Yes Virginia...It's a Bubble...

[gwynedd1]

Re: Another Alternate View - Stephen Roach

The value system is at the whim of the sovereign unless it decides to leave it to the market. So I am not sure if there will be a shock like crisis unless they try market corrections. Was there a pyramid bubble so long as the sovereign set the price? So who knows how long China can go on with a value system set by China.

[thriftyandboringinohio]

Re: Yes Virginia...It's a Bubble...

... Gordon Chang...says the country is pouring more money back into infrastructure and property again, something Chang says is ''exactly the wrong thing to do" because it takes China away from its "only sustainable growth model which is a consumption based one."...

There is another way to look at it.
The "American method" is to pour money into new things with no clear idea of how it will all turn out. The classic examples are US railroads and US internet infrastructures. In both cases manias developed, most investors were wiped out, and much fraud occurred. But in both case we ended up with something tangible and valuable for the nation -a transcontinental rail system 150 years ago, and widespread IT systems 15 years ago.

Perhaps something similar will happen in China -investors wiped out, bad debts written off, but a host of new cities and roads that will somehow be put to use in the coming decades despite no clear view today of how anyone might employ them productively.

[Milton Kuo]

Re: Yes Virginia...It's a Bubble...

Perhaps something similar will happen in China -investors wiped out, bad debts written off, but a host of new cities and roads that will somehow be put to use in the coming decades despite no clear view today of how anyone might employ them productively.

That's assuming the infrastructure was built well enough to not fall apart after five or ten years. Tall order.

[vinoveri]

Re: Yes Virginia...It's a Bubble...

There is another way to look at it.
The "American method" is to pour money into new things with no clear idea of how it will all turn out. The classic examples are US railroads and US internet infrastructures. In both cases manias developed, most investors were wiped out, and much fraud occurred. But in both case we ended up with something tangible and valuable for the nation -a transcontinental rail system 150 years ago, and widespread IT systems 15 years ago.

Perhaps something similar will happen in China -investors wiped out, bad debts written off, but a host of new cities and roads that will somehow be put to use in the coming decades despite no clear view today of how anyone might employ them productively.

And this is the one point of "success" that Austrian economists have not been able to answer. While I agree with many of their tenets, what they fail to seem to see is just this; the gov creates money and pumps it into creating tangible wealth in the form of infrastructure, etc. Fiat capital (i.e., capital created ex nihilo not having previously been saved) can in fact result in productive ends as long as confidence in the monetary unit is maintained.

If we lived in a world of philosopher kings, I would not have much problem with fiat currency b/c it would be used for the benefit of all. This is a dramatic contrast to our current environment of course where it benefits a select grout vastly more than the society at large.

[GRG55]

Re: Yes Virginia...It's a Bubble...

There is another way to look at it.
The "American method" is to pour money into new things with no clear idea of how it will all turn out. The classic examples are US railroads and US internet infrastructures. In both cases manias developed, most investors were wiped out, and much fraud occurred. But in both case we ended up with something tangible and valuable for the nation -a transcontinental rail system 150 years ago, and widespread IT systems 15 years ago.

Perhaps something similar will happen in China -investors wiped out, bad debts written off, but a host of new cities and roads that will somehow be put to use in the coming decades despite no clear view today of how anyone might employ them productively.

Certainly.

The US Interstate Highway system might be another example, sans bubble, in between the two you cited.

The question is whether China is at a similar point in its development and influence on global economic affairs as the USA was in the period between the end of WWI and the massive collapse of its financial system credit excesses in 1929, or has China already made the great leap forward to a place similar to the USA in the 1950s?

The title of this thread gives away my long standing view on this question...

[GRG55]

Re: Yes Virginia...It's a Bubble...

That's assuming the infrastructure was built well enough to not fall apart after five or ten years. Tall order.

Shanghai circa 2009. I am quite certain I wouldn't feel all that enthused about living in any of the adjacent, identical looking apartment blocks. Maybe that's why so many of them are empty in China? :-)

[Milton Kuo]

Re: Yes Virginia...It's a Bubble...

Shanghai circa 2009. I am quite certain I wouldn't feel all that enthused about living in any of the adjacent, identical looking apartment blocks. Maybe that's why so many of them are empty in China? :-)

If that's the fallen apartment/condominium building that I think it is, it didn't even come close to surpassing the meager five or ten years I was saying China's infrastructure would not last. Tenants hadn't even moved-in to the building when it toppled due to shoddy design!

If the infrastructure is all constructed so poorly, in the event of a bust, not only will China have to wipe out investors and write off bad debt, they'll have to write off the infrastructure as well!

Makes me wonder how long that the Bay Bridge in California is going to last.

[shiny!]

Re: Yes Virginia...It's a Bubble...

