China is in trouble….

12 06 2018

Between yesterday’s revelation of Saudi Arabia’s appointment with 2030 and now this, the global economy is looking ever more shaky….
Republished from MISES WIRE..
06/09/2018

Before we discuss the economic situation of China, a few words about China’s strongman, Xi Jinping. The “new Chinese emperor” has engineered a meteoric rise. He started off as simple rural laborer but is now the most powerful Chinese president since Deng Xiaoping. Such a career path requires strength, tact, and probably a dash of unscrupulousness. 

While the rulers of China have been able all along to hedge their plans over longer periods than their Western counterparts have, the new legal situation has extended this planning horizon even further.1 In comparison with those of Western economies, China’s countermeasures against the crisis in 2008 were significantly more drastic. While in the US the balance sheet total of the banking system increased by USD 4,000bn in the years after the global financial crisis, the balance sheet of the Chinese banking system expanded by USD 20,000bn in the same period. For reference: This is four times the Japanese GDP.

increm-China-1.png

The following chart shows the expansion of the bank balance sheet total as compared to economic output. Did the Chinese authorities assume excessive risks in fighting the crisis?

increm-China-2.png

Neither the fact that China’s bank balance sheets amount to more than 600% of GDP nor the fact that they have doubled in terms of percentage of GDP in the past several years suggests a healthy development. Our friends from Condor Capital expect NPL ratios51F to rise in China, which could translate into credit losses of USD 2,700 to 3,500bn for China’s banks, and this is under the assumption of no contagion (!). By comparison, the losses of the global banking system since the financial crisis have been almost moderate at USD 1,500bn

The most recent crisis does teach us, however, that the Chinese are prepared to take drastic measures if necessary. China fought the financial crisis by flooding the credit markets: 35% credit growth in one year on the basis of a classic Keynesian spending program is no small matter.

increm-China-3.png

Chinese money not only inflates a property bubble domestically but also around the globe (e.g. in Sydney and Vancouver). Further support for the global property markets is in question, given the measures China has recently launched. Due to financial problems, Chinese groups such as Anbang and HNA will have to swap the role of buyer for that of seller.

The IMF has forecast a further doubling of total Chinese debt outstanding from USD 27,000bn in 2016 to USD 54,000bn in 2022. By comparison, in 2016 China’s GDP amounted to USD 11,200bn. This spells debt-induced growth at declining rates of marginal utility. From our point of view, this development – which we can also see in the West – is unsustainable.

increm-China-4.png

In its most recent report, “Credit Booms – Is China different?”, the IMF states that in 43 cases worldwide of strong credit growth (i.e. the ratio of credit to GDP grows more than 30% over five years), only five cases ended up without a significant slowdown or a financial crisis. The IMF also points out that no expansion of credit that started at a debt to GDP ratio above 100% of GDP ended well. It is worth noting that China has a high percentage of domestic as opposed to foreign debt, which definitely makes matters easier for the country. But the question is: Will it be different for China this time?

The 19th-century Opium Wars that China fought with England, which are deeply rooted within the collective memory of the Chinese people, are historical events that are of great importance in connection with the punitive tariffs imposed by the US, as they remain a fixed and integral part of the Chinese history curriculum in schools.2 If necessary, China could stir up anti-Western sentiment in order to implement measures that are hard on its own population, even if they are unpopular. The buck would of course stop with the Americans. Thus, the US could shoot itself in the foot with any escalation of the trade war, as we regard the ability to bear hardships and the cohesion of Chinese society as much stronger than those of the American society.

The demographic development of China is also worth a quick sidebar. The World Bank forecasts a population peak of 1.4bn for China in 2028. The decline in population that is predicted to set in around that time should proceed at a similar pace as the increase towards the peak.

increm-China-5.png

The fit-for-work population (aged 16 to 59) has been decreasing since 2012 and is expected to decline by almost 25% to 700mn by 2050. Thus China, much like the West, has the problem of an aging population.

increm-China-6.png

Conclusion

Unlike his Western competitors, China’s new strongman, Xi, can implement his long-term strategy in a targeted and gradual fashion. Xi explicitly underlined his goal of asserting China’s interests in the world by referring to military, economic, political, and diplomatic means in his speech at the National Congress in October 2017.3 He left no doubt that China was not willing to compromise in any shape or form with regard to its territorial integrity (N.B. Taiwan, Hong Kong, Tibet), and he issued point-blank threats against separatist tendencies.

However, the transformation of the economy could (intentionally or otherwise) cause economic distortions not only in China but globally. Recent years have been dominated by a massive expansion of credit. In fact, it is often said that China has blown the biggest credit bubble in history.

It seems, there are greater similarities between China and the US than may be visible at first glance. China builds real estate for a shrinking population, invests for an overindebted client (the US, which even insists on a drastic reduction of the bilateral trade deficit) and finances all this with money it does not have.4

  • 1.An analogy from the field of sports: The national sport of the USA is baseball; in China, it is Go. The approach to foreign politics is similar: The Americans are known for their short-term “hit and run” foreign policy, whereas the Chinese play the long game in their foreign policy and are very difficult to read in doing so.
  • 2.Recommended reading: The Opium Wars, by Julia Lovell
  • 3.http://www.bbc.com/news/world-asia-china-43466685
  • 4.A paraphrase of the famous quote from “Fight Club”: “We buy things we don’t need with money we don’t have to impress people we don’t like.”

Ronald-Peter Stöferle is managing partner and fund manager at Incrementum AG, Liechtenstein. He invests using the principles of the Austrian school of economics.





Do we have five years left…….?

23 10 2016

You may remember the articles I recently published about the twilight of the age of oil by Louis Arnoux….. well Raul Ilargi from the Automatic Earth has published them too, and this time, there’s a video to go with them. It’s very informative, and led me to understand all sorts of things, not least why the price of oil can never go back up. Basically, as less and less net energy is present in each new barrel of oil extracted, it’s simply worth less….

I was getting very enthusiastic about this presentation, right up until the end when Arnoux starts pushing this ‘green box’ of his, the logo for which appears (I now realise) in the bottom corner of all his slides. It’s called the nGeni. And it all sounds too good to be true, especially after telling us all that the economy probably has just five years left, and will grind to a halt…..

Here’s the video

After watching it, I then googled nGeni, and found this website trying to crowdfund it. I’d love to know what DTM readers think of this, because it all sounds like snake oil to me…..





Techno-Narcissism & The Real Limits To Growth

2 06 2015

kunstler

James Howard Kunstler

Submitted by Howard Kunstler via Kunstler.com,

If there is a Pulitzer Booby Prize for stupidity, waste no time in awarding it to The New York Times’ Monday feature, The Unrealized Horrors of Population Explosion. The former “newspaper of record” wants us to assume now that the sky’s the limit for human activity on the planet earth. Problemo cancelled. The article and accompanying video was actually prepared by a staff of 23 journalists. Give the Times another award for rounding up so many credentialed idiots for one job.

Apart from just dumping on Stanford U. biologist Paul Ehrlich, author of The Population Bomb (1968), this foolish “crisis report” strenuously overlooks virtually every blossoming fiasco around the world. This must be what comes of viewing the world through your cell phone.

One main contention in the story is that the problem of feeding an exponentially growing population was already solved by the plant scientist Norman Borlaug’s “Green Revolution,” which gave the world hybridized high-yielding grain crops. Wrong. The “Green Revolution” was much more about converting fossil fuels into food. What happens to the hypothetically even larger world population when that’s not possible anymore? And did any of the 23 journalists notice that the world now has enormous additional problems with water depletion and soil degradation? Or that reckless genetic modification is now required to keep the grain production stats up?

No, they didn’t notice because the Times is firmly in the camp of techno-narcissism, the belief that the diminishing returns, unanticipated consequences, and over-investments in technology can be “solved” by layering on more technology — an idea whose first cousin is the wish to solve global over-indebtedness by generating more debt. Anyone seeking to understand why the public conversation about our pressing problems is so dumb, seek no further than this article, which explains it all.

Climate change, for instance, is only mentioned once in passing, as though it was just another trashy celebrity sighted at a “hot” new restaurant in the Meatpacking District. Also left out of the picture are the particulars of peak oil (laughed at regularly by the Times, which proclaimed the US “Saudi America” some time back), degradation of the ocean and the stock of creatures that live there, loss of forests, the political instability of whole regions that can’t support exploded populations, and the desperate migrations of people fleeing these desolate zones.

As averred to above, the Times also has no idea about the relation of finance to resources. The banking problems we see all over the world are a direct expression of the limits to growth, specifically the limits to debt creation. We can’t continue to borrow from the future to pay for our comforts and conveniences today because we have no real conviction that these debts can ever be repaid. We certainly wish we could, and the central bankers running the money system would like to pretend that we could by making negligible the cost of borrowing money and engaging in pervasive accounting fraud. But that has only served to cripple the operation of markets and pervert the meaning of interest rates — and, really, as a final result, to destroy any sense of consequence among the people running things everywhere.

The crackup of that financial system will be the signal failure of the collapse of the current economic regime. The financial system is the most fragile of all the systems we depend on (though the others do not lack fragility). This is the reason, by the way, that oil prices are so low, despite the fact that the cost of producing oil has never been higher. The oil customers are going broke even faster than the oil producers. Does anybody doubt that the standard of living in the USA is falling, despite all our cell phone apps?

The basic fact of the matter is that the energy bonanza of the past 200-odd years produced a matrix of complex systems, as well as a hypertrophy in human population. These complex systems — banking, agri-biz, hop-scotching industrialization, global commerce, Eds & Meds, Happy Motoring, commercial aviation, suburbia — have all reached their limits to growth, and those limits are expressing themselves in growing global disorder and universal bankruptcy. Do the authors of The New York Times report think that the oil distribution situation is stable?

There were two terror bombings in Saudi Arabia the past two weeks. Did anyone notice the significance of that? Or that the May 29th incident was against a Shiite mosque, or that the Shia population of Saudi Arabia is concentrated in the eastern province of the kingdom where nearly all of the oil production is concentrated? (Or that the newly failed state of neighboring Yemen is about 40 percent Shiite?) Have any of the 23 genius-level reporters at The New York Times tried to calculate what it would mean to the humming global economy if Arabian oil came off the market for only a few weeks?

Paul Ehrlich was right, just a little off in his timing and in explicating with precision the unanticipated consequences of limitless growth. But isn’t it in the nature of things unanticipated that they generally are not?