The 'Soft Landing' Meme


Recent economic data emerging from China have been anything but comforting. The HSBC flash PMI declined to 48, a steep fall to a 32-month low, indicating contraction in the manufacturing sector. It is interesting how little alarm this data point has raised (although equity markets did decline sharply following the release). Consider some of the comments from economists in the Reuters report on the release:

China's factory sector shrank the most in 32 months in November on signs of domestic economic weakness, a preliminary PMI survey showed, reviving worries that China may be slipping toward a hard landing and fuelling fears of a global recession.

The steep fall in the HSBC flash purchasing managers' index (PMI) to 48 in November from 51 in October largely reflected domestic weakness as both output and new orders shrank even as export orders continued to grow.

The flash PMI, the earliest readout of China's industrial activity, was the lowest since March 2009 and suggests the factory sector contracted during the month. A PMI reading of 50 demarcates expansion from contraction.

The PMI unnerved financial markets already roiled by the euro zone debt crisis and a downward revision in U.S. economic growth and underscored expectations that Beijing will lean more on policies to support growth than ones to fight inflation.

"They are not going to want this to go too far," said Tim Condon, head of Asia research at ING in Singapore. "I'm not sure if it (PMI) is a tipping point but I think it adds to the evidence."

Beijing has already announced some selective steps, geared to small business, to support the economy. HSBC said evidence in the PMI of a sharp drop in inflationary pressures meant Beijing had room for more selective measures if need be.

"There remains no need to panic," HSBC economist Qu Hongbin said. "Easing inflation provides room for more easing measures, which will keep China on track for a soft landing."


(emphasis added)

Note the underlying assumptions reflected in these analyst comments. 'They are not going to want this to go too far' – 'they' of course being the central economic planners in Beijing. Presumably this means that 'they' will just have to flick the right switch and things are going to be alright again.

'Easing measures will keep China on track for a soft landing' – based on what evidence, exactly? Qu Hongbin doesn't say, which goes to show how deeply ingrained faith in the planners is by now. Once again, the underlying assumption seems to be that they only need to nudge interest rates downward and the economic contraction will remain 'contained'.

Here one must stop to think what 'soft landing' actually means. It is widely held in mainstream economic circles that a so-called 'soft landing' is a desirable outcome once a central bank is forced to rein in a boom in order to stop 'inflation' (i.e., rising final goods prices) from getting out of hand. The ideal sequence of events in this framework is that consumer price inflation enters a downward trend just in time to enable the central bank to resume monetary pumping and reignite the boom before the liquidation of malinvested capital can go 'too far'. In this way, so it is reckoned, the central economic planning agencies can keep a kind of 'eternal boom' going, according to the Keynesian prescription.

The so-called 'Great Moderation' in the US was an example for just this kind of approach. By the mid 2000ds, policymakers and mainstream economists had become convinced (once again!) that central planning had 'vanquished' the business cycle. Since in reality, monetary pumping is the cause of the business cycle, it should have been obvious that this was a conceit.

So what does a 'soft landing' really represent? In the attempt to keep an 'eternal boom' going, policymakers must in essence ruin the balance sheets of one economic sector after another.  Economic booms tend to be centered around specific sectors of the economy (for instance, technology in the 1990's and housing in the 2000ds). The central bank can get an expansion of credit and fiduciary media going, but it has no control over where the credit goes. Newly printed money is never distributed evenly, it enters the economy at specific points. As a rule, the specific sectors that become the prime beneficiaries of the credit expansion have some sort of good fundamental story going for them at the beginning of the boom that attracts financing (revolutionary innovations in technology during the tech boom, a perceived 'shortage' of dwellings at the outset and during the housing boom).

Once the boom has run its course and it turns out that massive capital misallocations have in fact taken place, the sector that was subject to the boom is found to be in the most dire financial straits, as all the fictitious accounting profits from the boom disappear in a flash. In order to engineer a 'soft landing', there must still be sectors of the economy that are fundamentally sound or at least not yet completely ruined and can become the next targets of credit expansion. Concurrently, the renewed credit expansion will tend to arrest the liquidation of malinvested capital that the recession period was about to accomplish, so the structural legacy problems get 'papered over' and are dragged along as well. In short, an 'eternal boom' based on engineering multiple 'soft landings' will see one sector of the economy after another laid low in the end.

