The following is being used to point out that China is not in a bubble.
mortgages are not being spliced up and packaged and securitized by the likes of Citigroup and Bank of America. Instead mortgages are held by the original lenders, the way they were in the U.S. before financial innovation and lack of regulation broke down the old rules.
From: http://www.lewrockwell.com/rogers-j/rogers-j69.1.html
Even though this is true, I thought China was lending hundreds of billions of dollars to troubled economies (e.g U.S.) in order for them to buy Chinese goods. This sounds almost as bad as selling debt as an asset the way banks did to the world. Does this mean that China is not only blowing Chinese bubbles (plural), but also worldwide bubbles?
China's bubble is forming in specific commodities. Does the author of that article believe in Austrian monetary theory? If so, how can he claim that there is no malinvestment if the Chinese central bank has been expanding the renminbi's monetary base?
EDIT: Nvm, I see that the original article was published by Forbes. It is a more mainstream interpretation.
Thanks for the questions. The monetary base is increasing and mal-investments are being made. The author then overlooks another important aspect: Malinvesments leading to more gov't action.
[The Chinese Gov't] is therefore limiting the sizes of new apartments and restricting the construction of stand-alone luxury villas. (Most people in China's urban areas live in high-rise apartment buildings. I myself live in a 60-story building.) The government is also forcing developers to build low-income housing. And to prevent flipping and excess speculation, it is heavily taxing sellers who unload their properties within two years of buying them.
So the State increases the monetary base, mal-investments are made, and investors (like the author) believe it's not a big problem because the gov't is preventing more mal-investments through regulation. So we have monetary inflation with a splash of fascism?
The problem is one of simply looking at the housing market. The next bubble is not going to be in the housing market. Bubbles can exist in any industry which attracts the investment.
More interesting to me is the massive breakdown in logic. Since when does the fact that mortgages are not being securitized preclude the possiblity of a bubble in housing? I'm not saying that there is I'm just saying that quote is utter nonsense.
More interesting to me is the massive breakdown in logic....Bubbles can exist in any industry which attracts the investment.
Someone noticed how garlic bulbs and tulip bulbs look very similar :)
I've just read the original Forbes article. Typical fare written by a typical economist: please read the phrase about Alan Greenspan being an "Ayn Rand lover" and being staunchly against government intervention which had me laugh for a good ten minutes. This man is not insane. Nor deaf, dumb and blind. Nor he has lived under a rock for the past thirty years. He most likely hold at least one PhD and probably gets paid a few thousands a month for spouting out such hilarious lines. Sadly he's not working for Comedy Central.
China will pull through just nicely if they can avoid a war with the US. Sure, they'll have a few bubbles but they can survive. Contrary to the US and Europe that can ill afford what the depression has in store for them.
Before, I went to bed last night (this morning) that article provided for some late-night laughs. Honestly, I read most of the article, but couldn't get through the rest.
No logic. Whatsoever.
Kakugo: China will pull through just nicely if they can avoid a war with the US. Sure, they'll have a few bubbles but they can survive. Contrary to the US and Europe that can ill afford what the depression has in store for them.
How certain are you that when the real estate bubble there bursts, they will "pull through just nicely?" There seems to be quite a lot of inflation and devaluation of their currency, not to mention they are propping up a phony economy in the US, all while they are blowing up a real estate bubble that will eventually bust.
ThreeTrees: More interesting to me is the massive breakdown in logic. Since when does the fact that mortgages are not being securitized preclude the possiblity of a bubble in housing? I'm not saying that there is I'm just saying that quote is utter nonsense.
The mainstream thought is that it wasn't credit expansion by a central bank that caused the boom and bust, but it was the securities market that just, all of a sudden, went out of control as a result of greed and the repeal of glass-stegal.
The Chinese bubble (like many other bubbles) will provide more empirical evidence in support of the ABCT, and will show that the securities market isn't necessarily the culprit. It will be something else this time.
Mainstream opinion would logically hold that railroads, banks, securities markets, the stock market, computers, houses, oil and whatever else causes business cycles. They fail to see that every time it was always a result of government intervention/monopoly on money.
^Werd. Securitization can't "get out of hand". What gets out of hand is when those derivatives which have an underlying asset who's value is contingent on a liquidity spigot are used to capitalize banks.
But even if you don't understand the ABCT there's still those pesky, speculative "animal spirits" that so many believe are responsible for bubbles that (supposedly) don't rely on credit expansion or securitization to drive up asset prices.
ThreeTrees: What gets out of hand is when those derivatives which have an underlying asset who's value is contingent on a liquidity spigot are used to capitalize banks.
What gets out of hand is when those derivatives which have an underlying asset who's value is contingent on a liquidity spigot are used to capitalize banks.
I understand what you're saying, but the average attention span is much to short to pay attention to this. :( Hence, "animal spirits".
*As a side, I know that ABCT isn't a scientific theory that needs evidence to back it up. It's deductively derived. I'm just saying that these developments will help in providing empirical evidence in the sense that it will make the case stronger from a mainstream point of view.
da01tv: Even though this is true, I thought China was lending hundreds of billions of dollars to troubled economies (e.g U.S.) in order for them to buy Chinese goods.
Even though this is true, I thought China was lending hundreds of billions of dollars to troubled economies (e.g U.S.) in order for them to buy Chinese goods.
The way you describe this it would be stupid (working for nothing), but it would not be a bubble.
Jonathan M. F. Catalán:The problem is one of simply looking at the housing market. The next bubble is not going to be in the housing market. Bubbles can exist in any industry which attracts the investment.
You don't see malinvestments in the housing market in China? I read your article you have linked in which you brought up barley and garlic. Is there anything else you've come across that is being excessively credited (seemingly forming a bubble)?
Marko: da01tv: Even though this is true, I thought China was lending hundreds of billions of dollars to troubled economies (e.g U.S.) in order for them to buy Chinese goods. The way you describe this it would be stupid (working for nothing), but it would not be a bubble.
I personally think purchasing U.S. Treasuries is a textbook case of malinvestment. ;)
But seriously, China dooms itself to inflationary monetary policy as long as it doggedly pegs the Renminbi to the Dollar. The only way to do so is to inflate/devalue the Renminbi as fast as the U.S. inflates/devalues the dollar.
That's why other Asian countries are screaming about us exporting our bubbles over there into their economies. The "hot money" is flowing from here to there and they aren't happy about it. Some of them have already experienced the resultant boom bust cycles and they are not happy about it.