Why China Could Lead Us Into Another Depression [View article]
The current economic disaster is the result of the combination of negligence, hubris, and wrong economic theory. For decades, an economic and monetary policy has been practiced based on the illusion of, "It doesn't matter." At first it was, "Deficits don't matter." From that, the policy of "it doesn't matter" got extended to money creation, the credit expansion, the stock-market bubble, and the housing boom. Now, we're being told that buying financial junk by the central bank to beef up banks and brokerages also doesn't matter.
The current financial crisis is not of a cyclical nature. The financial turmoil is the symptom of the structural imbalances in the real economy. Over decades, expansive monetary policy has gone hand in hand with implicit and explicit bailout guarantees, and this has distorted the process of capital allocation. Under such perverted conditions, those investors will win most who cast away the restraints of prudence. It is a game that can go on for a long time — up to the point when the irrationality has become systemic.
The simple fact is that the US economy is burdened with a highly lopsided capital structure as the consequence of a wide discrepancy between consumption and production, which, in turn, is the result of monetary policy. Persistent trade and capital imbalances are the symptoms of this discrepancy. This means for the US economy that lower interest rates and government incentives aimed at boosting consumption work either as pure poison or bring purchases fprward. Instead of more consumption, more savings, less consumption and fewer imports are needed.
The current financial crisis reflects that many debtors have reached their debt limit and that creditors are lowering that limit. From now on, business and consumers, governments and investors must work under the restraints of lowered debt ceilings. Without an adaptation that would increase savings, decrease consumption, and reduce imports, the US economy can only go on in the old fashion with ever more debt accumulation. But the limit of debt expansion has been reached. The financial crisis has reduced the willingness of domestic and foreign creditors to extend loans, including China.
.A profound restructuring of global capital has become unavoidable. Such a process is quite different from a recession in the traditional sense. In contrast to a sharp and typically short-lived recession, when, after the rupture, business as usual can go on, the restructuring of a distorted capital structure will require time to play out. Rebalancing the distorted capital structure of an economy requires enduring nitty-gritty entrepreneurial piecemeal work. This can only be done under the guidance of the discovery process of competition, as it is inherent in the workings of the price system of the unhampered market.
Along with increasing the reserve requirments and imposing a series of bank lending reforms to curb speculation, China has also been draining liquidity through the sale of one and three year bills by the central bank.
The FT ran this today on the decline of the PMI:
Equities indices on the Chinese mainland were under pressure after manufacturing data showed the pace of activity within the country’s factories was slowing down. The official purchasing managers’ index, compiled by the China Federation of Logistics and Purchasing, fell to 53.9 in May from 55.7 in April. Meanwhile, the unofficial but closely watched HSBC China Manufacturing PMI fell to 52.7 from 55.2. An index reading above 50 indicates an increase in output. Purchasing Managers’ index data from Taiwan, South Korea and Australia showed a decrease in the pace of growth in output in May, setting the tone for weakness on share markets in most of the region.
Rosenberg Sees an L-Shaped Recovery [View article]
Along with persistently high unemployment, consumer demand will be contrained by the consumer is embarking upon a paradigm shift from being an unrepentant spender to a saver, increasing the rate of savings to the historical range of 8% to 10% . Alone, this will take about one point of growth off GDP.
With collapsing final demand and capacity utilization running at 69%, it's hard to make a case for increased private investment; sooner or later we will see a fillip from restocking of inventories but this is likely to be a one off event.
Our trade balance has improved simply because imports have fallen more rapidly than have exports. And while this has helped in statistical terms, durable benefits will be only be seen when we expand exports on a significant scale. With China teetering and most economies challenged, this does not appear to be imminent.
The state of our economy is reflected in the credit markets, where private debt and commercial paper is shrinking and public debt expanding.
The Stock Market Is Disconnected from the Economy [View article]
The current market, which is richly valued, allows no room for error and remains dependent upon Fed liquidity, unswerving faith in China's recovery and a better than expected recovery in the US.
Looming in the background are avalanches of debt, administration policy and the performance specific components of the recovery, particularly consumer spending, employment and corporate profitability.
Why China Could Lead Us Into Another Depression [View article]
The current financial crisis is not of a cyclical nature. The financial turmoil is the symptom of the structural imbalances in the real economy. Over decades, expansive monetary policy has gone hand in hand with implicit and explicit bailout guarantees, and this has distorted the process of capital allocation. Under such perverted conditions, those investors will win most who cast away the restraints of prudence. It is a game that can go on for a long time — up to the point when the irrationality has become systemic.
The simple fact is that the US economy is burdened with a highly lopsided capital structure as the consequence of a wide discrepancy between consumption and production, which, in turn, is the result of monetary policy. Persistent trade and capital imbalances are the symptoms of this discrepancy. This means for the US economy that lower interest rates and government incentives aimed at boosting consumption work either as pure poison or bring purchases fprward. Instead of more consumption, more savings, less consumption and fewer imports are needed.
The current financial crisis reflects that many debtors have reached their debt limit and that creditors are lowering that limit. From now on, business and consumers, governments and investors must work under the restraints of lowered debt ceilings.
Without an adaptation that would increase savings, decrease consumption, and reduce imports, the US economy can only go on in the old fashion with ever more debt accumulation. But the limit of debt expansion has been reached. The financial crisis has reduced the willingness of domestic and foreign creditors to extend loans, including China.
.A profound restructuring of global capital has become unavoidable. Such a process is quite different from a recession in the traditional sense. In contrast to a sharp and typically short-lived recession, when, after the rupture, business as usual can go on, the restructuring of a distorted capital structure will require time to play out. Rebalancing the distorted capital structure of an economy requires enduring nitty-gritty entrepreneurial piecemeal work. This can only be done under the guidance of the discovery process of competition, as it is inherent in the workings of the price system of the unhampered market.
China PMI: Is Its Economy Slowing? [View article]
The FT ran this today on the decline of the PMI:
Equities indices on the Chinese mainland were under pressure after manufacturing data showed the pace of activity within the country’s factories was slowing down. The official purchasing managers’ index, compiled by the China Federation of Logistics and Purchasing, fell to 53.9 in May from 55.7 in April. Meanwhile, the unofficial but closely watched HSBC China Manufacturing PMI fell to 52.7 from 55.2. An index reading above 50 indicates an increase in output. Purchasing Managers’ index data from Taiwan, South Korea and Australia showed a decrease in the pace of growth in output in May, setting the tone for weakness on share markets in most of the region.
Rosenberg Sees an L-Shaped Recovery [View article]
With collapsing final demand and capacity utilization running at 69%, it's hard to make a case for increased private investment; sooner or later we will see a fillip from restocking of inventories but this is likely to be a one off event.
Our trade balance has improved simply because imports have fallen more rapidly than have exports. And while this has helped in statistical terms, durable benefits will be only be seen when we expand exports on a significant scale. With China teetering and most economies challenged, this does not appear to be imminent.
The state of our economy is reflected in the credit markets, where private debt and commercial paper is shrinking and public debt expanding.
The Stock Market Is Disconnected from the Economy [View article]
Looming in the background are avalanches of debt, administration policy and the performance specific components of the recovery, particularly consumer spending, employment and corporate profitability.