Quotulatiousness

July 19, 2013

Protectionist law from 1920 strangling economies of Hawaii and Puerto Rico

Filed under: Economics, Politics, USA — Tags: , , , , — Nicholas @ 00:01

Keli’i Akina wants the US government to amend or (better) repeal the 1920 Jones Act:

What’s the best way to destroy the economy of an island or largely coastal region? From the Peloponnesian War to the 1960s confrontation between Cuba and the United States, the answer has been to impose an embargo. In effect, that’s what the United States has been doing for decades to its non-contiguous regions such as Hawaii and Puerto Rico as well as Alaska and much of the East and West Coasts. The culprit in this economically self-defeating practice is a little-understood federal statute called the Jones Act. The 1920 maritime cabotage law specifies that ships carrying cargo between two American ports must: 1) be built in the United States, 2) be 75% owned by U.S. citizens, 3) be largely manned by a United States citizen crew, and 4) fly the United States’ flag.

In 2012, the Federal Reserve Board of New York issued a warning to the federal government that, unless Puerto Rico is granted an exemption from these Jones Act rules, its economy would likely tank. Following suit, the World Bank released a statement announcing that it will cut back its financing of projects in Puerto Rico and begin encouraging investors to look to Jamaica as a new international shipping hub. Puerto Rico’s legislature, governor, and resident commissioner in Congress have voiced loud objections. They join a growing chorus of outrage which includes Alaska, whose legislature has passed a law (Sec. 44.19.035) requiring the governor lobby Congress for reprieve from the Jones Act.

The Jones Act creates an artificial scarcity of ships due to the inefficiency and the extraordinary cost of U.S. ship construction, driving up cargo costs and limiting domestic commerce. Through World War II the United States was a leading producer of merchant ships. Today we build less than one percent of the world’s deep draft tonnage, and the ships produced domestically for the commercial market come at a hefty price.

July 15, 2013

Expensive military gear to become piles of scrap

Filed under: Economics, Military, USA — Tags: , , — Nicholas @ 00:01

Strategy Page explains why billions of dollars in military equipment will be scrapped in Afghanistan:

It’s going to cost some $14 billion to deal with $26 billion worth of American equipment in Afghanistan. Half that cost will be for shipping gear out, but the other $7 billion will be the cost of equipment not worth shipping home and either destroyed or donated to the Afghans. About 78,000 tons of gear will be destroyed, including over 2,000 armored vehicles. Some has to be moved, given to the Afghan security forces, sold locally or destroyed. About 9,000 MRAPs will be sent back to the United States.

Unlike Iraq, where heavy stuff, like armored vehicles and trucks, could simply drive to a nearby port and put on a ship, Afghanistan has no ports. The nearest ones are in Pakistan and the road trip is expensive and dangerous because of the theft and the threat of attacks (by terrorists or gangsters seeking “protection” fees). So a lot more gear will be flown out of Afghanistan, which is quite expensive. The current plan calls for 28,000 vehicles and 20,000 shipping containers of gear are to be moved by the end of 2014.

The U.S. and NATO supplies coming in (or going out) via railroad from Western Europe, go through Ukraine, Belarus, Russia, Kazakhstan and Uzbekistan, to Afghanistan. This approach costs $400 a ton to move material to or from Afghanistan, versus three times that to truck it in from Pakistani ports, or $14,000 a ton to fly stuff in, or $10,000 a ton if you just fly material in from a friendly (Persian Gulf) port. For example, $600,000 MRAPs (Mine Resistant Ambush Protected) cost $140,000 to fly in from the Gulf. Some 2,000 of these MRAPs in Afghanistan are no longer needed by the United States or the Afghan forces so are being cut up for scrap in Afghanistan.

