Housing Bubble: China’s House Bubbles

I used to follow the evolution of house prices from China, and see how they were skyrocketing. But to see the images of empty cities built only to speculate with prices is unbelievable. 

Double Deep World Recession

What is the probability of a double deep recession?

Well, if we want to answer this question, we need to specify what are the key elements for this to happen. First of all we need to start analyzing the demand side. We can see in it a week recovery because we have a high unemployment rates in the main world countries. We can appreciate a positive trend in savings rate and a decline in the consumption. United States was the main world consumer, and the recovery of the world demand will depend of it. However, the consumer demand is still week in there.

Second, the supply side is recovering quickly. The inventories of companies are recovering swiftly. The production sometimes improves before of the demand in order to match it. In my view, China is now the main world supplier, and is having a big recovery of the production. The risk here is to have an important supply and an small demand. The overproduction is a likely scenary.

The excess of supply I think will determine if there is a probability of double deep. It could generate a sudden stop in Chinese production and negative circle around it (fall of investment and consumption). In addition, it will depend of the new type of growth model of United States.

The Spending Consumption is Hurt

The spending consumption is having a real hard time; now it is falling in similar pace of the recession of the 70's and the 80's. The reason are two: the lack of confidence of the American about the future of the economy and the burst of the bubbles. The first will be very difficult to recover because of the uncertainty of economic future. The second is related to the economic impact of the consumers when the prices of the houses and stocks severely fall; many of the people used the present value of these assets to buy things because they waited to pay them with the increase of their goods prices. These assets have been having a positive trend in for many years, but now we know that many of them did not have enough bases. It is possibly the end of one model of highly leveraged consumption.

This macroeconomic indicator is very important for the American economy. It represents more than 70% of the Gross Domestic Product, and it has been exceptionally active since the beginning of the 90's. It helped to have many years of growth not only in the United States but also in the rest of the world.

In my opinion, we will have to wait a couple of years to recover a positive trend again. If we want an improvement in a shorter time, the government has to take policies to recover the consumer confidence; these policies have to be enough clear and sound. In my opinion, the government is the doctor, and the economy is the very ill patient; so the doctor has to give the exact medicine; sometimes the patient does not like it, but he must take it to recover his health. I see the doctor has not acted as quickly as the required situation, so the wrecked economy will not regain health soon.

A Terrific Time for Economists

Today is a great time for some economists but a terrible for the world economy. In this difficult time economists fight themselves to show how their different theories and models are the right to solve the crisis; now they have the central attention of the media for something good or bad.

Heroes and villains

The public perception have changed quickly. Some of economist are blamed for the situation. They were praised some years ago, and now they are found guilty with the current situation. While economists who were back in the stage in that time, they are now more popular and play a main role in finding a solution.

My perception

I recommend that we have to take care about easy solutions of the problem; the experience teach us that they do not exist. Many of the solution alternatives who were sold by my colleagues are oriented to spend more money or to decrease taxes; I agree with these alternatives, but I considered that these are only partial answers to the big question. In my opinion, the wrecked economy has to start running again, but it is necessary to fix and to rethink how we would like that the economy will work in the future. For example, firstly the soundness of the capital market has to be recovered from this unpleasant moment. Because I think the market is still the best for the economy and it needs perfect information, we need to improve the role of the public institutions to solve the information problem that in my opinion was one of the guiltys of this mess. The policymakers with enough information at the right time could have taken actions to avoid this dangerous position.

Car Industry is One More of the Financial Crisis Casualties

The car sales are falling so fast that no car companies waited to have such a terrible situation. For the car business it is perhaps the worst hard land that they have ever had. How they get into this nightmare is what I will try to explain in the following paragraphs.

What do we need to cook something similar?

First of all, the companies produced relatively more expensive cars to be bought by the American middle class. The automakers produced these kind of cars because the demand for these vehicles were strong enough. The supply was following the demand, and theorically it was correct in average. The financial crisis showed that no everything was right; the consumers pressed the break pedal suddenly wrecking the American automakers. The business car is very competitive, and nowadays the Asian companies are leading the busineness in my opinion. The Asian automakers were investing a lot of money in more efficient and more affordable vehicles, and these characteristics will make them to better support the current crisis.

Logic Consumer Reaction

Now the American consumers, who have been spending more than they can afford, are decresing their expenses, especially the more expensive ones. For example, houses, cars, jewels, and electronics would be the more affected products. The consumers strategy would be to save money to pay their debts and deal with the very uncertain future.

What do American Automakers have to do?

First, the American companies have to manage to pass the bad weather; they have to cut unnecessary outlays and privileges, reanalyze their objective market, offer a wide variety of options to the market, and improve their competitiviness through a agressive investement policy with the help of new expert partnerts.

Officially, The United States is in One Year Recession

I have known for a while that The United States was in recession, but I have never thought that it began in december 2007. Economists use many indicators to predict when we get into this stage, but many of them failed to assure this in this time. In my opinion, I believed that USA has been in recession since june 2008 because the industrial production still showed year-over-year growth in the first semester of 2008 although the other indicators such as unemployment rate, nonfarm payrolls, and personal disposable income less goverment transfers have given us signs of economic weakness. I was convinced that to be in a meltdown period is necessary to have all components in red.

Misleading Indicators

In june 2008, the industrial production grew zero percent in a year-over-year period, and after this month this variable showed negative values. Other indicadors such as retail and total sales gave me the wrong impression of being still out of this period in the first half of this year. On the other hand, employment indicators and personal disposable income have given the contrary evidence since the end of 2007. In addition, consumer confidence, leading indicators, and house indicators have been drawing this bad picture.

NBER Gave Us the Initial Point, But...

The NBER said today the American economy reached its peak in december 2007, and now the problem is to forecast when it would get its trough. Many economists said this period would last one more year , and I agree with them because the real macroeconomic indicators do not exhibit any recuperation sign yet.

There Would be an Inflation Rebound in USA

Is it possible that in the United States the inflation rise again?. In september 2008, Kenneth Rogoff compared the economic problem in the United States with an emerging market country crisis which at the end will suffer of an inflation problem.

Let's try to think about this possibility.

First of all, let's check historically what happened with the inflation in a recession period. We can observe that most of this time the year-over-year price variation increased in each economic slowdown period. This outcome would be the product of the reduction of the interest rate that usually was applied as a policy monetary tool.

In this moment, the inflation, which was very high as a consequence of a strong leveraged demand, is now decreasing by the financial crisis. The financial crisis makes this recession special, because in my opinion it would multiply the common recession effects.

In my analysis I want to focus in one economic indicator, the money supply. Why do I care this variable?. Because the inflation is a monetary concept and has positive correlation with money supply. What has been happening with this indicator?. The monetary base (B) has been increasing rapidly to help the financial institutions, and although monetary supply (M2) does not show a big movement, this apparent discrepancy between B and M2 is due to M2 show the deleveraging process of the current crisis. The inflation problem will occur when present-day crisis impacts will disappear, and M2 will reflect the increased monetary base effects.

Monetary supply will increase in the near future and will impact over the inflation. I know that today there are other problems to deal, but we need to start thinking how to counter this new problem.