In addition it should be noted that some sectoral booms are more dangerous than others – and real estate tops the list. Consider that e.g. in the technology sector, due to the fast pace of innovation, the obsolescence of specific capital is a frequently encountered problem in most business endeavors. Failed investments are written off very quickly and the sector is geared toward dealing with extremely fast-paced change. A major boom-bust sequence centered on this sector will therefore be handled by economic actors with commensurate ease.

It is quite different with housing and real estate more broadly. Buildings and real estate developments are from an analytical standpoint akin to durable capital goods in that they render their services over a very long period of time. An important facet is also that this sector is the one that tends to produce the greatest  duration mismatches on the balance sheets of financial institutions, as mortgage loans are usually of very long duration (10 to 30 years), while the corresponding liabilities tend to be of much shorter duration (an extreme case was provided by the so-called 'special purpose vehicles' set up by US banks during the housing boom for the purpose of holding securities backed by real estate loans 'off balance sheet'. The liabilities of these SPV's were guaranteed by the banks that had set them up and they funded their assets in the commercial paper market with short term paper that had to be rolled over every 90 days).

Also, once a house or an office building is built, it becomes impossible to reverse the decision if it should later turn out that the investment was a mistake. A house is useful for housing only – it can not be easily transferred to alternative uses. Taking the house apart to salvage whatever raw materials have gone into its construction may cost more than can be realized by selling the salvaged commodities.

Due to the above and due to the large amounts of capital required to erect buildings a large housing boom has far more serious consequences in terms of capital consumption and the accumulation of unsound credit than booms in most other sectors of the economy.  It is precisely this fact that makes the smug assumptions regarding the ability of China's planners to engineer a 'soft landing' somewhat dubious. It should also be noted that the 'soft landing' idea represents the current consensus, and consensus opinion is often a red flag.


The China Bears

Our friend Dr. Marc Faber recently warned about the fact that the downturn in China is gathering steam, naming it as one of the factors that could come as a very negative surprise for stock market investors – see this interview on BNN, where he inter alia remarked:

“I believe the reason markets around the world sold off 20 to 30 and 40 percent in some cases in the last couple of weeks has to do with a meaningful slowdown in China, which I think will be very important for the global economy,” he says. “I believe the Chinese economy is meaningfully decelerating,” he says. “If we define a bubble as a period of excessive credit growth and a period in which interest rates were artificially low and led to excessive speculation…then very clearly China was in a bubble in the past three years.”

Alas, elsewhere he also noted that:

On the growing debate regarding China’s economy, according to Faber, it’s in a bubble; but the Chinese bubble can last longer than many expect; it could pop in three months or three years, he said.

It should be noted that the notion of a potential Japanese-style collapse in China has gathered steam lately—and was first suggested by famed hedge fund manager Hugh Hendry of Eclectica Asset Management, who said at an investment forum in Russia last year regarding China’s successive string of high GDP rates which appeared to him to be driven by too much capital spending, “Confucius say: thou shall not invest in overcapacity.”

Faber also touched upon the escalating geopolitical tensions between the West and the Middle East/Central Asia region. To contain China’s rise as a bona fide superpower, the West must secure oil supplies for themselves at the expense of China, he said.

But no matter how the struggle for oil supplies between the West and China plays out, or whether China’s economy heads south, or not, Faber wittily said, if need be, “Chinese invented paper. They know how to print money.”

Indeed, it is not possible to forecast the timing of the coming denouement in China with accuracy – all we can say with certainty is that the boom in China was the  result of an enormous expansion in money and credit, and that such a boom must eventually end in a major bust. There can however be no certainty as to the timing. The Chinese government has complete control over the allocation of credit in China's economy – it can and does literally order the banks to expand or contract credit according to the macro-economic objectives it deems most important. In this particular aspect, the Chinese economy is far more akin to a command economy than the economies of the West, where the central bank can engage in monetary pumping but can not literally force the banks to expand their lending.