July 14, 2013

Signs of an economic Sharknado

Filed under: Economics, Government, Media — Tags: , , , , — Nicholas @ 11:51

Feeling positive about the economy? Michael Snyder has ten reasons to change your mind:

Have you ever seen a disaster movie that is so bad that it is actually good? Well, that is exactly what Syfy’s new television movie entitled Sharknado is. In the movie, wild weather patterns actually cause man-eating sharks to come flying out of the sky. It sounds absolutely ridiculous, and it is. You can view the trailer for the movie right here. Unfortunately, we are witnessing something just as ridiculous in the real world right now. In the United States, the mainstream media is breathlessly proclaiming that the U.S. economy is in great shape because job growth is “accelerating” (even though we actually lost 240,000 full-time jobs last month) and because the U.S. stock market set new all-time highs this week. The mainstream media seems to be absolutely oblivious to all of the financial storm clouds that are gathering on the horizon. The conditions for a “perfect storm” are rapidly developing, and by the time this is all over we may be wishing that flying sharks were all that we had to deal with. The following are 10 reasons why the global economy is about to experience its own version of Sharknado…

#1 The financial situation in Portugal continues to deteriorate thanks to an emerging political crisis. […]

#2 The economic depression in Greece continues to deepen, and it is being reported that Greece will not even come close to hitting the austerity targets that it was supposed to hit this year […]

#3 The economic crisis in the third largest country in the eurozone, Italy, has taken another turn for the worse. […]

#4 There are rumors that some of the biggest banks in the world are in very serious trouble. […]

#5 Just before the financial crisis of 2008, the price of oil spiked dramatically. […]

#6 Mortgage rates are absolutely skyrocketing right now […]

#7 This upcoming corporate earnings season is shaping up to be an extremely disappointing one. […]

#8 U.S. stocks are massively overextended right now. […]

#9 Rapidly rising interest rates are causing the bond market to begin to come apart at the seams. […]

#10 Rapidly rising interest rates could cause an implosion of the derivatives market at any moment. […]

Most Americans don’t realize that Wall Street has been transformed into the largest casino in the history of the world. Most Americans don’t realize that the major banks are literally walking a financial tightrope each and every day.

All it is going to take is one false step and we will be looking at a financial crisis even worse than what happened back in 2008.

So enjoy this little bubble of false prosperity while you can.

It is not going to last for too much longer.

July 13, 2013

What is the real inflation rate?

Filed under: Economics, Politics, USA — Tags: , , , — Nicholas @ 10:11

The official US inflation rate is around 1% annually. That doesn’t seem quite right to a lot of people who seem to be spending more money for the same goods:

… what Bernanke will never admit is that the official inflation rate is a total sham. The way that inflation is calculated has changed more than 20 times since 1978, and each time it has been changed the goal has been to make it appear to be lower than it actually is.

If the rate of inflation was still calculated the way that it was back in 1980, it would be about 8 percent right now and everyone would be screaming about the fact that inflation is way too high.

But instead, Bernanke can get away with claiming that inflation is “too low” because the official government numbers back him up.

Of course many of us already know that inflation is out of control without even looking at any numbers. We are spending a lot more on the things that we buy on a regular basis than we used to.

For example, when Barack Obama first entered the White House, the average price of a gallon of gasoline was $1.84. Today, the average price of a gallon of gasoline has nearly doubled. It is currently sitting at $3.49, but when I filled up my vehicle yesterday I paid nearly $4.00 a gallon.

And of course the price of gasoline influences the price of almost every product in the entire country, since almost everything that we buy has to be transported in some manner.

But that is just one example.

Our monthly bills also seem to keep growing at a very brisk pace.

Electricity bills in the United States have risen faster than the overall rate of inflation for five years in a row, and according to USA Today water bills have actually tripled over the past 12 years in some areas of the country.

No inflation there, eh?

July 11, 2013

Inane new “measurement” claims 1978 was the “best year ever”

Filed under: Economics, History — Tags: , , , , — Nicholas @ 08:39

An editorial in New Scientist (which I can’t quote from due to copyright concerns) claims that using a new “measurement” called the Genuine Progress Indicator (GPI), human progress peaked in 1978 and it’s all been downhill since then. Anyone who actually lived through 1978 might struggle to recall just what — if anything — was better about 1978 than following years, but the NS editors do point out that the GDP measurement generally used to compare national economies doesn’t capture all the relevant details, while GPI includes what they refer to as social factors and economic costs, making it a better measuring tool for certain comparisons.

