The general perception of China is that they are this giant growth monster that will save the world from a stagnant economy. There are two reasons I think that is not so. Debt and Demographics.
The demographics is an easy one to point out. About 39 years ago China put in place the “one child policy”. A person who was 18 then, is now 57. 30 years old then is 69 years old now. That generation was the great generation of workers who grew china. All the while having only one child. They are now at retirement age or fast approaching it. For each 2 of them, there is 1 child.
That one child must fill all the jobs, support 2 elderly parents, and continue to grow the economy at the same rate as those 2 parents. Plus, China has suddenly realized they are in this bind, so have loosened the policy to a ‘Two Child’ policy. So some of these folks will be carrying 2 children as well.
For the next 20 years, at least, there will be fewer workers carrying more non-workers. That can not be changed. The great bubble of excess labor is retiring. Much like in the USA where the Boomers are retiring.
Both economies are going to have a shrinking labor pool and a growing ‘retired and consuming’ pool. When you have less production and more consumption you do not invest and grow at the same rate. Since growth is about 2% max (or about 0 in real terms) in the USA, we can expect a kind of stagnation for a few decades based on that Demographic Destiny. China is in worse shape as their policy had onset in one big step. They just issued expected growth targets of about 6% going forward, down from 12% the last couple of years. This will get worse, and rapidly. How do you get 6% growth out of a shrinking labor force with more “takers” and fewer “makers” every year as those 60ish year old folks stop working?
BTW, similar demographic trends apply to the EU as well.
Globally, the population with high fecundity (that is the Economic term of art for having kids) is the Muslim World. The EU needs to decide if they will stay European and accept a lower economic growth rate from reduced population; or let in the Islamic Migrants and become a part of the Muslim World in 30 years as Islam does not mix in but does have a lot of kids with their culture to replace yours. No, that is not ‘bias’. It is an abstract unemotional evaluation of the reality on the ground. A mathematical inevitability of the effect of fecundity ratios and immigration. The math doesn’t change depending on if you like it or not. “Reality just is. -E.M.Smith”. Angela has chosen a Muslim Germany. Hungary has not. Who knows what the rest of y’all will decide.
In the case of debt, the same reality applies to the EU countries, but I’m not going to go into it for them. We’ve all seen Greece and Cyprus implode. Spain and Portugal on deck. Italy in the wings.
We also all know that the USA is at about $19 Trillion in debt (about a 1:1 debt to GDP ratio as we had a $17.4 T GDP in 2014). That is about the limit of what is sustainable. Japan has gone up to about double that without a collapse, but at the expense of a couple of decades of zero growth and stagnation in the process. Greece did about double that, but is mid collapse at the moment. Usually about 150% of GDP as debt is the end of the road for any kind of decent economic performance. Less is much much better.
It is pretty well understood that the USA is on a rocket ride to debtors prison at the moment and we just passed the 100% of GDP level on the way to crashing. Obama did that in 6 years, and we have 2 more to go before anyone can change the budget (Gee, Thanks, Republicrims… and the Boehner Wet Kiss of departure…)
But this is about China.
Many of us also are painfully aware that we owe about $1 Trillion or so to China for national debt. The impression is that they have boat loads of cash and have been oh so frugal. So we borrow from them. But not so fast…
7:01 pm ET
Feb 4, 2015
China’s Total Debt Load Equals 282% of GDP, Raising Economic Risks
Pedro Nicolaci da Costa
China’s overall debt load has risen quickly since the global financial crisis. While still manageable, it raises some concerns for investors, the McKinsey Global Institute says in a new report.
The prospect of a major economic slowdown in China is among the key concerns for policy makers and investors in a turbulent global outlook. Many believe the Chinese government has the resources to manage a smooth transition to a slower growth rate without causing a financial crisis.
But the speed of Chinese debt growth, much of it related to real estate, raises risks that an unwinding of the country’s two-decade growth boom might not go down so smoothly.
Here are some key facts from the report.
Total Debt Equals 282% of GDP: That’s how big China’s total debt load, including borrowing by the government, banks, corporations and households, had gotten by the middle of 2014, the report says. That’s far above the average for developing countries and higher than some advanced economies including Australia, the United States, Germany and Canada.