In any case, Dr. Faber is at this point what we would term a 'cautious China bear' – he is well aware of how maladjusted China's production structure has become as a result of the credit boom, but he also acknowledges that it is not possible to predict with certainty when the chickens will come home to roost.

Two other prominent China bears, who appear more convinced that the current downturn is in fact going to lead to a big secular bust, are Societe Generale analyst  Albert Edwards and Jim Chanos of Kynikos, a hedge fund specializing in short selling. Edwards is also critical of the 'soft landing' idea and notes in a recent missive that he believes it is a consensus worth fading:

If the authorities are trying to deflate property prices, why won't this cause the overall economy to crash, just as it did in the US? The answer is that it can and probably will. But I am sitting in my kitchen writing this with every single work surface covered in persuasive articles about why the economy will soft-land. Some economists are so reassuring. Even in 2006/7 when I was convinced disaster was around the corner I often found their calm siren stories disturbingly reassuring.

China is a “freak” economy. To my knowledge no other economy in history has experienced such high investment/GDP ratios and seen so many sequential years of strong investment growth. If you came down from Mars and saw an economy with an investment/GDP ratio of 50% you would conclude it would be among the most volatile in the world, not the most stable!


(emphasis added)

The latter point of course is a reference to the fact that the economic data published by China's authorities are somewhat dubious – what should be an extremely volatile economy apparently grows at an extremely stable and predictable (as well as blistering) rate of about 9% per year.

Further below in the same report Edwards notes:

Chinese authorities are trying to soft-land a credit-fueled property/investment bubble. They may succeed at their own bit of can-kicking, but history is not on their side. The sudden cessation of FX reserve growth (China's very own form of QE) may well be the last straw to break the panda's back.

And if China is hard landing, I agree with the bulls on one thing: expect the authorities to become aggressively stimulative. And if as is highly likely, aggressive conventional monetary and fiscal stimuli fail to prevent a hard landing (as indeed was the case in the US in 2008) 'other' measures will surely include yuan devaluation.”


Needless to say, a weaker yuan is on nobody's radar at this time. And yet, it can not be ruled out and may in fact represent the ultimate contrarian trade at the moment. Below are three pertinent charts from Edwards' report.



After shooting up sharply in the wake of the 2008 crisis, China's money supply growth has decelerated equally sharply. Property developers are in dire straits, and have trouble getting bank funding. 'Other loans' are acquired in China's 'shadow lending' market at usurious interest rates – click for higher resolution.



Growth in China's foreign exchange reserves has slowed down dramatically – click for higher resolution.



We should note here that the tendency of developers to lately obtain funding in the 'shadow lending market' at extremely high interest rates is a phenomenon that is typically encountered at the tail end of a boom, as entrepreneurs scramble to obtain the funds required to finish already begun investment projects at all costs. In short, there is intensifying competition over the  dwindling pool of credit and resources required to finish these projects.

Jim Chanos just gave an interview following a recent visit to China. He thinks that China's banking system is in an 'extremely fragile state'.


