You know how it is with buses? You wait ages for one, far longer than seems reasonable – and then three arrive all at once. Financial crises are a bit like that too.
The financial crisis everybody in the business has really been waiting for is a “hard landing” of the Chinese economy, now one of the two motors of the global economy. (The other is still the United States.) Everybody thought it was bound to come eventually – well, everybody who was not too heavily invested in the Chinese market – and it now appears to be here, although the Chinese government is still denying it.
The second crisis, less widely anticipated, is a credit crunch that is sabotaging economic growth in almost all the developing countries except India. In many cases their currencies have fallen to historic lows against the dollar, making it harder for them to repay the dollars they borrowed. Moreover, it’s getting harder for them to earn dollars from their exports because commodity prices have collapsed.
And a third crisis is looming in the developed economies of Europe, North America and Japan, which can see another recession looming on the horizon before they have even fully recovered from the effects of the banking crash of 2007-08. And it’s hard to pull out of a new recession when your interest rates are still down near zero because of the last one.
These crises are all arriving at once because they are all connected. When the huge misdeeds and mistakes of American and European banks caused the Great Recession of 2008, China avoided the low growth and high unemployment that hurt Western countries by flooding its economy with cheap credit. But that only postponed the pain, and between 2007 and 2014 total debt in China increased fourfold.
The Chinese government is more terrified of mass unemployment than anything else. It believes, probably correctly, that the Communist regime’s survival depends on delivering continuously rising living standards. So the Chinese economy went on booming for another six years, but the “solution” was fraudulent and now it’s over.
The huge amount of cheap credit sloshing around the Chinese economy mostly went into building unnecessary infrastructure, and above all into housing. That did preserve employment, but property values soared and and a huge “housing bubble” was created. There was nobody to buy all those houses and apartments, and there are now brand-new “ghost towns” all over China, so property values are falling fast.
Since the crash on the Chinese stock markets began last month, the government has done everything it could to stop it. It has dropped interest rates repeatedly, it has devalued the currency, it has ordered state institutions to invest more – and nothing has worked.
Chinese exports have fallen 8 percent in the past year, and even the regime admits that the economy is growing at the lowest rate in three decades. Nobody outside the regime knows for certain, but it may scarcely be growing at all. The “hard landing” is now close to inevitable.
Now for the second crisis. While China’s artificial boom was rolling along, its appetite for commodities of every sort, from iron to soya beans, was insatiable, so commodity prices went up. The other “emerging market economies” grew fast by selling China the commodities it needed, they attracted large amounts of Western investment because of their rapid growth, and they borrowed freely because Western interest rates were at rock-bottom.
The collapse of Chinese demand ends this party too. From Brazil to Turkey to South Africa to Indonesia, exports are falling, the value of the local currencies is tumbling, and foreign investors are fleeing. Capital flight from the 19 largest emerging market economies has reached almost one trillion dollars in the past 13 months, and the outflow is still accelerating.
And the third crisis, in the West? The problems that caused the crash of 2007-08 have not really been addressed, just papered over. What limited growth there has been in Western economies is due almost entirely to absurdly low interest rates and“quantitative easing” (governments printing money).
The average time between recessions in the West is seven to ten years, so one is due around now anyway. The likeliest trigger for that is a collapse of demand in China and in the other emerging economies, which is now practically certain. And when it hits the West, neither of the traditional tools for pulling out of a recession will be available. Interest rates are already near zero, and the money supply has already been expanded massively.
It would be rash to talk about a long-lasting global depression in the style of the 1930s, because a lot has changed since then. But it is certainly safe to say that the global economy is heading into a perfect storm.
To shorten to 725 words, omit paragraph 7. (“The huge…fast”)
We have been hearing a lot about the 70th anniversary of the first use of a nuclear weapon on human beings, in Hiroshima on 6 August, 1945. The more important anniversary, however, is 9 August, when the LAST nuclear weapon was used in war, on the city of Nagasaki.
It was predictable that atomic bombs would be used as soon as they were developed in 1945. It was the sixth year of the Second World War, and more than 60 million people had been killed already. But nobody would have believed then that nuclear weapons would not be used again in future wars.
We cannot be sure that they never will be used in war again, of course, but seventy years is already an impressive accomplishent. How did we manage that? One way to answer that question is to consider the behaviour of US President Harry S Truman, who was the man who decided to drop the first atomic bombs in 1945 – and the first man to decide NOT to drop them, in 1951.
Truman’s decision to drop the bombs in 1945 probably didn’t seem as momentous to him at the time as it looks now. Killing tens of thousands of civilians in cities by mass bombing (Hamburg, Dresden, Tokyo) was practically routine by 1945, and the atomic bombs would have seemed like just a more efficient way of doing the same thing.
Besides, the fact that Japanese cities could now be destroyed by a single plane carrying a single bomb might well shock the Japanese government into surrendering. That would spare the lives of all the American soldiers (an estimated 46,000) who would die if Japan had to be invaded.
