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China Can’t Sustain Its Debt-Fueled Binge, Moody’s Says

nytimes.com

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Re: China Can’t Sustain Its Debt-Fueled Binge, Moody’s Says

#231

Post by ryandamm »

spangry wrote: post #175
valarauca1 wrote: post #147

Earlier quoted context omitted.

Solow-Swan model is based on neoclassical economics that assumes a closed market with zero technological growth. In the event of technological growth it assumes a steady state is still reached. And I quote, "Due to Common Sense." [1] How TF do you consider this a valid scientific theory? This is a theory based on NeoClassical economics which modern Behavior Economics finds that the models of NeoClassical economics fa…

I don't have the time atm to get into much detail (but will come back in 8ish hours after work), but very quickly: - This is just a simplified description of probably the simplest macro-economic growth model you'll learn if you study economics. It's basically the model you learn in Macro 101. I didn't really want to write a super-long post going through all the extensions of the base model (not to mention the more co…

Great, detailed response -- I learned a lot from this, so thank you. Also, I think it's hilarious/curious that the actual economist's response is buried in a thread.

Internet message boards (yes, even HN's) are not kind to actual expertise.

Re: China Can’t Sustain Its Debt-Fueled Binge, Moody’s Says

#232

Post by ryandamm »

gitah wrote: post #174
ryandamm wrote: post #130

Earlier quoted context omitted.

He elaborates on technology improvement in other articles, but it boils down to: technological improvements have a range of returns, but even the most optimistic of historical returns to technological progress can't paper over the debt-fueled boom China is currently undergoing. Basically, qualitatively, you're right. Technological improvements can generate growth from scratch. But when you look at the historical data…

I don't get it. US workers still have 5x higher average income than China. Doesn't this suggest there are still a ton of technological improvement left to exploit? Why can't China just keep walking the same path of technological improvement as the US?

The average disguises a few things. One, I assume that's in absolute terms and not, say, purchasing power parity (which accounts for lower consumer prices in China).

Two, the 'average' in China includes huge numbers of the rural poor. They are living in the third world; an office worker in Shanghai is not, but her income's contribution to the average is diluted by rural subsistence farmers.

This does suggest that there is room for growth via urbanization and modernization: if subsistence farmers switched to commercial farming, and the excess labor moved to productive cities, in theory you've got a productivity boom. But China's productivity is predicated on the world's ability to absorb their excess production, which is not actually unlimited. That said, the central government is taking deliberate steps to encourage urbanization (while simultaneously not undertaking some reforms that would help, like overhauling the hukou system).

Re: China Can’t Sustain Its Debt-Fueled Binge, Moody’s Says

#233

Post by ryandamm »

yxhuvud wrote: post #199
mistermann wrote: post #158

Earlier quoted context omitted.

"To move from the abstract to something specific, I will assume, as occurred in 2009-10 as a consequence of the global crisis, that for reasons external to China there is a sharp contraction in its current account surplus, mainly caused by a sharp fall in exports....." (he then goes on to describe the repercussions that match his model.) Maybe I'm misunderstanding what he's saying, but isn't what he describes true of…

So what you are talking about would amount to a rebalancing of the economy from the SOEs to the private sector. This is something he has written extensively about and that he thinks is necessary for long-term sustainable growth. But something has to be done about the SEOs, and right now they are kept afloat by a transfer in the OTHER direction. That is, the resources spent on their debt is cannibalizing growth in oth…

To piggyback on your point, Pettis lays out explicitly how China should shift to consumer-driven GDP growth... then also points out how politically difficult it will be (because it likely entails assigning losses to the wealthy and politically connected, via breakup of SOEs, transfer of wealth to households from the government, etc).

So yes, grandparent's point is correct, that there's room for consumer-led GDP growth. But the mechanism for how to get there is not easy. (And it's something Pettis has written about extensively.)

Re: China Can’t Sustain Its Debt-Fueled Binge, Moody’s Says

#234

Post by grzm »

ryandamm wrote: post #231
spangry wrote: post #175

Earlier quoted context omitted.

