Monday, January 25, 2010

The China Story Has Major Plot Holes

China's Economy: Something Is Not Right in Beijing

The State Council has demanded frantic bank lending that has generated far too much liquidity, a stunning increase in commercial property sales, and an even more unbalanced economy. The American version of this policy ended badly and the Chinese version will as well, whatever official data say.

What's wrong with the official data?

Much published Chinese data is unusable, unemployment being an obvious example.

For the sake of argument, let's assume that the data is usable.

If Chinese data are accurate, policy is therefore headed straight off a cliff--constantly pushing real GDP growth near 10 percent but in an increasingly futile and clearly unsustainable effort to create jobs.

So what happens when it all falls apart?

The surge in property prices must eventually halt. This will expose investors, from individuals to the biggest state banks, to heavy losses that will then be compounded by ensuing stock market weakness.

If true, savvy Chinese investors and/or global commodity investors better get a clue. This sounds a lot like Professor Plum in the Conservatory with a Lead Pipe.

Propaganda do jogo Clue da Hasbro


mab said...


Great article!

I'll take Old(e) Yeller behind the woodshed with a wait, on second thought, I'll take the Red Headed Step Child in, now I've got it, I'll take David Lereah.....check that, was it Jim Cramer with winners of the new world....ooh, now I've got it, Robert Kiyosaki with Poor Dad....uhmm, no, here it is....Bernanrd Madoff in the big house....Ken Lay, Bernard Ebbers, Chainsaw Al Dunlap, Charles Ponzi, was it FASB in the fancy office with mark to myth?......

Ah forget it. The Chinese have the whole thing hedged with credit default swaps from Goldman that are layed off on AIG, I mean the American tax payer.....give me Ben Bernanke in the helicopter with the printing press.

Whew! I was getting worried. Thought I was stuck in a "doom loop":

G.H. said...

After posting my thoughts on the TARP yesterday I spent some time last evening digging into all the numbers. I was going to post here but it's too much so I created a simple (very simple) web page on TARP.

I call it TARP - If only you'd have invested $10,000.00

Have fun with it...and share the link with anyone who might appreciate it.

Stagflationary Mark said...


From your link...

These five strategies are the latest incarnation of efforts by the banking system to boost shareholder returns and, whether by accident or design, game the state. For the authorities, it poses a dilemma. Ex-ante, they may well say “never again”. But the ex-post costs of crisis mean such a statement lacks credibility. Knowing this, the rational response by market participants is to double their bets. This adds to the cost of future crises. And the larger these costs, the lower the credibility of “never again” announcements. This is a doom loop.

The “St Petersburg paradox” explains how a gambling strategy which starts small but then doubles-up in the event of a loss can yield positive (indeed, potentially infinite) expected returns. Provided, that is, the gambler has the resources to double-up in the face of a losing streak. The St Petersburg lottery has many similarities with the game played between the state and the banks over the past century or so. The banks have repeatedly doubled-up. And the state has underwritten any losing streak. Clearer practical examples of a policy time-consistency problem are unlikely to exist.

I've used that very casino analogy many times to describe how we got here. I never used the "doom loop" term before though, unless one counts the name of my blog!

Stagflationary Mark said...


I don't see the TARP as an investment. I see it as a charity event. That said, I wonder how many lives it has saved. Maybe that's how we should judge its success.

Between Black Thursday and the end of 1929, only four of the 100 suicides and suicide attempts reported in the New York Times were plunges linked to the crash, and only two took place on Wall Street.

If the lives of just two excessive risk takers was saved by TARP, then surely the hundreds of billions of dollars was money well spent.

Sarcasm, it isn't just for breakfast any more. ;)

EconomicDisconnect said...

Clusterstock had a strange story about Chinese bank lending going haywire after banks were told to reign in lending:

Guess they are as screwed as the rest of us.

EconomicDisconnect said...

Well now, BRK-B shares to enter the S&P500. Now all those extra shares makes some sense. Good for an 8% plus pop right now.

Stagflationary Mark said...


From your link...

"It sounds as though China's central bank's attempt to engineer a cooldown and end its bubble is going badly."

From my post...

"This sounds a lot like Professor Plum in the Conservatory with a Lead Pipe."

Uncanny! ;)