Truman had fought in the First World War (he was the only major Allied war leader who did). Although he was not generally seen as an imaginative man, he would have been vividly aware of the ordeal that awaited American soldiers if they had to invade Japan. He would also have been conscious that the US public would never forgive him if they found out that he had the bomb but didn’t use it to save those soldiers’ lives.
So he gave the orders and the bombs fell, adding a last quarter-million lives to that 60-million death toll. But five and a half years later, when US forces in Korea were fleeing south after Chinese troops intervened in the war there (“the big bug-out”), Truman behaved quite differently.
It may or may not be true that US General Douglas MacArthur, who commanded the United Nations troops in Korea (including a third of a million Americans), wanted to drop atomic bombs on China’s Manchurian provinces to cut the supply lines of the Chinese troops in Korea. It is certainly true that Truman fired MacArthur, and that he did not use nuclear weapons even though thousands of American troops were being killed or captured.
Truman never explained his decision, but one possible reason is that actually seeing what nuclear weapons do to human beings (which nobody had yet seen when he made his 1945 decision) may have changed his view of them. They were not just another new weapon. They were the ultimate weapon, and they must not be used. And the other reason is obvious.
By late 1950, the United States had between 50 and 100 nuclear weapons – but the Soviet Union had tested its first atomic bomb in the previous year, and by then it already had at least half a dozen of the things. The era of mutual deterrence had arrived.
Truman didn’t know for certain that the Soviet Union would go to war if the US dropped nuclear weapons on China. He would have been fairly certain that the Russians didn’t yet have the ability to drop even one on the United States, although they could definitely hit America’s allies in Western Europe. But it didn’t matter: once both sides have nuclear weapons, they get a great deal more cautious.
In the following decades, many military theorists have worked hard to come up with strategies that would make nuclear weapons useful in war, and many scientists and engineers have worked on new techniques and technologies that would achieve the same objective. But nobody has ever had enough confidence in their promises to use even one of these weapons in a war.
The number of nuclear weapons in the world (many of them much more powerful than the Hiroshima and Nagasaki bombs) peaked at around 50,000 in the mid-1980s, and has since fallen to about 15,000. The US and Russia still own 93 percent of them, but seven other countries now have nukes too – and still nobody has used one in war.
It is also true that no great power has fought any other great power directly for seventy years, which is certainly a first in world history. Is this because the two world wars had been so destructive that they created institutions like the UN Security Council to avoid another, or because they knew that great-power wars would probably be nuclear wars?
Probably both, but at any rate we’re making progress.
To shorten to 725 words, omit paragraphs 6 and 8. (“Truman…lives”; and “Truman…obvious”)
A few weeks ago, at the height of the panic in the Chinese stock markets, a sour joke was doing the rounds: “Last month, the dog was eating what I eat. Last week, I was eating what the dog eats. This week, I think I’ll eat the dog.” A lot of people have lost a lot of money.
The Chinese governent is permanently terrified. It is terrified of climate change, of slowing economic growth, even of a fall in the stock market – of anything that might cause the population to turn decisively against it. When you are running a 66-year-old dictatorship, and your only remaining credibility in the public’s eyes is your ability to keep living standards rising, any kind of change is frightening.
How terrified is it? Consider its reaction to the recent sharp fall in the two main Chinese stock markets. China has a capitalist economy, albeit a highly distorted one, and stock markets are a normal part of such economies. They go up, they go down, and normally governments do not intervene in the process.
The Chinese stock markets have recently been on a roller-coaster ride. After treading water for years, prices exploded in June 2014. Over the next year, there was a 150 percent average rise in prices on the Shanghai Composite exchange, and almost 200 percent on the Shenzhen. Obviously this was not sustainable, especially since growth in the real economy has been falling for years. A “correction” was inevitable.
It came with a bang, on 12 June of this year. Since then prices have fallen 30 percent on the Shanghai market, 40 percent on the Shenzhen. Around $4 trillion in paper values have been wiped out – but so what? Chinese stock prices are still far higher than they were a year ago. Indeed, at an average of 20 times earnings they are still overvalued by real-world standards.
Why would any government intervene over this? Some investors will win, some will lose, and it will all work itself out. But the Chinese government intervened in a very big way. First it cut interest rates to the lowest level ever. When that didn’t stop the slide in prices, it banned large investors (holding more than 5 percent of a listed company’s shares) and all foreign investors from selling their shares for six months.
It encouraged around 1,300 Chinese companies – half the stock market – to suspend trading in their stocks. It forbade any new listings (IPOs) on the markets. It even ordered a state-backed finance company to make new loans to people who want to make bigger bets on the stock market than they can afford.
Anything and everything to stop the prices from falling, and lo! They did stop. Last week, prices even rose a bit.
This may just be what traders call a “dead cat bounce” – if the price falls from high enough, there is bound to be a little bit of a bounce at the bottom – but that is mainly of interest to Chinese investors. The interesting question for the rest of us is: why did the Chinese Communist regime do all this?
