Ka-Poom Theory Update Two – Part I: Bang or a whimper - Eric Janszen

[EJ]

Re: Ka-Poom Theory Update Two – Part I: Bang or a whimper - Eric Janszen

Thank you for the glimpse.

In summary, China's ongoing investment into the US will increasingly be fueled by profits from China's exports to the ROW while the economic risks from China's internal bubble(s) will not change the trajectory of China's economic course in the next few years.

I have no disagreement with the analysis on China's strategy with respect to the US. It is similar to what I'd noted in other posts: ultimately China only has to employ wuwei in order for the US' overreach to correct itself.

Of course there are risks attendant to this strategy as well: for one thing, a purely IMS based economic restraint on a military power still presumes said power will not perform actions ranging from outright repudiation on down. While I do not believe the present US political structure would ever contemplate such actions, at the same time the increasing societal dissatisfaction in the US coupled with political stagnation ratchets up the possibility of the emergence of a demagogue.

I am a little less sanguine about the impact of burst bubbles in China; while the leadership in China is far more measured and steadfast, the population there is more volatile. China's leadership may understand that 'this too will pass', but the people may not.

China Crash 2011 - Part I: The repetition compulsion of central bankers accurately forecast the impact of the Bank of China's effort to pop the property bubble. It crashed right on schedule nine months later, but then the BOC quickly reflated it before the macro-economy followed the property market down the tubes. It was back to the drawing board to figure out why.

My conclusion? What I call "China's Great Wall of Money," a FIRE Economy that does not depend on foreign investment flows the way the US FIRE Economy does. Without outside accountability, China can make up new rules as it goes along, like the rules of Calvin and Hobbes' Calvinball. "I'm broke," says the regional bank. "No you aren't," says the central government as it adds another billion to the bank's balance sheet and gives the bank its monthly a loan quota. The whole system is financed via mercantile trade policy. The Productive Economy the also centrally planned the way the FIRE Economy is in both the US and China, thus transmission of the crash into the "real" economy from the financial economy through the banking system can be halted as quickly as policy can be decided. There's no bi-partison bickering over issues like debt ceilings because there are no elections, so policy decisions are immediate as are the results.

I detailed my theory in a speech last year to the Florida Council of 100 and in an article in the subscription area of this site. As both are paid venues, it's not appropriate for me to go into the theory in detail here. The two other economists who were also paid speakers told me they were impressed that I'd "worked it out," which is gratifying. I expect readers will see the concept presented over time by other parties, but I won't hold my breath waiting for attribution.

That was also, by the way, the event where I tried to pin down Marco Rubio down on his take on crony capitalism, a topic brought up by one of two other economists who also spoke. He dodged the question, which is unfortunately because I'm otherwise pre-diposed to like pro-entrepreneur candidates.

[Chris Coles]

Re: Ka-Poom Theory Update Two – Part I: Bang or a whimper - Eric Janszen

Yes, I'd like to see a lot less "World Police" role for the US also. But I can't help but think we still should be concerned about what is going on right at our own doorstep. I mean, China may indeed be buying stuff everywhere, but why the Caribbean?

Recently I renewed an old business friendship who had married into a Jamaican born family. It would appear that when the plantations were freed from slavery, the previous slaves proposed a deal where they worked part time for the landowners so that they could also spend some time on their land. What happened was that the Chinese that were also on the island decided to replace the slaves and work full time for the plantation owners. That single decision, meaning that all the ongoing prosperity became the income of the Chinese, has, over a very long period, meant that all the shops are now Chinese owned, rather than owned by the indigenous population.

If that story is correct, then all that is occurring in the Caribbean is a further consolidation of the long term investment by the Chinese community. Nothing different to the same process in the likes of China Town in San Francisco.

In which case, perhaps it is appropriate to suggest that we should relax and stop making mountains out of molehills.

[Prazak]

Re: Ka-Poom Theory Update Two – Part I: Bang or a whimper - Eric Janszen

China Crash 2011 - Part I: The repetition compulsion of central bankers accurately forecast the impact of the Bank of China's effort to pop the property bubble. It crashed right on schedule nine months later, but then the BOC quickly reflated it before the macro-economy followed the property market down the tubes. It was back to the drawing board to figure out why.