They are already past “Going Japanese” in this regard.
In short, we borrow from them as THEIR central bank prints money like crazy and others borrow from US as OUR central bank prints money like crazy.
It is all one giant Ponzi Scheme of Debt.
In reality, there isn’t any real wealth to back up all that debt. We are each writing IOUs to the other based on nothing.
Once that reality sinks in, and as the Demographic Wall forces it to be undeniable, there will be some major issues that can no longer be ignored. Like how do you cash out that debt, to pay the retirement for all those folks no longer working, when each ‘retirement account’ is full of IOUs to the other one?
Social Security has no assets. It is a promise to pay where the old folks expect the young ones to do the paying. Which (or what) ‘young ones’, in a shrinking demographic? The same is true for IRAs and 401ks and Japanese Annuities and whatever China has in place. Real goods and services must be delivered. They can ONLY be delivered by the real workers at the time of delivery. Paper in a box doesn’t do that.
So all at the same time, from the EU to the USA, to China and Japan: The demographics do not support the reality and the promises; and no amount of mutual money printing and mutual lending can fix it. There just are not enough “young workers” globally to do that. (Where there are enough, they don’t want to work so much as kill and destroy, and will not support the legal structure behind the ‘obligations’ anyway. Their social contract is to Allah and The Imam, not to Social Security or Chinese bonds and pensions. Germany has decided to ‘learn this the hard way’, so at least it will be interesting to watch… In the USA, the Democrats and many Republican Establishment folks think a flood of young Mexicans will fix it… Maybe, but be ready to have hot enchiladas in the rest home and learn to ask for your meds in Spanish. Oh, and hope that they don’t vote to change the law taxing them to death for your retirement.)
That’s the basic problem facing the world. Demographics do not support the intergenerational promises made by politicians who long ago retired on fat pensions. The Fed and other Central Banks trying to paper over this with money printing can only drive up the price of paper assets, not create real jobs, real workers, real retirement homes, nor provide bodies to change the bed pans and cook (nor grow and deliver) the dinner.
They can, and have, and continue to, drive debt to insane levels as they attempt to do so. This further distorts markets and economies until they collapse (see Greece as only the most recent of many such events in history).
What is the trigger for catastrophe? For Greece, they owed money to bankers who were not under their political control. For Japan, they owe debt to themselves, largely. When the banker says “stop spending or else” is when it is a SHTF moment. Or when there isn’t anyone left willing to lend. Essentially when it is clear to all that it’s a bad deal. That point is about 300% Debt / GDP but varies with the reputation of the borrower and the smarts of the lenders. The European experience with debts from the 1500s to date argues folks can be pretty dim sometimes.
Now in the present case, we have a unique circumstance in that the demographics are fairly synchronized globally. That adds its own timer. IMHO, that timer is hitting right now, but takes about a decade to bite.
Somewhere between now and 2030 we hit a hard demographic wall, and there is nothing that can be done to fix it. You can not give birth to a 20 year old worker. (There is a small chance robotics can help. Japan is betting on this big time). Perhaps putting a ‘wage tax’ on robots to pay off the debt and retirement promises can fix it, but don’t bet on it.
IMHO, during that time, the only real choice for Central Banks is going to be a near zero interest rate. There will be no ‘overheated economy’ to cool off, and when you owe 200% of GDP, any rise in interest becomes lethal to the budget. At this point, move rates to 3% and you bust the Federal Budget, collapse the paper economy, and break the ability to fund a military and social security (pick one to keep…)
It will not matter if it is The Fed, The BOJ, The EU Central Bank, or the Bank of China. ALL of them have the same problem. Governments drowning in debt trying to turn paper into real product.
IFF we are lucky, it will be 20 years of stagflation as the “obligations” are erased in an inflationary POOF! and if we are not lucky, it will be a USSR implosion reset in one go. (Perhaps one way in the USA, another in the EU, and who knows what in China…)
Until that day, at least you know to look at who is putting IOU’s in their bank backed by IOUs from another bank that is backed by IOUs from the first bank…