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I think there is one fundamental point people should understand when pondering macro issues: for a closed system the amount of savings is equal to the amount of

I think there is one fundamental point people should understand when pondering macro issues: for a closed system the amount of savings is equal to the amount of debt. Every dollar of debt is a dollar of savings for the debt holder and vice versa (the first part is always true; for the second part to be true we can either take a narrower view of what savings are or we can view "debt" a little more expansively to mean all financial assets -- the key is that claims are always matched by obligations). So China having a lot of debts is equivalent to Chinese having a lot of savings since most of the debts are held domestically. With that in mind maybe people can get a better perspective on the "what if" the credit boom stops.

fludlight 9y ago
https://en.wikipedia.org/wiki/Fractional-reserve_banking https://en.wikipedia.org/wiki/Fractional-reserve_banking
- seanmcdirmid 9y ago
  Ya, my thoughts exactly. I think the reserve ratio for Chinese banks is less than 20% ATM; and that doesn't include off the book shadow loans. A lot of the extra liquidity is being sopped up directly into real estate. It never even hits the real economy.
  - fspeech 9y ago
    "A lot of the extra liquidity is being sopped up directly into real estate" It doesn't really work that way. People who buy lose liquidity but people who sell gain liquidity. Cash just changes hands. The question is what are the side effects of these transactions. In this case lots of apartments get built. Many of them empty. You may not regard that as the real economy. But is digging up gold to put in a vault or mining bitcoin any more real?
    - seanmcdirmid 9y ago
      No, they aren't. It isn't doing anything useful, just acting as a speculative asset. It isn't developing the economy so that production is increased later on. Gold and bitcoin mining similar don't create value either (for gold's usage as a speculative asset).
      - fspeech 9y ago
        With their real estate boom people will eventually live in larger and more modern housing units. The process to get there may be more wasteful than necessary but it can be eventually productive even from a very utilitarian perspective. During the dotcom boom much more fiber capacity than needed were built but they were eventually absorbed. It was a misallocation of capital at the time and companies went bankrupt for that. But it was eventually not all waste.
        Macuyiko 9y ago
        Except that here it's kind of frightening to see the quality standards that are being followed (or rather: not followed) when putting up all of this housing, especially in non tier one areas. Housing gets build. Stays empty. After a few years look likes it's ready to be bulldozed and reconstructed from scratch again. In most cases, this is indeed exactly what happens, but it's hard to see any long term benefit from this sort of approach once the economy slows down.
        fspeech 9y ago
        If one sees a shanty town in the developing world one may wonder who would want to live there. What one does not see is what the conditions were before people moved into the shanty town. China actually completed rural electrification (and road coverage, cellular coverage etc) but still just having running water and indoor plumbing is a positive change for many.
        seanmcdirmid 9y ago
        Ha! The last time I looked at apartments in Beijing (late 2015) was depressing. Rents for 10k RMB/month, sells for $1 million USD, has one bathroom with a crappy wet floor shower (rental, the for sale places were completely unrenovated of course). Those buildings are also not meant to last more than 20 years without extensive maintenance (Chinese overbuild on concrete to take adavantsge of unskilled migrant labor, this leads to serious maintenance problems, but the CCP sees it as a feature rather than a problem), they start looking depilated after 5. My wife owns a villa in a tier 88. It is a nice place, but the standards are so different, the lack of indoor heating makes me wonder how it could ever be livable. Also, China lacks a property tax, so housing is seen as a speculative asset. It is really just like gold or bitcoin. Lots of house aren't even lived in (e.g. See ghost cities that have completely sold out but no one wants to actually live there).
- fspeech 9y ago
  Right that is the process of money creation. However it does not change the accounting identity that asset and liability are the flip sides of each other.
woodandsteel 9y ago
Except that means that if the debtor defaults, then the creditor loses all their savings. And the problem here is that what you have in large nations is a gigantic, interlocked network where every creditor is a debtor to many other lenders. The result is that a limited number of debtor defaults can start a chain-reaction that freezes the whole system. Then you have a financial crash, and history shows these usually take a decade or more to get out of. Or is it your view that there is something special about the Chinese such that that couldn't possible happen there.
- fspeech 9y ago
  I wouldn't say that it is impossible. The tendency is though to double or triple count negative things. Chinese economy has lots of inefficiencies. Very true. That is reflected in the low per capita income. People could live a higher standard of living given the amount of effort they put in if the system were more efficient. People's lives are a lot less free. Capital control for example. Bitcoin was okay and then it is not. Inefficiencies in the economy can brake contagions though. What is negative in one aspect can be a saving grace in another. Check out how coal price behaved. The party wanted to shut down capacity and they did. Even as coal demand dropped the price shot back up. Difference between coal and oil? Coal is much more local while oil is international.

