| Pettis on Debt, Malinvestments, Hidden Losses, and China's GDP Posted: 25 Dec 2013 11:24 PM PST Heading into 2014, Michael Pettis at China Financial Markets remains adamant that growth estimates for China are too high and that rebalancing (while necessary), implies lower growth than most expect. Via email ... It is widely acknowledged that perhaps the most important reason to change the Chinese growth model is its excessive reliance on debt to generate growth. Debt has soared in recent years, to the point where many economists simply look at credit growth in the current quarter in order to determine what GDP growth over the next few quarters are likely to be.
But as China deleverages, growth in demand must drop sharply. After all, if economic growth over the past several years has been goosed by rapid credit expansion, deleveraging must have the opposite effect. It is strange that economists who acknowledge that the current growth model is overly dependent on debt have failed to understand that its reversal will have the opposite impact. If it did not, it is hard to explain why anyone would consider debt to be a problem in the first place.
If China currently has wasted significant amounts of investment spending, it is clear that much of the accompanying bad debt has not been written down correctly. Bad loans are almost non-existent in the banking system – that is they have not been recognized in the form of reserves or write-downs.
But the failure to recognize the loss does not mean that the loss does not exist. The losses implicit in the bad loans must (and will) be written down over the future, either explicitly, in which case they will result in a direct deduction to GDP growth, or implicitly, in which case they will require implicit and hidden transfers from one part of the economy or another (usually the household sector) to cover the gap between the "real" cost of capital and the nominal (subsidized) cost of capital. This transfer must reduce future growth.
The point here is that if credit is a problem in China – something no one doubts – it must be a problem because of wasted investment that has yet to be recognized, otherwise it would have resulted in negative GDP growth today. Failure to recognize the investment losses will, of course, artificially boost GDP growth today, but it must also artificially reduce GDP growth tomorrow as the recognition of those losses is simply postponed, not eliminated. The failure of many economists to recognize that wasted investment has a cost – even as they recognize that investment has been wasted – has caused them both to misunderstand the relationship between wealth creation and GDP and to understate the future impact of this overstated GDP.
Debt matters, and the only time it can be safely ignored is when debt levels are so low, and the borrower is so credible, that it creates no financial distress costs and has a negligible impact on demand. Neither condition applies in China, and so any prediction that ignores debt is likely to be hopelessly muddled. In fact I would like to propose a simple rule. Any model that predicts China's future GDP growth must include, if it is to be valid, a variable that reflects estimates of the amount of hidden losses buried in the banks' balance sheets. If it does not, it cannot possibly be a valid model to describe China's economy, and its predictions are useless.
China's astonishing growth during the past three decades is partly the result of a system that subsidized growth with hidden transfers from the household sector. These transfers are at the root of the current imbalances, and once reversed, so that China can rebalance its economy towards healthier and more sustainable sources of demand, the very processes that turbocharged growth will no longer do so.
If growth has been healthy and sustainable, there would be no need for Beijing to change its growth model – in fact it would be foolish to do so. If growth has not been healthy and sustainable, this is almost certainly because it has been artificially propped up, and if the reforms are aimed at unwinding the mechanisms that artificially propped up growth, then subsequent growth rates must be substantially lower.
Low interest rates, low wages, an undervalued currency, nearly unlimited access to credit for state-owned enterprises, a relaxed attitude to environmental degradation, and other related conditions were both the source of China's ferocious growth as well as of China's unprecedented economic imbalances. Reversing these conditions will rebalance the economy, but will do so while lowering growth in the obverse way that these conditions had accelerated growth.
One of the most obvious places in which to see this is in excess capacity in a wide range of businesses. It is clear that Beijing recognizes the problem of excess capacity. Here is Xinhua on the subject: Tackling excess capacity will be one of the top tasks on China's economic agenda in 2014, as the issue becomes a major challenge to maintaining the pace and quality of economic growth. "The Chinese economy still faces downward pressure next year," the Central Economic Work Conference pointed out on Friday, citing the capacity issue weighing down some sectors as one of the major challenges facing the world's second-largest economy.
It should be obvious that building excess manufacturing capacity, like building up inventory, is a way of propping up growth numbers today at the expense of tomorrow's growth numbers. Closing down excess manufacturing capacity must be negative for growth in the same way that building it was positive.
These three conditions, which are the automatic consequences of the reform process – deleveraging, writing down unrecognized investment losses, and reversing policies that goosed growth rates – must lead to much slower growth. In theory these conditions can be counterbalanced by an explosion in productivity unleashed by the reforms.
But this is unlikely to be the case. For the net impact of the reforms on growth to leave China's GDP growth unchanged, or even to accelerate, the amount of productivity that must be unleashed by the reforms is implausibly, even extraordinarily, high. What is more, the positive impact on productivity must emerge almost immediately. Longer-term productivity improvements – for example those generated by education, land, and hukou reforms, or reforms to the one-child policy, or a speedier and more efficient urbanization process – do not count.
I am so convinced that the implementing of these reforms must result in slower growth – if only because it is impossible to find a single relevant case in history in which the adjustment following a growth miracle did not include an unexpectedly sharp slowdown in growth – that I would propose that we can judge the forceful implementation of the reforms inversely with GDP growth. If China is able to impose an orderly adjustment quickly, its GDP growth rate will slow substantially for several years.
GDP growth rates of 7% or more, on the other hand, will suggest that credit is still rising too quickly and that China has otherwise been unable to implement the reforms, in which case China is likely to reach debt capacity constraints more quickly. Growth of 7% for the next few years, in other words, is almost prima facie evidence that China is not adjusting.