My conclusion? What I call "China's Great Wall of Money," a FIRE Economy that does not depend on foreign investment flows the way the US FIRE Economy does. Without outside accountability, China can make up new rules as it goes along, like the rules of Calvin and Hobbes' Calvinball. "I'm broke," says the regional bank. "No you aren't," says the central government as it adds another billion to the bank's balance sheet and gives the bank its monthly a loan quota. The whole system is financed via mercantile trade policy. The Productive Economy the also centrally planned the way the FIRE Economy is in both the US and China, thus transmission of the crash into the "real" economy from the financial economy through the banking system can be halted as quickly as policy can be decided. There's no bi-partison bickering over issues like debt ceilings because there are no elections, so policy decisions are immediate as are the results.

I detailed my theory in a speech last year to the Florida Council of 100 and in an article in the subscription area of this site. As both are paid venues, it's not appropriate for me to go into the theory in detail here. The two other economists who were also paid speakers told me they were impressed that I'd "worked it out," which is gratifying. I expect readers will see the concept presented over time by other parties, but I won't hold my breath waiting for attribution.

That was also, by the way, the event where I tried to pin down Marco Rubio down on his take on crony capitalism, a topic brought up by one of two other economists who also spoke. He dodged the question, which is unfortunately because I'm otherwise pre-diposed to like pro-entrepreneur candidates.

Isn't China's mercantilist FIRE economy just as predicated on cheap oil as America's transportation grid and the sprawl of car-oriented development? Looking forward to your take on how Peak Cheap Oil plays out within the two biggest economies in the world.

[lakedaemonian]

Re: Ka-Poom Theory Update Two – Part I: Bang or a whimper - Eric Janszen

Isn't China's mercantilist FIRE economy just as predicated on cheap oil as America's transportation grid and the sprawl of car-oriented development? Looking forward to your take on how Peak Cheap Oil plays out within the two biggest economies in the world.

I'm wondering the same.......I'm guessing energy/oil consumption per unit of GDP(where it's at today and where it's headed tomorrow) would play an important role in measuring relative pain in a Peak Cheap Oil environment.

I wonder if it will be inversely analogous to the relationship shared here in iTulip before on the diminishing returns on GDP with increasing credit/debt?

Hopefully further iTulip analysis on this topic might include a ranking of nations in terms of their relative vulnerability to Peak Cheap Oil.

[bart]

Re: Ka-Poom Theory Update Two – Part I: Bang or a whimper - Eric Janszen

Here's two views of the GDP & energy usage picture.

[lakedaemonian]

Re: Ka-Poom Theory Update Two – Part I: Bang or a whimper - Eric Janszen

Here's two views of the GDP & energy usage picture.

I've been having a hard time getting much sleep the last few days(been really busy), but if I'm looking at that correctly it looks like we're seeing diminishing returns on energy per unit of GDP created, much like we've seen with debt, but less pronounced?

It looks like we're getting 25% less economic $bang$ for every BTU in just the last 8 years and a similar % for every barrel of oil in the last 10? On the surface, that's pretty scary.......and it only leaves me with more questions such as why is it? What's so different in the last 8/10 year time frame for BTUs/oil respectively?

Would a chunk of that(if so is it possibl;e to determine how much) be the defense/war effort of the past decade?

Again IF I'm reading it correctly.....in my last post I had made the ASSumption that we would be going the other way.

Is there a clear and direct relationship between this chart and the previous ones seen here on iTulip on the diminishing GDP returns from increased debt?

[bart]

Re: Ka-Poom Theory Update Two – Part I: Bang or a whimper - Eric Janszen

I've been having a hard time getting much sleep the last few days(been really busy), but if I'm looking at that correctly it looks like we're seeing diminishing returns on energy per unit of GDP created, much like we've seen with debt, but less pronounced?

Yes, that's what I see too.

It looks like we're getting 25% less economic $bang$ for every BTU in just the last 8 years and a similar % for every barrel of oil in the last 10? On the surface, that's pretty scary.......and it only leaves me with more questions such as why is it? What's so different in the last 8/10 year time frame for BTUs/oil respectively?