fludlight 9y ago

https://en.wikipedia.org/wiki/Fractional-reserve_banking https://en.wikipedia.org/wiki/Fractional-reserve_banking

seanmcdirmid 9y ago
Ya, my thoughts exactly. I think the reserve ratio for Chinese banks is less than 20% ATM; and that doesn't include off the book shadow loans. A lot of the extra liquidity is being sopped up directly into real estate. It never even hits the real economy.
- fspeech 9y ago
  "A lot of the extra liquidity is being sopped up directly into real estate" It doesn't really work that way. People who buy lose liquidity but people who sell gain liquidity. Cash just changes hands. The question is what are the side effects of these transactions. In this case lots of apartments get built. Many of them empty. You may not regard that as the real economy. But is digging up gold to put in a vault or mining bitcoin any more real?
  - seanmcdirmid 9y ago
    No, they aren't. It isn't doing anything useful, just acting as a speculative asset. It isn't developing the economy so that production is increased later on. Gold and bitcoin mining similar don't create value either (for gold's usage as a speculative asset).
    - fspeech 9y ago
      With their real estate boom people will eventually live in larger and more modern housing units. The process to get there may be more wasteful than necessary but it can be eventually productive even from a very utilitarian perspective. During the dotcom boom much more fiber capacity than needed were built but they were eventually absorbed. It was a misallocation of capital at the time and companies went bankrupt for that. But it was eventually not all waste.
      - Macuyiko 9y ago
        Except that here it's kind of frightening to see the quality standards that are being followed (or rather: not followed) when putting up all of this housing, especially in non tier one areas. Housing gets build. Stays empty. After a few years look likes it's ready to be bulldozed and reconstructed from scratch again. In most cases, this is indeed exactly what happens, but it's hard to see any long term benefit from this sort of approach once the economy slows down.
        fspeech 9y ago
        If one sees a shanty town in the developing world one may wonder who would want to live there. What one does not see is what the conditions were before people moved into the shanty town. China actually completed rural electrification (and road coverage, cellular coverage etc) but still just having running water and indoor plumbing is a positive change for many.
      - seanmcdirmid 9y ago
        Ha! The last time I looked at apartments in Beijing (late 2015) was depressing. Rents for 10k RMB/month, sells for $1 million USD, has one bathroom with a crappy wet floor shower (rental, the for sale places were completely unrenovated of course). Those buildings are also not meant to last more than 20 years without extensive maintenance (Chinese overbuild on concrete to take adavantsge of unskilled migrant labor, this leads to serious maintenance problems, but the CCP sees it as a feature rather than a problem), they start looking depilated after 5. My wife owns a villa in a tier 88. It is a nice place, but the standards are so different, the lack of indoor heating makes me wonder how it could ever be livable. Also, China lacks a property tax, so housing is seen as a speculative asset. It is really just like gold or bitcoin. Lots of house aren't even lived in (e.g. See ghost cities that have completely sold out but no one wants to actually live there).
fspeech 9y ago
Right that is the process of money creation. However it does not change the accounting identity that asset and liability are the flip sides of each other.

woodandsteel 9y ago

Except that means that if the debtor defaults, then the creditor loses all their savings. And the problem here is that what you have in large nations is a gigantic, interlocked network where every creditor is a debtor to many other lenders. The result is that a limited number of debtor defaults can start a chain-reaction that freezes the whole system. Then you have a financial crash, and history shows these usually take a decade or more to get out of. Or is it your view that there is something special about the Chinese such that that couldn't possible happen there.

fspeech 9y ago
I wouldn't say that it is impossible. The tendency is though to double or triple count negative things. Chinese economy has lots of inefficiencies. Very true. That is reflected in the low per capita income. People could live a higher standard of living given the amount of effort they put in if the system were more efficient. People's lives are a lot less free. Capital control for example. Bitcoin was okay and then it is not. Inefficiencies in the economy can brake contagions though. What is negative in one aspect can be a saving grace in another. Check out how coal price behaved. The party wanted to shut down capacity and they did. Even as coal demand dropped the price shot back up. Difference between coal and oil? Coal is much more local while oil is international.