Mish's Global Economic Trend Analysis |
| Indebted Dragon: The Ponzi Scheme Driving China's Construction Economy Posted: 28 Nov 2012 04:16 PM PST In Indebted Dragon, Professor Lynette Ong from the University of Toronto discusses how the Chinese economy relies on land as collateral to borrow money while paying the interest on the loans by selling and leasing the land. Ong notes this makes China susceptible to two problems: a real estate bubble and political instability stemming from displaced farmers who land has been taken from them. The subtitle to Ong's article is "The Risky Strategy Behind China's Construction Economy". I suggest "Ponzi Scheme" is a more apt description than "Risky Strategy". Let's take a closer look. For four decades, the Chinese economy has grown by between seven and ten percent each year. It is the envy of the world, despite its relatively sluggish recent performance. Visitors to Beijing, Shanghai, and other major Chinese cities are quickly awed by impressive skyscrapers, glittering shopping malls, new highways, and high-speed rail lines, all of which leave the impression that China is a developed economy -- or at least well on its way to becoming one. Even in some smaller cities in inland provinces, government buildings make those in Washington and Brussels appear meager. In an area of Anhui Province that is officially designated an "impoverished county," the government office block looks exactly like the White House, only newer and whiter.Classic Ponzi Behavior Perpetually rolling over an ever-growing number of loans to pay off prior loans is classic Ponzi behavior. SOEs and Overstated GDP Ong concludes with ... "Given slower growth rates and falling real estate prices this year, the frequency of land expropriation is slowing down. But the truth remains that much of urbanization in China is a state-driven phenomenon, using resources drawn from the financial sector. Although the central government recognizes the seriousness of the problem, it seems to lack any real resolve to tackle the issue head on. Muddling through seems to be so much easier. So until a major slowdown in the economy happens, the Chinese real estate market will continue on its current course." The first two sentences are undoubtedly true. State-Owned-Enterprises (SOEs) are a huge drain on the real Chinese economy while making GDP look far better than it really is. For more on the overstatement of Chinese GDP, please see How Sustainable are China's Copper, Cotton, Steel Imports? What About Chinese Purchases of Canadian and Australian Real Estate? Fresh Thinking on Balance of Payments Ghost Malls, Ghost Cities, Infrastructure Malinvestment As noted by Ong, and on numerous occasions by me, China is home to numerous vacant cities. For a discussion, please see World's Biggest Property Bubble: China's Ghost Cities Revisited; 64 Million Vacant Properties The Video of Ghost Cities is a must see eye-opener for those overly bullish on China. China is also home to the world's largest shopping mall and it sits empty. For a discussion and video, please see How Will China Handle The Yuan? A week ago I reported Sky City: China to Build World's Tallest Building, 220 Stories, in 90 Days Unlike Ong, I see no realistic way China can "muddle through" for much longer given the bubble is busting in China right now, but that is my only objection to a very well written article. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific. 
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| Posted: 28 Nov 2012 11:25 AM PST As costs of college soars (with thanks to absurd union salaries and benefits, as well as absurd administrator salaries and benefits), those attending college have increasing trouble paying back loans. The fully expected consequence is Student-Loan Delinquencies Now Surpass Credit Cards. The proportion of U.S. student loan balances that are in delinquency — that is, unpaid for 90 days or more — surpassed that of credit-card balances in the third quarter for the first time, according to the Federal Reserve Bank of New York. [no link provided]37.5% of Graduates Work in Jobs Requiring No Degree In its article Student Loan Debt Hits Another New Record: Study, Senior CNBC Correspondent Scott Cohn cites a study noting these facts.
Cohn mentioned the word "study" fourteen times without once providing a link to the study, or even mentioning the name of the study. I suspect this is some kind of record, jut not one anyone should be proud of. Such semi-plagiarism is quite frankly inexcusable. Who is to Blame? I receive emails from readers all the time blaming the problem on point number four above, state budget cuts. Nonsense. Taxpayers are overburdened too much already. States have cut back on the percentage of money to education out of sheer necessity as education costs have risen far faster than anything else including health care and energy. Here are some charts and comments from my post What Role Does Government Play in Price Inflation? Inflation Comparison - Select Components Since 1978  Inflation Comparison - Current CPI Components Since 2000  The above charts are from Doug Short at Advisor Perspectives. Doug creates excellent charts every month on various CPI components. Rather than reinvent the wheel, I asked Doug for a set of custom charts. Specifically, I had asked Doug to go back to 1971 for both charts. Unfortunately, data for components in the first chart only goes back to 1978, and in the second chart not even that far. The reason I asked for a starting year of 1971 is that's when I started college. Tuition at the University of Illinois in Fall of 1971 was $250 a semester for engineers (My degree is in civil engineering). Current University of Illinois Tuition is $8,278 per semester for Illinois residents, $15,349 for non-residents. Note that tuition difference: $250 in 1971 vs. $8,278 today. Note Areas of Highest and Lowest Price Inflation The least government interference is in apparel and recreation. The most government interference in the free market is education and health care. Education is rife with "no child left behind" madness, free tuition for veterans, and for-profit school scams that flourish only because student loans cannot be discharged in bankruptcy. Chasing the American Dream, Gone Bust I have talked about this many times before. One key post is Trading Caps and Gowns for Mops; Why Go to College If There Are No Jobs? Chasing the American Dream Some People Do Not Belong in CollegeWhenever government sticks its neck into solutions, costs escalate. We saw it in housing, with hundreds of affordable home programs artificially increasing demand, and with Bush's "Ownership Society" artificially increasing demand, etc., etc. We see the same thing now in health care. Expect such problem to grow until they blow sky high, which appears to be right at hand. Mish's Six Point Education Proposal?
I assure you that if those actions were taken cost of college education would crash. But no one really wants that, any more than they want affordable housing. Politicians gain far too much in campaign contributions from unions, from for-profit schools, and from banks wanting to make kids debt-slaves, to really address the problem. Legislators would rather pretend they want to do something rather than actually doing something because it suits their purpose (getting reelected). Unfortunately, millions of students will pay the price as debt-slaves for life. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com "Wine Country" Economic Conference Hosted By Mish Click on Image to Learn More  Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific. 
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