The majority of the effect in my opinion is that the gap between the GDP deflator (or CPI-U) and CPI w/o lies has grown much larger - around a 5% gap per my work.

Would a chunk of that(if so is it possibl;e to determine how much) be the defense/war effort of the past decade?

I think it would be, but the data wouldn't be easy or quick to locate. We know there have been a bunch of wars, and wars use lots f energy/

Again IF I'm reading it correctly.....in my last post I had made the ASSumption that we would be going the other way.

Is there a clear and direct relationship between this chart and the previous ones seen here on iTulip on the diminishing GDP returns from increased debt?

Very much so, but for different reasons. Reinhart and Rogoff's work on debt to gdp is probably what you're looking at, but the real and understated inflation hits everybody - including governments eventually.

[oboy]

Re: Ka-Poom Theory Update Two – Part I: Bang or a whimper - Eric Janszen

+1

[lakedaemonian]

Re: Ka-Poom Theory Update Two – Part I: Bang or a whimper - Eric Janszen

Thanks Bart!

[touchring]

Re: Ka-Poom Theory Update Two – Part I: Bang or a whimper - Eric Janszen

China Crash 2011 - Part I: The repetition compulsion of central bankers accurately forecast the impact of the Bank of China's effort to pop the property bubble. It crashed right on schedule nine months later, but then the BOC quickly reflated it before the macro-economy followed the property market down the tubes. It was back to the drawing board to figure out why.

Can you actually reflate the China property bubble? Bear in mind that Shanghai real estate now cost as much as New York but young graduates earn 4000 Yuan ($630) a month. And 50% of apartments in Shanghai are actually empty - http://www.villable.com/market_comme...ang2-1260.html

[raja]

Re: Ka-Poom Theory Update Two – Part I: Bang or a whimper - Eric Janszen

"In China, as a result of the one-child policy and sex- selective abortion, that ratio has been 120 boys for every 100 girls. From 2000 to 2030, the percentage of men in their late 30s who have never been married is projected to quintuple. Eberstadt doesn’t believe that having an “army of unmarriageable young men” will improve the country’s economy or social cohesion."

My advice -- go long Chinese hookers; they will be busy

Just another reason China is headed for the dumpster (also posted in different form on another thread):

Bloomberg China’s Pending Population Crash

Today’s most important population trend is falling birthrates. The world’s total fertility rate -- the number of children the average woman will bear over her lifetime -- has dropped to 2.6 today from 4.9 in 1960. Half of the people in the world live in countries where the fertility rate is below what demographers reckon is the replacement level of 2.1, and are thus in shrinking societies.

As Eberstadt points out, we can make predictions about the next 20 years with reasonable accuracy. The U.S.’s traditional allies in western Europe and Japan will have less weight in the world. Already the median age in western Europe is higher than that of the U.S.’s oldest state: Florida. That median age is rising 1.5 days every week. Japan had only 40 percent as many births in 2007 as it had in 1947.

These countries will have smaller workforces, lower savings rates and higher government debt as a result of their aging. They will probably lose dynamism, as well.

All these effects will, in turn, almost certainly make these countries even less willing than they already are to spend money on their armed forces. Americans who want Europe to bear more of the free world’s military burden -- or even provide for its own defense -- are probably going to be disappointed. So will those who expect Europe to take on humanitarian missions. It won’t even be able to maintain its current weight in future debates about the values of peace and democracy.

China’s rise over the last generation has been stunning, but straight-line projections of its future power and influence ignore that its birthrate is 30 percent below the replacement rate.

The Census Bureau predicts that China’s population will peak in 2026, just 14 years from now. Its labor force will shrink, and its over-65 population will more than double over the next 20 years, from 115 million to 240 million. It will age very rapidly. Only Japan has aged faster -- and Japan had the great advantage of growing rich before it grew old. By 2030, China will have a slightly higher proportion of the population that is elderly than western Europe does today -- and western Europe, recall, has a higher median age than Florida.

