Tuesday, June 7, 2011

Roubini: Hard Landing Coming for China

Nouriel Roubini, the most connected economist on the planet, is out saying that overinvestment in China will lead to hard landing. Not a question of if, but when.

Roubini is off on theory, but he is solid with the numbers and understands what is in front of him. He is reading the Chinese economy correctly.

13 comments:

  1. How soon is this coming to fruition and what can we do if we have serious investments in China?

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  2. if he is wrong, then educate us O Master!? we want more details what is your theory.

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  3. “There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.” – Ludwig von Mises

    This quote was in a reply earlier today, and the impact of it, in real time, on the world credit(debt) system is apparent to anyone with at least a rudimentary understanding of Austrian economics who follows the financial news.

    Our masters in DC (and the City of London) don't have the will to reform, and thus the expansion will continue as a PR tested successor to QE1&2 but called some other creative lie. Their greed has driven the system that sustains them past a point of no return. If Mises is correct, and he's been correct in just about every other area, it is now not a game of if but when for the second proposition- a final, fatal destruction of the entire credit(debt) monetary system. Every system on the planet is at risk due to the interconnected nature of fiat money in a digital world, and the failures of one or two (Greece? Japan?) WOULD unravel the whole game.

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  4. I'm beginning to have trouble swallowing the idea that a person can be wrong on theory but nonetheless understand the numbers well enough to make a good call despite his theoretical errors. I thought you can't interpret the numbers (historical data) without theory, ie, the numbers tell you nothing by themselves, they're only meaningful when interpreted with a properly reasoned theory.

    If Roubini's theory is flawed (which it is), I am confused as to how he keeps arriving at about the right conclusion anyway by filtering the numbers through his theory?

    Does it mean some critical part of his overall flawed theory is in fact correct, and that happens to be the part that he uses to interpret the numerical data? Or is he using another theory other than the one we've been assuming he is using, which is a consistently reasoned theory? Or is the man just getting wildly lucky?

    This whole "the theory is off but he still sees what the numbers are saying" stuff doesn't jive with me anymore.

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  5. If a house is on fire, you may hold an incorrect theory that a house is on fire becasue of say, spontaneous combustion, but still recognize that a house is on fire.

    Similarly, you may see a lot of home owners not making their mortgage payments and not understand business cycle theory, but still realize the housing market is in trouble.

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  6. I'd say that Roubini is about 3 months late in making this call, everybody worth their salt has seen that China is in a bubble. The only difference is that China also has a manufacturing base, world reserve assets, and over a billion people ready to work for peanuts. They've been inflating to try to keep pace with the dollar, and they are just now realizing that this is a horrible policy. My 2¢ is that a recession in China is probably the best thing that could happen to them, just so long as they stay away from the presses. If they let the currency rise and the corrections to take place, they just may come out of it the strongest economy in the world.

    Let's see what they do...when it happens, of course.

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  7. I don't know enough about the Chinese economy to know where it's going. I know they make just about everything we use and they are printing money to keep their currency sinking with the dollar. Peter Schiff thinks they may suffer at first from losing their biggest customer, the US, but they have enough domestic demand to replace us. That makes sense to me.

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  8. Wenzel,

    Right, but you still have to have an intellectual theory or framework that is in place to see increasing mortgage delinquency as a bad thing. The numbers themselves don't tell that tale. And then you have to have a further theory to know that if this correlates with some other figures, it means X, or that if you notice that pattern, you should look for Y, as well.

    If you were just taking 1st and 2nd derivatives of various period-over-period changes and then trying to forecast off of that, your record is going to be pretty horrendous most of the time. But Roubini seems to get it right more often than he gets it wrong, at least with certain things. So there is something he is looking at besides his flawed Keynesian macro framework to know how to make sense of these 1st and 2nd derivatives.

    I mean, isn't it obvious that there is something else and we should wonder what it is when everyone is operating off the same intellectual framework as him yet never manages to trumpet the same notes at the same time as he does?

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  9. I hope Deft, but the internal structures of China's capitalist class Communist government are so at odds that a wholesale restructuring of the entire Chinese economy will be required for them to take the next step in becoming a fully functional world class economy.

    IMHO.

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  10. Well, so does that mean that Roubini and Chanos agree on China?

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  11. Does this mean that Roubini and Chanos agree on China?

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  12. "If Roubini's theory is flawed (which it is), I am confused as to how he keeps arriving at about the right conclusion anyway by filtering the numbers through his theory?

    Does it mean some critical part of his overall flawed theory is in fact correct, and that happens to be the part that he uses to interpret the numerical data? Or is he using another theory other than the one we've been assuming he is using, which is a consistently reasoned theory? Or is the man just getting wildly lucky?

    This whole "the theory is off but he still sees what the numbers are saying" stuff doesn't jive with me anymore. "

    It could just indicate he has good instincts, or that he is operating on the basis of well-formulated theory, either explicitly or implicitly. I mean he could adhere to elements of Austrian analysis without getting it all right, but enough to guide him in the right direction. A lot of the time people operate on the basis of unconscious assumptions, which means they might not even be basing their thought on theory they purportedly espouse.

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  13. Before China crashes, which I doubt, the Chinese will cash in their 3 trillion in US treasuries. The US will crash before any other country.

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