It seems that most people are in 'ten years after the crash' mode. I'm pleased to note that some are in the here and now as well.
Today may be busy for a while as I am in Edinburgh for a lunchtime gig at the Book Festival so let me just offer links to two things worth reading.
One is from Bill Mitchell on why German infrastructure is crumbling. The German obsession with balanced budgets, or surpluses, is coming at a cost: the country is literally falling apart.
And then there is Larry Elliot on where the next crash is coming from. He has a unique and new thesis and it's plausible.
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Can’t really see any connection here (from L.E.) ” Markets have become relaxed about geopolitical risk and with good reason. Wall Street started rising from the moment Iraq was invaded in 2003. There was barely any response to Russia’s annexation of the Crimea in 2014.” Iraq was threatening the petrodollar, as did Libya later, and the Crimea wasn’t. No comparison at all in that sense. Wholly invalid. Anyone care to counter?
@ Richard
I have a theory of when the next financial crisis will happen. Over the last 20-30 years most crises around the world have happened in a year ending with 7. So, we got another 4 months to see if something happens.
Nice to know that Larry Elliot is reading Steve Keen.
You’ve made clear your views on budget deficits and surpluses in the UK where the government issues its own currency, and I’m sure you believe that Germany would better off issuing its own currency, but given that Germany is in the Eurozone, i.e. taxes/borrowing do fund spending, and given that the ECB isn’t going to act in the way you believe a currency issuer should act, what are your views on how Germany (and other Eurozone countries) should treat deficits and surpluses in comparison to currency-issuing countries?
I am aware I have not replied to this, holding back in the hope of finding time to do so
That has not happened as yet
Sorry
I don’t buy the Larry Eliot idea China’s economy will blow up under pressure from a US instigated trade war.
China’s economy is not as dependent on exports as we’re lead to believe. http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/a-truer-picture-of-chinas-export-machine
Their government doesn’t buy into the neoliberal austerity myth so they are happy to use government spending to support domestic aggregate demand. If Chinese private debts become unsustainable the government will step in with bailouts and prevent a collapse.
http://bilbo.economicoutlook.net/blog/?p=16523
http://bilbo.economicoutlook.net/blog/?p=8788
Trump may well will trigger a trade war but it won’t be the Chinese economy that crashes as a result. Neoliberal economic illiteracy will ensure we hobble ourselves while the Chinese sail on unscathed and growing ever stronger.
You are ignoring debt, which underpinned his argument
And it’s got a pile of that
Richard:
I’m not ignoring Chinese private debt I just don’t think it is the same as debt in the West. My understanding is the government allows state owned banks to lend money into existence to local authorities and other local state owned or privately owned organisations but if they can’t repay they just roll the debts over. The debt itself won’t blow up the economy because repayment is never enforced and more credit is always available. Basically the government is just deficit spending while pretending to private sector lending is occurring.
What will wreck Chinese growth and development is rampant corruption, poorly planned and executed projects and lots of white elephants that no-one actually wants or needs. These mal-investments may eventually suck so many real resources out of the productive economy that essential products and services are increasingly unavailable and public disorder ensues. Then there may be a regime change, revolution or break up of the country.
On the bright side the Chinese still have vast natural resources and a huge pool of unemployed/underemployed labour out in the countryside. If they can get a grip on corruption and incompetence and direct more activity to actually useful infrastructure, research and production for domestic
consumption they’ll be just fine.
Richard
The stuff about Germany is truly shocking. I had no idea but I had been wondering how they were getting on over there for sometime.
But it also reminds why it is so worth it coming here. Thank you for passing it on.
As for China I’m not sure. The somewhat unique mixture of communism and capitalism there makes it hard to predict how any crash will happen even if we accept that it will. In 2008 they were victims of US Government stupidity (because the DNA of the 2008 crash was created in the US).
The only way out for the Chinese it to print more money to pay debts or annul those debts or write them down. But what effect that will have on the rest of the world economy could be quite drastic. Even more than that, what effects it will have on world peace is even more worrying as (correct me if I’m wrong) I feel the US would love to go to war with its biggest creditor?
Some interesting details on the state of play in China here https://www.nytimes.com/2017/05/24/business/china-debt.html “…highly leveraged deals are getting more scrutiny. And Chinese authorities have started to publicly warn about speculative, loosely regulated lending.
“The continuing increasing leverage rate is not good for sustainable development of the economy, and some risks have accumulated,” Yi Gang, a senior deputy governor of the central bank, said in March. “We should think first to stabilize leverage – that is, to stabilize the overall rate of leverage, or let it grow more slowly.”
Zhou Xiaochuan, the governor of the central bank, said the same month: “Every enterprise, especially those with too high a rate of leverage, should be controlled.”
Foresea was among the first to be pinched.
The China Insurance Regulatory Commission in December banned Foresea from offering new products, contending that the company was essentially selling high-yield debt even though it had permission to issue relatively low-risk life insurance. Two months later, the regulator accused the company of misleading authorities.