In fact, because what happened the last two crises, in 99 and 04, when non-performing loans went crazy in China without even a recession, the Chinese banking system was not re-capitalized like ours was, it was papered over. Going into this credit expansion, Chinese banks are sitting on lots of bonds from the so-called asset management companies set up in 1999 and 2004, and they are keeping them on the books at par, at full value. In the case of Agricultural Bank of China, which were short, those restructuring receivables are equal to over 100% of their tangible book. The Chinese banking system is built on quicksand, and thats the one thing a lot of people dont realize. When they talk about the foreign reserves of $3 trillion, what everybody forgets is theres liabilities against that.“Everybody seems to think it is a free and clear open checkbook. It’s not. That is what we have been trying to tell people. Focus on the lending system over there, because everything occurs through the banking system.”“Property prices and transactions are really beginning to decelerate. We saw that starting in August, that’s continued into November. Transactions are down 40% to 50% year over year in the tier 1 through 3 cities. Prices are down. In some cases, we’ve seen riots in sales offices, where people are amazed that prices could actually go down. There’s lots of indicators on the side. There’s a growing sense that the Chinese government will ease. We point out that credit this year will grow between 30% and 40% of Chinese GDP. If that’s tight, I’d hate to see it ease.”“At some point, we will cover our shorts. [The scenario would be] a system where the banking system would have to be recapitalized again, most likely. You would see a flood of RMB in the system, and a realization that the growth by fixed asset model has got to change. Mr. [Stephen] Roach and others are convinced that the Chinese customers will pick up the slack. And at some point, he and she will. But the transition is going to be the real tough part. And right now, the consumer continues to decline as a percent of the Chinese economy. That is, I think, flies right in the face of what most people think will happen.”

Obviously Chanos expects the Chinese economy to suffer a big bust in the wake of the massive capital malinvestment that has taken place as a result of the credit expansion. Alas, he is of course also 'talking his book'.


The Real Estate Bubble Falters

Indeed, what is happening lately in China's real estate sector shows that the government has finally been successful in reining the bubble in – and it will quite possibly soon come to regret its success. As Bloomberg reports, citing research by Nomura:

China’s property market has reached a “tipping point” and the slowdown in the housing industry will have a spillover effect on demand for steel and other construction materials, according to Nomura Holdings Inc.

The risk of the nation’s economic growth falling to less than 8 percent in the first quarter is also higher than before because of the housing market, Zhang Zhiwei, a Hong Kong-based economist at Nomura, said on a conference call today.

“The property sector has probably already reached a tipping point given the data is getting worse at a very fast pace,” Zhang said. “We’ve been here before in 2008 with housing investment and I feel we’re getting close to that stage. I’m more worried about the housing sector and the GDP of the first quarter.”

China’s home prices fell in 33 of 70 cities monitored by the government in October, the worst performance since it expanded property curbs and scrapped the reporting of national average housing data this year, according to figures from the statistics bureau on Nov. 18.

The country’s private housing investment is expected to increase 14 percent in 2012, matching the gain in 2008, which was the slowest in 10 years, Nomura said. So-called second- and third-tier or less affluent cities will drive the nation’s housing demand, the brokerage said.”


More than twice the number of cities posted declines in October compared with September, when 16 locations reported lower prices from August, according to the latest government data. Prices in 23 cities were unchanged in October and 14 recorded gains, the data showed.

Housing values in the financial center of Shanghai and the southern business hub of Guangzhou fell 0.2 percent from the previous month, while those in Shenzhen, neighboring Hong Kong, slipped 0.1 percent. Beijing prices were unchanged.

Home prices will fall between 15 percent to 30 percent in the next two years, Mark Mobius, who oversees $40 billion as Hong Kong-based executive chairman of Franklin Templeton Investments’ Emerging Markets Group, said before the housing data last week. BNP Paribas predicted a 10 percent decline by the second half of next year.

“I expect more cities to fall month-on-month,” Zhang said. “We are certainly not at the worst moment yet.”


(emphasis added)

Note here that these mainstream commentators generally tend to be overoptimistic in their assessments. Once even Mark Mobius thinks that prices will fall between 15 to 30 percent, then things must really be quite bad. Meanwhile it has turned out that Chinese builders are facing payment delays as developers are running out of money, another sign that the bubble is transitioning into the bust phase:

Most Chinese builders face payment delays from developers as the pace of construction slows from three months earlier amid tighter credit and a slowdown in home sales, Credit Suisse Group AG said in a report.

About 80 percent of construction companies said developers were behind on payments, and property companies expect them to put up more up front investments for projects, the brokerage said, citing a survey with builders. About 27 percent of the builders said developers wanted to slow down the construction process, up from 13 percent three months ago, it said.

