Tuesday, June 21, 2016

China Must Follow Japan To Survive
Economist Richard Duncan emphasizes how China is dependent on the U.S.$ standard & how there is simply not enough demand in the entire world to permit China’s investment-driven economy to grow .. "China’s investment boom has long since outpaced demand. And with exports contracting, that is now resulting in heavy losses in the banking system. Investment is a net good, but only as long as it creates goods that can be sold for more than they cost to make. When investment is too high relative to demand, prices fall and investment results in losses, rather than profits. That’s what China is facing. China realizes it can’t continue having such massive levels of investment. That investment has already resulted in far too much excess production capacity. Most of it is already generating losses. And the more they invest now, the more wealth they destroy. Further investment in loss-generating enterprises will only result in more losses. But without continued high rates of investment, the Chinese economy will fall into severe recession. That’s the trap." .. compares China to Japan .. The Japanese bubble popped in 1990. And today, 26 years later, its economy is no bigger than it was in 1993 in nominal terms. Japan’s now been in an L-shaped recovery for 26 years. In an L-shaped recovery, the economy declines sharply initially, which is then followed by a long period of flat or stagnant growth. 26 years is a long time of flat or stagnant growth. But Japan managed to avoid a full depression because it increased its debt from 60% of GDP to 250% .. "I expect something quite similar to happen in China. Hopefully, with some luck and skill, China will be able to replay the Japanese scenario. Through very large budget deficits and a very large rapid increase in Chinese central government debt, they can avoid collapsing into a Great Depression. China isn’t going to have very much GDP growth to speak of at all, not for a very long time potentially. Its export-fueled growth of the past 25 years has come to an end. And it’s attempts to transition to more of a consumption-based economy will not be easy. But if China follows the Japanese model, it can hopefully avoid a depression. A Chinese depression would present a great challenge not just for China, but for the entire world."
LINK HERE to the article

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