I think the best model to understand this is Michael Pettis's balance sheet analysis. He covers it extensively, but here's his latest digest of the model:
It really makes clear how stark the choices are for China. The debt binge of the last ~10 years has masked the flattening out of productive investment, and there will need to be a reckoning. Hopefully it's a soft landing, but that will depend on politics as much as anything.
It seems like smart people have been predicting that China's growth is unsustainable on a regular basis for at least 15 years... it's tough for an average HNer like myself to take the time to tell which "expert" is just blowing smoke and which expert truly has a handle on the salient facts- Guess all I can really do is simply wait and see who ends up being right...
Agreed, to an extent (though not every 'expert' is equally reliable). Two ways I look at it:
1) Generally, the nature of a bubble is that nobody knows when it will pop. People knew about the U.S. asset bubble in the mid-2000s for years, but even those not caught up in the bubble mass psychology couldn't accurately predict when it would collapse. The same was true of the dot-com bubble around 2000. You can be right that there is a bubble, but be far wrong about when it ends.
2) There was a stock broker looking for new business. He cold called 512 people (he must have been a quant); half he told to sell X stock, half he told to buy. The next week he called the 256 for whom he'd made the right prediction and did the same again: Half he told to sell, half to buy ... several weeks later he was down to 16 people. He called all of them and said, 'look, I was right 5 times in a row ...'.
I believe this was actually the plot of an episode of the kids educational show "MathNet"* in the early 90's. I've often wondered if people just do this over email now, but automated. And why write to just 512 people about who's going to win tonight's football game, when you can have your script write to 1,048,576? Or does this happen?
* Actually a show within the actual show "Square One TV"
> There was a stock broker looking for new business. He cold called 512 people (he must have been a quant); half he told to sell X stock, half he told to buy. The next week he called the 256 for whom he'd made the right prediction and did the same again: Half he told to sell, half to buy ... several weeks later he was down to 16 people. He called all of them and said, 'look, I was right 5 times in a row ...'.
Except, what you just described is a scam and not something a registered broker can do.
Ha, that's a great observation; I hadn't thought of it. On one hand, I'm very uncomfortable with any implied comparison to the most well known practitioner of parables. On the other, many others have used the form. Maybe I'll write all my HN posts in parable form - 'those who have ears to hear' will understand; the others I won't have to deal with. I could use it for business emails too.
Coming up with that many parables might be challenging.
It's a really effective technique for getting a point across to most people if they'll give you the time to listen and you're a good storyteller. It's a bit less effective in highly nerdy spaces but still worth doing.
To be clear, I wasn't uncomfortable with the implied comparison because I have something against Jesus or the Gospels. I was uncomfortable because I don't want anyone to think for a moment that I am comparing myself to him. (I'm not.)
Keynes took previously unacceptable ideas and made them gospel, and he also was critical of economics when others thought they had everything figured out.
Before an econ degree I thought it could all be understood the way we understand, say, a chemical reaction, or some process with rules, laws and order.
But afteran econ degree the thing I realized is that money and economics, it's all about people. Money and debt has no intrinsic value (especially in 2017)--it's just promises and credits people made to each other.
But people are prone to irrationality, cheating, and frankly, their own bullshit. The global financial system in 2017 has not done everything it can to minimize this, either. If anything, they take advantage of it where it profits them.
I would also assume that a majority of the options to "call an irrational market's bluff" aren't freely available vis China. So it would be less exposed to international market driven deleveraging?
(Actually asking, I know they've been loosening their financial walls but am not sure what the current controls are)
To the extent people are trying to trade on this model, they look for liquid marketplaces that are exposed to China's economy. Australian metals and mining stocks, for instance, or currency fluctuations in closely-pegged economies (forex being pretty darned liquid with a very deep futures market).
Chinese equities are something else entirely, closer to a derivative class. And hard to trade in directly (not that I have tried or would ever try -- I'm in index funds).
And the truth is, the banking system is less liquid, and the equities market much smaller, than developed economies. Oh, also, short-selling is illegal, I believe.
So no, there aren't any natural, market-driven checks on this stuff.
It's funny because these massive debt accumulations invariably end up either in financial collapses or period of very high inflation, both of which can have dramatic impacts on a large part of the population (particularly savers and pensioners). But they are the most predictable thing in the world. Yet no one seems to be worried about them, whether in Europe or in the US.
When the collapse will happen, people will be outraged and will pretend like in Greece that they were betrayed by their politicians, lied to. But this accumulation of debt happens in plain sight, it is just that no one seems to care.
Hard to predict the timig, like it is hard to predict the timing of a market crash. I have heard people calling the end of the current economic cycle for the past 5 years. Some say Trump has delayed a correction that should have happened this year by 2-3 years (if his economic package goes through). Well it's the same with the accumulation of debt. You can live on the credit card as long as your creditors are not concerned about your credit. At one point the sentiment turns and your credit lines get cut. Then it is the end. Greece is there. Italy is close. France and Japan a little further. The US will get there eventually.
China is a bit more of a complex situation since they are a republic, the citizens have no direct say in government matters. Now of course the Chinese government knows they have to continue providing growth, otherwise citizens will question the system and revolution could happen.
But let's say a majority of voting eligible citizens decided their country needs to dial down debt-fueled growth? Well there's almost nothing they can do, even though popular opinion has changed.
In Greece, even with the fraud that went on voters still had to know bad financial choices were being made. Heck, I live in the U.S. and know when politicians are using financialeering to make the books balance better...
I think China may be more on the brink than people realize. Right now there are about 30 million men in China who can't get married,not wont, can't. There simply aren't enough women in China for the men to find a bride. That's 30 million men who may be left jobless, and without a relationship. That is a recipe for disaster, maybe even a revolution
Unfortunately, these 30 million are "men of marriageable age" (the imbalance is due to the practice of aborting female foetuses during the "one child" policy). This would mean perhaps 15-20% of young men are doomed to bachelorhood... potentially a volatile situation!
By being politically dedicated to maintaining low levels of debt:GDP. It's easier when, as parent said, your voters remember what happens when things go really badly.
But this is actually why the euro isn't an optimal currency area. Germany's low levels of debt:GDP are a result of explicit suppression of the household sector -- a deal struck by Merkels government with labor unions to restrain wage growth.
This kept German industry competitive, and enhanced exports. This overall made the euro stronger, but not as strong as the deutschmark would have been. Greece suffered from the other end: they became less competitive by being tethered to Germany's economy.
I don't buy that excuse. Everyone knew the Greeks are very corrupt, and one feature of corrupt governments everywhere is they fake their economic numbers. So the lenders really should have looked deeper. They didn't because they knew the EU would bail them out.
Some of the lenders actually helped them cook the books [1] . And I wasn't excusing the lenders, I was excusing the citizens. How are the citizens supposed to make informed decisions when they are getting fabricated numbers?
You don't need to decide which is expert is right. You need to know -- if it concerns you-- that there is a chance there will be a contraction in the Chinese economy. Economists predict this sometimes, and it gets news because when it is presented as a certainty it seems like news. The truth is it is always a risk, and probably more of a risk than it was ten years ago. As an average HNer it probably doesn't matter much either way, unless you are planning on investing in China or counting on no recessions in the US in the next ten years.
>It seems like smart people have been predicting that China's growth is unsustainable on a regular basis for at least 15 years
If you mean sound growth, they were right. That has ended and growth is increasingly based on financial tricks that will make things worse in the long term, so I would say the experts turned out to be correct.
Also, even with all the debt, yearly GDP growth is down from the previous 10% to something like 6%, so again the experts were right.
Everything exponential is ultimately unsustainable.
The value of these analyses is they try to plumb the limits of the model; there was a substantial sea change in how China's economy operates ~2008-9, with a shift towards massive debt growth. That's inherently less sustainable, particularly because the rate of debt growth is climbing.