I can only assume that most of the economists who believe that 1978 was a peak year for the environment hadn’t been born at that time: pollution was a much more visible issue in North America and western Europe than at almost any time afterwards (and eastern Europe was far worse). Industry and government were taking steps to cut back some of the worst pollutants, but that process was really only just in its early stages: it took several years for the effects to start to show.

In the late 1970s, the world was a much dirtier, poorer, less egalitarian place than even a decade later: China and India were both much more authoritarian and had still not mastered the art of ensuring that there was enough food to feed everyone. Behind the Iron Curtain, Soviets and citizens of their client states in Europe were falling further and further behind the material well-being of westerners (and becoming much more aware of the deficit).

No matter how much emphasis you put on nebulous “social factors”, the fact that the world poverty rate — regardless of how you measure it — has been cut in half over the last twenty years, lifting literally billions of people out of near-starvation makes an incredibly strong case that the world is doing better now than at any time since 1978. You can prattle on all you like about “rising inequality”, but for my money it’s a better world where the risk of people literally starving to death is that much closer to being eliminated. Give me an “unequal” world where even the poorest have enough food and clean water over an egalitarian world where billions starve, thanks very much.

July 10, 2013

Next up on our agenda of things to panic about is “peak water”

Filed under: Economics, Environment, Technology — Tags: , , , , — Nicholas @ 00:02

sp!ked editor Rob Lyons explains that “peak water” just isn’t something to worry too much about:

Disappointed by the failure of the peak-oil disaster to come to fruition, our doom-mongering, Malthusian friends have alighted on other scary narratives to confirm their suspicions of humanity as a rapacious blight on the planet. Their latest is ‘peak water’.

On the face of it, peak water is a boneheaded concept on a planet where two thirds of the surface is covered in, er, water. According to the US Geological Survey, there are 332 million cubic miles of water on Earth. What we tend to need, however, is not sea water but fresh water, of which there is much less: nearer 2.5 million cubic miles. And much of that is too deep underground to be accessed. Surface water in rivers and lakes is a small fraction of overall fresh water: 22,339 cubic miles. Handily, though, natural processes cause sea water to evaporate and form clouds, which then dump their contents on to land — so in most populated parts of the world there is currently sufficient water to supply our needs in an endlessly renewable way. As for the future, it is clear there is no shortage of H2O on the planet. What we really have is a shortage of cheap energy and the necessary technology to take advantage of the salinated stuff.

The ‘peak water’ theorists focus on groundwater supplies that are either being used faster than they are replenished, or supplies that are not replenished at all: so-called ‘fossil water’. According to leading environmentalist Lester Brown, writing in the Guardian last weekend, the rapid exhaustion of these supplies in some parts of the world is leading to the decline of food production. And at a time of fast-growing populations, this apparently promises disaster for these countries.

But often, the problem is a political rather than a practical one. [. . .]

In reality, all of the fixes that apply to peak oil also apply to peak water. New technology may make water desalination far cheaper than it is now, a claim being made for new water filtration methods based on nanotechnology. Better use of water in irrigation, through careful management of when and how water is applied to crops, could cut usage dramatically — something that is already happening in dry countries such as Israel and Australia and in parts of the US. Current uses of water, like flush toilets, may be superseded in places where water is in high demand. Through civil engineering projects, water can be shifted from places where it is plentiful to places where it is needed most, something societies have been doing for thousands of years.

July 7, 2013

Trying to prevent another “flash crash”

Filed under: Business, Economics, Technology — Tags: , , , — Nicholas @ 10:57

Tim Harford discusses high speed trading and its potential problems:

“High-frequency trading” is a rich environment of algorithms, of predators and prey, all trying to make money by trading financial products at tremendous speed. But the basic proposition is simple to state. When the price of a share rises in New York, the price of related contracts will rise in Chicago just as soon as the news arrives. But if everyone else gets the news on the regular cable, and you’re renting space on the faster cable, you can see into everyone else’s future by (say) 0.7 milliseconds, plenty of time to buy soon-to-rise assets and then, less than a thousandth of a second later, to sell them again.

