By David Stockman, Budget Director under President Reagan and author of the bestseller, The Great Deformation: The Corruption of Capitalism in America. This article originally appeared on David Stockman’s Contra Corner.
The thing to understand about China is that it is not just another booming Emerging Market economy that is momentarily struggling to cool down its excesses in fixed asset investment and make a transition to some kind of more “normal” consumer-based economy. That comforting notion represents an odd-confluence of propaganda from the comrades in Beijing and hopium from Wall Street stock peddlers.
In fact, China is a grotesque economic aberration that bears no relationship to prior economic history or any conventional economic models – not even to the export-mercantilism model originally developed by Japan, and which has now proven itself wholly unsustainable. Instead, China is a nation that has gone mad building, speculating, and borrowing on the back of a credit bubble so monumental (and dangerously unstable) that its implications are resolutely ignored by observers deluded by the notion that China embodies a unique economic model called “red capitalism.”
But when a nation’s debt outstanding explodes from $1 trillion to $25 trillion in 14 years, that’s not capitalism, even if it’s red. What it represents is monetary madness driven by the state.
Occasionally a picture is worth a thousand words, and here’s one buried in a Financial Times story on China’s rapidly deteriorating housing market. It seems that during the two-year period 2011-2012, which was the peak of China’s much praised “aggressive” stimulus response to the Great Recession in the Developed Markets world, China consumed more cement than did the United States during the entire 20th century!
That astounding fact needs to sink in, and it is a fact – blessed by the U.S. Geological Survey. Stated differently, imagine the whole urbanization and suburbanization of America over 100 years; the building of all the office towers, skyscrapers and malls which festoon thousands of city landscapes from coast to coast; the building of all the great public works of the 20th century including likes of the Hoover, TVA, and Grand Coulee dams and all the Army Corps locks, dams, navigation and flood control projects; the Interstate Highway system and all the derivate highways and suburban sprawl which came with it; all the stadiums, auditoriums, airports, bus and train stations, subways and parking lots that have ever been built in America; and keep imagining because the underlying proposition is itself scarcely imaginable, as Zero Hedge pointed out:
The FT reported overnight that “In just two years, from 2011 to 2012, China produced more cement than the US did in the entire 20th century, according to historical data from the US Geological Survey and China’s National Bureau of Statistics.” We showed this two years ago – little did we know that two years later the situation would be completely out of control.
You can’t look at China’s entirely doctored and goal-seeked GDP accounts and have any understanding of the thundering collapse which will actually occur when the building boom ends. The idea that fixed asset investment at 50% of GDP is just some kind of economic ratio that the comrades in Beijing can shimmy down to normality – say 25%, which is still high by every other economy in the world – fails to comprehend what China’s economy really is: a continent-wide construction project in which everything flows into obtaining, moving, fabricating and erecting infrastructure, both public and private, retail and industrial.
So when the building stops because the inflated prices of real estate are collapsing and credit expansion can no longer prop up the bubble, the implosion will be thunderous. Cement production could drop from 2 billion tons per year to 500 million; rebar consumption would crater proportionately; industrial fleets of cement trucks and steel haulers would lie idle; demand for tires, engine parts and truck fuel would vaporize; vendors of all the services that support this gigantic flow of cement and steel will be out of business; the empty apartment “investments” held by their owners will be worthless. And millions of jobs will disappear.
That’s what will happen when the building stops. And such a turn of events, the Telegraph reported, might not be all that far down the road. As one observer ventured: “They can keep on building but no one will buy.”
By David Stockman. Check out his bestseller, The Great Deformation: The Corruption of Capitalism in America, and while at it, check out my 5-star review (in 2nd place). This article originally appeared on David Stockman’s Contra Corner.