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Much talk over the past year of recessions, difficulties, paring back, etc etc. But, hold on, when you look at it objectively, things mysteriously don't seem to have been as bad as they could have been. Indeed, the performance of the equity markets and the "free mortgage" for a large number of home "owners" on trackers has meant that quite a few people in the UK are, well, rather well off. Not only does it not look like a depression, it doesn't even look like a recession.
And, as I've written, it caught me a little bit on the hop. Surely quantitative easing can't have had this much impact?
Well, as I mentioned last year and as Merryn Somerset Webb mentioned in the FT Money section at the weekend, the QE is a red herring. The real cause of the remarkably smooth route through what could well have been a knife edge between recession/depression is China.
If we look at the current economic situation through China's eyes, things are quite interesting.
1) The western world's consumer boom goes tits up as it suddenly realizes it has been spending tomorrow's money today. Imports will have to slow down drastically
2) China has been expanding like there's no tomorrow. Its current account surplus is huge, as is its capacity. It needs to keep the economy expanding to avoid social unrest.
3) The best solution would be to get Chinese consumers to take the place of foreign consumers, but that just ain't gonna happen. China's high savings ratio is hard-wired into individuals and into small businesses. The lack of a social benefit system, the awareness that you need to protect yourself against your old age, and a fair bit of awareness that tomorrow might be shit, all combine to keep the Chinese conservative when it comes to spending.
4) Therefore the only solution is infrastructure spending. And that is what is happening. The government told the banks to lend. The banks, assuming that the government would back them if things went tits up (and, indeed, they probably will when it does), started to lend like crazy. It's like the Oklahoma Savings And Loan situation in the 1980s. Walk into a bank, ask to borrow a few million for some kind of scheme that will return 20% a year, honest, and that bank will throw money at you. It's like Dragon's Den where everyone is a winner.
5) In the first six months of last year, China lent about $1,000,000,000,000 (one trillion dollars), or about 20% of GDP, or about $800 a head in the world's most populous nation, where GDP is only just over $4,000 a head.
6) The problem is, there isn't enough valid stuff to lend on (as in, there weren't enough proper borrowers to lend to in the US in the early 2000s). Buildings are going up that remain unoccupied, shopping centres are not being used. Just when the building sector should be slowing to cope with a falling-off in the expansion of demand, it's speeding up. More of the money is going into the stockmarket (which I suspect peaked in November) while some is just going into "safe" deposits that return more than the interest being charged on the loan. Want to know one good reason why the London property market has held up so much better than it was expected to? Chinese money.
7) The really frightening thing is, this credit bubble is going at about three times the pace of the US credit bubble. That, you may recall, started when George W Bush's administration created easy credit to stop a recession fall-out from the dotcom collapse. From mid-2002 onwards this expansion did not reach its peak until about late-2006. The Chinese expansion has already had a year, but it looks unlikely that there are two more years in it. If there are, then the final collapse will be all the more horrific.
8) What form will that collapse take? Well, much the same as it did in the west. It will start with a modest regional bank announcing that it is in trouble because defaults on loans have been far greater than expected (as with the German bank announcing this in mid-2007). That in turn will lead to the "mother of all crashes" on the Shanghai and, inevitably, on the Hong Kong exchanges.
9) Who will be left holding the tab? Well, the Chinese government, equals, the Chinese population. Because even thought he Chinese people think they have been saving, all that has happened is that the Chinese government is spending their money for them. Those who are borrowing money at the moment would be wise to follow the plan that would have worked in Oklahoma in the 1980s. Borrow as much as possible and bury it in the back yeard. In two years' time, the banks will jump at an offer of 50 cents on the dollar.
10) But what will it mean for the west? Well, that depends. Presumably China hopes against hope that the US and others will have recovered their consumerist excess and will be buying stuff again. But China seems to have failed to have realized that the consumption of 1995 to 2007 was never sustainable.
11) All of that seems, to me, to spell social unrest; indeed, social unrest (and/or inflation) seems to me to be the inevitable outcome in a large number of places. Greece, Spain, China, Vietnam, and anywhere else that isn't loaded up on commodities.