I don't have the time atm to get into much detail (but will come back in 8ish hours after work), but very quickly: - This is just a simplified description of probably the simplest macro-economic growth model you'll learn if you study economics. It's basically the model you learn in Macro 101. I didn't really want to write a super-long post going through all the extensions of the base model (not to mention the more co…

Great, detailed response -- I learned a lot from this, so thank you. Also, I think it's hilarious/curious that the actual economist's response is buried in a thread. Internet message boards (yes, even HN's) are not kind to actual expertise.

> Also, I think it's hilarious/curious that the actual economist's response is buried in a thread.

> Internet message boards (yes, even HN's) are not kind to actual expertise

Would you elaborate on this, in particular what you mean by buried? I'm assuming you're referring to 'spangry's responses. Given the nature of threading and where 'spangry chose to respond, I don't see how it could be anywhere other that where it is. As of the posting of this comment, both of 'spangry's responses are the highest of its siblings. Are you thinking of a different model of threading or highlighting highly-upvoted comments?

Re: China Can’t Sustain Its Debt-Fueled Binge, Moody’s Says

#235

Post by HillaryBriss »

state_less wrote: post #145
HillaryBriss wrote: post #126

Earlier quoted context omitted.

but, strictly speaking, the Fed isn't the same as the federal government. also, the US government has borrowed a whole hell of a lot of money from outside sources (e.g. corporations, US investors, and foreign governments from Japan to China to Saudi Arabia to European nations)

The Fed was enacted by the federal government and lives under its rule of law. I'm not sure what you're digging at. I think we need numbers because I don't know what you mean when you say, "a whole hell of a lot of money." It looks like the citizens hold 70% of the debt. And keep in mind, these countries come to us to put their money in treasury bonds. They buy bonds that don't pay a very spectacular rate either (2.2…

You're right, but, I'm just focusing on the fact that the Fed maintains a distance, an independence, from politicians and government officials. The Fed is not directly accountable to an elected leader in the same way that a typical federal agency is.

As for who buys government bonds from the US Treasury, I just wanted to emphasize that the Fed is not the only buyer.

The often repeated notion that, "to a great extent, we owe this money to ourselves," is not necessarily comforting. Most American citizens have very little, if any, savings. The "ourselves" in that notion is heavily weighted to a relatively small number of wealthy US citizens. It's fair to question whether their interests align with the interests of the average US citizen.

Re: China Can’t Sustain Its Debt-Fueled Binge, Moody’s Says

#236

Post by state_less »

HillaryBriss wrote: post #235
state_less wrote: post #145

Earlier quoted context omitted.

The Fed was enacted by the federal government and lives under its rule of law. I'm not sure what you're digging at. I think we need numbers because I don't know what you mean when you say, "a whole hell of a lot of money." It looks like the citizens hold 70% of the debt. And keep in mind, these countries come to us to put their money in treasury bonds. They buy bonds that don't pay a very spectacular rate either (2.2…

You're right, but, I'm just focusing on the fact that the Fed maintains a distance, an independence, from politicians and government officials. The Fed is not directly accountable to an elected leader in the same way that a typical federal agency is. As for who buys government bonds from the US Treasury, I just wanted to emphasize that the Fed is not the only buyer. The often repeated notion that, "to a great extent,…

> The Fed is not directly accountable to an elected leader in the same way that a typical federal agency is.

That can be a good thing. We separate the three branches, specifically not to have direct accountability to a single branch. And we buffer power changes over many election cycles. Otherwise one branch, say the executive, could just fire a judge or investigator when they broke the law.

> The often repeated notion that, "to a great extent, we owe this money to ourselves," is not necessarily comforting.

I wasn't repeating that notion. In my mind, going bankrupt is not a good thing in either case.

> Most American citizens have very little, if any, savings. The "ourselves" in that notion is heavily weighted to a relatively small number of wealthy US citizens.

I guess you could say, if you're wealthy you have more to lose, but poor people might lose their life if the US goes bankrupt whereas wealthy families would probably survive, though with a smaller balance sheet. So it matter to both poor and wealthy alike if we are reckless and go bankrupt, probably more so if you're poor. And I agree, we should be questioning if wealthy interests are putting themselves or the country first, because we don't have much use for those who aren't improving citizen's welfare.

Re: China Can’t Sustain Its Debt-Fueled Binge, Moody’s Says

#237

Post by ryandamm »

ethbro wrote: post #219
draw_down wrote: post #82

Earlier quoted context omitted.

