There are troubles brewing around the world that could push the world’s economy back into the toilet.
However our response to these issues can make the difference between prosperity and growth or penury and unemployment if not worse.
For example, many deep trend seeking and pattern recognizing analysts now believe that China is headed for a hard landing.
Because China is much more vulnerable to an international slowdown than is generally understood…
China’s reliance on exports and a controlled currency for growth, will no longer work if the US consumers are engaged in a chronic saving spree, as I believe they will be along with their European counterparts. Therefore the vaunted Chinese export growth, which averaged 21% per year in the last decade, is bound to suffer…. Inflexibility of renminbi… Commodities shortages… Inflation looming… Tapering demand… Internal debt escalation beyond sustainable levels…
China’s state-controlled economic boom may soon lead to crippling inflation. In February 2011, the director of the National Bureau of Statistics said that “asset-price increases pose a challenge for macroeconomic policy.”
Sill with a 9.8% quarterly growth things seem fine and the resultant housing boom has pushed up prices to the point that apartments in Beijing are affordable to only the top 10% percent of all wage earners, because they’re selling at about 22 times average income. Compare this to the average US house prices that peaked at six times average income. A square meter of property in China costs an estimated 164 times per-capita income, compared with 33 times in high-priced Japan…
No wonder there are sixty four million newly built homes sitting empty and unsold. If that isn’t a bubble then please someone tell me what is a giant coloured balloon floating in the sky above China hiding the sun — is doing.
However, the government fearful of rising prices, has moved to prevent speculation. Buyers must now put down 60 percent of the purchase price on second homes, and 30 percent on first homes. Still it’s not containing the crisis. And now the government is pressing banks to contain mortgages, and some have even raised their interest rates.
So, why is China finding it so difficult to fight inflation?
Mainly, because a shadow banking system has sprouted up and is providing massive amounts of credit outside the traditional “regulated” banking system. That’s adding to the money supply and driving up prices.
According to a study issued by the People’s Bank of China in 2010, non-banking sector lending has expanded to 63.3 trillion Yuan, ($10 trillion), 44.4% of total lending activities of China’s economy. Shadow banking, a concept coined by the US Federal Reserve, refers to non-banking financial institutions with some banking functions, but they are not or less regulated like a bank. In the U.S., the lack of regulation for the securitization of traditional financial products, including home loans, was one of the major causes of the financial crisis. Shadow banking in China mainly exists in the form of “Bank and Trust Cooperation”, the underground financing networks; but small loan companies and pawn shops also play a role in these shadow financing activities. While mortgage securitization is not an issue in China, the “Bank and Trust Cooperation” is a vehicle to provide ‘hidden’ loans to enterprises outside the scope of the bank’s reserve limit. Similar to the credit securitization problems in the US, the banks play the role as an intermediary.
Data released on March 31th, by China Trustee Association, shows that the scale of Bank and Trust Cooperation as has already reached to 15.3 trillion yuan ($2.35 trillion). The risks of such financial arrangements are asymmetrically transferred to buyers. Since no credit ratings are available for these debts, the buyers have to blindly follow the bank’s referrals, hoping the banks, which make money from commissions and fees no matter what happens with the loan, have done due diligence and are honest.”
Unregulated “shadow” banking inevitably ends in disaster because loan-quality gradually deteriorates and that leads to panic selling. This is essentially what happened at BNP Paribas when they suspended withdrawals at their 3 funds; they became suspicious of the underlying collateral (subprime mortgages) and that sparked a bank run in the repo market. China will face the same problem if the government doesn’t reign in its shadow banks and control the flow of credit.
There are also troubles in the eurozone which could send the global economy sliding back into recession.
George Soros warned last week: “We are on the verge of an economic collapse which starts, let’s say, in Greece, but it could easily spread…..The financial system remains extremely vulnerable.”
Greece will eventually have to restructure its debt as its debt-to-GDP ratio continues to widen each year it stays on its present payment schedule.
