EconoMonitor » Beijing’s New Leaders Are Right to Hold Back

Michael Pettis argues that China cannot stimulate its economy out of trouble:

There are still bulls out there who insist that China is out of the woods and making a strong recovery, for example former Deputy Governor of the Reserve Bank of Australia, Stephen Grenville, who argues in his article strangely titled China doomsayers run out of arguments:

“The missing element from the low growth narrative is that unemployment would rise, provoking a stimulatory policy response. China would extend the transition and put up with low-return investment recall that when unemployment was the issue, Keynes was prepared to put people to work digging holes and filling them in rather than have unemployment rise sharply. To be convincing, the low-growth scenario needs to explain why this policy response will not be effective.”

It seems to me that the reason why simply “provoking a stimulatory policy response” won’t help China has been explained many times, even recently by former China bulls. Of course more stimulus will indeed cause GDP growth to pick up, as Grenville notes, but it will do so by exacerbating the gap between the growth in debt and the growth in debt-servicing capacity. Because too much debt and a huge amount of overvalued assets is precisely the problem facing China, it is hard to believe that spending more borrowed money on increasing already excessive capacity can possibly be a useful resolution of slower Chinese growth.

Read more at EconoMonitor : EconoMonitor » Beijing’s New Leaders Are Right to Hold Back.

Unintended consequences: Rewarding failure

Robert Shiller summarizes the arguments for raising taxes and increasing government spending at Project Syndicate:

……while that [austerity] approach to debt works well for a single household in trouble, it does not work well for an entire economy, for the spending cuts only worsen the problem. This is the paradox of thrift: belt-tightening causes people to lose their jobs, because other people are not buying what they produce, so their debt burden rises rather than falls.

There is a way out of this trap, but only if we tilt the discussion about how to lower the debt/GDP ratio away from austerity – higher taxes and lower spending – toward debt-friendly stimulus: increasing taxes even more and raising government expenditure in the same proportion. That way, the debt/GDP ratio declines because the denominator (economic output) increases, not because the numerator (the total the government has borrowed) declines.

What he does not consider, however, is the message we are sending to government. In much the same way as bailouts increase moral hazard — with too-big-to-fail institutions taking on bigger risks secure in the knowledge that the taxpayer will bail them out if the bets don’t pay off — we encourage bad behavior from politicians if we allow them to raise taxes and increase government spending every time they screw up the economy. Federal government spending in the US economy has grown from 12.5% of GDP in 1950 to nearly 25% of GDP today. Seems like they are getting the wrong message.

That is like giving someone a promotion or a raise every time they mess up. When politicians fail, they need to get the right message — and not only at the next election. Cutting budgets when the economy is in recession is the right response, but how can we achieve this while saving the economy from a deflationary spiral?

The only way I can think of is to cut taxes and government expenditure, but encourage private investment in productive infrastructure through Treasury-backed low-interest or even interest-free development loans. These could be administered by an independently-elected infrastructure body with representatives from all parties. There are dangers, and the process would have to be closely monitored, but the risks are minor compared to rewarding failure.

Read more at Debt-Friendly Stimulus by Robert J. Shiller – Project Syndicate.

Don’t be fooled: The Republicans are winning | Business Insider

Henry Blodget:

Yesterday, the American government voted to extend almost all of the Bush Tax Cuts permanently. Not temporarily, as a stimulus measure. Permanently.

Read more at DON'T BE FOOLED: The Republicans Are Winning – Business Insider.

Nomura: China recovery unsustainable | | MacroBusiness

Interesting take by Nomura, reported by FT Alphaville.

Nomura thinks that after this year, China’s days of 8 per cent-plus growth are finished, and that stimulus efforts will run into problems with CPI inflation, not to mention its own credit system…..

via Nomura: China recovery unsustainable | | MacroBusiness.

A Hard Landing Down Under | The Big Picture

Andy Xie has a bearish outlook on China and believes 2013 could be a tough year for Australia:

The market went from not believing in China’s growth story a decade ago to extrapolating past performance into the infinite future……The year 2008 should have been the end of this boom cycle. China’s stimulus misled the market into believing otherwise…..The Australian economy is probably a bubble on top of China’s overinvestment bubble. The latter’s unwinding will sooner or later trigger the former to do so, too…..

via A Hard Landing Down Under | The Big Picture.

China’s failed gamble for growth

Zarathustra: The idea of this gamble is simple. With the financial crisis in 2008 hitting the developed world, it naturally affected external demand. The Chinese knew these. At the end of 2007, trade surplus accounted for more than 7.5% of GDP. Currently, the same number is at its low single digit, probably 2% or so. No longer is China’s growth driven by trade. It is now driven largely by domestic demand.

And this is where the gamble lies. The massive stimulus was meant to stimulate domestic demand for a few years, in hope that perhaps the rest of the world will recover, and hence external demand would have recovered. Or else, in hope that domestic demand will become strong enough and sustainable so that the economy no longer depends on the health of the rest of the world…..

via China’s failed gamble for growth.

Short-Term Stimulus Won’t Help U.S. in Long Run: Glenn Hubbard – Bloomberg

The president’s announced jobs plan centers on the need for additional short-term stimulus designed to boost aggregate demand and jump-start economic growth. In some recession scenarios, such action, if timely, can indeed raise output and employment.

In our current state, however, calling for additional spending and temporary tax relief without addressing longer-term economic challenges may exacerbate the likelihood of another recession in the coming year.

This is because the U.S. economy suffers from structural problems predating the financial crisis, particularly an excessive reliance on household consumption and government spending, and insufficient attention paid to business investment and exports. The financial system and the economy need to adjust in the face of this structural shift.

This observation points out two problems with the case for stimulus being made by Obama. The first is that near-term and temporary support for household incomes does little to counterbalance the chilling effect of announced future policies. Uncertainty becomes the enemy.

via Short-Term Stimulus Won’t Help U.S. in Long Run: Glenn Hubbard – Bloomberg.

What the Country Needs Is a New New Deal – Truthdig

The problem is that the president believes we can cure our jobless problem by providing the proper incentives to the business community. And here he is committing one of the few big policy blunders from Lyndon Johnson’s War on Poverty. Like Johnson, who focused on retraining the unemployed for jobs that did not exist, Obama has focused on incentivizing the businesses community to hire workers to produce for customers that do not exist.

……The truth is simple and contrary to these views. Business will not hire more workers until it has more sales. Consumers will not spend more until they’ve got more jobs.

via What the Country Needs Is a New New Deal – Truthdig.