You don’t have to be a socialist to find this kind of thing discomfiting. There are three concerns. The first is that scarce resources are being spent on high-speed connections that have no social value in what is at best a zero-sum game. The second is that high-frequency traders may be making money at the expense of fundamental investors. The third problem is that such trading appears to introduce systemic risks. The “flash crash” of May 2010 is still poorly understood, which should ring alarm bells — especially since the need for speed means most high-frequency algorithms are simple and therefore stupid.

What, then, should be done? Rather than trying to slow down the algorithms, why not slow down the market? Most financial exchange markets run continuously, effectively assuming that traders can react instantaneously, withdrawing out-of-date offers and replacing them with up-to-the-picosecond prices. It’s this flawed premise — that all trades could be instantaneous — that means that no matter how fast the computers get, there will always be an incentive to go faster still.

A simple way for an exchange to improve matters would be to run an auction once a second, batching together all the offers to buy and sell that have been submitted during that second. Unsuccessful bids and asks would be published and would remain on the books for the next auction, unless withdrawn. One auction a second ought to be enough for anyone; it would deliver a stream of well-behaved data to regulators — currently unable to figure out what is going on — and it is plenty of time for a computer to weigh its options.

July 4, 2013

“Buenos Aires […] is the headquarters for the central planning bad idea bus”

Filed under: Americas, Economics, Government — Tags: , , , , , — Nicholas @ 08:32

At the Sovereign Man blog, Simon Black discusses Argentina’s sad history of central planning failures:

The more interesting part about Buenos Aires, though, is that this place is the headquarters for the central planning bad idea bus.

Argentina’s President, Cristina Fernandez, continues to tighten her stranglehold over the nation’s economy and society.

This country is so abundant with natural resources, it should be immensely wealthy. And it was. At the turn of the 20th century, Argentina was one of the richest countries in the world.

Yet rather than adopting the market-oriented approaches taken by, say, Colombia and Chile, Argentina is following the model of Venezuela.

Cristina rules by decree here; there is very little legislative power. She may as well start wearing a crown.

Just in the last few years, she’s imposed capital controls. Media controls. Price controls. Export controls.

She’s seized pension funds. She fired a central banker who didn’t bend to her ‘print more money’ directives. She even filed criminal charges against economists who publish credible inflation figures, as opposed to the lies that her government releases.

Inflation here is completely out of control. The government figures say 10%, but the street level is several times that.

[. . .]

Being here in this laboratory of central planning makes a few things abundantly clear:

1) Printing money does not create wealth. If it did, Argentina would be one of the richest places in the world again.

2) All of these policies that are ‘for the benefit of the people’ almost universally and up screwing the people they claim to help.

Printing money creates nasty inflation. If you’re wealthy, it leads to asset bubbles, which can make you even wealthier. If you’re poor, you just get crushed by rising prices. Or worse – shortages (remember the recent Venezuelan toilet paper crisis?)

3) Desperation leads to even more desperation. The worse things get, the tighter government controls become… which makes things even worse. It’s a classic negative feedback loop.

Both the United States and pan-European governments are varying degrees of this model, with only a flimsy layer of international credibility separating them from the regime of Cristina.

So Argentina is really a perfect case study in things to come.

July 3, 2013

Kathy Shaidle’s “Dispatch from Canada”

Filed under: Cancon, Economics, USA — Tags: , , , , , — Nicholas @ 09:21

Kathy will be writing a weekly column for our American friends, updating them with whatever’s up here in the Great White North. Given how little actually ever happens in Canada, it might be just a weather report or the latest style change for Justin Trudeau’s hair. However, to start it off, yesterday’s column attempted to correct a few common notions about Canada:

Because a lot of what you think you know about Canada is probably decades out of date.

As investment bigwig and journalist Theo Caldwell recently noted:

    But Canada is far from American stereotypes of socialism, centralization and obeisance, at least in relative terms. By almost any measure, Canada is a freer country than the U.S.A.

    Economically, the contrast is stark, for those who care to see. While folks reflexively state that Canadian taxes are higher than those of the United States, corporate and personal rates are lower up north.