Because there are 90 million private investors in the Chinese stock markets. They tend to be older (two-thirds of them didn’t finish high school), they have been betting their savings on the market – and according to state media they have lost, on average, 420,000 yuan ($67,000) in the past six weeks.
That would be no problem if you were already in the market a year ago: you would still be well into the black. But a great many of the private investors piled in very late in the game – 12 million new accounts were opened as recently as last May – and they have already lost their shirts. They would have lost their skirts and trousers too if the government did not stop the collapse in prices.
So the regime intervened. This may be because the Chinese Communist Party loves the citizens so much that it cannot bear to see them lose. It is more likely to be because it is frightened that those tens of millions of stock-market losers (who were officially encouraged to invest) will start protesting in the streets. Whether the Chinese regime’s power is secure or not, it certainly does not FEEL secure.
This latest government action is part of a pattern that extends back to the global bank crisis of 2008, after which China was the only major country to avoid a recession. It did so by flooding the economy with cheap money. So few people lost their jobs, but the artificial investment boom created a bubble in the housing market that is now starting to deflate: millions of properties lie empty, and millions of mortgages are “under water”.
Sooner or later, this game is going to run out of road. The risk is that China’s road ends where Japan’s thirty years of high-speed growth ended in the late 1980s, with a collapse to 2 percent growth or less and a quarter-century of economic stagnation. China is around the thirty-year point now, and its regime is doing all the same things that the Japanese government did just before the collapse there.
To shorten to 725 words, omit paragraphs 7 and 11. (“It encouraged…afford”; and “That would…prices”)
The picture of the two Asian giants that most people carry around in their heads shows China racing ahead economically while India bumbles along, falling ever further behind. People even talk about the 21st century as “China’s Century”, just as they called the 20th century the American Century. But it may turn out to be only China’s Quarter-Century.
The headline economic news this year is that India’s economy is growing faster than China’s. Not much faster yet, according to the official figures – a 7.5 percent annual rate for India vs. 7.4 percent for China – but there is good reason to suspect that the real Chinese growth rate is considerably lower than that.
Anybody who goes to both countries can see that India has a huge amount of catching up to do. The contrast in infrastructure is especially striking: China has 100,000 km of expressways (freeways, motorways); India has only 1,000 km. But the differences in income and productivity are also very big: Gross Domestic Product per capita in China is between three and five times higher than in India, depending on how you calculate it.
But that is a snapshot of now. It was very different thirty-five years ago, when per capita income in India was still higher than it was in China. It was then-leader Deng Xiaoping’s decision in 1978 to open up the Chinese economy that unleashed the spectacular economic growth rates of the recent past, and an economy growing at ten percent a year doubles in size every seven years.
That means (allowing for a little slippage) that the Chinese economy has grown more than twentyfold since 1978. That’s why it is so far ahead now. India’s growth rate was a quite respectable three or four percent for most of that period, but that gave the Indian economy a doubling time of around twenty years, so it has only grown around threefold during the whole period. India is not chronically poorer than China. It just missed that particular bus.
The next bus has now arrived: India actually could catch up with China if its economic growth rate is now really surging ahead of China’s. There is good reason to believe that it is, because China’s declared growth rate for this year is pure fiction.
China avoided the global recession after the 2008 crash by opening the credit taps to full and embarking on the largest spending spree on infrastructure (roads, housing, railways and airports) that the world has ever seen. But capitalist economies cannot avoid recessions forever. The country is now full of empty apartment buildings, the private debt load has doubled in five years – and the recession is coming.
More than that, China’s period of high-speed growth was probably always going to be limited. Japan enjoyed a quarter-century of ten percent annual growth in 1955-80 and became, for a while, the world’s second-biggest economy. But once its per capita income reached developed-world levels, the growth rate dropped down to developed-world levels too: between two and four percent. (Now it’s almost nothing.)
In fact, all the East Asian economies (except North Korea, of course) have followed the same pattern: a lengthy burst of ultra-high-speed growth, followed by a fall to the developed-state norm once a certain level of prosperity has been achieved. South Korea and Taiwan both did it – and then subsided to a growth rate not very different from that of the United States.
China has also had its quarter-century of ten percent growth, and it is probably over. The official figure for economic growth last year was still over seven percent, but the less easily manipulated numbers for rail freight, electricity production and bank lending suggest that the real growth rate was only around three percent. That is to say, less than half of India’s.
The other thing that will hold China back in future is a steady fall in the population of working age. India’s birth rate is still 2.7 children per woman (though it’s falling fast). China’s is at most 1.7, and the one-child policy means that it may even be lower than that. So fewer and fewer young Chinese are entering the work-force, whereas there will be no shortage of young Indians.
India’s total population will overtake China’s in less than five years (they are both around 1.3 billion), and after that the gap will steadily widen. While China’s population shrinks and its economic growth slows, India is only now entering the golden quarter-century of high-speed economic growth. In 25 years’ time, India may be back in the position it occupied for most of the past two thousand years: the biggest economy in Asia.
To shorten to 725 words, omit paragraph 9 (“In fact…States”)