Standby for the Second Asian Financial Crisis
Posted on 31 May 2010 with 2 comments from readers
British economists wrote to Her Majesty the Queen to apologize for not seeing the global financial crisis on the horizon, or even just before it happened. Is the same mistake now being made by economists so enamoured with Asia that they fail to see the coming downfall? They also missed the first Asian Financial Crisis, why not the second?
Why do highly educated economists with degrees by the bucketload miss key turning points in the global economy? It is not for lack of traveling or meeting with the right people. It is more the myopic fascination with formulas and projecting lines on graphs to the exclusion of imagination.
China crisis
Take China. The economist can see nothing more than a high growth level that can be projected forward. Of course any expert or government leader he or she meets in China will support that view.
But where did that high growth rate first come from? It came from a decade of ever increasing exports to the US and Europe. That is now over. This is the end of a trend, not a line carrying on up into the future.
It is very much the same as US subprime housing loans. Indeed, almost identical. The Chinese economic miracle is now built on real estate and construction fuelled by cheap loans. That is a boom approaching a bust which may already have happened with house prices tumbling last month in many cities. Bond issues by Chinese developers have stalled, cutting off their credit lines.
Dubai x1000
Hedge fund manager Jim Chanos calls it ‘Dubai times one thousand’. Anybody who lives in Dubai knows what an economic ’sudden stop’ feels like. We had one in October 2008 and half-built skyscrapers litter the city, and the economic mess has brought a deep recession.
Dr Marc Faber suggests shorting Australia or industrial metals as a way to play the coming collapse of China which will be the Second Asian Financial Crisis. For these countries have only been extending their previous boom times with bailouts and subsidies, and do not have the domestic consumer demand to support a fresh boom of their own, beyond the initial bubble phase.
This bubble is going to come unstuck. This is not a new era. It is so obvious that economists ought to see it picked out in neon lights ten metres high but for some unfathomable reason the dismal science is always seduced by the present and recent past, and cannot see into the future.
Would it not be reasonable to expect Asia to correct and consolidate its recent boom before enjoying another, especially given the major problems in its key export markets? And after such a long and powerful upturn since the first Asian Financial Crisis is it not about time for another?
2 Comments posted by readers:
Well said, Peter.
On The Nature of Economists:
There’s an old saying that goes something like this: “ on the average, people are not as dumb as economists” author unknown
Prof. James Galbraith Speaks Out:
A few weeks ago, Prof. Galbraith testified before the US Senate Judiciary Committee about the nature of economists. He began his discourse with the following paragraph:
“I write to you from a disgraced profession. Economic theory, as widely taught since the 1980s, failed miserably to understand the forces behind the financial crisis. Concepts including “rational expectations,” “market discipline,” and the “efficient markets hypothesis” led economists to argue that speculation would stabilize prices, that sellers would act to protect their reputations, that caveat emptor could be relied on, and that widespread fraud therefore could not occur.”
Is it any wonder why economists can’t see the forest through the trees? Take US economists, as an example. Most economists in the US who are half-way competent also serve as “consultants” to the US FED . . . and they are paid handsomely for agreeing with the FED’s general consensus.
That fact, coupled with their endless and myopic fascination with their economic formulae (which work only during boom times!!!) are the reasons.
I think you may be talking about economic models when you hark on about poor economics and formulas, and yes you are correct! any calculation which has all unknown variables is simply untrustworthy. If no constraints can be used as laws to govern the variable then the chance of correctly measuring a variable is very slim, a multitude of these a computation makes not. However, as for China the chance of their exports falling is dependent on the world economy! They have a mass of commodities bought during the downturn at low prices which means they will still produce the lowest cost goods by a long way when the economy recovers, This would also ask a question of the idea on shorting Australia, sorry mate the contracts are signed and paid for as the Aussie might say, and the continued movement of people who on average have little debt and more money than the average westerner mean that the internal economy will continue to grow unless the world economy falters, in which case other countries will suffer more than the Chinese.
Their housing bubble is fed by the movement of people from the country to the cities , 600,000,000 still live in the country. Not to sure how many people live in the country near Dubai? and to be honest 50% of people in Dubai worked in the built environment, thats why it happened, stupid prices and a lack of realisim or real exports or money making ideas. The Chinese on the other hand have been trying to calm their market for years now.
The movement is why the property continues to rise, but you should also look closer at the Chinese property market itself.
1. High costs are associated with only some cities, these cities are very popular and will remain so.
2. The majority still rent so while there is massive building it is only the prices of the private sector which represent less than 1% of all residential property which is in reality potentially on the market, these are funded with large deposits.
As for bad loans this is poor research once again. The majority of money lent was lent at incredibly low rates to be used as an incentive to produce more demand in the wider economy, however the Chinese being the Chinese accepted the money and for the most part put it in bank account incase A, things turn out bad and B, to gain the interest from the saving account interest rates which are higher than the original loan rate.
I suspect Dubai, the Middle East the rest of the world and Chinese will grow in the next few years. Countries which will struggle include the UK, Ireland, Spain and several eastern European economies, I would imagine the USA will also come out smelling of roses.
Ed Note: Yes people wrote similar comments at the top of the Dubai boom – spot the unsustainable bubble, we have learned out lesson!