Why do economists praise a Communist model that has already failed in so many countries?
During the Great Recession, China’s growth dropped by half and slowed from 12% to 6%. That became the portrait of the recession in China that was in direct contrast with its unprecedented steroid-driven growth over the past 15 years.
Throughout the recovery since 2009, China’s growth has been approximately 8% and has continued to fall over the last year. It’s presently at 7% due largely to a dramatic decrease in its exports because of the slowing in global growth.
We’ve been warning for years that China has the greatest infrastructure, real estate and debt bubble in modern history and that when it bursts… it’ll be a major factor in triggering the next deep financial crisis.
Now there is a new indicator that points in that direction in a more quantifiable way…
Fathom Consulting has a China Momentum Indicator predicting that China’s growth will fall to 4% or 5% in 2015. It’s obvious that it would be a major disaster for China as well as for the world economy. But it’ll also affect commodity prices… they’ve been dropping since mid-2008 and then went into freefall in early 2011.
When you look at this chart, you can see that this indicator has tracked well with past GDP trends in China. It peaked in late 2005 and China’s GDP growth peaked just two years later in 2007, showing a two-year lag. The indicator bottomed in early 2009 with GDP beginning its fall just a few months later in the same year.
The indicator peaked at lower levels in mid-2010 falling in line right along with GDP. Now it points down to 5% growth in 2015.
Take note that actual GDP has always overshot this indicator a bit with a one-year lag on average. This would suggest that GDP will fall to as low as 4% by late 2015 or so.
If China does keep slowing as we’ve been expecting, then the global economy will keep slowing as well, especially since China is the second largest economy in the world and the largest exporter and manufacturer.
This will create a negative feedback cycle that will build on slowing growth in Europe, as well as further demographic weakness ahead for the U.S. It’s a classic catch-22 scenario.
At some point, there will be an avalanche once China’s massive real estate bubble bursts. And it will affect real estate markets around the world, especially the English-speaking cities that the affluent Chinese are buying into like crazy: LA, San Francisco, New York, Vancouver, Toronto, Singapore, Sydney, Melbourne and London.
I’ve argued for years on the point that China has a flawed model that’s already been heavily disproven. It’s not China’s centralized planning that’s causing its massive growth; it’s the unprecedented overbuilding and government-driven stimulus. It’s the “poster child” for an economy on steroids.
Communism and centralized planning can’t possibly work as well as free market capitalism balanced by a democratic government. This has already been proven.
The Cold War was lost by the former U.S.S.R. that was the first major country to go all out for the communist and top-down centralized model. It was then trounced by the western and more free-market economies.
David Brooks wrote a recent op-ed in the New York Times on November 11 titled “The Legacy of Fear.” His premise was that 25 years after the fall of the Berlin Wall most of the post-communist nations are still doing very poorly. He takes research from Branko Milanovic, an economist at the City University of New York.
The greatest failures are Ukraine, Georgia, Bosnia, Serbia and others. It’ll take decades for them to get back to the incomes they had when Communism fell. These comprise about 20% of all the former communist countries.
Countries like Russia and Hungary are part of the subsequent 40% that are growing at less than 1.7%. Another 30% are growing less than 2%, like the Czech Republic and Slovenia. Then there are a few successes at around 10%, with only five countries emerging as successful capitalist economies: Poland, Belarus, Armenia and Estonia.
Milanovic observes that many of these successful countries owe it more to their valuable natural resources for exporting rather than to strong productivity.
The difference with China is that the government has massively overbuilt everything in the economy and pushed rural to urban migration at unprecedented… and unsustainable rates. I calculate that China has built enough real estate, infrastructure and industrial capacity for the next 12 to 15 years.
That’s what you get from centralized planning in a corrupt mafia-like political system and crony capitalism.
China’s stock market has been trending down since a feeble bounce it experienced back in February 2010 after a 70% crash from the extreme bubble that peaked in late 2007. The stock market is measuring profits and not growth. It’s telling the truth about China’s economy.
Overbuilding is not profitable as it creates high fixed costs and debt.
I’ve been forecasting for years now that China will not only slow but it will fall over like the behemoth it is. Bubbles do not correct… ever. All they can do is burst and with devastating results.
This will be the greatest bubble burst in modern history. It’ll prove once and for all that bottoms-up, free market democracies outperform top-down centrally-planned communist models.
Since the late 1700s, it’s been the marriage of free market capitalism and democracy that has made certain nations rich. The Cold War centered on the battle between these two models and you know what happened. The free markets won.
Since economists don’t understand the dynamic play of opposites that drives the stellar innovation of capitalism, they tend to mistake outrageous overbuilding for success.
I find this extremely pathetic — and truth be told, it’s the very reason why I don’t listen to people who have never had sex. Or run a business.