As the stock market closely observes Europe, it is caught in a whirlwind of uncertainty. One day, the indices soar; the next, they plummet. At times, it seems Europe is teetering on the edge of a financial catastrophe, while on other days, optimism surges with hints of major bailouts. This volatility leaves investors and analysts alike guessing about the future.
Instead of attempting to unravel this complex situation, let’s gain some perspective on the issues at hand.
Focusing on the “if” and “when” of a potential Greek default serves only as a significant distraction. While it may feel like a market crash is imminent, whether it happens tomorrow or a year from now doesn’t change the reality that the economy is struggling, a fact that is widely recognized. Additionally, there seems to be little anyone can do to alter this course.
For instance, this past Tuesday, the Conference Board reported that consumer confidence in September hovered near a two-year low at 45.2. Additionally, the Case-Shiller index revealed that property values had fallen by 4.1 percent in the twelve months ending July 2011. On Wednesday, Federal Reserve Chairman Ben Bernanke identified long-term unemployment as a national crisis. The following day, we learned that the economy grew at an annual rate of less than 1 percent during the first half of the year.
Is it any wonder that consumers are feeling pessimistic? They look around and see a scarcity of well-paying jobs, an economy drowning in massive government debt, and elected officials who seem to consistently make poor choices. Each night, they go to sleep in homes worth less than what they paid, adding to their worries.
But that’s not the whole story…
Dr. Copper and Bad Chinese Debt
Dr. Copper, the metal with a doctorate in economics, has a knack for predicting the economy’s direction. Its extensive use in various industries makes copper a reliable early indicator of economic activity.
When copper prices rise, economic activity typically follows suit, whereas falling prices often signal stagnation. Recently, copper hit its lowest closing price in 14 months.
The decline in copper prices suggests that China, which has been on a vigorous growth trajectory for the past decade, may be slowing down. Indeed, Chinese copper imports have plummeted by 27 percent over the past year. This raises a question: isn’t China supposed to be the world’s new economic powerhouse, capable of pulling the global economy from the brink of depression?
Unfortunately, China’s impressive growth may have been propped up by a bubble of poor lending practices, making U.S. banks look prudent in comparison. Jim Chanos, a noted fund manager and skeptic of the Chinese economy, recently told Bloomberg that many analysts expect a significant proportion of new loans in China to go bad. He noted, “If we assume that China’s total credit growth this year will be between 30 percent and 40 percent of GDP, and half of that debt goes bad—with recovery rates around 50 percent—then China may not be growing at all on an after-write-off basis. Its reported 9 percent growth could effectively be zero.”
China’s Return to Normal
Though we at the Economic Prism have yet to visit China or independently verify Chanos’ claims, the possibility that China’s outstanding economic growth might be leading toward a significant downturn is something that cannot be easily dismissed.
Reports indicate that China’s manufacturing sector has contracted for three consecutive months in September. It appears that the world may have reached peak saturation of ‘Made in China’ products. Additionally, Chinese stock markets have hit a 14-month low, declining 16 percent over the past year.
That said, it’s quite likely that China will become the world’s largest economy in the next decade or two. Absent a dramatic rebound in the U.S. economy or a complete collapse of China’s, the math is simple: China is on track to surpass all others in global economic standings.
Ultimately, this transition signifies a return to historical norms. According to Henry Kissinger, “China produced a greater share of total world GDP than any Western society in eighteen of the last twenty centuries.”
It’s clear that the last two centuries saw China slip from its historical prominence. The Industrial Revolution catapulted Great Britain and then the United States to the forefront, while China spent a large part of the 20th century grappling with radical communal living. Now, however, it is rapidly catching up and preparing to reclaim its status as a leader in global economic dominance.
But first, it seems, they will have to confront the same financial challenges as the rest of the world.
Sincerely,
MN Gordon
for Economic Prism