Pettis assumes, without justification, that the assets owned by the Government of China would be more productive in private hands, and thus calls for the government "to begin to sell off government assets". That's an ideological position. The privatization experience of the USSR indicates otherwise.
China's government debt situation isn't bad.[1] Government debt / GDP is less than half that of the US. Japan is much worse off, with the world's highest Government debt to GDP ratio.
What's really likely to hit China is the same thing that's hitting the rest of the developed world - it just doesn't take all that many people to make all the stuff. This is a killer for an export economy. This hit in Japan 20 years ago, in the US 10 years ago, and is starting to hit in China.
The biggest suggestion of trouble is that so many wealthy Chinese are trying hard to get assets out of the country. This fuels the Vancouver and London real estate booms, and in a lesser way, Bitcoin.
As for government debt, it really depends on if you include SOE debt or not. So SOEs are technically companies owned by the state, but have implicit backing from the government that they won't go bankrupt, giving them access to easy credit from the biggest banks (also often state owned....).
Without the perception that moral hazard exists, this credit binge is really dangerous.
No, the reason he suggests the government move assets into private hands is because his main thesis for how China can get out of the jam is to improve household consumption vis-a-vis growth in household wealth.
Not covered in the article I linked in particular, but his main idea is that China has had investment-fueled growth that's no longer sustainable; the foundation for all advanced, post-industrial economies is a robust consumer sector. China's is stunted at best. That's the motivation for transfers, not a productivity argument.
When you have a hammer everything looks like a nail. My problem with these kind of analysis is that it pretty much only looks at things from a financial perspective thinking it's the be-all-end all.
However, on first level principles, money is simply an abstraction; it's a medium for trading your services for other people's services. And if you become more efficient, you can buy more services with the same amount of effort and vice versa. The root cause of this increase in efficiency is technology.
As a developing country, China has lots of easy productivity growth just by adopting current technologies on the technological frontier. Therefore, I think an analysis on how fast China is advancing in various technological areas and their industrial policy would be much more useful than one just at a financial level. Are Chinese companies as a whole becoming more productive and creating new technology?
As a developing country, China has lots of easy productivity growth just by adopting current technologies on the technological frontier.
High rates of growth in developing countries, with the rate slowing as they 'catch-up' to more developed countries, is also what the bog-standard macro-growth model (Solow-Swan) predicts.[0] To simplify, developing countries will have lots of labour inputs and relatively few capital inputs. Therefore the marginal factor productivity of each capital input will be high. Eventually, as the economy reaches capital saturation, the marginal productivity of capital will decline and the economy will settle into a low 'steady-state' growth level, where real growth is largely the product of technological advances.
This is why I've always been puzzled by economic commentators who assume China will continue to enjoy 7-9% GDP growth rates forever. Although I'm not suggesting that there's "nothing to see here" in this particular case. China does indeed have a bubble (and massive oversupply) in its residential property market, mostly due to the stimulus deployed just after the GFC. It could make one hell of a pop.
Solow-Swan model is based on neoclassical economics that assumes a closed market with zero technological growth. In the event of technological growth it assumes a steady state is still reached. And I quote, "Due to Common Sense." [1] How TF do you consider this a valid scientific theory?
This is a theory based on NeoClassical economics which modern Behavior Economics finds that the models of NeoClassical economics fail in nearly every situation [2].
The Solow-Swan model has no rigor, predictions, or testable results to justifying its usage nor faith in its system. Science is a quantitative game, yet economics isn't?
I don't have the time atm to get into much detail (but will come back in 8ish hours after work), but very quickly:
- This is just a simplified description of probably the simplest macro-economic growth model you'll learn if you study economics. It's basically the model you learn in Macro 101. I didn't really want to write a super-long post going through all the extensions of the base model (not to mention the more complicated micro-economically founded concepts, models and theories you'd learn if you study developmental economics) as one of the predictions of the simple model that I thought relevant, that economies experience slower rates of growth as they reach capital saturation, is empirically supported.
- It's not intended to accurately reflect all aspects of a actual economy. No model is. If a model did this, it wouldn't be a model. We would probably just call it 'the economy'. It's just a simplified model from which a number of more complex extensions have been made, but I didn't feel were worth going into.
- It doesn't purport to make realistic assumptions, and no-one with any sense would think that to be the case. In addition to what you've pointed out, it also assumes the economy only produces a single good, has no government, no international trade, and constant returns to scale. All of these are almost certainly incorrect to varying degrees. Despite these simplifying assumptions, that does not mean the model is useless, or that it does not make any testable predictions. No-one in their right mind would think these assumptions are correct.
I'm honestly not sure what level of realism you expect an economic model to have. Just because a model is strictly wrong (as all models are; hence the name: model), does not mean it isn't useful. You mention empirical results from behavioural economics, which strongly suggest the neoclassical assumption of perfect actor rationality is incorrect. Again, this is just a simplifying assumption under which models can still yield accurate predictions in the large. Is Newton's law of gravitation completely correct? No, and it's been superseded by general relativity. However, is it still useful? Yes.
I can't really think of any economists (and this is certainly true for those I work with), let alone any people in general, who would believe any of these assumptions accurately reflect reality. There are a whole bunch of others too, like the implicit assumption that the labour-capital split of income remains constant. This is also almost certainly not correct as well.
It, and its extensions which account for 'human capital' (which has a multiplicative effect when combined with physical capital) which the simplified model just rolls into the solow residual (i.e. total factor productivity), do make a number of testable predictions, some of which have actually been tested in cross-country econometric studies. For example, here's a paper that examines a number of extended models, and among other things, examines the evidence for absolute vs conditional convergence (http://www2.stat.unibo.it/brasili/file/2009-2010/COSDI/chap1..., see pages 48 & 49).
You can literally just look at the model equation, do some simple algebra to turn one of the independent variables into the sole dependent variable and, presto, you have a prediction. Here are a few:
- An economy will converge to a balanced-growth equilibrium, regardless of its starting point. At this point, the growth of output per worker is determined solely by the rate of technological progress.
- At equilibrium, the capital/output ratio depends only on savings, growth, and depreciation rates.
- Countries with higher savings rates will accumulate capital at a faster rate (if all other relevant features of these economies are the same, which they aren't).
- If productivity is the same across countries (which it isn't), then countries with less capital per worker will have a higher marginal productivity of capital and provide a higher return on capital investment. Consequently, in a world of open market economies and global financial capital (which does not exist, and probably can't), investment will flow from rich countries to poor countries, until capital/worker and income/worker equalise across countries.
All that said, if you are able to produce a model that makes no incorrect assumptions, accurately accounts for bounded rationality, and all its predictions in every real world scenario are accurate, you'll win a nobel prize (and will also become filthy rich by investing according to this super-model's predictions).
Given us economist have simply just been 'doing it wrong' this whole time, because we foolishly didn't realise SF computer programmers held a much deeper understanding of macroeconomics, I'm really excited to being a first-hand witness to, what will be, a quantum leap in our understanding of macroeconomic dynamics and development economics.
I'll try to make sure to list every relevant caveat (the above is only a partial list, at best, for this particular model btw), before daring to discuss an unscientific subject like economics (which I apparently know nothing about).
Great, detailed response -- I learned a lot from this, so thank you. Also, I think it's hilarious/curious that the actual economist's response is buried in a thread.
Internet message boards (yes, even HN's) are not kind to actual expertise.
> Also, I think it's hilarious/curious that the actual economist's response is buried in a thread.
> Internet message boards (yes, even HN's) are not kind to actual expertise
Would you elaborate on this, in particular what you mean by buried? I'm assuming you're referring to 'spangry's responses. Given the nature of threading and where 'spangry chose to respond, I don't see how it could be anywhere other that where it is. As of the posting of this comment, both of 'spangry's responses are the highest of its siblings. Are you thinking of a different model of threading or highlighting highly-upvoted comments?
Sure, I'll elaborate, but it may not be terribly illuminating.
As for why it's "hilarious" (okay, overstatemetn) -- it's not really a critique of how comments work -- more just that this is sort of an off-topic subject matter for the audience, and spangry is trying to reply to a comment.
If I were spangry, I would've replied to the post itself. I think HN commenters are pretty thoughtful, and his detailed post probably would've risen to the top, and enhanced the overall conversation.
So the right way to read my snark is more as a commentary on the fact that economics is a technical subject, but most technical readers at this site are technical in different ways. I would assume the top comment (and attendant conversation) would be spot-on for the latest framework or software technology, though.
> However, on first level principles, money is simply an abstraction; it's a medium for trading your services for other people's services. And if you become more efficient, you can buy more services with the same amount of effort and vice versa. The root cause of this increase in efficiency is technology.
From the article, Pettis assumes the following is true:
1) China has overinvested in infrastructure and manufacturing capacity to such an extent
that in the aggregate the cost of additional
public sector investment exceeds the present
value of future increases in productivity generated by
the investment
and
2) China's long-term sustainable growth rate is substantially below the economy's current GDP growth target
Why does he make these assumptions without also analyzing the technology improvement aspect? I don't see anything about that in this article.
He elaborates on technology improvement in other articles, but it boils down to: technological improvements have a range of returns, but even the most optimistic of historical returns to technological progress can't paper over the debt-fueled boom China is currently undergoing.
Basically, qualitatively, you're right. Technological improvements can generate growth from scratch. But when you look at the historical data to try to quantify it, you see it's quite modest. Big gains have come from: women entering the workforce, electrification, containerization. The rest is incremental enough it doesn't matter in the same way.
(Part of this is how it's measured; the fact that consumers get much more value for their dollar isn't well captured, but the point remains because it's about debt-servicing, not consumer value.)
Containerization? That's really interesting. I knew it had a big effect on how shipping worked, but didn't realise it was as important driver of change to the world economy as electrification.
My Dad used to work as a merchant seaman, I believe he got up to first officer and had passed his captain's exam.
But then the big container ships came along, and they needed a tiny fraction of the captains, officers and seaman they needed previously per tonne and he ended up coming ashore to pursue a different career. His stories from those times are pretty amazing.
I don't get it. US workers still have 5x higher average income than China. Doesn't this suggest there are still a ton of technological improvement left to exploit? Why can't China just keep walking the same path of technological improvement as the US?
The average disguises a few things. One, I assume that's in absolute terms and not, say, purchasing power parity (which accounts for lower consumer prices in China).
Two, the 'average' in China includes huge numbers of the rural poor. They are living in the third world; an office worker in Shanghai is not, but her income's contribution to the average is diluted by rural subsistence farmers.
This does suggest that there is room for growth via urbanization and modernization: if subsistence farmers switched to commercial farming, and the excess labor moved to productive cities, in theory you've got a productivity boom. But China's productivity is predicated on the world's ability to absorb their excess production, which is not actually unlimited. That said, the central government is taking deliberate steps to encourage urbanization (while simultaneously not undertaking some reforms that would help, like overhauling the hukou system).
Similarly, if you use Western standards to measure economic metrics of China, everything looks weird.
China is still pretty much a planned economy, where the government is in control of major state-owned corporations. I wouldn't worry too much about the debts that they owe to the state.
> ...when those resources disappear from the economy then many people will lose out.
My initial reaction is "...and?"
Not because I'm trying to be obstinate or lacking empathy, but because I'm trying to hard visualize a situation (re: China) where those who lose out legitimately can do anything about it.
They can't realistically move, or revolt. They can starve[0], but that's happened in the past and the State really didn't suffer for it.
Some can. Those are the ones who matter. No man rules alone--political leaders are only powerful insomuch as they can incentives or coërce others to act for them. A ruling class whose living standards is falling is a ruling class more willing to entertain other leaders.
"Certain types of unemployment are likely to be perceived as more politically costly than others - e.g. because returning to family farms acts as a kind of safety valve, even though a significant fall in living standards, unemployment among migrant workers is likely to be less costly, or because university graduates are presumably more communicative and have higher expectations, their unemployment might be more costly" [1].
The vast masses of Chinese citizens are not those people.
History isn't in agreement, and time after time, the peasants will starve before the bourgeoisie suffer to a point that they feel enough pain to revolt.
It's economically cheaper for the State to continue to pay for the ruling classes' requisite "hookers and blow" than it is to pay for social programs.
> The vast masses of Chinese citizens are not those people.
I can't recall a single civilization where the majority of people were "those people". The point is there are enough who demand enough that mortgaging the non-influential majority to pay for "those peoples'" bread (or as you put it, "hookers and blow") will be a short-term patch at best. (Reverse wealth transfers are not uncommon in a regime's dying days. Case in point: Venezuela.)
This may be a banal point, but do you think the increasing concentration of wealth within the American upper class, with a simultaneous impoverishment of the middle class, is such a reverse wealth transfer?
A salient difference between existential and incidental reverse wealth transfers appears to be (a) the existential pain the rulers, as a whole, defer by enacting them and (b) their intent. Consider the 2008 bailouts [1]. The masses helped, in part, pay the salaries of well-compensated professionals [2]. But could Washington, D.C. have let the banks fail? Probably. Were politicians primarily concerned with the bank executives rebelling? Or were the masses interests' in mind? I think it's safe to say the latter was the intent behind the bailouts, even if a good amount of the former happened along the way
Another example is the scientific and military grant-making processes. Such grants may fund labs and companies with wealthy owners and managers. But that isn't the intent behind the grants. Furthermore, politicians--as a group--don't existentially fear the defense contractors or contract-lab operators.
Now consider Venezuela. Babies are starving [3]. Yet bondholders get paid. Why is the government more afraid of its bondholders than citizens? If it's because the government fears the bondholders' reactions, e.g. military insurrection, more than popular revolt then it's a desperate maneuver.
I don't disagree with you, and I'm sorry if I wasn't clear. I just don't believe that those in power consider farther than the short term (say, three to ten years).
The bill eventually comes due, but what cost does the population pay in the interim?
I hope that all subjugated and disenfranchised people rise up to remind their governments that they are the reason that those governments ultimately exist, but the cost of that "disobedience" is a heavy burden if they don't succeed.
> People have been waiting decades for Japan's post-boom day of reckoning and we've not seen it.
Japan's "day of reckoning" already came: what they've been in for the last 25+ years is the "post-reckoning" of ZIRP, low growth and low inflation. If the Chinese debt bubble explodes, it's not like the country is going to collapse, the most common prediction is that they'll become "Japan 2.0" where the country is functional but trapped in anemic growth because they won't let zombie businesses fail.
Yeah, it's more like people have been waiting for decades for a day of reckoning for Japan in the sense that the country is still very productive in many senses but has yet to escape its extremely long-term recession. Japan has been punished enough.
Punished? Late stage first world economies with structural issues (an aging population, enourmous entitlement obligations) can escape recessions (stagnation, really) no more than humans can escape the heat death of the universe.
Huge problem in China is that unlike Japan it is not a uniform country. Income is VERY unevenly distributed geographically. Japan can stay in zombie state because even in stagnation it is pretty nice place to live for most people. The poor areas of China can not afford stagnation. Elite knows this and dreads it, why Vancouver housing market is nuts? Because when you live in China and have $$ you really want to have a place to bolt to or at least have your kids be somewhere else when the proverbial shit hits the fan.
Pettis quantifies it (elsewhere in his articles). He's gone on record that there's going to be an explicit or implicit write down, and China's average GDP growth is going to be well below 5% (averaging more like 2-3%) by 2020. I think those numbers are roughly correct.
What appeals to me about Pettis's analysis is it's rooted in a simple quantitative model that rests on accounting identities. When you've got a model that fundamental, it's easier to make strong predictions.
