of us to survive past the century.

It is unfortunately because of WW2 and the lack of full scale conflicts since. Unfortunately total war is good for the economy.

[Rake]

I think I disagree with some of your points Tychus but I will have a think about them and, once again, get back to you.

I do, however, know about the Australian housing bubble (I have been calling it that for years as have others):[URL="http://theconversation.edu.au/debunking-the-myths-peddled-by-australias-property-bubble-deniers-4488"]


It was not caused by foreign investors, but by psychology, pop economics and negative gearing. Negative gearing was supposed to lower the price of rents by incentivising people to build houses and rent them out. Actually, that was never the purpose, the purpose was to prop up house prices for political reasons (along with such stupid policies as the 'first home buyers grant'). It didn't lower rents but it did allow people who were in the property market to realise massive gains for no effort and make people who owned houses think they were much richer even if, in fact, they were not.

Anyway, if Australia is very, very lucky the bubble will deflate with the house prices staying flat but with inflation actually reducing their real value by 3% or so. People may slowly realise their losses without causing a massive flight, go out of the market without panic, etc. without causing massive problems.

However, during that period, any tiny thing may set off a collapse, including a foreign investor flight.

I told my friends not to buy houses now, but they didn't listen to me.

Bubbles are bad but it hard to know how to stop them. It would help if there weren't stupid policies promoting them though. :/

[TheEconomist]

I think I disagree with some of your points Tychus but I will have a think about them and, once again, get back to you.

Everyone always does right before the truth smacks them in the face. If you really want to think about it, then read about previous bubbles and the arguments against them Sure, Australia could move to prevent a recession but then you'd create massive debts, resulting in a worse recession later. If you start to see this, know you've been screwed by your politicians.

It was not caused by foreign investors,

Are you talking about Canada or Australia here? I said in the previous post in the other topic was Australia's housing bubble was fueled by a construction boom. However, in this topic, I am talking about foreign investors because for the past two years (since the Chinese housing market went to shit) the Chinese have been buying massive amounts of NA and AU property. They are the icing on the top for the housing bubble. They kept it going a little bit past when it would've collapse normally and without them keeping the bubble going, it will pop. That's recently though. This housing bubble has probably been in the works for close to a decade.

Anyway, if Australia is very, very lucky the bubble will deflate

A bubble deflating slowly is NEVER a good idea except politically. The damages are far worse over the long term than just outright collapsing for a year or two. America is a perfect example of this. If America had just collapse, then America would have been forced to go through the necessary social, political, and economic changes necessary to survive over the long haul. Instead, America is still doing the same things because it wasn't punished. People are like children. They need someone to discipline them in order to change bad habits.

However, during that period, any tiny thing may set off a collapse, including a foreign investor flight.

Which investors have already shown they will do at the slightest hint of trouble. BHP said that their exports were slowing a bit and massive stock dips and investor flight ensued for days afterwards. The news that the CEO gave wasn't even that grave. It will get much worse and so will the reactions.

I told my friends not to buy houses now, but they didn't listen to me.

I had the same thing. My closest SC2 friend is also an investor. I told him not to invest in Brazil, India or China because they were going to go to shit. This was two years ago and, at the time, it was common knowledge that these countries were going to rule the world in a few years. I told him that is the best time to sell given that such psychology always comes before huge collapses and then proceeded to site hundreds of statistics. He didn't listen. Now, he's hurting

It would help if there weren't stupid policies promoting them though

Wherever there's government and political economics, there is economic ruin. America's housing bubble started when the government wanted to increase house ownership so that everyone could have one. Despite any country doing the same and trying to force house ownership past 2/3 resulting in a tragedy, American politicans thought it would be a good way to get votes. Ten years later, 17 trillion in housing wealth has been lost and the world has entered the worst recession in since the 1930's, all majorly contributed by these policies.

It is unfortunately because of WW2 and the lack of full scale conflicts since. Unfortunately total war is good for the economy.

After having read five or so geopolitical books, and 20-30 more chapters from various other books, I can assure you that, even ignoring the Middle East, a World War 3 of far greater magnitude than WW2 will start within a decade (that's a very optimistic time range). It's quite telling that, for the first time in 400-600 years (depending on the estimates) that Asia's military expenditures are higher than Europe (and the difference will only get bigger), and even Canada is buying jet fighters. It won't be long before people start chatting, "Remember when we thought America was the most evil country in the world? Those were the good ol' days."