Wednesday, July 15, 2009

The stupidity with GDP

Our enemies have now discovered that China is increasing its growth with gross domestic product expanding by 7.9 per cent. Several papers and news stations around the world is stating this today seemingly saluting Keynesian policies. This is, of course, like so many other things they will have us believe, pure madness. Every economist with the slightest brain capacity knows how to increase GDP with 10% or more, that is not a problem. All you need to do is to borrow a shitload of money, print even more money and then force banks to loan all that money to those who knows how to spend it on useless things; the public sector. Then you hire a huge amount of unemployed and have them shuffle dirt, build things no one wants, manufacture left shoes or some other pointless tasks. And presto, GDP is up.

So far this year, China have tripled the amount of new loans, hired lots of people to the public sector, spent an obscene amount of money and forced several publicly own companies to, among other things, increase the public building ratio i.e. forcing ‘em to build parks, attractions and so forth that no one is really using.

The only thing you might accomplish with this madness is to create an atmosphere of positivism which in turn can have a slightly positive impact on the economy, but then only temporary. And when we look at Chinese figures those show us that private companies lending are minimal, at best, and direct lending to small and medium-sized companies accounted for less than 5 per cent of the total. Also, in the beginning of June the Chinese government tried to sell government bonds, they failed to sell them all which means that not only is the market suspicious towards the Chinese trustworthiness, the market also predicts an increase in inflation since the money supply is growing so rapidly. And, in the end, should we really trust numbers coming from a central planning committee whose job it is to obey the communist leaders?

But even IF these numbers are correct - not just made up – there is still some things you need to bear in mind. Firstly the Chinese are the main reason why the dollar is still holding pretty strong since they are the main buyer of USD. China is also the largest creditor to the US and the main reason why the Obamination can borrow trillions in order to squander, spend and waste. So when the dollar really start to deteriorate and it becomes more evident that the US is defaulting on its enormous debt, this will have serious impact on the Chinese economy even withstanding the fact that the American market is the most important one for Chinese manufacturers. Also, a credit boom enhancing GDP is in no way a sure way of measuring real wealth since GDP does not take into account the difference between bad investment and good investment. As stated above, increasing GDP is very easy, to increase wealth however you need to produce real value, not empty office space, demolish and rebuild certain structures or make things that cannot sell for a price of higher than that of the cost. Lastly one needs to mention water that is in short supply in China, which can be a big problem. Also worth mentioning is that the recent riots we seen in the news are in no way isolated incidents, there is a huge potential for further, bigger and more violent uprising in the future. So far the Chinese government have managed to keep the richer urban populace fairly happy, if this were to change, it can even lead to civil war.

Even if I sound quite pessimistic, China is still, in several ways, better off than most western economies since the Chinese production capacity is pretty high and the production cost low which at least means that when (if) things turn around they will be much better equipped to adapt and produce. And they still have a big currency reserve and are not nearly as insolvent as the US or totally broke as UK.

No comments:

Post a Comment