Interesting thoughts. Would quibble with even bothering to cite the official 5% figure given the limited data we have almost conclusively disproves it in favor of something in the ballpark of 1%.
Two unfortunate realities dominate the lives of my Chinese friends and family:
1. The inescapable reality of Y=C+I+G+(X-M) is that in market economies GDP consists of present standard of living (C, M, some of G) plus every sacrifice required to sustain present standard of living (I, X, the rest of G). The latter are a dependent variable; the level of spending needed to sustain the former. In non-market economies, the accounting is thus easily gamed for even quite long periods of time. Governments simply choose to treat the non-consumption components as an input and use fiscal repression and control over the flow of credit to inflate the hell out of them.
2. China's government is not actually capable of the reforms necessary to spin up a virtuous cycle of domestic consumption. It is too afraid of any disruption to employment in major secondary sector industries, the non-market means of disbursing credit are too deeply embedded in the economy, its senior figures are too opposed to "Latin American welfarism"... the structural reasons are many. Long story short, it would sooner exchange the fruits of Chinese labor for pieces of paper far, far more worthless than US Treasuries (in the form of various infrastructure bonds in SE and S Asia) than to buy up empty speculative housing to sell or rent cheaply to young families, institute a universal healthcare system that exists on more than paper outside first tier cities, offer credit for educated young people to start services businesses, or care for its elderly poor.
Between the two of these insights, it is entirely possible to envision a China whose neo-mercantilism has denuded much of the rest of the globe of industrial capacity and *still not fucking made China rich*. In the absence of foreign pushback or domestic resistance (even if only in the form of an imploding birthrate) to having immense tax burdens placed on families to fund export industries, that would seem the most likely outcome, to be frank.
Fantastic analysis! Two follow-up questions. (1) What are possible solutions to China's debt problem? Though households and local government have maxed out their leverage, the central government still has room. Then, a possible way out is for the central government taking in the bad debts and leveraging up, relieving other sectors' debt burden, just like what happened in the late 90s, cleaning up the banking system. (2) A natural conclusion I draw from your analysis would be long USDCNY, as the currency will be the relief valve sooner or later, and we are paid while waiting (positive carry). Yet, you did not mention about this. So I'm really curious. Thanks again!
A very interesting perspective - Thanks. It seems to me that we have crossed a sort of macro rubicon in 2008 (hence the title of your Substack?) Both China and the West appear to be stuck in a doom loop as the debt driven post Bretton Woods period appears to have ended with a bang at the GFC. Both China, the US and Europe are now transitioning to an economic mode of competition that relies on fiscal deficit spending combined with various protectionist measures. I wonder therefore if the commodity/dollar doom loop that you describe might now be somewhat different - As you indicate deflation in commodity prices begets falls in currencies of the producers etc which causes flight to safety of …. The USD?? But post GFC - Is the USD really safe given the increasingly apparent fiscal dominance and financial repression policies now being enacted to address the debt to GDP burden. Would the flight to safety not perhaps be increasingly likely to benefit currencies outside of the global fiat $ (fiscal domination / financial repression) doom loop? Ie.Gold and Bitcoin? Things that governments find difficult to debase and default on that are commodities/currency that are not dependent on economic demand but on financial demand for actual safe financial assets. Sorry to drop the Bitcoin bomb here :-). Thoughts?
thank you! very insightful article. is there any possibility the gold to have its own course and not to follow the commodity index? because in a scenario of low world growth and low rates the gold price could increase
Great as always. Thanks.
Interesting thoughts. Would quibble with even bothering to cite the official 5% figure given the limited data we have almost conclusively disproves it in favor of something in the ballpark of 1%.
Two unfortunate realities dominate the lives of my Chinese friends and family:
1. The inescapable reality of Y=C+I+G+(X-M) is that in market economies GDP consists of present standard of living (C, M, some of G) plus every sacrifice required to sustain present standard of living (I, X, the rest of G). The latter are a dependent variable; the level of spending needed to sustain the former. In non-market economies, the accounting is thus easily gamed for even quite long periods of time. Governments simply choose to treat the non-consumption components as an input and use fiscal repression and control over the flow of credit to inflate the hell out of them.
2. China's government is not actually capable of the reforms necessary to spin up a virtuous cycle of domestic consumption. It is too afraid of any disruption to employment in major secondary sector industries, the non-market means of disbursing credit are too deeply embedded in the economy, its senior figures are too opposed to "Latin American welfarism"... the structural reasons are many. Long story short, it would sooner exchange the fruits of Chinese labor for pieces of paper far, far more worthless than US Treasuries (in the form of various infrastructure bonds in SE and S Asia) than to buy up empty speculative housing to sell or rent cheaply to young families, institute a universal healthcare system that exists on more than paper outside first tier cities, offer credit for educated young people to start services businesses, or care for its elderly poor.
Between the two of these insights, it is entirely possible to envision a China whose neo-mercantilism has denuded much of the rest of the globe of industrial capacity and *still not fucking made China rich*. In the absence of foreign pushback or domestic resistance (even if only in the form of an imploding birthrate) to having immense tax burdens placed on families to fund export industries, that would seem the most likely outcome, to be frank.
Fantastic analysis! Two follow-up questions. (1) What are possible solutions to China's debt problem? Though households and local government have maxed out their leverage, the central government still has room. Then, a possible way out is for the central government taking in the bad debts and leveraging up, relieving other sectors' debt burden, just like what happened in the late 90s, cleaning up the banking system. (2) A natural conclusion I draw from your analysis would be long USDCNY, as the currency will be the relief valve sooner or later, and we are paid while waiting (positive carry). Yet, you did not mention about this. So I'm really curious. Thanks again!
A very interesting perspective - Thanks. It seems to me that we have crossed a sort of macro rubicon in 2008 (hence the title of your Substack?) Both China and the West appear to be stuck in a doom loop as the debt driven post Bretton Woods period appears to have ended with a bang at the GFC. Both China, the US and Europe are now transitioning to an economic mode of competition that relies on fiscal deficit spending combined with various protectionist measures. I wonder therefore if the commodity/dollar doom loop that you describe might now be somewhat different - As you indicate deflation in commodity prices begets falls in currencies of the producers etc which causes flight to safety of …. The USD?? But post GFC - Is the USD really safe given the increasingly apparent fiscal dominance and financial repression policies now being enacted to address the debt to GDP burden. Would the flight to safety not perhaps be increasingly likely to benefit currencies outside of the global fiat $ (fiscal domination / financial repression) doom loop? Ie.Gold and Bitcoin? Things that governments find difficult to debase and default on that are commodities/currency that are not dependent on economic demand but on financial demand for actual safe financial assets. Sorry to drop the Bitcoin bomb here :-). Thoughts?
thank you! very insightful article. is there any possibility the gold to have its own course and not to follow the commodity index? because in a scenario of low world growth and low rates the gold price could increase