Also, "markets being irrational" is a claim about asset bubbles. What we're discussing here is much larger, and subject to its own laws of dynamics. It's not a bubble, per se -- it's more like a bad loan that keeps getting rolled over and bigger, and no one acknowledges the loan won't be repaid. Someone is going to lose out, but the day you can't cover the interest payments is the day you have to acknowledge the loss.
In the case of China in 2017, the debt is held by banks, who are functionally insolvent if the bad loans (usually to property developers and commercial entities) were called in. Many of these commercial entities (large, state-owned enterprises, or state-adjacent conglomerates) simply have no possible way to service the actual loans, short of rolling over more debt.
This isn't about asset prices, or a bigger fool bidding up the price of, say, housing stock: it's about the ratio of debt to productive capital. And the reason debt ballooned post 2008 is because the regular investment engine (mostly infrastructure and housing) had started to lose steam. The growth in debt in the economy was a rational response to the need to keep growth numbers high.
But deferring the reckoning doesn't make it better. Though it's held in the corporate sector, much of China's debt behaves almost like revolving consumer credit in the US.
(Also: one form of reckoning is flat growth for an extended period of time; Japan's lost decade is entering its third decade now, and systemic debt is still really bad. Pettis holds up Japan as one example of how not to correct the imbalances.)
>He's gone on record that there's going to be an explicit or implicit write down, and China's average GDP growth is going to be well below 5% (averaging more like 2-3%) by 2020.
But I'd hardly describe that as a "reckoning". It sounds more like a predictable "regression to the mean"
China's unprecedented growth is unsustainable; people know this. Case in point: this article.
"To move from the abstract to something specific, I will assume, as occurred in 2009-10 as a consequence of the global crisis, that for reasons external to China there is a sharp contraction in its current account surplus, mainly caused by a sharp fall in exports....." (he then goes on to describe the repercussions that match his model.)
Maybe I'm misunderstanding what he's saying, but isn't what he describes true of any export-driven economy? And, doesn't it ignore the fact that a large portion of the country is still pre-industrial and is easy pickings for GDP growth? It should be not terribly difficult to grow GDP via moving these people to an industrial standard of living based on domestic consumption, albeit not nearly as easily as in an export-driven economy where your customers are holding your hand along the path. And, does it not also ignore the possibility of moving up the value chain as their technological prowess increases? China is producing some pretty sophisticated technology on their own these days, and they have no shortage of engineers (although the quality may not be world class, I have no idea).
This isn't to say his theory is wrong, it just doesn't seem terribly useful. But I think I must be missing something?
So what you are talking about would amount to a rebalancing of the economy from the SOEs to the private sector. This is something he has written extensively about and that he thinks is necessary for long-term sustainable growth. But something has to be done about the SEOs, and right now they are kept afloat by a transfer in the OTHER direction. That is, the resources spent on their debt is cannibalizing growth in other areas.
To piggyback on your point, Pettis lays out explicitly how China should shift to consumer-driven GDP growth... then also points out how politically difficult it will be (because it likely entails assigning losses to the wealthy and politically connected, via breakup of SOEs, transfer of wealth to households from the government, etc).
So yes, grandparent's point is correct, that there's room for consumer-led GDP growth. But the mechanism for how to get there is not easy. (And it's something Pettis has written about extensively.)
I'm probably a bit naive, but I don't really understand why it would be that difficult. You have an extremely hard working populace with powerful aspirations (viewing their countrymen who've risen up from poverty), they have the technology and manufacturing prowess, natural resources, political will and experience, money....if any country in the history of the world was in a position to do it, China seems like the very well best prepared by far. The biggest hurdles I can think of is the cultural propensity for corruption and excessive savings, far from insurmountable imho.
No, they really don't have any political will to do anything about the SEOs. That is why their debt is still ballooning in an unsustainable manner. Just as Japan didn't, and the Japanese economy is still held back by keeping failing business afloat. The entrenched elite is just too strong, in both Japan and China.
China may overcome the issues in a way Japan didn't, but the things you list apart from the political will (that they emphatically doesn't have) is plain irrelevant.
Pettis's recent articles show he's more optimistic than Moody's in the short term, and more pessimistic than the new optimism driven by a Morgan Stanley bluepaper, "Why We Are Bullish on China."
He's pessimistic in the longrun, but it seems like China may be able to keep the ball in the air for the next few years.
Yea, basically the demand for goods from China is fuelled by increasing US and other debt, which increased the value of the yen too. In the 1970s and 1980s when US first got off the gold standard it was Japan I think.
10-20 years ago I can remember the analyses arguing China can only continue to grow with liberalization, even outright requirements for democracy. Perhaps these pronouncements are still being made.
I've come to believe that what's really useful to people isn't "democracy" or "freedom" rather rather stability. That means political and economic stability.
One thing I find fascinating is China's ghost cities. I remember reading some report that said housing for 64M+ was sitting vacant, largely unaffordable to locals. Now one can argue that such work is stimulating the economy by providing employment.
But here's another view. As much as we might (rightly) deride Trump, there are the (very) occasional nuggets of truth. Some might say even racist clocks are right twice a day [1]. Whatever the case, the specific issue is infrastructure.
Infrastructure in the US is crumbling. What's more, a lot of infrastructure exists now that would be completely uneconomic to build now. Look at the Second Avenue Subway in NYC that apparently somehow cost $17B+ to basically go 50 blocks. What's more, a lot of this infrastructure has not and is not being maintained.
So why is this unaffordable to build now? I suspect the answer is that labour is simply too expensive as is real estate.
So what if China is simply building infrastructure now while it's relatively cheap to do so? Obviously once built infrastructure depreciates but inflation also works in your favour (assuming positive inflation).
Now I don't know if that is the Chinese government's thinking but I find it an interesting thought.
Ghost cities are weird: first they talk about the ghost cities, then others say the ghost cities are filling up. If you actually visit, say, Ordos New Town, you'll really get that, no, those ghost cities really exist.
Some will fill up, like Pudong did, I get Tianjin's new financial district will also. But those in areas with little economic hope in the near term (Ordos and dying coal), they really aren't going to happen before the buildings become substantially rundown (given Chinese concrete overbuilding to make use of unskilled migrant labor, these buildings require a lot of maintenance and will look decrepit sooner rather than later).
I wonder how much percentage of all buildings are empty in China. In my visit I saw plentiful empty skyscrapers, especially next to decaying homes where people would still live.
Local governments have ways of telling, e.g. By electricity usage. You can also try counting the lights on at night to get an idea of apartment occupancy (a fun last time at the apartment complex I used to live in). Someone definitely knows, but you can be damned sure that this information is considered "state secrets."or
All the fears around growth is from people not understanding the difference between absolute growth and relative growth. Which is better growth of 1000 or 3% ? the developed world cannot grow at high percentage points because they're so large.
This video more or less shows the insanity of trying to grow at a fixed rate (say being an "emerging market" at 6% per year) for an indefinite timespan.
I hope China can continue their development of high-speed rail. They have about 12,000 miles of track, more than the rest of the world combined, and they should have almost 30,000 miles by 2030. They are trying to improve the performance:
Ok, this is probably a silly question, but who holds all the debt now? The avg US citizen would say China holds much of the US debt, but now it sounds like China is borrowing their way into trouble too... it's not any of these third world countries... who is it?
The average US citizen should say the US citizen holds much of the US debt. Since they do. About 70% is domestic, and 7% is owned by China.
The Chinese are in a similar boat. About 60% of their debt is domestic. Their inflating debt, however, is in part what is driving the gap between the two, and they are ramping up foreign debt faster as a result.
The biggest group holding US debt are its citizens. The social security trust fund has been raided for decades by the general fund to spend on defense security state and has not been paid back.
Politicians and their funders hope everyone is hoodwinked into forgiving the debt or just taxing everyone more to make up for the stolen^W borrowed money.
> The social security trust fund has been raided for decades by the general fund to spend on defense security state and has not been paid back.