“The China property market correction has just begun, and completion slippages and sales weakness will likely follow,” Credit Suisse analysts Wenhan Chen, Jinsong Du and Duo Chen said in a report sent today, maintaining their “underweight” rating on the nation’s real estate market. “With the property market remaining sluggish and the credit environment still tight, we expect developers’ cash flows to deteriorate further.”

Premier Wen Jiabao said this month that the government won’t relax property curbs. The government this year raised down-payment and mortgage requirements, and imposed home purchase restrictions in about 40 cities to avert a bubble. The central bank also increased interest rates three times and the reserves ratio six times this year.

Agile Property Holdings Ltd. (3383), the Chinese developer in which JPMorgan Chase & Co. owns a stake, will stop buying land until at least February and is slowing construction at some projects as sales dwindle amid the government’s property curbs.

“We have put a full stop on land purchases,” Vice President Alex Liu said yesterday in an interview in the southern Chinese city of Guangzhou, which neighbors Zhongshan, where Agile is based. “We’ll stop for at least the next three months and probably assess the situation again after Chinese New Year.” The Lunar New Year runs Jan. 23-25.

Land purchases by Chinese developers plunged 42 percent in the first 10 months this year, according to China Securities Journal, citing data from B.A. & 515J Group. Residential land spending dropped to 65.7 billion yuan ($10.3 billion) at top 10 developers by sales, the newspaper said.


China’s property price “bubble” may burst, the Financial News newspaper reported, citing increasing financial risks in locations such as Wenzhou, Sihong and Ordos in Inner Mongolia. Regional financial risks are contagious and could become systematic, according to the newspaper published by the People’s Bank of China. In Ordos, known as the country’s “Ghost City,” home prices plunged 70 percent, China Enterprise News reported, citing sources it didn’t identify.

The country’s home prices fell in 33 of 70 cities monitored by the government in October, the worst performance since it scrapped the reporting of national average housing data this year, according to figures from the statistics bureau on Nov. 18.”


(emphasis added)

Will it be possible to 'soft-land' this bubble one more time? We're not sure, but there clearly is a risk that it won't work and there can be little doubt that this would have a major impact on the banking system. As noted in another press report on Chanos:

“China spent 3.5 trillion yuan ($US530 billion), equal to a fifth of its 2005 gross domestic product, bailing out and recapitalizing state-owned banks since 1998 as their lending to unprofitable state-owned businesses turned sour, according to an estimate by Moody's Investors Service in 2007. Since September 2008, Chinese banks doled out $US3.8 trillion in new loans to offset the impact of the global financial crisis, according to the International Monetary Fund.”

In light of what we noted above about housing booms specifically, there is certainly a potential for the developing bust to turn into the 'secular' variety, this is to say a bust that can no longer be stopped by more monetary easing.

However, it must be stressed that this is indeed uncertain – although China has engaged in the equivalent of pyramid building, such as building countless office and apartment buildings and huge shopping malls that stand completely empty, up to erecting entire ghost towns, the decisive factor -a factor that is beyond measurement  – is the state of the country's pool of real funding. If it is still growing, then it will be possible for monetary pumping to have an effect and bring the boom back by once again diverting resources into fresh bubble activities (alas, this will of course only lead to an even bigger bust down the road). If the  pool of real savings is already stagnating or declining, no effort by the central bank will suffice to revive the boom.

It is noteworthy in this context that the Shanghai stock index is close to a technically decisive juncture. From a recent technical report by Paul Nesbitt from 618034, here is a proposed wave count and the delineation of a very long term triangle in the index:



The triangle in the Shanghai Stock Index (unfortunately it was not possible to make a higher quality copy of the image, but this should suffice for the basic idea to come across) – click for higher resolution.



The wave count above indicates that the next move in the index should be to the upside note that this goes for both alternatives of the wave count (either the move will be a wave 3 or a wave C, the difference would only be that wave 3 would be part of an evolving impulsive 5 wave structure of a new bull market,  while wave C would be a final move up in a bear market correction).

