Economics in Deep Trouble

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That in turn cut into demand for auto parts, steel, glass and other materials. But help may be on the way.

The Chinese government has allowed big-ticket projects, like new subway lines in many cities, to move forward, and it has pumped more money into the financial system. China could take measures like loosening limits on mortgage lending and easing the ability of property developers to buy land and deal with their debt. But that approach comes with dangers. The sector is already overbuilt and plagued with speculation, something the Chinese authorities have long tried to contain. Log In. More detailed data tell a less positive story.

By the Numbers Beijing took steps to rekindle growth at the end of last year, and it showed. Driving the Slowdown Some economists note that the biggest factor driving the weakness in retail sales in China, which by some estimates has accounted for half or more of the entire slowdown, is a sharp fall in auto sales. How Long Will It Last? One big option that China still has: help the housing market. Ailin Tang contributed research.

The feeling is understandable, but the conclusion is supported by neither logic nor the preponderance of evidence. A government so dependent on sustained economic growth for its legitimacy, and so keenly aware thanks to its own recent history of the disastrous consequences of relying on bad data, has a strong self-interest in maintaining statistics that are approximately right, at least with regard to trends, even if they do not meet the highest standards of modern statistical science. Eighteen years in China! Times flies when you're having fun, Michael.

I'm a great fan of all yours posts for many years. I'd be delighted if one day you magically decided to move to India and start an Indian blog about her economy. I suppose India is the next big thing, right? Great to know that Michael! At least you've considered moving to India. Who knows in a few years? I'll wait im patiently for this day to come.


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Could you please comment on such trade surplus targeting? It feels like treating a symptom and not the underlying problem and there are multiple ways the balance could go to zero, not all of which are desirable. Thank you. I don't think it is even possible for them to negotiate the size of China's trade surplus, Matt. There might be such discussions about the bilateral trade balance, but as I discuss in several earlier posts, this way of thinking about trade imbalances is obsolete. In my next book September publication, I think I will show very explicitly why bilateral trade imbalances tell you almost nothing in today's world, unlike, say, years ago.

To someone whose understanding of economics is so limited that he needs to be spoonfed, this is wonderfully clear and illuminating. Where are the economic-social and - environmental dimensions? Are we chalkenging the right weakness? That, they really believe that bad debt recognition can be delayed indefinitely, that it's perfectly OK and that's not falsifying in any way. I think maybe it's time you change location I miss the old Pettis : The world needs the old Pettis back.

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Your blind spot is now the size of Neptune You are completely missing the point, John. What you are arguing is that there is no difference between what I identify as the first set of GDP-related problems and the third set. There very clearly is. In the first set, the statisticians lie about what they record -- their data is still an output measure, but they falsify the data. In the third set, they record accurately what economists agree to record, but it is effectively an input, so that recording it tells us nothing about the system.

All countries do the same thing, but in China, because producers of GDP are effectively government guaranteed, they are able to ignore hard budget constraints, and so are able to engage in activity that creates no value. Confusing the two may feel satisfying, but it adds nothing to the analysis. That's the point of my essay. Has there been any progress at all by Beijing when it comes to reining in debt and privatising government assets? What will be the effect of the tax cuts on the economy? You said before that there is at most years before China reaches debt-servicing capacity, but it seems like the leadership doesn't have much sense of urgency.

Tax cuts simply change the locus of borrowing, CYC, from households or businesses, depending on whose taxes are cut, to the government. They do not create credit-less fiscal expansion, as many economists strangely seem to believe. This is because if the government cuts taxes but maintains fiscal spending, they must fund the gap, which they can do either by monetizing the debt, borrowing, or selling off assets.

The first and third options are separate decisions which occur whether or not they cut taxes, so that in the end, the only effect is to shift borrowing directly onto the government balance sheet. I'm not an economist, but if I were an economist, this issue, and I don't believe it's just an issue for China, seems rather fundamental, and further all I have to do is think about it and a number of possible answers come to mind.

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The answer is to gather a lot of different economic statistics, the more objective the better, and to apply the same methods to many different countries. For example I just imagined a starch index. It works like this: 1 find the nearest 25 stores to your house; 2 go to each of these stores and record the prices of all the commonly sold starches in your area including wheat, maize, potatoes, various beans; 3 do this every month; 4 publish the data on a blog; 5 describe the procedure in enough detail that a volunteer in another country can do the same thing they don't have to be an economist ; and get these volunteers to report their data to you so that different regions can be compared.

And then there are two further steps to perform to make this data more meaningful that require someone that is very good with numbers and creating functions, but fortunately doesn't need to be done that often. The functions needed are a 'deflator' which assigns different weights to the specific starches in a given region to reflect the most available and cheapest starches in a given area and calculate a cost per unit of starch that can then be compared to other regions even if the specific starches being consumed are different in different areas.

And two, do a similar sort of statistical analysis as was done in the satellite imaging study mentioned in the essay above. It might seem like a starch index is far removed from GDP but I'll guess it has at least as much correlation, and maybe far more, as measuring lights in the night.

I imagine that if I start thinking about it that I'd be able to come up with dozens of indexes where the data could be gathered by volunteers and although they are all imperfect measurements they still are perhaps more objective than things like official GDP claims. Some of the things we want to know aren't so easy to measure, things like the distribution of incomes and government expenditures, but for all these things I imagine there are proxies that can be objectively gathered that have some correlation with the actual desired piece of information.

Once dozens of different relatively objective indexes have been constructed like this, we will not have a single measure of GDP, but rather dozens of different stories. The interpretation of those stories depends on the observer and what weight they put on different things. Despite the variance, my guess would be that there are going to be correlations between the different measures, and that it is in these correlations, that unfortunately require subjective interpretation, that we would be able to come up with a pretty good estimate of GDP as well as other crucial economic indicators.

Now having said this I'm thinking surely this is obvious and it has already been done. It would also seem obvious to construct a website that aggregates all the different proxy indexes that economists and others have constructed and are tracking, month-by-month. And surely this is a popular website if only among economists.

I've been trying to find that website as I've typed these comments in but so far I'm coming up short.

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I agree, mandrewa, and I suspect most economist who have thought deeply about GDP do too. It is an extremely clumsy measure of whatever it is that we think we are measuring, and it is probably foolish even to think that there is a single measure that serve all the purposes to which we apply the GDP measure.

Pettis wrote: "You are completely missing the point, John. You are saying that they first decide on a number and then invest uneconomically to achieve that number. You also wrote that they do not recognize bad debt in their calculation of this previously determined number. That is, when they decide on a number in advance they also decide that this number should not consider bad debt. I am saying: 1. They are surely aware of this and no one is naive.

Image a company doing something similar Michael, do you post in Chinese on a different platform? Are your writings accessible to an average Chinese reader? I really enjoyed reading the Chinese version of your September post. I would be happy to translate for you or refer to amazing translation services.


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Hi Michael, I just saw in the news today that Chinese banks will start issuing perpetual bonds to shore up their capital and continue credit growth ad. The PBOC has also encouraged the move and stand to buy these bonds and support their market. Their goal would be to promote even more credit growth. This seems to indicate that the financial repression is alive and well and in fact potentially getting worse! Although such a move absolutely prevents a financial crisis since the banks will be effectively recapitalized - when does the financial repression and investment lead growth end? Should mean decreased margins for both sides.

Medium-long term we are sourcing supply elsewhere. I recognize we have that luxury and other industries do not.

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Anyway, I mention this because I think your statement, "So far US tariffs have had a minimal impact on the Chinese economy There's a cash-flow for margin trade in the near term hiding the impact, but the impact is there. What mechanism is creating the gloominess, if not restrictions on credit? And if it is restrictions on credit, are you saying that the target GDP has effectively fallen by half, even if that policy has not been announced? Hi Michael, I'm wondering if you think the Chinese economy will recover this year given the amount of stimulus the PBOC has initiated over the last six-nine months?

You describe the current circumstances as the worst you've seen in the 18 years you've been there so I wonder if you think they're pushing on a string? There's a lot of vigor in many areas. What about the double digit growth in outbound tourism in ? The author's viewpoint that Chinese GDP figures are especially out of touch with reality are I suspect not so much based on objective analysis but motivated by a desire to save his reputation for forecasting.

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This is quite a revelation. The US military has shifted its focus from fighting counterinsurgencies to countering near peer adversaries.