How much lower are those corporate taxes? Canada ranks 6th lowest out of 185 nations. America came in at a shocking 69th place.

Believe it or not, Canada’s average household net worth is higher than America’s.

We also have lower unemployment, and our economy is holding steady, thanks in part to our ingenious refusal to give mortgages to welfare bums.

We have fewer divorces, fewer traffic fatalities, and way fewer tornadoes.

We’re skinnier, too. (Seriously: your restaurant portions are freakishly huge.)

But what about “the American Dream”?

According to one (Canadian) economist, “a son born to a poor father in the U.S. is twice as likely to remain poor throughout his life than if he had been born in Canada.”

[. . .]

We’ve got our flaws too, of course.

We literally have no abortion law, which means it’s easier to get one than a gun, even at the nine-month mark.

There’s no death penalty. And try getting an MRI, unless you’re a cat.

Our cops are increasingly corrupt, if not downright fascist. (Don’t be fooled by the propaganda about the noble, virtuous Mountie…)

We have this unelected Senate thing (long story) and a dorky constitution, especially compared to yours.

And don’t get me started on Quebec.

July 1, 2013

The rise and fall of economic powers

Filed under: China, Economics, History, Japan — Tags: , , , , , — Nicholas @ 10:30

Charles Hugh Smith has a guest post at Zero Hedge, talking about the theme of economic decline of great powers:

Our collective interest in the rise and fall of empires is not academic. The meteoric rise of China and the financialization rotting out global capitalism are just two developments that suggest we are entering an era where some great powers will collapse, others will remake themselves and others will gain ascendancy.

[. . .]

In 1987, pundits were predicting that Japan’s “5th generation” computing would soon dominate what was left of America’s technological edge. They were spectacularly wrong, as the 5th generation fizzled and Japan became an also-ran in web technology, a position it still holds despite its many global electronic corporations and vast university research system.

Japan’s modern economy was set up in the late 1940s and early 1950s to exploit the world of that time. Sixty years later, Japan is still a wealthy nation, but its relative wealth and power have declined for 20 years, as its political-financial power structure clings to a model that worked splendidly for 40 years but has not worked effectively for 20 years.

The decline is not just the result of debt and political sclerosis; Japan’s vaunted electronics industry has been superseded by rivals in the U.S. and Korea. It is astonishing that there are virtually no Japanese brand smart phones with global sales, and only marginal Japanese-brand sales in the PC/notebook/tablet markets.

The key dynamic here is once the low-hanging fruit have all been plucked, it becomes much more difficult to achieve high growth rates. That cycle is speeding up, it seems; western nations took 100 years to rapidly industrialize and then slip into failed models of stagnation; Japan took only 40 years to cycle through to stagnation, and now China has picked the low-hanging fruit and reverted to financialization, diminishing returns and rapidly rising debt after a mere 30 years of rapid growth.

There is certainly evidence that China’s leadership knows deep reform is necessary but the incentives to take that risk are low. Perhaps that is a key dynamic in this cycle of rapid growth leading to stagnation: the leadership, like everyone else, cannot quite believe the model no longer works. There are huge risks to reform, while staying the course seems to offer the hope of a renewal of past growth rates. But alas, the low hanging fruit have all been picked long ago, and as a result the leadership pursues the apparently lower-risk strategy that I call “doing more of what has failed spectacularly.”

Though none of the historians listed above mention it, there is another dangerous dynamic in any systemic reform: the very attempt to reform an unstable, diminishing-return system often precipitates its collapse. The leadership recognizes the need for systemic reform, but changing anything causes the house of cards to collapse in a heap. This seems to describe the endgame in the USSR, where Gorbachev’s relatively modest reforms unraveled the entire empire.

June 28, 2013

QotD: In praise of Bastiat’s “What is seen and what is not seen”

Filed under: Economics, Education, Government, Liberty, Quotations — Tags: , , , , — Nicholas @ 00:01

For me, [Bastiat’s “What Is Seen and What Is Not Seen“] is the pinnacle of economic profundity. You can call it obvious. But when I first started learning economics at the age of 17, none of Bastiat was obvious. I was an honors student at a well-regarded California high school. Yet as far as I can remember, I had never heard any argument against the minimum wage, Social Security, or the FDA in my entire life.