At the antipodes of the world, and in another ancient nation state things look completely pear shaped and sad. Because the leaders are thinking that they can defy history… and economic logic.
Greek Prime Minister George Papandreou is not just daft, but he is apparently suicidal. He and his incredibly stupid cohorts are killing the Greek economy in order to please the DSK style IMF’s poor economy rapists and the rapacious Germans… Ahhh and to also serve their main client, the bloated and useless Greek public sector.
One has to wonder: Who is the pimp benefiting from all this?
Why else they are willingly gutting public assets, driving contraction, and laying off 20% of the workforce?
If they do this in order to appease foreign private bondholders who refuse to accept small haircuts on their risky sovereign debt investments — they are abysmally daft. Or for sure somebody’s pimping them. Same as those all too willing chamber maids at the Manhattan Sofitel. A place known on the street in Manhattan as a sure lay bet. Wall Street I mean…
And here’s an economic metaphor of the goings-on in Greece:
Imagine that in the worst year of our recent recession, the United States government decided to reduce its federal budget deficit by more than $800 billion dollars – cutting spending and raising taxes to meet this goal. Imagine that, as a result of these measures, the economy worsened and unemployment soared to more than 16 percent, and then the president pledged another $400 billion in spending cuts and tax increases this year. What do you think would be the public reaction?
It would probably be a lot worse if not similar to what we are seeing in Greece today, including mass demonstrations and riots, because that is what the Greek government has done…
Because of the massive opposition to further economic self destruction – the latest polls show that 80% of Greek citizens are opposed to making any more concessions to the European authorities.
But the IMF’s latest review of its agreement with Greece suggests that the Euro, for the Greek economy, is still 25% -35% percent overvalued. This makes a recovery through “internal devaluation” – i.e., keeping unemployment so high and therefore lowering wages to make the economy more internationally competitive – an even more remote possibility than it would otherwise be. But the big problem is that the country’s fiscal policy is going in the wrong direction, and of course they cannot use monetary policy because that is controlled by the ECB whose views are anachronistic and Kaiser Wilhelm like. Both long dead as doornails.
And while the Papandreou pseudo socialist government has clinched enough votes in parliament to borrow another tranche for their summer holidays and quickly pass another phase of the EU’s austerity plan, this merely puts off the day of reckoning.
Greece will not escape default.
Structured, unstructured, whatever. Default by any other name is just that.
Whatever the silly rating agencies say, they are in it way over their head. because basic economic reality remains.
Eventually, the bondholders will be forced to take a hit on their investments. You want proof?
Go ahead and tty to sell your holdings of Greek debt on the open market right now. You can – of course you can — but you got to trim few inches off. Same as the investors of the secondary debt have to do now when they recycle their holdings of Greek debt into safer pools of risk like into US T-bonds.
Right?
But when the restructuring hits, it will push the EU banking system, particularly English, French and German banks, into serious crisis. The lower European banks are already in semi permanent crisis so it doesn’t matter… And these EU stress tests don’t really do any justice because they haven’t foreseen the possibility of a sovereign debt restructuring as if these tests take place n another solar system away from our Galaxy and the Eurozone.
So please listen to the steward and Brace yourselves for the coming shocks from a crash landing.
Brace — Brace
For this coming meltdown may not be big, but it will certainly be enough to push the eurozone back into recession.
Yours,
Pano
PS:
And with Chinese fearful of the US debt being devalued unilaterally, they cause the drop themselves.
Something like the white missionary with the fork when he heard the aborigines wanted to make canoes or a pirogue with his supple skin…
As for the Greek socialists hoping that Chinese capital communists might bail them out…
They need to have a rethink.
Because ever since tricky Dick turned these eager beaver Communists into capitalist Investors in the 1970′s, they haven’t looked back, and are far more likely to deal with winners than losers.
Bulls before bears and all that jazz — you know?
Back to the grindstone then….