12) That would seem to me to indicate that the country's to go for at the moment are the ones rich in natural resources: CANZ (Canada, Australia, New Zealand) or, to be honest, CANZUS (add in the US). Of the BRIC countries, Russia and Brazil have the edge on India and China. But the UK, France and Germany look horribly vulnerable.
___________________
And, as I've written, it caught me a little bit on the hop. Surely quantitative easing can't have had this much impact?
Well, as I mentioned last year and as Merryn Somerset Webb mentioned in the FT Money section at the weekend, the QE is a red herring. The real cause of the remarkably smooth route through what could well have been a knife edge between recession/depression is China.
If we look at the current economic situation through China's eyes, things are quite interesting.
1) The western world's consumer boom goes tits up as it suddenly realizes it has been spending tomorrow's money today. Imports will have to slow down drastically
2) China has been expanding like there's no tomorrow. Its current account surplus is huge, as is its capacity. It needs to keep the economy expanding to avoid social unrest.
3) The best solution would be to get Chinese consumers to take the place of foreign consumers, but that just ain't gonna happen. China's high savings ratio is hard-wired into individuals and into small businesses. The lack of a social benefit system, the awareness that you need to protect yourself against your old age, and a fair bit of awareness that tomorrow might be shit, all combine to keep the Chinese conservative when it comes to spending.
4) Therefore the only solution is infrastructure spending. And that is what is happening. The government told the banks to lend. The banks, assuming that the government would back them if things went tits up (and, indeed, they probably will when it does), started to lend like crazy. It's like the Oklahoma Savings And Loan situation in the 1980s. Walk into a bank, ask to borrow a few million for some kind of scheme that will return 20% a year, honest, and that bank will throw money at you. It's like Dragon's Den where everyone is a winner.
5) In the first six months of last year, China lent about $1,000,000,000,000 (one trillion dollars), or about 20% of GDP, or about $800 a head in the world's most populous nation, where GDP is only just over $4,000 a head.
6) The problem is, there isn't enough valid stuff to lend on (as in, there weren't enough proper borrowers to lend to in the US in the early 2000s). Buildings are going up that remain unoccupied, shopping centres are not being used. Just when the building sector should be slowing to cope with a falling-off in the expansion of demand, it's speeding up. More of the money is going into the stockmarket (which I suspect peaked in November) while some is just going into "safe" deposits that return more than the interest being charged on the loan. Want to know one good reason why the London property market has held up so much better than it was expected to? Chinese money.
7) The really frightening thing is, this credit bubble is going at about three times the pace of the US credit bubble. That, you may recall, started when George W Bush's administration created easy credit to stop a recession fall-out from the dotcom collapse. From mid-2002 onwards this expansion did not reach its peak until about late-2006. The Chinese expansion has already had a year, but it looks unlikely that there are two more years in it. If there are, then the final collapse will be all the more horrific.
8) What form will that collapse take? Well, much the same as it did in the west. It will start with a modest regional bank announcing that it is in trouble because defaults on loans have been far greater than expected (as with the German bank announcing this in mid-2007). That in turn will lead to the "mother of all crashes" on the Shanghai and, inevitably, on the Hong Kong exchanges.
9) Who will be left holding the tab? Well, the Chinese government, equals, the Chinese population. Because even thought he Chinese people think they have been saving, all that has happened is that the Chinese government is spending their money for them. Those who are borrowing money at the moment would be wise to follow the plan that would have worked in Oklahoma in the 1980s. Borrow as much as possible and bury it in the back yeard. In two years' time, the banks will jump at an offer of 50 cents on the dollar.
10) But what will it mean for the west? Well, that depends. Presumably China hopes against hope that the US and others will have recovered their consumerist excess and will be buying stuff again. But China seems to have failed to have realized that the consumption of 1995 to 2007 was never sustainable.
11) All of that seems, to me, to spell social unrest; indeed, social unrest (and/or inflation) seems to me to be the inevitable outcome in a large number of places. Greece, Spain, China, Vietnam, and anywhere else that isn't loaded up on commodities.
12) That would seem to me to indicate that the country's to go for at the moment are the ones rich in natural resources: CANZ (Canada, Australia, New Zealand) or, to be honest, CANZUS (add in the US). Of the BRIC countries, Russia and Brazil have the edge on India and China. But the UK, France and Germany look horribly vulnerable.
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