Photo credit: Janet Donovan
If you were paying any attention to the stock market yesterday, you realize by now that your wallet has shrunk. Some are calling it “Black Monday.” While it can’t all be blamed on the Chinese, we’d like to thank them anyway for “Unlocking the Gates of Hell” – a reference actually to a segment of The Hungry Ghost Festival (Yu Lan) during which many Chinese make efforts to appease their ancestors by ‘feeding’ them at roadside fires where they burn faux money and other offerings for use in the afterlife. The US will likely hit 18.1 trillion in debt by mid-November, according to the Congressional Budget Office. We’d like to be appeased in this life.
Photo credit: Creative Commons
We checked in with our economist friend Andrea Sommariva (formerly of the IMF in Washington) who has spent many years in China. He explained it this way: “There are several reasons why China has devalued the Yuan in recent weeks, ranging from falling exports to a declining growth rate. But there are some doubts whether devaluation of the Yuan and expanding public works will jolt the economy back into action. This is due to what is happening to China’s labour market. For many years, China’s labour market has been tight as people moved from rural areas to cities in search for work. From 2010, many people have aged out of the labour market, pushing the ratio of job offers to seekers upwards. This indicates that the China economy has reached a limit of its supply capacity. Economic stimulus, such as devaluations and public works, may have limited impacts on economic growth. The only way to revive economic growth is through increase productivity per worker, which requires a more efficient allocation of resources. But it will take some years to make workers more productive and, in China’s case, to liberalize the economy to achieve a more efficient allocation of resources.”
David Stockman doesn’t blame it on the Chinese. He thinks the US is pretty screwed up. He told us back in 2013 that the banking system is kind of like The Roach Motel – where the money goes in but doesn’t come out. According to Stockman, long time critic of our country’s financial health, The Federal Reserve has turned into a serial bubble machine.
Hollywood on the Potomac sat down with Stockman just before tax day in 2013 at a book launch in his honor for The Great Deformation: The Corruption of Capitalism in America. We asked him to speak to us about the economy in lay terms; after all, we had to look up coruscating and exegesis. We just wanted to know what the deal is.
One on one with David Stockman. Translation: WE’RE FRIED!
Last year Richard Vague called the world economy a House of Cards: in his latest tome: The Next Economic Disaster.
“When there’s a really rapid run up in private debt,” said Vague, “that means we’re building too much of something. It can be houses, it can be office buildings, it can be railroads like it was in the late 1800’s. We’re building too much of something and what that means is number one, there’s probably more bad debt than there’s capital at the banks. So the banks are risking collapse or failure and the government has to step in to save them. When we built way too much of something, economic growth is going to be very slow because we already have more capacity than we need and it’s going to take several years for us to absorb that capacity before economic growth can continue.”
Richard Vague
“In China we’ve got that situation,” he added. “They’ve got ghost cities you’ve probably read about. They’ve got way too much in terms of ships built and steel sitting there by the tons. If we have a crisis like this in China, it’s going to mean a slow down in Asia, it’s going to directly impact their neighboring countries like Vietnam, South Korea, Australia. But we’re going to feel an indirect effect as well because global demand is going to slow down if Asia has a crisis.”
“If there’s a big slow down in China, and we think that’s almost inevitable, that means there’s going to be less demand for commodities globally and locally. That’s steel, that’s coal, but that’s also other agricultural products. So I think one of the consequences is going to be a general commodity price decline. Farmers in Ohio can understand that.”
Translation: They will not require as many of our services or products and therefore it slows us down to the extent that any of our banks or funds have invested in China.
This is long, but if you care about what’s in your wallet, you may want to stick it out:
