Economic Delusions and the Madness of Crows

Lately we have been treated to an excess of crowing about the amazing robustness of the Chinese economy (8.9% GDP growth) and the incredible US stock market run since March of 2009. Unfortunately, the majority of comfort to be derived from either crow song is largely delusionary.

First, China's amazing 8.9% GDP growth in the midst of a world recession:

The “resilience” of the Chinese economy right now is based, at least in part, on several factors that I find cause for concern:

* acceleration of a 20-year pipeline of infrastructure projects into a 5-year time horizon, including many seemingly redundant projects or vanity projects, or ones where the returns are far from clear (such as the construction of entirely new cities to replace perfectly good old ones);
* reconstruction in the aftermath of the Sichuan earthquake (which needs to be done, but is actually the replacement of destroyed value, not — as growth figures imply — a form of genuine economic expansion; otherwise you could tear down the whole country just to rebuilt it and call it “growth”);
* construction of large-scale luxury condo developments that go entirely unoccupied and serve merely as investment vehicles, on the expectation of future appreciation;
* easy state-provided credit that has kept businesses — many of them poorly run and financed — from exiting sectors (such as steel) that have chronic excess capacity;
* misdirection of business loans into stock market and real estate speculation, fueling bubbles in both markets
* direct investment by government ministries in order to speculate in — and thereby prop up – the real estate market, on the misconception that a rising real estate market is a “driver” of growth (rather than a result of real demand for more and better usable space driven by business expansion and rising living standards);
* the possibility of “channel stuffing,” where wholesalers and retailers are forced to build up unsold inventories to keep factories (particularly state-owned factories) running. Ironically, this shows up in China’s official statistics as “retail sales” because in China, retail sales are counted when the manufacturer ships, not when the products is sold to a consumer. _SeekingAlpha

As for the US stock market rally, we might want to ask ourselves: Why is the market going up when jobs are going down? The most rational answer is the obvious: the market is not the economy. Companies can improve the bottom line -- and thus the stock price -- by lopping employees off the payroll. If enough companies use this approach to build a convincing enough Potemkin Village for investors, the stock market may very well rally convincingly -- for a time.

Certainly the US government can fudge GDP numbers as easily as the Chinese government. And it is certain that the US government has been fudging employment numbers for several months (years?) now. As stupid as government, media, and academic mouthpieces for the economy may be, a healthy economy that is based upon consumption requires healthy levels of employment and productive income.

....we're likely to see a fresh batch of encouraging numbers, there's plenty of reason to remain humble on expecting that salvation is imminent for one simple reason: the labor market continues to bleed.

"While job losses will likely end early next year, robust job gains may still be several quarters away," according to Christina Romer, the chair of President Obama's Council of Economic Advisers, in testimony to Congress last week.

That's a fairly stark assessment considering that it comes via the usual political spin that passes for debate in Washington. A cynic might argue that if the White House is preparing the nation for many more months of job destruction, the truth may be even harsher. Meantime, the next clue comes on November 6, with the monthly update on employment from the government.........

In short, talk is cheap and so the world waits for numbers _SA