Will the bubble burst?

Seven years ago we were in Amsterdam airport departure lounge when the news came through that Lehman Bros would indeed go bust, which finally triggered the GFC (Global Financial Crisis).

James Headway, Chief Economist for the New Economics Foundation takes a look at what’s happening in China, and it’s scary.

China escaped by letting lending rip. Since then they have produced half the world’s growth. But in doing so they have created a giant property bubble, followed by a share market bubble. It looks like coming unstuck.

There is a possibility that the Chinese authorities get a grip – the article presents the best and worst case scenarios. I guess there is also everything in between.

Part of the worst case scenario:

    Western banks, having loaned massively to China over the last few years, find themselves confronted by a huge number of non-paying customers, and face collapse – the UK has the largest single exposure to Chinese debt of any Western country as a result of bank lending.

Let’s hope our banks have been sensible, and probably they have, but if the whole thing blows it may be hard to find some high ground.

Increasingly and ultimately there may be no high ground, except for the one per cent, if Paul Mason is right about the end of capitalism
.

Neoliberalism, he says, has morphed into a system programmed to inflict recurrent catastrophic failures. The GFC wiped 13% off global production and 20% off global trade. And it has not been fixed. The favoured solution of austerity actually “means driving the wages, social wages and living standards in the west down for decades until they meet those of the middle class in China and India on the way up.”

    Meanwhile in the absence of any alternative model, the conditions for another crisis are being assembled. Real wages have fallen or remained stagnant in Japan, the southern Eurozone, the US and UK. The shadow banking system has been reassembled, and is now bigger than it was in 2008. New rules demanding banks hold more reserves have been watered down or delayed. Meanwhile, flushed with free money, the 1% has got richer.

At this point I urge you to read the article in full. Mason says something deeper is going on, the corrosion of capitalism itself, by information, along with the emergence of a new human being who is educated and connected.

    we can see their prefigurative forms in the lives of young people all over the world breaking down 20th-century barriers around sexuality, work, creativity and the self.

He sees a “sharing economy” emphasising networks rather than hierarchies emerging over a period of decades.

Mainstream economics struggles to cope:

    mainstream economics proceeds from a condition of scarcity, yet the most dynamic force in our modern world is abundant and, as hippy genius Stewart Brand once put it, “wants to be free”.

And:

    postcapitalism as a concept is about new forms of human behaviour that conventional economics would hardly recognise as relevant.

Mason says:

    The main contradiction today is between the possibility of free, abundant goods and information; and a system of monopolies, banks and governments trying to keep things private, scarce and commercial. Everything comes down to the struggle between the network and the hierarchy: between old forms of society moulded around capitalism and new forms of society that prefigure what comes next.

Perhaps Mason says more in his book about a new agenda for the left. He finishes the article with:

    We need more than just a bunch of utopian dreams and small-scale horizontal projects. We need a project based on reason, evidence and testable designs, that cuts with the grain of history and is sustainable by the planet. And we need to get on with it.

Mason gives us much to meditate upon. Meanwhile in Australia I think we have a predominantly old-style economy, ill-prepared for any external shock. JP Morgan chief economist Stephen Walters commented on the news that business capital expenditure was now below the levels of the 1991 recession:

    My main concern is not the timing of the recession but when it comes, and it’s inevitable, it’s going to be quite a bad one.

    We haven’t had a recession, or a serious recession for two and a half decades so we’re carrying some pretty big excesses into whatever downturn comes.

    So, household debt’s very high; we’ve got very high house prices so the policy levers are pretty much maxed out already with interest rates at record lows and the budget deficit quite large and public debt exploding.

There were economists in that link with more sanguine views and tonight our ABC man in China seemed to think the Chinese would manage the transition to a ‘normal’ consumer economy. But old Immanuel Wallerstein who has been talking about the end of capitalism for 40 years thinks we are in a turbulent time of transition. So shocks and bursting bubbles may be the new normal.

39 thoughts on “Will the bubble burst?”

  1. The way I see it, the vast majority if economists advising governments around the world , and indeed Treasury economists are rabid Keynesians.
    All desperate to achieve a sugar hit with gazillions of debt, fuelling the China bubble with imports from there.
    We only scraped by due to the ensuing astronomical price of rocks ( black, red and yellow )

    In short, Governments distorting the market always amplifies any harm over the longer term.

  2. Paul Mason misses the reality that there is baseline capitalism that works natuarally and successfully. Simply put, people have got to eat. One quarter of the economy operates right there. Economies become unstable when people speculate beyond there means, every Austerian understands this, and this includes property too.

    But Mason’s comments on information are interesting

    “There is, alongside the world of monopolised information and surveillance created by corporations and governments, a different dynamic growing up around information: information as a social good, free at the point of use, incapable of being owned or exploited or priced.”

    He is aluding to a return to a time when performances were not recorded and performance was appreciated at the time of presention. The performer strove to gain a reputation in order to be sort out for their skills, rather than be recorded for perpetual replay. I think there is scope and a need for both. When my daughter viewed the Mona Lisa at the Louvre I did a quick calc to see if everyone in the world could view Lisa for five minutes, and the answer is no.

    A stable society that is worth living in is one that maintains a comfortable living for those at the bottom and guards against extreme wealth at the top, but maintains a broad and energetic margin for creativity and initiative in between.

    It is true that our world is way out of wack at present, but I don’t see it collapsing. It is easy to think it possible but that is because it is impossible to fully comprehend the volume of produce and product that moves around at the eating level, let alone every other level. As an example contemplate the coconut.

    http://www.cdjedmin.gov.lk/home/images/kapruka_newsletter/english/2012_october_12/CDN-10-12-pg07-dms-COC.pdf

  3. Bilb, welcome back!

    I liked this statement:

    A stable society that is worth living in is one that maintains a comfortable living for those at the bottom and guards against extreme wealth at the top, but maintains a broad and energetic margin for creativity and initiative in between.

    Much of the initiative and creativity in between relates to information and some of it has a price. But it’s light, with a small carbon footprint.

    In addition to eating, I kept asking myself how the ships, aircraft, roads, bridges and buildings get built. It seemed to me reading Mason that capitalism and associated markets would continue to provide the basic scaffolding of society. But then I might be an old codger who just doesn’t get it.

  4. John Plender on Late Night Live gives a different view.

    He says that there is nothing other than capitalism on offer, but there is enormous choice in the kind of capitalist society we adopt.

    He sees capitalism as essentially unstable, generating on average a crisis every year and a major crisis every 10 years. Not sure of his definitions.

    He says there was a stable period for some decades last century after the Great Depression. It would be interesting to hear his reasons.

    Currently he says the financial sector is out of control.

  5. In Aus we have a surplus of production capacity and people who are willing to work more to buy the products produced by this surplus capacity. We also have the capacity to increase production capacity.
    The problem is that our current finance/economic system is failing to facilitate the above happening because of old thinking.
    Historically the move from crude barter systems to what we have now has required revolutions to facilitate this move. Think the invention of money, lending, paper money etc. along this process. We need another revolution now.
    Free market globalization is holding this revolution back because it stops an individual country trying something revolutionary.

  6. John
    We do not, nor have ever had, anything close to a free market.
    Every single transaction has the distorting hand of ” The State ” on it. Every single one in some way or another. And some more than others.

    This raises the cost of everything and the burden is carried by everyone.

  7. Jumpy: It is compulsory free trade across borders that is the problem. It makes it hard for countries to control their economy or be innovative.
    I would prefer market distortion to a country with 6 % unemployment.

  8. Jumpy, I recommend you read Francis Fukuyama’s The Origins of Political Order. Seriously!

    Worse than a modern concept of “The State” is not having “The State”.

  9. John

    It is compulsory free trade across borders that is the problem.

    Give me one example of Free Trade across borders and who exactly makes this fictitious trade compulsory ?
    Brian
    I’m not arguing for no ” State “, that’s for the anarchists.
    I’m arguing for the ” State ” to protect our borders and freedoms/rights.
    No more, no less.
    That’s what I pay them for, nothing else.
    Certainly not to tell me how to live/buy/sell/think/fart.
    ( email me and i’ll reply with my postal address for you to send a copy of the book, I’ll read it when i’m not too busy finding work for my employees and I )

  10. Jumpy: Every single transaction has the distorting hand of …. The Corporation on it.

    1989~1991, Communism collapsed – and good riddance to it.

    However, since then, we have had two-and-a-half decades of the alternative system in all its glory and unopposed …. and what a horribly inefficient, wasteful, destructive, backward mess it has shown itself to be! We would be better off going back to Square One with robber-barons and an all-powerful single church running the whole show and then starting all over again.

  11. JD

    The countries that went from dirt poor to wealthy in the second half of the 20th century, like the Asian Tigers, did so by trade. Contra Jumpy, they also had interventionist goverments.

    Countries that have shut themselves off from globalisation have stagnated, not innovated.

    I first toured Communist Indo-China in the mid 1980s, when they were cut off from globalisation and free trade. I will never forget the sense of despair, filth, the sewage in the streets, the sunken eyed and pot bellied kids with obvious malnutrition.

    Indo-China started opening up in the late 1980s. Now it is so much richer and vibrant. It is far from perfect but no-one wants to go back to the bad old days.

    We need more globalisation, not less, so that poor countries have maximum access to rich country markets.

    Even the Greens aren’t as opposed to globalisation as JD.

    I also agree with Brian. Small government is a myth.

  12. Brian
    I’ll consider an iBook version.
    Now, I know that noone wants to answer any questions I ask but how about just one to help me find out your position ?

    If I draw a line with the left hand end marked ” all work for Government ” and the right hand end marked ” none work for Government ” , where on that line do you feel most comfortable?
    Remembering the middle represents 1 for 1.

  13. Jumpy

    I enjoy reading economic blogs and books and occasionally discussing it with people who want a genuine dialogue. However discussing economics with guys who have a fiery glint in their eyes, skirted legs that scissor in to the air, “rah rah Ayn Rand” chants and flailing poms-poms is pointless.

    Then of course you have the Austrian Orcs ….

    Discussing economics with fanatics has a very high opportunity cost 🙂

  14. Karen
    It’s folks that add nothing, no questions, no answers, no ideas put, no reason given for their position but just poo poo others position with name calling and sneer that I try to avoid.

  15. Karen: Trade can be good for the countries participating as long as, overall, it is win win.
    On the other hand free trade arrangements that force countries to keep on importing are not win win and contribute to global instability. Think about countries such as Greece being forced to import from other parts of the EU when they had enormous debts.
    You are being simplistic again.

  16. Jumpy, if you go to the CIA World Factbook site, click on Oceania, Australia, Economy, Taxes and other Revenues, then World Comparisons, you get to this screen.

    Australia comes in at about 33% of GDP. I am not an economist, but I assume that includes everything, including local government.

    Scroll up and you’ll find most of the other OECD countries up to the Scandinavians at over 50%. I’d like to see us lob in there in the middle with NZ and the UK at about 40%.

    Other than Gonski, national disabilities etc it’s a disgrace that there is no reasonable access to dental care. It’s a disgrace that no-one except the rich can afford a lawyer to do anything meaningful if we suffer an injustice. I could go on.

  17. John

    Think about countries such as Greece being forced to import from other parts of the EU when they had enormous debts.

    What were they forced to import ?
    Honest question.

  18. Jumpy, just to add, if we tax to 40% of GDP it doesn’t mean that 40% of people work for the government. A lot of government expenditure produces work in the private sector. This needs to be looked at on a case by case basis, as to what you do inhouse and what you outsource.

  19. Brian
    ” Size of Government ” to me isn’t just the tax burden.
    It’s also the sheer enormity of the public sector with about 17% of all employees. The crowding out of private enterprise and competition is diabolical.
    It’s also the regulatory and compliance burden, not to forget the unintended consequences when they get it wrong.

    All this costs every one of us as consumers, not just the taxpayers.
    Every new regulation add to inflation and the cost of living.

    As for lawyers, the rich and the poor ( legal aid ) but not the middle. And dentists ? If your Aboriginal in my town it’s free and you only wait 1-2 days max.

  20. Jumpy, you are relentless with what seems to me to be a libertarian attitude to government, and anything I say is not likely to make any difference.

    Starting from the bottom, access to justice is a basic element of a functioning modern state to guarantee freedoms. You won’t get far with legal aid.

    What happens to Aborigines in your town is irrelevant to the general (lack of) provision.

    Regulation and compliance can always be improved and may at times be unnecessary, but you can’t eliminate them entirely.

    The “crowding out” argument is overdone. Schools hospitals and police which make up the bulk of government employment are not crowding out private enterprise. I can’t think of a single significant example.

  21. Brian

    Regulation and compliance can always be improved and may at times be unnecessary, but you can’t eliminate them entirely.

    Agreed, this is an area that we can work with.

    Schools hospitals and police which make up the bulk of government employment are not crowding out private enterprise.

    All State responsibilities yet the Federal Government spend huge amounts on education and health department bureaucracies all the way up to Ministers and their staff.

  22. All State responsibilities yet the Federal Government spend huge amounts on education and health department bureaucracies all the way up to Ministers and their staff.

    Jumpy, these are old chestnuts. It’s easy to throw around words like “huge”. The frontline work in education and health is where most of the money goes. Bureaucracies have been trimmed repeatedly over the last 30 years.

  23. JD:

    That sounds like Looney Tunes to me.

    Can you link to a reputable economist who says that Greece would be better off if it hadn’t been, in your words, “forced to import from other parts of the EU when they had enormous debts”.

    AIUI, Greece would have been better off if it had its own currency which could deflate, making imports more expensive and exports more competitive.

    Greece’s situation does not IMO validate your bizarre anti-trade rant.

  24. Bureaucracies have been trimmed repeatedly over the last 30 years.

    Yet they are bigger now than 30 years ago.
    My public school math can’t work that one out.

  25. Jumpy: Just on the issue of countries being “forced to import” – have you checked the shelves of the bargain shops in Australia lately? No rational buyers for a retail firm would ever, in their right mind, procure half the junk that is on sale in them. This stands in marked contrast to the quality, durability and appropriateness of merchandise on sale in similar bargain shops in Japan (they used to be called “hundred yen shops), in Singapore, in the European Union, etc. Australia seems to get what the aforementioned countries reject for sale in their bargain shops.

  26. Jumpy, I’m getting a bit weary in talking in a fact free zone. I lived through the purges that hit departments in the 1980s. One of my interstate colleagues saw his staff reduced from 65 to 13 while he had to reapply for his own job three times.

    When I left in 1991 my position was responsible for 243, being downsized to two. In the event it turned out to be one.

    Departments typically have had to cough up a ‘productivity dividend’ of one or two per cent each year. It’s true that the dividend may turn up somewhere else in government as ‘new initiatives’.

    I’d be happy to talk about a proper study of what’s going on with the bureaucracy, and possibly set it up in a new thread when I get back. This thread was never set up for that conversation, and the post is really about something else.

  27. Not sure how relevant this is to the topic, or to what John said, but I heard two things about stuff Greece was ‘forced to import’. One is that they import over half of their food, the other that they import something like 80% of their power.

    Quoted from memory.

    The examples were put forward as reasons why Greece wouldn’t survive well with a devalued drachma. The necessities of life would become horrendously expensive.

  28. Jumpy, I really was weary last night and my mind is increasingly elsewhere. It seems to me that you subscribe to the ‘big government/bloated bureaucracy’ myth, which McAuley and Lyons in pick apart in Governomics. I read the book, but the argument is too detailed to effectively summarise in a post. Too detailed for me, anyway.

    17% does not seem to me a large figure in a modern society where we expect a variety of services. There has been a tendency to outsource, which the Newman government in Qld was adopting to the max. Sometimes this leaves the bureaucracy so bereft of skills that they can’t properly assess tenders for services. And usually involves a diminution of service which has negative effects.

    The whole area is very complex, and I don’t think we get very far in trading one-liners. That’s all.

  29. Brian: Thanks for the tip (in your reply to Jumpy) about governomics. Drifted around the internet looking for more information without finding much I could use – so shall ask the shire library if they would kindly seek McAuley and Lyons’ Governomics on an interlibrary loan.

  30. Jumpy: Decisions re whether it is smarter for things to be done by governments or left for the private sector to handle need to be considered on a case by case basis instead of being based on ideology. It is much the same as making decisions whether to do something with your own crew or to use subbies.

  31. John D, That was one of the disasterous failures of Thatcherism – and of its mirror-image Communism. One size does not fit all. An economy, and the society in which it operates, are too complex to be operated by simplistic notions; each aspect has to be, of necessity, operated on a case-by-case basis.

    That’s why the mixed economy Australia used to have was so efficient despite the mighty efforts of boozed-up and horribly incompetent managers in various parts of it. Allowing the drug-crazed rejects of New York to persuade us to turn away from that successful economic model instead of tweaking it was the worst thing we Australians ever did to ourselves.

  32. John

    Jumpy: Decisions re whether it is smarter for things to be done by governments or left for the private sector to handle need to be considered on a case by case basis instead of being based on ideology.

    Agreed.
    I would never support privatisation of the Army (Fed), Quarantine or Police (States). Nor nationalising car dealerships, food retailers or airlines.
    Energy generation is another area that should be privatised, let’s face it, Government is doing crap job of it value wise.

  33. Jumpy: Yep, the argument is really about where the boundary is.
    I don’t like private when we are talking about situations where there is no competition like the grid.

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