Quite possibly such a move up could be ignited by the adoption of easier monetary policy in China. This would provide us with indirect evidence that it is indeed still possible to 'rescue' the boom.

However, one must also consider the alternative – namely that the chart formation above leads to a downside breakout. A recent example from a region that has also been struck by the collapse of a real estate bubble is the Dubai stock index.



From a recent 'chart of the day' feature, Dubai's stock market hits a 7 year low. Note the strong similarity of this index with the Shanghai index. Alas, it broke below the boundaries of a very similar triangle. The market has been drifting lower ever since, in spite of loose monetary policy (note that the initial collapse from the secondary bubble high occurred after monetary policy had been tightened, which is a parallel to what is happening in China at present) – click for higher resolution.



Of course every region and every period of history is driven by a myriad of factors that are unique to the situation observed, so in that sense such a comparison must be taken with a grain of salt. Still, we found it noteworthy that in spite of a strong rise in the oil price, which has seen money flows into the Arab region increase and the adoption of loose monetary policy in the Emirates, Dubai's stock market was unable to recover from the effects of the real estate collapse .

Since China's stock market is very close to the point where a strong break-out move can be expected, we will soon know whether the same will happen in China's case or if the authorities will be able to arrest the liquidation of malinvested capital and ignite yet another boom.



We recently remarked on a plea from the Vatican to 'install a global central bank', to which we said that the Vatican should perhaps concentrate on central banking in the after-life, which seems for the most part appropriate for Hell. A friend has in the meantime pointed out to us that this is not the official stance of the Vatican as such, but rather that of the 'Iustitia et Pax' (Justice and Peace) commission, which is known for its sometimes odd views.

We want to use this opportunity to correct this erratum, which was based on mainstream media reports which simply reported that 'the Vatican said', etc., without identifying the source with more precision. However, in the meantime the CEO of the Vatican Bank has come out demanding more money printing from the ECB. According to the WSJ:

The European Central Bank should act as the euro zone’s lender of last resort and the implementation of the euro-zone bonds proposal are both necessary in the bloc’s efforts to rein in the debt crisis, the head of the Vatican’s bank said Wednesday.

The signal that these measures would send to investors would be so strong as to abate speculative attacks on some euro-zone countries, Ettore Gotti Tedeschi, chairman of the Vatican bank, known as the Institute of Religious Works, said at a conference in Rome on the debt crisis.”

So there are evidently a few others in the Vatican besides the Iustitia and Pax commission that have a misguided faith in the printing press.




Charts by:SocGen, 618034,





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6 Responses to “China – Can The Planners Do It One More Time?”

  • I’m sorry I missed this one. Great article Pater. One thing in a credit bubble is it is hard to tell what is savings and what is credit. I suspect that savings is only real if it will perform. Massive overbuilding of industrial output can be looked at as investment, but is it really? When the production is used to build public works boondoggles, more overbuilding of industrial output and empty real estate, I would beg to differ. It merely means they have succeeded in making money circulate. China’s international prosperity is based more on the surplus of labor, combined with western capital than some magic formula developed by their government.

    I am happy to read that your view of their money and the surplus of foreign currencies is one and the same. These foreign currencies are their money. The currencies give them purchasing power throughout the world, which gives their own money significance. To this day, there isn’t an international trade in yuan, mainly because there isn’t an international need for it. The grip of debt has them as well as the rest of the world. In the literal sense, the housing bought by many as an investment, non-performing is just as much a mortgage as the pay option arm. Those that need their money won’t get their hands on it and the lending supported the base of this bubble none the less. The debt is merely sitting on a different ledger.

  • roger:

    A second point I would like to discuss is regarding the probability of
    more bubble blowing. If there is indeed the possibility of more bubble
    blowing, in what areas will it still be likely conceivable? Throughout
    history (at least the ones I have read about), real estates are the
    last bubble a government can blow (case in point: Japan 1989-90, US
    2006-7). After that it is usually the government debt bubble, but this
    always failed to achieve the same level of enormity as the real estate
    bubble, looking at the 2 precedents mentioned — at least so far.

    In China, not only do we have real estate bubble (arguably on a scale
    unprecedented in the history of man), but also the infrastructure
    bubbles (e.g. railways to nowhere) and government bubble (hidden in
    massive local govt debts, SPVs) — among others, but the 3 mentioned
    are arguably the largest of those. It is true that the govt bubble in
    some cases can get even bigger (e.g. Japan), but given that these are
    already stratospheric, won’t this argue more against the possibility
    of blowing further bubbles? Perhaps the possible coming of political
    headwinds (change in CCP leadership), stratospheric food/gas prices
    causing unrests (yet in the media the news is suppressed), provides
    yet more argument against the possibility of a new bubble — or at
    least one that can supplant the current bubbles in scale.

    From another perspective, it is true that we must never underestimate
    the willingness of governments to blow bubbles. The US is certainly an
    epitomy of that. China to this point is also another example. But in
    light of the facts we have discussed above, isn’t it more likely than
    not that right now the obstacles are too overwhelming to be overcome?
    That is, without causing a potential breakdown which might just be
    downright too scary even for the govt to contemplate.

    • Well, one of the reasons why I am uncertain if they can not swing it one more time is that the DIRECT leverage in real estate is fairly small. This is to say, most of the leverage is actually on the part of developers and local governments, but not so much on the part of the owners. ‘Nothing down’ liar loan mortgages don’t exist in China.
      Moreover, there is a large amount of personal savings in China, so I assume that alongside the bubble, there is also genuine wealth creation going on. Whether that is sufficient to allow for a renewed diversion of resources into bubble activities remains to be seen.
      There have been a few historical examples of real estate bubbles faltering and being replaced by a stock market bubble – the US in the 1920’s would be an example, although the RE bubble that faltered in 1924/5 was largely concentrated on Florida.

  • roger:

    Pater, I remember in one of your past articles briefly discussing
    China, you also mentioned that Chinese economy was communism only in
    name and that it was more capitalistic than communist. In this article
    you are saying that it is more of a command economy. Indeed, the issue
    is complicated and although the two types of economies mentioned are
    opposites, probably both statements are true to some degree —
    respective to which aspect of the economy we are discussing. That is
    to say that as a whole it is a mix between the two in a complicated

    But in aggregate, is it fair to argue that it is more of a command
    economy, rather than capitalistic (despite strong capitalistic
    characteristics in many areas of the economy)? Large portions of the
    wealth are arguably controlled by the govt. Qualitatively, numerous
    ghost cities & apartment towers, majestic infrastructure/construction
    marvels that is economically unviable, suppression of free speech,
    disregard of property & intellectual rights, government control over
    the banking sector…argue strongly for this case (command economy).

    • Roger,
      true, it is an odd mixture. In some areas China’s economy is more free and capitalistic than the economies of the West. For instance, I once read a report from a Westerner who runs a restaurant somewhere in China, who was full of praise for the lack of regulatory hassle and the relatively low taxes he pays – although he did complain a bit about corruption.
      On the other hand, the government has complete control over the growth of credit as well as credit allocation, although, as the ‘black market’ credit enterprises show, there are constantly attempts to wrest that control from the government.
      Also, the government makes use of price controls and tries to micro-manage production of bulk commodities like steel, aluminum, etc., but there are also many sectors of the economy in which it hardly intervenes at all. In fact, much of China’s economy is not even represented in the official statistics I believe.
      All in all though there is obviously still a long way to go before one can call the economy truly capitalistic – although it seems to be moving into that direction. I must add here, my views have become a bit more circumspect after I have seen what the government did following the 2008 bust and after learning a few things I had not been aware of before from people who are well versed with regards to China.

  • jimmyjames:

    The signal that these measures would send to investors would be so strong as to abate speculative attacks on some euro-zone countries, Ettore Gotti Tedeschi, chairman of the Vatican bank, known as the Institute of Religious Works, said at a conference in Rome on the debt crisis.”

    The signal to investors would likely be when gold goes screaming past 10K-

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