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I wish my readers a great 2014. This will be the last issue of 2013 before the holidays. Next year promises to be an exciting and unsettling one. Stay tuned. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
| Darlene Love - Christmas Wish Posted: 25 Dec 2013 02:39 PM PST Darlene Love has been appearing on the David Letterman Show every Christmas week since 1986, always singing the same song, 'Christmas (Baby Please Come Home)'. I watched most of them. I caught the 2013 version this year as well. She is one of my favorite "girl group" singers from the 60's 1986 Rendition The productions now are quite spectacular vs. 1986. Here is the 1986 rendition. Broadway World has many interesting details. The legendary Darlene Love, who's become a Late Show with David Letterman holiday staple, returned to the hit show this week for her annual performance of "Christmas (Baby Please Come Home)" with Paul Shaffer. Love, who's appeared in Broadway's HAIRSPRAY and GREASE, first took to Letterman's stage in 1986.
From her first number one recording, "He's A Rebel," through her string of label hits with legendary producer Phil Spector, including "Da Doo Ron Ron," "He's Sure The Boy I'm Gonna Marry," and "Christmas Baby Please Come Home" to the countless songs she sang backup on for artists like Sam Cooke, Elvis Presley, Dionne Warwick, Cher,Luther Vandross and Aretha Franklin, Darlene Love is still blazing a trail of success in the music industry and has been nominated to the Rock and Roll Hall of Fame. Her albums include Age of Miracles, recorded live in New York City, her first gospel album; Unconditional Love released by Harmony records.
Over the course of her career Darlene has been hailed as one of the greatest singers in pop music by such music legends as Cher, Better Midler and the legendary Luther Vandross. She has proven herself a talented actress as well on stage and screen, starring as Danny Glover's wife in all of the Lethal Weapon films and lighting-up Broadway in such musicals as Grease and the Tony Award-nominated Leader of the Pack. Darlene also starred for three years on Broadway as Motormouth Maybelle in the Tony Award-winning musical Hairspray. Wikipedia notes Darlene Love (Wright; born July 26, 1941) is an American popular music singer and actress. She gained prominence in the 1960s for the song "He's a Rebel," a No. 1 American single in 1962, and was one of the Phil Spector artists who produced a celebrated Christmas album in 1963.
She appears in the documentary film 20 Feet From Stardom (2013), which premiered at the Sundance Film Festival.
Early career
She began singing with her local church choir in Hawthorne, California. While still in high school (1959) she was invited to join a little-known girl group called The Blossoms, who in 1962 began working with producer Phil Spector. With her powerful voice she was soon a highly sought-after vocalist, and managed to work with many of the legends of 1950s and 1960s rock and soul, including Sam Cooke, Dionne Warwick, The Beach Boys, Elvis Presley, Tom Jones and Sonny and Cher; Darlene and the Blossoms sang back-up vocals on the Shelley Fabares hit "Johnny Angel", Sharon Marie (Esparza) (a Brian Wilson act), as well as John Phillips' solo album John, Wolfking of L.A., recorded in 1969. They also appeared on Johnny Rivers' hits, including "Poor Side of Town" and Motown covers "Baby I Need Your Loving" and "The Tracks of My Tears". (The Blossoms recorded singles, usually with little success, on Capitol 1957-58 [pre-Darlene Love], Challenge 1961-62, OKeh 1963, Reprise 1966-67, Ode 1967, MGM 1968, Bell 1969-70, and Lion 1972.)
Hurriedly recorded and released by Spector in November 1962 under the name of The Crystals in order to get his version of the Gene Pitney song onto the market before that of Vikki Carr, the single "He's a Rebel" actually featured Love singing lead for the first time on a Spector recording, backed by The Blossoms. The ghost release of this single came as a total surprise to The Crystals who were an experienced and much traveled girl harmony group in their own right, but they were nevertheless required to perform and promote the new single on television and on tour as if it were their own. The less successful "He's Sure The Boy I Love" was the only other release by Spector under the name of The Crystals which featured Love on vocals again backed by the Blossoms.
Subsequently Love recorded "Today I Met The Boy I'm Gonna Marry" which was released as a single by Spector, and now featured Love's name as the artist. She says that Spector offered $3,000 for her rights to the song. And though he said it was going to be a hit, she took the money. But, in spite of that decision, she said that she has continued to have a career because people have loved hearing her sing her songs. She was also part of a trio called Bob B. Soxx & the Blue Jeans, who recorded a cover version of "Zip-a-Dee-Doo-Dah", an Oscar-winning song from the 1946 Walt Disney film, Song of the South, which got into the Top 10 in 1963. The Blossoms landed a weekly part on Shindig!, one of the top music shows of the era. They were part of the highly acclaimed Elvis Presley's '68 Comeback Special, which aired on NBC.
"Christmas (Baby Please Come Home)" is a song by Darlene Love from the 1963 holiday compilation album, A Christmas Gift for You from Phil Spector. The song was written by Jeff Barry and Ellie Greenwich, along with Phil Spector, with the intention of being sung by Ronnie Spector of The Ronettes. According to Love, Ronnie Spector was not able to put as much emotion into the song as needed. Instead, Love was brought into the studio to record the song, which became a big success over time and one of Love's signature tunes. Wikipedia has many more details on TV, Broadway, and Rock and Roll Hall of Fame. Merry Christmas, Happy HolidaysFrom Me: Merry Christmas and Happy Holidays to you and your loved ones. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
| Merry Christmas, Happy Holidays Posted: 25 Dec 2013 11:11 AM PST Merry Christmas and Happy Holidays to you and your loved ones. Mish |
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