Good rule of thumb if you're an individual investor. If you're China, well...

I would also assume that a majority of the options to "call an irrational market's bluff" aren't freely available vis China. So it would be less exposed to international market driven deleveraging? (Actually asking, I know they've been loosening their financial walls but am not sure what the current controls are)

To the extent people are trying to trade on this model, they look for liquid marketplaces that are exposed to China's economy. Australian metals and mining stocks, for instance, or currency fluctuations in closely-pegged economies (forex being pretty darned liquid with a very deep futures market).

Chinese equities are something else entirely, closer to a derivative class. And hard to trade in directly (not that I have tried or would ever try -- I'm in index funds).

And the truth is, the banking system is less liquid, and the equities market much smaller, than developed economies. Oh, also, short-selling is illegal, I believe.

So no, there aren't any natural, market-driven checks on this stuff.

Re: China Can’t Sustain Its Debt-Fueled Binge, Moody’s Says

#238

Post by ryandamm »

ethbro wrote: post #224
chadcmulligan wrote: post #207

Earlier quoted context omitted.

So how does Germany manage to avoid the same situation?

By being politically dedicated to maintaining low levels of debt:GDP. It's easier when, as parent said, your voters remember what happens when things go really badly.

But this is actually why the euro isn't an optimal currency area. Germany's low levels of debt:GDP are a result of explicit suppression of the household sector -- a deal struck by Merkels government with labor unions to restrain wage growth.

This kept German industry competitive, and enhanced exports. This overall made the euro stronger, but not as strong as the deutschmark would have been. Greece suffered from the other end: they became less competitive by being tethered to Germany's economy.

Re: China Can’t Sustain Its Debt-Fueled Binge, Moody’s Says

#239

Post by ryandamm »

drcode wrote: post #31
ryandamm wrote: post #15

I think the best model to understand this is Michael Pettis's balance sheet analysis. He covers it extensively, but here's his latest digest of the model: http://carnegieendowment.org/chinafinancialmarkets/66221 It really makes clear how stark the choices are for China. The debt binge of the last ~10 years has masked the flattening out of productive investment, and there will need to be a reckoning. Hopefully it's a…

It seems like smart people have been predicting that China's growth is unsustainable on a regular basis for at least 15 years... it's tough for an average HNer like myself to take the time to tell which "expert" is just blowing smoke and which expert truly has a handle on the salient facts- Guess all I can really do is simply wait and see who ends up being right...

Everything exponential is ultimately unsustainable.

The value of these analyses is they try to plumb the limits of the model; there was a substantial sea change in how China's economy operates ~2008-9, with a shift towards massive debt growth. That's inherently less sustainable, particularly because the rate of debt growth is climbing.

Re: China Can’t Sustain Its Debt-Fueled Binge, Moody’s Says

#240

Post by state_less »

HillaryBriss wrote: post #121
matheweis wrote: post #43

Ok, this is probably a silly question, but who holds all the debt now? The avg US citizen would say China holds much of the US debt, but now it sounds like China is borrowing their way into trouble too... it's not any of these third world countries... who is it?

This is from the NYTimes article itself: ... the biggest category of debt in China is corporate debt, which equals almost 170 percent of annual economic output. This debt consists overwhelmingly of loans by state-owned banks to state-owned enterprises. So ... does that answer the question? I'm not sure. I'm used to thinking about how much money the US government owes to outsiders . But, this "state owned enterprise"…

Here is a toy scenario, suppose we have 1000 people and they are capable and willing to build a new solar electric system. The problem is, nobody has any money. The 1000 people could form an institution, let's call it a bank, that would hand out IOUs to anyone who wants to build and install the solar panels. Some of the 1000 people agree and start building out the electric system. Once the system is in place, people start paying the organization for electricity and then all the IOU holders can get payed for their work.

The payments to the organization might come in the form of goats, chickens, timber, or even IOUs!

If the organization had used the debt to make a bunker instead of an electric system. The citizens may not be so interested in hanging out and using (paying) for the bunker, so all the IOU holders would be out of luck.

In other words, if the IOUs to the contractors aren't eventually repaid. People won't accept IOUs from the organization (bank) anymore.

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