“The fact that Foresea Life made up and provided fake material is clear,” the commission said. “It is a serious circumstance that should be punished according to the law.”
The moves have spooked customers. Revenues from newly issued policies plummeted 99.8 percent in the first quarter from the same period last year, to just $11.4 million. Investors also became wary, demanding their money back.
Foresea has insisted the business remains healthy. But the leaked memo suggested deeper troubles.
“Most of the clients are in economically developed areas like Guangdong, Jiangsu, Shanghai,” the memo read. “Clients from these areas have a strong awareness of protecting their rights. The possibility of mass disturbances cannot be ruled out.”.”
Hmmm… could be there’s a little public disorder on the cards then.
I’m certain that Larry Elliott is right, insofar as he’s looking for a source we’ve been ignoring; and it may even be the one he’s suggesting.
There are other sources of instability out there: one of them is that accounts should be shelved in bookshops under ‘Fiction’ in China, and a collapse in confidence is quite likely.
A property crash and capital flight from the UK is a plausible trigger event.
Both Russia and Saudi Arabia are far less stable than you think, even if you think that they are very unstable indeed.
Another is the coming budget round in Washington: the Republican majority might not be the source of stability we were hoping for. Bluntly, it might not be a source of sanity: more ‘House Republicans’, and more to the right, is a recipe for a deadlock that passes from brinkmanship to ‘over the brink’.
…But this, too, is a ‘known unknown’ and there’s no shortage of imbalances and sources of instability; and in such circumstances, all kinds of trivial and unexpected things can be a trigger.
But my money will be on a liquidity event, and OIS spreads to Libor are worth watching.
Nile, you know LIBOR’s on the way out? Being replaced with SONIA, for Sterling Overnight Index Average http://uk.reuters.com/article/uk-banks-libor-markets-exclusive-idUKKBN1AQ1X9. There are those who say it’ll actually be easier to rig than LIBOR was. Perhaps that’s the idea, eh?
Here we go again – “Capital Flight”! The Economist magazine thinks that “Capital Flight” will occur if Jeremy Corbyn becomes PM and tries to implement the Labour Party manifesto, and that this is a bad thing. Nile thinks that “Capital Flight”, following a property crash, might lead to a UK financial crisis. If foreign investors, having paid inflated sums for assets in the UK, have to sell them at a loss to “fly” their capital away, why is this a bad thing for our economy? If rich UK citizens liquidate their assets and use the sterling funds to buy Swiss Francs why is this bad for our economy?
Can anyone explain some more about this? Google isn’t much use, although the prevailing view seems to be that Capital Flight would lead to a lower exchange rate. A bad thing necessarily?
I get the impression that Richard thinks that “Capital Flight” is an outdated concept used to scare us, like the “Bond Vigilantes”. Is that right Richard?
Capital flight can cause currency fluctuation. I think there maybe some such flight if Labour was elected, but it would probably be temporary and nothing like that Cameron caused by the Brexit vote as the uk economy may be fundamentally stronger under Labour (the UK usually is) and fundamentals always out. So am I worried? No, in word. I can’t see the benefit of being the home to hot money.
The main risk in a ‘capital flight’ event involving all the foreign property speculators stampeding for the exit as prices begin to slide is that so much lending is secured on property.
Accepted
But the reality is most won’t stampede – there is massive aversion to realising losses
We’re well overdue for a correction in the property market: the question is how disorderly it will be, and what can be done to mitigate the damage.
Long term, affordable housing is an enormous economic gain: short term, this could be the end of the line for UK banking in its present form, a currency collapse, a liquidity crisis, and a very, very sharp contraction in the economy.
The other question is about government: could it be that someone relishes the damage it would do, and sees an opportunity to make the hollowing-out of the middle class a permanent economic reality?
Mr Murphy.
Yet another flight from reality by not even deigning to publish my comment .
There is no obligation to personally reply. Others may do so if they feel so emboldened. Of course they cannot if all rekevant but opposing viewpoints are all religiously ” editorially” excised.
…….
Someone who trolls from a South Georgia email address does not deserve to be published
Hooray! China gets a hearing on this blog!
Wholeheartedly agree with L Elliot. There are a lot of misconceptions:
“China’s economy is not as dependent on exports as we’re lead to believe.”.
How much steel is China producing? more than the rest of the world combined? More than global demand? And it is increasing now? China’s debt issuance and currency fix demand and result in high exports. Global trade partners will not accept this for much longer.
“The debt itself won’t blow up the economy because repayment is never enforced and more credit is always available”.
Yes it will and it already did. Look at the 2000s. Zhu Rhongzhi had to enact very painful reforms and the debt was put into bad banks, with one off benefits from joining WTO and strong global economy. Not likely this time.
Also on the currency fix – the PBOC prints RMB to absorb high USD surpluses. When these are redeemed it needs to redeem RMB – take money out of the economy. That is a ponzi scheme and not sustainable.
Disagree with one point though – international financial markets are more exposed to China than people realise, including via Hong Kong lending – including British banks…