Where is the money in the social security trust fund kept. I had assumed it was in treasury bonds and therefore lent to the US Government general funds to be spent at the will of congress. Is the Social Security Administration actually holding VOO or physical gold?
Although this has been done, the social security system is primarily going to fail because more people are using it then have paid for it, so the system is actually borrowing from the future citizens (our kids). You can blame defense spending (which is too much), but that's not the main reason the system itself is broken.
This is from the NYTimes article itself: ... the biggest category of debt in China is corporate debt, which equals almost 170 percent of annual economic output. This debt consists overwhelmingly of loans by state-owned banks to state-owned enterprises.
So ... does that answer the question? I'm not sure. I'm used to thinking about how much money the US government owes to outsiders.
But, this "state owned enterprise" and "state owned bank" thing -- how do you make sense of that? The government, which also controls and creates the currency, has loaned its own enterprises a bunch of money. So what if they default? Does it matter?
Except it isn't really a government giving money to itself, it's the banks.
When and if the enterprises default, the banks will go under. This means that Chinese people will lose money (or the government will try to be fiscally prudent to recover money lost in bad investments, which will mean that Chinese people will lose money).
Money owed by a government owned bank to a government owned enterprise is a real debt, which if defaulted upon will have a lot of real effects.
Here is a toy scenario, suppose we have 1000 people and they are capable and willing to build a new solar electric system. The problem is, nobody has any money. The 1000 people could form an institution, let's call it a bank, that would hand out IOUs to anyone who wants to build and install the solar panels. Some of the 1000 people agree and start building out the electric system. Once the system is in place, people start paying the organization for electricity and then all the IOU holders can get payed for their work.
The payments to the organization might come in the form of goats, chickens, timber, or even IOUs!
If the organization had used the debt to make a bunker instead of an electric system. The citizens may not be so interested in hanging out and using (paying) for the bunker, so all the IOU holders would be out of luck.
In other words, if the IOUs to the contractors aren't eventually repaid. People won't accept IOUs from the organization (bank) anymore.
US government borrows money from the Fed. People (China) also buy Treasury bonds, but I think this is much smaller than the debt we owe ourselves.
Someone else can chime in with more depth, but basically the US government has been good about not borrowing too much from itself. I just hope we can stay rational as a country and this continues.
but, strictly speaking, the Fed isn't the same as the federal government.
also, the US government has borrowed a whole hell of a lot of money from outside sources (e.g. corporations, US investors, and foreign governments from Japan to China to Saudi Arabia to European nations)
The Fed was enacted by the federal government and lives under its rule of law. I'm not sure what you're digging at.
I think we need numbers because I don't know what you mean when you say, "a whole hell of a lot of money." It looks like the citizens hold 70% of the debt. And keep in mind, these countries come to us to put their money in treasury bonds. They buy bonds that don't pay a very spectacular rate either (2.28% for 10 year bond). I'd caution against the rhetoric that we are broke, or people don't want to lend to us. It's often pushed by people who want to reduce federal spending (usually spending cuts on healthcare and welfare for the less fortunate).
You're right, but, I'm just focusing on the fact that the Fed maintains a distance, an independence, from politicians and government officials. The Fed is not directly accountable to an elected leader in the same way that a typical federal agency is.
As for who buys government bonds from the US Treasury, I just wanted to emphasize that the Fed is not the only buyer.
The often repeated notion that, "to a great extent, we owe this money to ourselves," is not necessarily comforting. Most American citizens have very little, if any, savings. The "ourselves" in that notion is heavily weighted to a relatively small number of wealthy US citizens. It's fair to question whether their interests align with the interests of the average US citizen.
> The Fed is not directly accountable to an elected leader in the same way that a typical federal agency is.
That can be a good thing. We separate the three branches, specifically not to have direct accountability to a single branch. And we buffer power changes over many election cycles. Otherwise one branch, say the executive, could just fire a judge or investigator when they broke the law.
> The often repeated notion that, "to a great extent, we owe this money to ourselves," is not necessarily comforting.
I wasn't repeating that notion. In my mind, going bankrupt is not a good thing in either case.
> Most American citizens have very little, if any, savings. The "ourselves" in that notion is heavily weighted to a relatively small number of wealthy US citizens.
I guess you could say, if you're wealthy you have more to lose, but poor people might lose their life if the US goes bankrupt whereas wealthy families would probably survive, though with a smaller balance sheet. So it matter to both poor and wealthy alike if we are reckless and go bankrupt, probably more so if you're poor. And I agree, we should be questioning if wealthy interests are putting themselves or the country first, because we don't have much use for those who aren't improving citizen's welfare.
>The avg US citizen would say China holds much of the US debt, but now it sounds like China is borrowing their way into trouble too... it's not any of these third world countries... who is it?
The central banks, obviously. Many of them not being beholden to a nation but to private individuals.
At the end of the day though, even private individuals are beholden to the people in the nation. It's a social contract, so people may no longer agree to allow those private individuals to be wealthy and run the banks.
That said, if you're holding the wealth, it's not too hard to keep the shop running (people happy) so long as you don't get bored, reckless and feckless.
The citizens elect the government, so I have to take issue with this point. Wealthy people do have quite a bit of influence though.
Basically what I'm saying is, we can elect a government that serves our own interest if we cared to.
If it does get ugly, and the government/military turns on its citizens then the US as we know it will be dead or on life support. Probably, in such a scenario, people won't go quietly into that night.
> we can elect a government that serves our own interest if we cared to.
In theory, I'm still waiting to see it in practice. The Bernie Sanders situation from last election was a decent illustration of how legitimate the election process is, and they took care of him before the gloves even came off. (Trump was far trickier but as it turns out he's more of the same, if not worse.)
>If it does get ugly, and the government/military turns on its citizens then the US as we know it will be dead or on life support. Probably, in such a scenario, people won't go quietly into that night.
Not to also mention that government's and militaries need people to supply it, and if their suppliers are now on the list of enemy combatants then such governments and militaries won't have the same leverage/power as those that are not combating it suppliers.
We're saying the same thing. Most central banks, e.g. the Federal Reserve, were created by law. The Congress giveth and the Congress taketh away. In any case, the comment I was replying to seemed to imply central banks are privately owned. That's what I was refuting.
I think the comment was implying that their policies, not being entirely democratically accountable - the effectiveness of these instruments themselves being arguable - are very likely going to be swayed by private interests.
I know there exists a revolving door b/w FDR and major Wall Street banks, but I'm not sure about other countries. I'd not be surprised if this were the case everywhere.
Edit:
'Princes of Yen' is a documentary that I found did a good job of illustrating the dangers of having such high powered unaccountable cabals (without all the BS that is typical in this genre).
Congress could technically issue a new law, but otherwise the president can't interfere beyond his ability to nominate replacements. What china really lacks is this separation of power, which is seen as a western imperialistic concept unsuited to china like rule of law via an independent judiciary.
The source of all the debt is money creation. Any amount of money can be created by central banks. The commercial banks can also create money by lending more (up to 10x) money that what they have.
Here's the thing about China, if it doesn't pay up, the world at large can't do anything to China. The world is dependent on Chinese export. If China sinks it will sink the world economy with it. Too Big to fail actually applies to China. If China falls short of paying up its mortgages or loans on time it can't be recovered by anyone. The only thing one could do is wait. So all the talk is useless, China gas got everyone by the balls. There is no way to threaten China, nor can any sanction be put on China because the world trade would suffer. China is indeed the world's factory. In my opinion, Moodys is wrong this Debt-Fueled growth of China will and has to be sustained for safeguarding everyone's investments, China cannot be sunk at this point at any cost. Moodys is not the sole authority on rankings and their opinion matters less and less in the context of China.
China doesn't import that much goods from the west. So crisis there shoudn't have big impact on US and Europe. Except real estate market. It seems that US, European land/houses are the only thing Chinese are interested in.
