By David Mc Williams
This week has been an extraordinary one for financial markets. On Friday, five straight days of losses were reversed in equity markets. The world is slowing down. The Chinese growth model, for so long the envy of the West, is stalling. The American recovery is spluttering and the crisis in Europe rumbles on. What is happening is not that different from what happened in Ireland. A huge investment boom is coming to an end. But China has the resources to plough into the domestic economy, so let’s wait to see what happens there.
One of the dilemmas for China is that when you have an investment-led, rather than consumption-led boom, you tend to be left with overcapacity – an Asian version of a giant ghost estate. Cutting interest rates in such an environment, if it doesn’t boost consumption and goes into yet more investment, makes the problem worse.
Over in the US, something stranger is happening. The consumer, the great hope of America, has disappeared. Consumer spending is not responding to the many interest rate cuts the Federal Reserve has offered in the past few years. The problem now is that real interest rates are negative, so cuts in nominal interest rates are not going to help much
- “Microfounded” and Useful Models (delong.typepad.com)
- Craig Stephen’s This Week in China: China’s deflationary growth threatens profit (marketwatch.com)
- China, beyond the hard/soft landing debate (superbullinvestor.com)
- Tall Tales About China’s Banks Hide Economy’s Problems – Bloomberg (bloomberg.com)
- China surprises markets by lowering interest rates – what does this mean for the property market? (savills.co.uk)