Monday, August 24, 2015

Steve Keen — China Crash: You Can’t Keep Accelerating Forever

As I noted in last week’s post “Is This The Great Crash Of China?”, the previous crash of China’s stock market in 2007 lacked the two essential pre-requisites for a genuine crisis: private debt was only about 100% of GDP, and it had been relatively constant for the previous decade. This bust however is the real deal, because unlike the 2007-08 crash, the essential ingredients of excessive private debt and excessive growth in that debt are well and truly in place.
China’s resilience against credit crises came to an end in 2009, when in a response to government directives, Chinese banks began lending to anyone with a pulse. As Figure 3 in last week’s post showed (reproduced below as Figure 3 below), the growth in private debt rocketed from 17% per year at the beginning of 2009 (versus nominal GDP growth of 8% at the same time) to 37% per year by the beginning of 2010 (nominal GDP growth peaked six months later at 20% per year). By the beginning of this year, private debt had hit 180% of GDP and had grown by over 80% of GDP in the previous seven years.
This was the fastest growth in credit in any country, EVER. It dwarfs both Japan’s Bubble Economy and the USA’s combination of the DotCom and Subprime Bubbles. China’s bubble drove private debt up by as much in 5 years as Japan managed in over 17 years, and more than the USA’s debt rose in the entire Clinton-Bush debt bubble from 1993 until 2010….
China Crash: You Can’t Keep Accelerating Forever
Steve Keen


Dan Lynch said...

Hard to argue with Keen. Though it's possible that the Chinese government could pull some "extend and pretend" policy out of its hat to re-inflate its bubble.

On a related note, Rodger Mitchell posted an interesting chart recently suggesting that a US recession may not happen for several years yet. It's hard to argue with Rodger's chart, but my gut feeling is that our economy is a house of cards and it wouldn't take much to pop it.

NeilW said...

" Though it's possible that the Chinese government could pull some "extend and pretend" policy out of its hat to re-inflate its bubble"

Keen generally misses the obvious fix - debt for equity swap. Once you make money patient you don't need the velocity to feed it. And that tends to stop the cash-flow failures from happening. People 'trade out of the situation'.

Dan Lynch said...

Not sure that I follow your logic, @Neil ? Care to give an example of a debt for equity swap that you have in mind?

Bottom line is that you need to create money to feed the economy, either private deficit spending or government deficit spending. If you are suggesting that government step in to "buy" toxic private debt when markets implode, similar to the Fed buying MBS's, that's government spending by any other name, and those types of corporate bailouts are generally not supported by the public in our so-called democracies.

The whole point of capitalism is that it supposedly ensures that resources are invested wisely. Unwise investments need to be allowed to fail, otherwise capitalism is not really capitalism. Just my 2 cents. :-)