I question the assertion that allowing things to fail like big banks or China would be bad in the long term. And this is economics, which like religion, isn't an exact science so neither of us know for sure.
Can you point to an example where such things happened and the result was not calamitous? I can't think of many happy endings to stories that involve massive bank runs, which would presumably be what happened when big banks started failing.
>The Financial Crisis Inquiry Commission estimates that by April 2010, of all mortgage-backed securities Moody's had rated triple-A in 2006, 73% were downgraded to junk.
Anything Moody's says must be taken into context given their history of taking money to lie to and cheat investors. Their executives should have gone to prison and the company should have been liquidated a long timo ago.
Good point. If you think about it, where does Moody's, which at the end of the day is just a bunch of individual bureaucrats, many of which are likely writing the story they are told to write, get the idea that they have the expertise to second guess the architects of the largest, most complex (financially, culturally, psychologically, etc, etc, etc) transformation the world has ever witnessed?
Sorry, but until I see strong evidence to suggest otherwise, I'm going to assume the Chinese government knows better of how to grow an economy than its international critics.
Have a look at "The Big Short" (the book, not the movie). Reading how clueless those idiots at those Rating Agencys were is fascinating. The had no idea, basically just rating every pile of horseshit AAA because they are dumb and have no idea what they are doing.
Presumably this is the same Moody's that predicted the 2008 crash so well? Why does anyone even listen to them anymore? They failed miserably at their role.
In my opinion, china GDP is under-valuated (despite government growth figure cooking). So, I guess that debt will not be a problem. What could be a problem is private debt, driving to fusion of similar companies, and public bail-out of banks in case of Chinese housing bubble popping in major cities. Pretty much what happened in Japan (1989, [1], [2]), EE.UU. (2007, [3], [4]), and some places of Europe (2007-2009 [5], [6]).
Do ratings agencies like Moody self sustain on the psychology of the people who listen to them? People who take them seriously factors them into their decisions. People who don't take them seriously has to still factor them into their decision because of the people who do take them seriously.
There might be some kind of tipping point where the amount of people who do not believe their ratings triggers a downward spiral in confidence?
Slightly off-topic, but in 2011 when Moody's downgraded the US credit rating, we all were saying "well, Moody's is feeling a bit moody".
The US continued to struggle in fits and spurts in some industries. But lately, it has been all "risk-on" for most traders.
We have been through a few "asian asset bubbles" before. Whether this is the big one is anybody's guess, but sometimes the broken doomsday clock gets the time right.
What it's going to come down to, is whether the Chinese government has enough control to tell the general public to eat the loses and to make them take it (relatively peacefully).
If they do, this sets the basis of the play and outcome.
Yes, elites are escaping what they can of their personal assets -- and eventually, if necessary, themselves or their next generation.
As I stop to think about it, that could actually prove to be something of a safety valve, from China's perspective.
Anyway, with the Great Firewall and a thousand other things: It's not exactly as if they haven't been (at all) preparing for this.
This kind of article to me sounds like, an outside developer look at all the charts of a system and tell the developers who are working on the system: "well, this system's going to crash in a week based on the numbers on the charts". If I'm going to argue with this "expert", I would say, you saw what you can see, unfortunately, you are not the engineer see all the sh*t of how the machine works.
Sustainability is a function of total annual deficit relative to growth in ability to service the debt. Deficits that lead to productivity-enhancing investments will pay for themselves: education, infrastructure, etc. Deficits that result from cutting taxes will not: the idea that we're on the virtuous part of the Laffer curve has been thoroughly debunked in economic, if not political, circles.
Furthermore, debt in the US is a result of exogenous capital flows, not the other way around. If the US government tightened belts and cut heavily, leading to a fiscal surplus (or even just balanced gov't budget), we would see a growth in private sector debt.
It's one of my favorite hobby-horses, this idea -- because it's counterintuitive until you dive into the balance sheet analysis, then it makes perfect sense. All credit due to Michael Pettis:
> Furthermore, debt in the US is a result of exogenous capital flows, not the other way around. If the US government tightened belts and cut heavily, leading to a fiscal surplus (or even just balanced gov't budget), we would see a growth in private sector debt.
Are you seriously suggesting that US government deficits are run to invest in education and infrastructure? Deficits are mostly attributable to military spending. I'm doubtful that killing people in other countries who present absolutely no threat to you is productivity-enhancing.
I know there is some fake news floating around with a chart that purports to show 57% of spending goes to the military, but it's been debunked. 28% goes to healthcare (Medicare), 25% to Social Security, 16% to Defense.
I think you're correct to point out the inaccuracies of the image, however I disagree with the cavalier use of the term "fake news" to describe arbitrary instances of false or misleading information. The problem of "fake news" is actively perpetuated in part by the impulse to use the term as a catch-all pejorative for information we deem to be specious.
Fake news is when a media source that claims to report an accurate account of events deliberately peddles stories they know (or can safely assume) are false. Random images floating around the internet are not fake news.
like CNN, you don't get to define fake news. Fake news is as simple as it sounds: articles that are factually incorrect. Sadly, from random images to all major media, everyone is guilty of it.
> you don't get to define fake news. Fake news is as simple as it sounds: articles that are factually incorrect.
I'm happy to debate the nuance of the term fake news, but I think it's ironic that you presume to glibly assert your own definition of fake news right after exclaiming that one cannot do so (unless you're suggesting that CNN and myself, in particular, are forbidden from doing so).
Anyway, fake news is not simply "articles that are factually incorrect", otherwise every misreported fact or journalistic error could be classified as fake news which any intellectually honest person will admit is not what is intended to be described by the term fake news. Further, something cannot be fake news if it is not "news". Random images floating around the internet is not news. People posting memes and rumors on social media is not news. Honestly, even partisan bias and selective reporting by news organizations is not "fake news", and the terms "bias and selective reporting" accurately convey those qualities. Fake news is a loaded pejorative that carries the baggage of the 2016-2017 zeitgeist, so if you're going to use it at all, stick to the definition that common sense would have given us prior to 2016: reporting of current events that is deliberately presented as true when the authors know it is false.
and tell me again, based on your own definition, how all news isn't fake news? Fake news was pushed heavily as a term by the 'liberal media' until it was pushed back against them and they threw a fit and tried to redefine it. In reality, all modern news is fake news. Every outlet has a left or right agenda, and shapes the news in that way based on clever editing, lies, and omissions. Let's call a spade a spade, and admit that all factually incorrect articles, infographics, and stories are what they are...fake news.
edit:
these comments are mostly made out of frustration with news today. Maybe I'm old, i know that i'm older than the median here now. News was different as a kid. There's always been biases, but less subtle. And 'news' used to be the gold standard in editing and investigating. Now, I see error prone articles that seem to have no editing at all, and swings toward propoganda on both sides. Maybe it's a reflection of our own ignorance and biases. But to me, it's the great fall of media, debasing the term 'news'
This is the correct answer. Surely there must be a blog out there that deconstructs "news" articles from highly respected sources pointing out what people think is news is actually propaganda....anyone?
> and tell me again, based on your own definition, how all news isn't fake news?
That's a pretty disingenuous response. Obviously, "all news" is not deliberate fabrication presented as truth, and to suggest as much is worthless cynical hyperbole or willful ignorance or both.
For example, if I load up CNN.com right now, the tag-line for the front-page story reads "Another blow to Trump's travel ban". Clicking through to the article yields the headline "Appeals court upholds block on Trump's travel ban". You can read the article here:
This is not fake news. The 4th Circuit court really did uphold the block on Trump's travel ban. Here is an excerpt FTA:
> Judge Paul Niemeyer, one of the three dissenters, said the majority "looks past the face" of the executive order.
The approach "adopts a new rule of law that uses campaign statements to recast the plain, unambiguous, and religiously neutral text," Niemeyer, a George W. Bush appointee, wrote. "Opening the door to the use of campaign statements to inform the text of later executive orders has no rational limits."
I will reiterate: this is not fake news, Judge Paul Niemeyer really is a 4th circuit judge and those really are his words. Do you understand what I'm saying here? This is a thing that happened in the real world, it is not a fabrication created by CNN to defame Trump, this is reporting of a noteworthy current event that merits news coverage. A critic of CNN might claim "CNN always reports negative stories about Trump". Fine. Selective reporting meets the definition of bias, but bias, once again, is not fake news.
We can perform the same exercise with Fox News. The front-page tag-line reads "TWISTED TREACHERY - ISIS tricked US into bombing building where 100 innocents held captive". Clicking through to the article yields the headline "ISIS rigged explosives to home where 100 civilians died in US-led airstrike, military says". You can read the article here:
This is not fake news. The military really did report that ISIS tricked them into bombing civilians. Here is an excerpt FTA:
> An investigation into the March bombing found that the terror groups rigged a house with over 1,000 pounds of explosives, put civilians in the basement, and employed two ISIS snipers on the roof to bait the U.S.-led coalition to attack.
U.S. Air Force Brig. Gen. Matthew Isler, the investigating officer for US Central Command, told Pentagon reporters that the bomb used by the American jet, a GBU-38 (500-lb bomb), would not have caused the type of damage associated with the destruction of the building.
I will reiterate: this is not fake news, Air Force Brig. Gen Matthew Isler really is a U.S. Air Force Brigadier General, and those really are his words. Am I making myself crystal clear? This is a thing that happened in the real world, even if civilians are not in a position to corroborate the findings of a military investigation, this is the official report from the military and not a fabrication created by Fox to excuse or justify the U.S. bombing of civilians. A critic of Fox might claim "Fox News always defends the military, even when they kill innocent civilians". Fine. Publishing stories with a tone favorable to one's predefined narrative meets the definition of bias, but bias, once again, is not fake news.
You see what I'm getting at here?
> Let's call a spade a spade, and admit that all factually incorrect articles, infographics, and stories are what they are...fake news.
Simply posting something on the internet does not make it news and you are actually contributing to the "debasing of the term news" that you complain about by refusing to acknowledge the distinction between memes posted to facebook, factual errors in reporting, institutional bias, and deliberate fabrications with no basis in reality. I mean, you're argument is literally "all news is fake". If more people would abandon your cynical defeatist attitude that encourages labeling literally everything as fake news and actually judged individual stories based on their own merit, political discourse in the USA would be a lot more productive.
If it was random, you'd be right, But that image wasn't arbitrary, it was deliberately misleading and created to generate hype/outrage, and the numbers in it now come up as fact. It would be like taking a particular 5 year snapshot of temperatures that were declining, graphing it and labeling it "Climate Change Debunked."
I'm open to it being in some other category of fake, but then we need a label for it.
> I'm open to it being in some other category of fake, but then we need a label for it.
I agree with you. I think "deliberately misleading", "factually inaccurate", even "complete bullshit" are applicable, I just disagree with the overloading of the term "fake news" to describe all manner of falsehood. The word fake followed by the word news in an english sentence is supposed to mean something very specific and when the term is blithely abused to suit the egos of warring partisans it diminishes society's ability to hold the influential news media organizations responsible for accuracy in reporting. In today's world everything is fake news to somebody and that wasn't true in 2014.
It's hardly fake news. It's actually the truth. Of discretionary federal government spending, ~57% does go to the military (if you don't include interest expense on the deficit I believe...removing that...)
It becomes false when you remove the "discretionary" from the label and just call it Federal Spending. And the the labels aren't that useful anyway. Mandatory spending isn't mandatory, it is just pre-programmed. One the main reasons we are in debt is that the only place that there has been any focus on cuts is the discretionary side. And if you make across the board cuts in discretionary spending as happened with the Obama budget deal, that pie chart doesn't change because there is no visualization of it shrinking versus the other 50%+ of spending. Defense spending had been shrinking for the last 5 years as a percentage of GDP.
If you just look at federal income tax (not payroll tax which is stacked on top of it, and not state and local taxes on top of that), the long term trend is downward since the end of WWII.
State and local taxes have nothing to do with the federal deficit, so excluding them is obviously correct when talking about the federal deficit.
Social Security is the bulk of payroll taxes, and most of the increase in payroll taxes, and remains self-funded (though that would cease to be the case if the trust fund was to be exhausted and full benefits maintained.) So it makes sense to exclude that.
But payroll tax also includes Medicare taxes (the payroll tax portion, not the additional income tax portion on certain income not subject to payroll a tax imposed under the ACA) as amuch smaller component, and while Medicare Part A is self-funded, Parts B and D have significant general revenue contributions as well. But Medicare payroll tax hasn't changed significantly (and the share of GDP subject to it has dropped as returns move out of labor and into capital), so if you kept it in but split out Social Security for the reason above, it wouldn't change the declining trend shown by income taxes (except to enhance it).
So, again, the federal deficit is driven by declining federal income tax share.
No, I was making a general point about what's productive investment and what isn't.
In the US, we're doing a bad job of making our deficits count. That will be bad in the medium and long term. In the short term, any spending is mildly stimulative. (Though spending that doesn't create future growth is essentially what creates the situation China is in: you're creating future debt-servicing obligation without creating debt-servicing capacity -- so you're making yourself poorer.)
I was just making a point about economics. I'll spare you my political opinions about the utility of US deficits, or the direction we're going, but based on your tone I imagine we might agree quite a bit more than you think.
In my opinion, in a modern society education should be free, for everybody, and not influenced by private or religious interests. If a society fails to provide this to their youth, then somebody else will influence the kids, but not necessarily provide education.
It's just my opinion. Otherwise we are back to Middle Age.
Your comment isn't very coherent. The GI bill was originally enacted after WWII, yes, but it has applied to service members ever since. They enacted an enhancement to it post 9/11 and service members have a choice between the original Montgomery GI bill and post 9/11 GI bill education benefits now. They can even transfer those benefits to their spouse or child if they don't want to use them.
We also have immigration into the US. I read somewhere that growth in the population vis-a-vis immigration (and the higher birth rate of recent immigrants) propped up US growth, and explains both why the US didn't suffer as badly as Europe post-recession, and also why our demographics will look better down the road (better ratio of workers to dependents).
Japan has very little immigration. Europe and America are obviously grappling with these issues politically, but it's pretty clear from the economic numbers that immigration is important for growth if you don't have stable population growth. (Japan and parts of Europe are in decline, as would the US be if not for immigration, I believe.)
US debt to GDP ratio is half that of China, not claiming the trend is sustainable but that (at least according to Moody's) China is more at risk of a runaway debt-spend crisis than the US is.
By what measure is the US ratio lower than China's? US is worse in the IMF measure of gross debt to GDP by far. Looking at total debt (government, corporate, and household), the US is worse: 331% to 250%. What numbers are you looking at?
China's total debt is about 250% of GDP, compared to over 300% for the United States [1]. It's more useful to observe total debt since lots of debt the Chinese government will ultimately have to assume, in one form (e.g. financially) or another (e.g. political turmoil), is not held on the government balance sheet, e.g. debt issued by its banks or critical employers or regional governments. Most American debt, on the other hand, is issued by relatively-well regulated banks and by the federal government.
The parent is talking about total debt - public, household, and corporate. China's public debt isn't too much but the corporate debt is what has skyrocketed. Many analysts treat Chinese corporate debt as more-or-less equivalent to public debt (and don't do this for the United States), on the assumption that the government will bail out SOEs rather than allow them to fail and create widespread unemployment. That may or may not be true, but that's why they make statements like "China's debt is twice the United States'".
>Many analysts treat Chinese corporate debt as more-or-less equivalent to public debt (and don't do this for the United States), on the assumption that the government will bail out SOEs rather than allow them to fail and create widespread unemployment
I'd say this certainly gives a lot of political leeway in China, compared to having the opposite in place. I wonder if all the major US companies that were bailed out, that their debt should be considered public debt seeing there is already a precedent in place. But something tells me I doubt moodys will have a word on that.
I can't seem to edit my comment anymore. In an attempt to correct the record, I'm very wrong about my claim in at least a couple of ways.
1. I made that statement without checking my facts
2. I recalled from the news today that China had a debt to gdp ratio of about 250% (this is total debt to gdp, including debt held by consumers and corporations)
3. I compared it to a number in my head of US debt to gdp ratio being about 100% (this turns out to be about government debt to gdp).
At the very least, the thing I intended to say is wrong or an unequal comparison at best.
Argentina is NOT the USA. The size, the resources, the people, the culture, and more importantly of all the regulations regarding businesses. Huge difference.
Moody's? Is that the same credit rating agency which intentionally inflated credit rating for risky mortgage investment and eventually fined almost $1b[1]? It is just so funny that an agency that has already destroyed its own creditability is still running around and doing credit rating for others.
> Surprised this sentiment isn't more popular, they've proven themselves to be both dishonest and incompetent.
Maybe because the question of whether they are dishonest and incompetent is a less interesting ad hominem (ad companis ?) than the question of whether China can or cannot sustain its debt-fueled binge.
> Whether or not it's "interesting", the trustworthiness of the source seems rather important.
Not really. If the question is about the popularity of a sentiment, then of course the interestingness of the sentiment is relevant.
But as with every argument, it's the quality of the argument that is important, not the arguer. The only way that the trustworthiness of the source is important is if you are unable to evaluate their argument based on other factors and were planning merely to trust them or key information they relied on based on their perceived authority which I agree would be a bad idea.
Economics is far more complicated than most other fields, and you very often don't know the real "quality of the argument" until years later. So yes, in this case prior track record does very much matter.
I find it very ironic that Moody is pointing a finger at China's "debt-fueled binge" when plenty of federal debt issues are staring us right in the face here in the US.
The 8 years of Obama doubled a national debt that had taken about 230 years to accumulate. No regime in the history of America has even come close to that debt figure, and current US obligations looking forward cha-ching in ar around $200T more, far more then we can ever hope to afford.
China, being a one-party communist rule, probably has a much better chance of fixing its issues then we do due to the lack of any political infighting. It's leaders can do whatever they need to fix budget shortfalls, irregardless of having to worry about reelections.
> The 8 years of Obama doubled a national debt that had taken about 230 years to accumulate.
It's obviously bad to have out-of-control debt, but it's worth expressing national debt as % of GDP for two reasons: (a) the GDP of a nation is an engine to be used for repayment and (b) it accounts better for inflation (in periods that the nation is off the gold standard). In that context, the Obama years did not put us back up to the record (WWII).
S&P is arguably worse - S&P was fined $1.5B for its shameful role before GFC, it refused to downgrade problematic assets because their business revenue relies on all those junk assets being rated AAA[1].
Oh man, thank you for bringing this to my attention. I thought they were the last credible source since they were the first to downgrade US sovereign rating in 2011 or 2012.
Large seas of debt made sense when they were somewhat more underdeveloped, and every additional unit of debt could be used for 'easy' value creation. As it currently stands, I don't see their rate of value creation servicing their debt. Similar dynamics, albeit to a lesser extent, are in play in India and other countries in South East Asia.
Does anyone how much external debt is held by China ? I'd imagine their generally (well-placed IMO) aversion to IMF/WB folk might help them plod along with the help of their central bank. Money is fictional you know.
The US economy will see a series of booms and busts. As all economies will. As will China's. When? Who knows? But I wouldn't be the one to bet on never.
Tomatoe tomahtoe. Toronto's RE market is already hitting the brakes within the last week; buyers are walking from deposits, sales are down, listings have shot up. Everyone is trying to get out the door at once.
With the amount of leverage in the system and the culture of "privatize profits, socialize risks", if China hiccups the rest of the world is in very serious trouble.
The day after the Fukushima nuclear incident, the top-voted article on HN was an extremely confident-sounding article by an expert about how this was a minor incident, sure to be contained and forgotten. The comments in the article were dismissive about alarm. I remember feeling a sigh of relief that the experts had pronounced it a minor incident. As the days rolled by, the news about Fukushima turned from bad to worse to horrible. Unfortunately, my archive.org skills were not good enough to dig up the front page of HN around that time to show you the article in question.
A closer tale about experts being wrong, and persistently so is the tale of the Japan Bonds' "widowmaker" trade: apparently, a lot of smart people have been wrong about this:
The really infuriating thing about Fukushima disaster, in my opinion, is how many people died as a result of evacuation. From wikipedia:
> A survey computed that of some 300,000 evacuees, approximately 1,600 deaths related to the evacuation conditions, such as living in temporary housing and hospital closures that had occurred as of August 2013, a number comparable to the 1,599 deaths directly caused by the earthquake and tsunami in the Prefecture.
Contrast that with the actual death that occurred/will occur due to radiation:
> In 2013, WHO reported that area residents who were evacuated were exposed to so little radiation that radiation induced health impacts were likely to be below detectable levels. (...) According to a linear no-threshold model (LNT model), the accident would most likely cause 130 cancer deaths.
In other words, if the Japanese government had told everyone that this was a minor incident and everyone should stay at home, it's likely that less people would have died as a result. Of course, hindsight is 20/20, and even with perfect information it would have been political suicide anyway.
Such is the danger of nuclear power. The world's second worst nuclear disaster was literally less dangerous than running away from it.
> residents who evacuated were exposed to so little radiation
It does not say anything about residents who did not evacuate. How can we know how many cancer deaths would have happened if nobody had evacuated, and whether that would be less than the amount that died due to poor evacuation procedures?
Given the difference of ~130 vs ~1600 in actual deaths, I'm naively assuming that staying at home would not have increased radiation exposure tenfold.
(There are ways to limit radiation exposure even if you're in the middle of a lightly contaminated region. I think delivering clean food would have been easier than trying to accommodate 300k additional refugees after tsunami.)
Not the OP, but 15,000 people died because of the tsunami. No one died from the radiation release at Fukushima and:
"A comprehensive assessment by international experts on the health risks associated with the Fukushima Daiichi nuclear power plant (NPP) disaster in Japan has concluded that, for the general population inside and outside of Japan, the predicted risks are low and no observable increases in cancer rates above baseline rates are anticipated."
No one dying quite glibly ignores the economic and social consequences of displacing somewhere in the neighborhoods of 120,000 people.
That aside, are we to believe that no one's medical conditions were made more severe by the stress and displacement caused by this disaster? And no one died as a result? Something of the scale of Fukushima can't be so easily dismissed by this kind of cursory analysis of radiation related health risks.
As yongjik commented elsewhere, an order of magnitude more people died as a result of the evacuation than the WHO predicts would die of additional cancer deaths. And that's assuming a linear no-threshold model of radiation exposure, when current thinking is that a threshold-based model is more accurate.
As s/he summarizes, more people died as a result of running away from the disaster than would have died if they'd stayed put.
Fukushima and Chernobyl are both classed as 7s, but the amount of radiation released at Fukushima was at least an order of magnitude less than Chernobyl, with 80% of that falling on the ocean.
Fukushima caused half as many people as Chernobyl to evacuate.
No one died as a direct result of Fukushima, as opposed to 2 immediate + 28 cleanup deaths from Chernobyl.
Fukushima definitely deserves to be taken seriously, and it belongs in the same class as Chernobyl, but at the other end of that class.
Thousands of families have forced out of their homes and displaced by a radiation-polluted landscape, which the conservative government is trying to pass off as safe so they can pull their disaster relief subsidies:
http://carnegieendowment.org/chinafinancialmarkets/66221
It really makes clear how stark the choices are for China. The debt binge of the last ~10 years has masked the flattening out of productive investment, and there will need to be a reckoning. Hopefully it's a soft landing, but that will depend on politics as much as anything.