What's the deal with the Bay Bridge?

[thriftyandboringinohio]

Re: Yes Virginia...It's a Bubble...

What's the deal with the Bay Bridge?

Critical components of the new bridge are being manufactured in China.

[Milton Kuo]

Re: Yes Virginia...It's a Bubble...

Critical components of the new bridge are being manufactured in China.

Yep. And you can bet your boots I'm going to avoid ever using that bridge.

[GRG55]

Re: Yes Virginia...It's a Bubble...

What's the deal with the Bay Bridge?

don posted some interesting stuff about the Bay Bridge a while back:

Here: http://www.itulip.com/forums/showthr...and-the-Bridge

And here: http://www.itulip.com/forums/showthr...-Bridge-Update

It's surprising how much good info from the past there is on iTulip. But it does require an "archeological dig" to unearth it sometimes...

[Southernguy]

Re: Yes Virginia...It's a Bubble...

To know, really know, what the quality of production in China is like you should have statistical information that could be trusted.
Ipads, Ipods, Iphones and the lot are made in China. So what?
China is a gigantic county: a new electric generating plant (most of them coal fired) is built every few days.
How many apartment buildings are built every week?
Of course, a new apartment building collapsing is big news. The photo deservedly travels worldwide. But what does happen with the photos of the buildings that do not collapse?
In Uruguay most (90% or more?)motorcycles are made in China. Are they comparable to a Honda?. Certainly not. But they work.
Thousands of people (in this 3.3 million country) use them daily.
The same can be said of all types of machinery: metallurgic, cranes, earth movers, utility vehicles, etc.
I am not worried by many Itulipers holding erroneous concepts about many things happening around the world because of political-values (axiologic) issues.
You have the right to think as you like.
The problem is that for the sake of economic analysis (which has always a heavy political component inside it) the certainty or which is essential for investing acumen, you should have a much better perception about how the world works.
I have seen here repeatedly said here that Chavez is a dictator.
Well, Mr. Chavez won no less than 8 or 9 free elections in Venezuela from 1998 when he was elected President for a first time.
There is a free press in Venezuela, opposition media are virulent and very agressive. They have a lot of money and bigger audiences than the official press.
Nobody is in jail because of political affiliation-opinions.
Moreover: in 2002 a military coup with the collaboration of the main chambers of commerce deposed Chavez for a couple of days. The President was very near to being killed.
Thousands of people came to the rescue. Chavez was freed and retook office.
After that Chavez did not carry out any repression to be noted.
No one was killed. As far as I remember only one or two civilians were prosecuted and spent some few years in not particularly harsh imprisonment.
A few military officers lost their jobs.
Letīs imagine the same situation in the USA.
How many people would have been subject to the death penalty?
Because deposing the President is the worst possible form of treason here, there and everywhere.
Letīs say it again: What I am telling about Venezuela is just an example of gross misrepresentation of political reality of an important (big oil producing) country.
I am not worried by the moral-political-ideological implications of this kind of grossly false perceptions.
I am worried because I have money in this game.
As far as those misrepresentations donīt touch the essential aspects of economical analysis all is well.
But I think a more leveled approach should be in place of world affairs.
There is a lot of corruption going on in Venezuela.
But it has a free press and elected government.
What can you say to that respect of the oil rich monarchies in the Middle East?
All that has much to do with political stability.
Which is heavily related to nothing as important as oil.
China is the second world economy and it is expanding fast.
To misjudge whatīs going on there is dangerous.
To that respect I am reassured by EJ talking some time ago of the "wall of money".
You donīt have to cheat anybody inflating any bubble if the money to finance investment in infrastructure, industrial production, high education, etc. comes directly from the State printing press.
When the financing comes from private investors who must earn an interest out of the money then there is the need to inflate bubbles and cheat a lot of people.
Some years ago, when the bubble burst in the USA and the "great recession" began I made the mistake of thinking that China was about to a hard landing. History demonstrated I was wrong.
The same happened when Roosvelt financed USA reconstruction with public money. There was no need for anyone to be robbed.
The real constraints for public financing are the national balance of payments, the current account and the supply of essential raw materials.
A so big exporting machine as China is well inside the limits, so far, allowed by economic fundamentals.
Something of the sort happens when Argentina is analyzed.
Following mainstream financial pundits and media many people consider Argentina as some kind of rogue country.
They are mistaken. And they are loosing a good investment opportunity which is Argentina public debt.
It is absurd that a country as Argentina which is paying down itīs public debt out of CB reserves has a 1000 bp risk premium
While Uruguay, which is paying down debt with new emissions and therefore debt is continously expanding has a 100 bp risk premium.
Thatīs the kind of market anomalies that allow to make a buck.
But they depend on a well balanced political as well as economic analysis. Free of propaganda.

