Wednesday, December 22, 2010

Put Me Down as a Bear on China: A Comment on the Split in the Austrian Camp

I see that Walter Block has placed me on his list of Austrian economists that called the housing bubble.  I note that Block links to my analysis of a Fed paper that said there was no housing bubble. This is accurate as far as the housing bubble itself is concerned, but there was much more that an Austrian could understand about the overall financial crisis, for that, see my post, An Administration Keynesian Speaks of Failure, Failure and Failure (And an Alternative Examined).

I also note that Block mentions forecasts about the Chinese economy. For the record, I am in the bearish camp on China. Although, I don't think China will completely stop printing money, I fully expect them to continue to slow money printing, which will lead to an eventual stock market crash and stagflation.

Block quotes an anonymous author:
Today – We have more "Austrian" forecasters than ever. Is China a bubble? The supposedly Austrian-leaning Jim Rogers, Peter Schiff, Jim Puplava, and Adrian Day say "no." Left-leaning Jim Chanos says "yes." I tend to agree with Chanos. So what happens to the credibility of Austrian economics if the China bubble bursts? Will the fault lie in the theory or those applying it?

This is an important question, I believe the split between Austrian bulls on China and Austrian bears can be explained, not as a failure in Austrian Business Cycle Theory but in the consistent application of it, and the problem with getting reliable hard data out of China.

The data coming from China is notoriously questionable, including their money supply statistics. Even Li Keqiang, an economist, who may become the next Prime Minister of China questions the data. He suggests using anecdotal evidence.

This is what I tend to do, rather than look just at the numbers put out by the China's central bank. For example, it's clear to me that given the huge price inflation being reported in China that the Chinese must have printed a substantial amount of money. Further, the fact that China manages their currency and has accumulated a trillion dollars in U.S. securities is indicative of huge Chinese money printing to buy the securities. When they stop, or more likely just slow money printing, a crash/stagflation will occur.
As for misapplication, Peter Schiff's position is:

As the RMB goes up that’s going to cause more money to flow out of Dollars into RMB and, of course, the Chinese aren’t going to be expanding their money supply as much and they don’t have to buy as many Treasuries, and that means the Fed is going to be printing even more Dollars to buy what the Chinese don’t want
This is part is in sync with my view thatthe Chinese won't be expanding their money supply as much. Based on classic ABCT, this will mean a downturn in the Chinese economy. Schiff thinks otherwise. Perhaps Schiff is thinking that money flow into the RMB from outside China will replace the capital structure funds that will stop flowing as a result of a slowdown in future Chinese money printing. But if the U.S. is an example, the flight into the RMB may actually result in drain of capital from private sector investment. The recent financial crisis saw huge money flows into the dollar, but to the degree these were held in the form of Treasury securities by foreign entities and not in private sector instruments, the support to the private sector capital structure did not occur. Indeed, the capital structure saw declining prices, during this period.

Furthermore, as American forecasters, it was easy to see that the size of the U.S. housing boom was so great that it would be very difficult for foreign investors to come in with the necessary private capital to support the housing market and stop the crash. Not having solid economic data from China, it is difficult for an Austrian economist outside of China to get a sense of the distortions that are occurring in China, other than from the anecdotal evidence of price inflation, and the reports of  Ghost Cities. To me it appears severe and that the bulls simply fail, from a distance, to get a sense of the huge economic distortions and money printing that must be going on.


  1. It's easy to be a bear on China! central economic planning never works!

    The chinese though, have savings and actually produce goods...

  2. Wenzel,

    I should have some "anecdotal" perspectives from a number of actual, young Chinese citizens in a blog post coming up shortly. Passing around some of the "ghost cities in China" links has really generated some interesting comments from this group.

    I don't think the debate is bubble/no bubble. It's when the bubble will burst. Rogers/Schiff see it bursting in a decade or so, while Chanos sees it bursting within a couple of years.
    I too am closer to Chanos' point of view. China is already engaging in credit tightening, the first step of a bubble bursting.

  4. China statistics are notoriously unreliable, but I am convinced that China is in a massive bubble based on anecdotal evidence, and part of the reason why they don't get the statistics right is that they are worried that accurate statistics will only expose their the flaws in their seemingly healthy economy.

  5. Walter Block's list should be called "Walter Block's list of Austrians Who Called The Housing Bubble and Of Whom I Approve," since it leaves out many, many Austrian writers, including this one, who called the bubble as early, and in many cases much earlier, than the people he cites.

    Strike two against Dr. Block's integrity. The first strike occurred when he failed to object on behalf of free speech and other supposedly libertarian values when a libertarian outfit disinvited me to a conference because of my pro-Palestinian positions.

    Dr. Block's contribution to libertarian thinking then was to imply to me that I was an "extremist."

    This would be funny if it were not sad. When Dr. Block was attacked for his classroom presentation at Loyola College for misogyny and extremism, I do recall writing in support of him...

    I guess these things are a one-way street.
    Can't say such spokesmen for libertarianism impress me, however brilliant they might be.