China’s Challenges

China, notoriously, has another demographic challenge. The normal sex ratio at birth is about 103 to 105 boys for every 100 girls. In China, as a result of the one-child policy and sex- selective abortion, that ratio has been 120 boys for every 100 girls. From 2000 to 2030, the percentage of men in their late 30s who have never been married is projected to quintuple. Eberstadt doesn’t believe that having an “army of unmarriageable young men” will improve the country’s economy or social cohesion.

Foreign-policy thinkers can often lose sight of demographic trends, Eberstadt says, because from a policy makers’ view “they tend to look really glacial. If it’s not happening in the next 48 to 72 hours, it’s not in the inbox.” But “population change gradually and very unforgivingly alters the realm of the possible.”

[Polish_Silver]

Re: Ka-Poom Theory Update Two – Part I: Bang or a whimper - Eric Janszen

by 2030, China will have a slightly higher proportion of the population that is elderly than western Europe does today

Interesting Data! Peter Drucker was a big believer in demographic trends being very important for forecasting.
China's growth will slow down for multiple reasons:

1) aging population
2) bankruptcy in the nations they are trying to export to
3) internal bubbles

[Polish_Silver]

How oil could kill the dollar

Oil prices will rise in the future. But the structure of the oil market could matter just as much as prices. A long time ago oil was sold in long term contracts between producers and consumers. The big international oil companies had vertically integrated systems from
oil field to gas pump. Relatively little oil was sold on spot market.

Mark Rich pioneered the modern oil market, where a large volume of oil is sold on a spot basis. The advantage of the spot market is that there is more competition, and prices tend to be lower. Only price matters, not nationality and pre-existing contracts.

Supposedly, China is reversing this trend. They are negotiating long term contracts with oil exporting governments. They are infiltrating oil producers on a business and political level.
Their influence will be to supply China at a known price, regardless of what the spot price is.

If the US neglects to lock in dedicated supply, we will have to rely on the spot market. When supply gets tight, spot market prices could rise dramatically, causing a deep recession. China would be insulated by it's long term supply guarantees. It will be very hard to resolve this, since China would have locked in the good sources. The US will have to become much less oil intensive. Currently, the US uses about 2X the oil per capita as other developed nations.

California discovered this in the 90's, when the spot market was unable to provide the needed electricity. Rolling blackouts occured throughout the state.

[metalman]

Re: Ka-Poom Theory Update Two – Part I: Bang or a whimper - Eric Janszen

"In China, as a result of the one-child policy and sex- selective abortion, that ratio has been 120 boys for every 100 girls. From 2000 to 2030, the percentage of men in their late 30s who have never been married is projected to quintuple. Eberstadt doesn’t believe that having an “army of unmarriageable young men” will improve the country’s economy or social cohesion."

My advice -- go long Chinese hookers; they will be busy

hookers... he he... he... he he he...

[touchring]

Re: Ka-Poom Theory Update Two – Part I: Bang or a whimper - Eric Janszen

Interesting Data! Peter Drucker was a big believer in demographic trends being very important for forecasting.
China's growth will slow down for multiple reasons:

1) aging population
2) bankruptcy in the nations they are trying to export to
3) internal bubbles

It's not just this 3 factors. Buying a new home is an incredibly expensive affair for a Chinese couple. A small apartment in the outskirts of Shanghai costs well over 2 million Yuan. A couple in their late 20s doing white collar jobs earn a combined income of 10,000 yuan a month. Note: We'll leave blue collar workers on 1500-2500 yuan a month income out because most can't afford to get married in the first place.

The cost of living in Shanghai is not cheap to begin with. ith mortgage rates at 7%, you can roughly work out that it is nearly impossible to buy an apartment on a 120K a year combined income since just the interest alone for a 1.2 million Yuan is 84K yuan a year. 1 million loan, assuming that their parents provide the other 800K down payment as a gift.

The situation in other cities is not much better since although real estate is cheaper, income is also lower. In Beijing, people earn even less than in Shanghai but the cost of real estate is not cheaper.

With real estate prices this high, very few new couples can afford to have children.

And to think that EJ is talking about a reflation of the Chinese property bubble!! Sometimes it is good to know what is happening on the ground.