[GRG55]

Re: Yes Virginia...It's a Bubble...

To know, really know, what the quality of production in China is like you should have statistical information that could be trusted.
Ipads, Ipods, Iphones and the lot are made in China. So what?
China is a gigantic county: a new electric generating plant (most of them coal fired) is built every few days.
How many apartment buildings are built every week?
Of course, a new apartment building collapsing is big news. The photo deservedly travels worldwide. But what does happen with the photos of the buildings that do not collapse?...

They appear in the background of the photos of the identical structures that did collapse.

In Uruguay most (90% or more?)motorcycles are made in China. Are they comparable to a Honda?. Certainly not. But they work.
Thousands of people (in this 3.3 million country) use them daily.
The same can be said of all types of machinery: metallurgic, cranes, earth movers, utility vehicles, etc.
I am not worried by many Itulipers holding erroneous concepts about many things happening around the world because of political-values (axiologic) issues.
You have the right to think as you like.
...

After finishing the bunker (long time iTulipers will know what that means) in December 2011, I spent the past calendar year as CEO running a junior gold and silver mining company in one of the Central Asian Republics that my partners and I are invested in. I lived there full time. My commentary and opinions about China are formed, in part, from first hand experience dealing, on a commercial level, with Chinese manufacturers, Chinese wholesale suppliers, Chinese banks, Chinese air freight companies, etc. My views come from my own experiences and observations. I often use a lot of anecdotes to explain those on this site. The apartment building is one example of that (I first posted it on another thread back in 2009 when the incident happened). It is a symbol of what is wrong within China and the Chinese economy. So are the collapsing bridges/overpasses, the failures of the high speed trains that have resulted in horrific fatalities, the fatality rates in their coal mines, and so forth.

I have likened China to the USA in the post-WWI-Roaring Twenties era. A rising power that was just starting to exert real influence over global affairs...ultimately displacing England as the predominant economy and reserve currency holder later in the 20th century. Perhaps in this century China might achieve something similar compared to the USA. Perhaps, but at this point far from an assured outcome as many pundits would wish to have us believe.

In some ways China might also be compared to Japan in the 1950s and early 1960s...a producer of low quality goods ("Made in Japan") viewed as a nation that was incapable of creating anything itself, but good at "copying" what others invented (sounds familiar, non?).

I find it interesting that China is behaving in a similar fashion to both the USA and Japan during those earlier periods, internally absorbed and deliberately isolationist in its external politics. China has been described as a dragon at home (aggressive internal political control) and a panda abroad (official policy of political non-interference).

Japan ultimately overcame both the reality and reputation of that time, grew to become the second largest economy on earth, celebrated that success by inflating an internal property and financial bubble of magnificent proportions...and have been trying to recover from the party hangover ever since. Some might think the USA did more or less the same during the Roaring Twenties, and lived to do it all over again, on a bigger scale this past decade. China looks to be following that same pattern...well on the way to creating a new record-breaking mother-of-all-credit-bubbles. Why should it end any differently for it?

As you describe, China today is a third world economy, producing largely third world quality goods for third world consumers. My experiences in 2012 cemented my opinion that I prefer not to have anything to do with Chinese-made products, and I have no respect for their repeatedly untrustworthy business practices (which are by no means unique to China). At this point in time I think their human capital, in the form of engineering and technical services, is their real value proposition to anyone wishing to do business with them.

These are some of the reasons I don't think its as big a threat to the USA as many make it out to be. Yet.

[ProdigyofZen]

Re: Yes Virginia...It's a Bubble...

If that's the fallen apartment/condominium building that I think it is, it didn't even come close to surpassing the meager five or ten years I was saying China's infrastructure would not last. Tenants hadn't even moved-in to the building when it toppled due to shoddy design!

If the infrastructure is all constructed so poorly, in the event of a bust, not only will China have to wipe out investors and write off bad debt, they'll have to write off the infrastructure as well!

Makes me wonder how long that the Bay Bridge in California is going to last.

Milton, have you ever considered that is China's plan? For example they will build a sidewalk outside an apartment building and after two years tear it up and put a new one in.

This all to keep economic GDP high. If they build a structure that lasts only 10 years well fantastic they can fix it or build another one and continue the imports of iron ore, concrete etc into perpetuity and their population base allows for it.

They could care less if the building falls like the one in the picture, it is not like the citizens are going to sue the builder or government.

The point is they can keep this up longer than you can stay fearful of a collapse.

[lektrode]

Re: Yes Virginia...It's a Bubble...

....The point is they can keep this up longer than you can stay fearful of a collapse.

at least until they run out of plentiful natural resources and cheap labor....
and/or ink, 'digital' or otherwise...

this image comes to mind: