China Bubble Bursting

I don't have time today to link all the evidence, but the combination of crashing real estate markets and the Chinese government jamming liquidity into its banks tells me the China bubble is bursting as we speak.

This is an interesting test of the Austrian view of depressions vs. the Keynesian / Krugman / Thomas Friedman / MITI view of government-orchestrated prosperity.  If the latter are right, then China is doing more right to keep their economy going than any country in history and you should go invest all your money in Chinese real estate.

However, if one believes the Austrian model about government-enforced mis-allocation of capital and labor leading to bubbles and crashes; if one believes that the technocrat-beloved MITI was largely responsible for the Japanese lost decade; if one believes that the US govenrment through articially low interest rates and government-directed reductions in underwriting quality helped create the housing bubble -- then the mother of all crashes is looming in China.  Because no country has done more to reallocate resources and capital based on the whims of a few technocrats  and well-connected industrialists than has China.  After all, this is why Thomas Friedman loves China, that it does not rely on the judgement of millions of individuals to allocate capital, but instead on the finger pointing of a few at the top.


  1. Lorenzo from Oz:

    Wow, what an enormous excluded middle. I don't believe either theory: which puts me in a class of persons that would include most mainstream economists, for example.

  2. commieBob:

    Dan Gardener is a journalist who has written a book on experts. It is based on the work of Philip Tetlock. Dan is one of those who popularizes the work of academics. It's a good thing to do because society in general has to understand certain things.

    Tetlock points out that experts are no better than chance at predictions. Government experts should not delude themselves that they can direct the economy. The evidence doesn't support them.

    Good government should provide certain social goods: defense, education, health care, a certain amount of necessary regulation (the less the better). It should be wary of regulation and it should be prevented from trying to run the economy. It can only get it wrong.

    The government's approach to regulation should be something like Warren Buffet's investment philosophy:

    The central tenet of Buffett’s investment philosophy is that one should not invest in anything that one does not understand and that one should be unremittingly focused on long-term value.

    In other words, KISS.

  3. Sean:

    You do realize that the government engineered the real estate 'crash', yes? They've made a point of trying to decrease developer speculation. The only people buying houses now are those who are buying their first house almost entirely in cash. This is not what the US saw. The US encouraged house purchases for a decade. China has been making purchasing a house more and more difficult since 2005, with the harshest regulations coming in 2010, and there have been additional restrictions since.

    All the 'price crashes' are the smaller developers without a healthy balance sheet desperately selling to meet debt obligations. The healthier developers have been sitting on inventory the entire time, and slowing down future projects that demand cash flow.

    Not saying that its entirely healthy, just that it is not at all the story you are assuming it is.

  4. John O.: Austrialia's ABC Dateline program did a rather telling piece. Its not the same as US real estate by involving massive credit but it has the characteristics of a bubble from infusion of money from the government command economy. This crash will be heavily inflationary in the sense that the government deliberately built cities for the sake of building something. Its the same as if you paid workers to dig a trench then had them fill it again and repeat ad nauseum.

  5. Lorenzo from Oz:

    Housing bubbles are generally caused by land rationing. Asset prices surges attract credit, but places with land rationing had price surges, places without it did not. (Australia has lots of land rationing). Read the Unconventional Economist's posts to get the grisly details.

    Japan's "lost decade" was caused by land rationing and the Ministry of Finance's "management" of the Japanese money market with a large dash of demographics. MITI was a bunch of over-hyped blowhards, but they had little to do with either Japan's economic success or the collapse of the bubble economy.

  6. me:

    Long time coming. When I was living in China, there were entire floors of apartments bought purely for speculation - they weren't rented out, out of fear that an actual renter generating income would reduce the resale value, which, after all, was all that mattered.

  7. IGotBupkis, Paranomasty Specialist, Level 12:

    >>> instead on the finger pointing of a few at the top

    I've always wondered how these guys know where to point their fingers when their head is so far up their ass....

  8. IGotBupkis, Sailing the Economic Seas Betwixt Scylla And Charybdis:

    >>> the government deliberately built cities for the sake of building something. Its the same as if you paid workers to dig a trench then had them fill it again and repeat ad nauseum.

    Not quite accurate, I think.

    Digging a trench and then filling it back in, all you have is a long line of land where the grass is messed up.

    Building a city for the sake of build a city, you've still got the city. Unless you have no use for it until time has reduced its functionality to zero via dilapidation, it's still at least a potential asset.

  9. Craig:

    I so look forward to Friedman's column, when and if this indeed occurs.