Every teacher and book I ever encountered treated naive populism like the Law of Gravitation. Evil businesses aren’t paying workers enough? Raise the minimum wage; problem solved. The elderly are poor? Increase Social Security payments; problem solved. Evil businesses are selling people bad drugs? Impose more government regulation; problem solved.

If you favor these programs, you can call these arguments straw men. But I assure you: These “straw men” were never presented by opponents of these policies. On the contrary, these “straw men” were invariably presented by people who favored these policies. How is that possible? Because during my first 17 years of life, I never encountered an opponent of any of these policies! You might assume I was grew up in a weird Berkeley-esque leftist enclave, but bland Northridge, California hardly qualifies.

What was going on? The best explanation is pretty simple: I only heard straw man arguments in favor of populist policies because virtually everyone finds these straw man arguments pleasantly convincing. Regardless of the merits of the minimum wage, Social Security, and the FDA, economic illiteracy is the reason for their popularity. If someone like Bastiat convinced people that the pleasantly convincing arguments are inane, proponents would have to fall back on arguments that are intellectually better yet rhetorically inferior.

Bryan Caplan, “Who Loves Bastiat and Who Loves Him Not”, EconLog, 2012-08-15

June 27, 2013

How many “environmental” groups are actually harming the environment

Filed under: Economics, Environment, Media — Tags: , , , — Nicholas @ 00:01

Willis Eschenbach at Watts Up With That:

Now, given that poverty is the greatest threat to the global environment, the inescapable conclusion is that the only way the global environment stands a chance is if poor countries can develop economically.

And that is why the anti-development, pro-expensive energy stance of the large environmental NGOs is one of the great environmental tragedies of our times.

Here’s the chain of causality:

1. Climate alarmists, with the strong support of the major environmental NGOs like Greenpeace and WWF, declared war on CO2.

2. The method that they chose to fight CO2 was to discourage fossil fuel use by making energy more expensive, using a combination of taxation, legislation, international pressure, and expensive subsidies to achieve that end. Obama’s War on Coal, announced today, is just one of hundreds of examples of the wealthy NGOs and the rich governments working to increase the price of energy.

3. Since energy is development, expensive energy keeps poor countries in poverty. When the World Bank denies loans for coal fired plants in India, the poor suffer … but the environment suffers more. Until they can afford to use coal and gas, they’ll run the country on wood … I refer you back to Figure 1 for how well that works out.

4. Expensive energy slows a country’s economic development, and as President Obama pointed out, people worried about money don’t pay attention to the environment.

This ends up in a bizarre position—the actions of the major environmental NGOs are ensuring continued environmental destruction in the developing world.

June 22, 2013

Generating electricity from “biomass” – bad economics and bad for the environment

Filed under: Britain, Economics, Environment — Tags: , , , , — Nicholas @ 09:57

Matt Ridley explains why replacing natural gas (or even coal) electrical generation with biomass is an absurd “solution”:

Under the Government’s plan, biomass power stations will soon be burning much more wood than the country can possibly produce. There is a comforting myth out there that biomass imports are mainly waste that would otherwise decompose: peanut husks, olive pips, bark trimmings and the like. Actually, the bulk of the imports are already and will continue to be of wood pellets.

It is instructive to trace these back to their origin. Reporters for The Wall Street Journal recently found that the two pelleting plants established in the southern US specifically to supply Drax are not just taking waste or logs from thinned forest, but also taking logs from cleared forest, including swamp woodlands in North Carolina cleared by “shovel-logging” with giant bulldozers (running on diesel). Local environmentalists are up in arms.

The logs are taken to the pelleting plants where they are dried, chopped and pelleted, in an industrial process that emits lots of carbon dioxide and pollutants. They are then trucked (more diesel) to ports, loaded on ships (diesel again), offloaded at the Humber on to (yet more diesel) trains, 40 of which arrive at Drax each day.

[. . .]

Over 20 or 40 years, study after study shows that wood burning is far worse than gas, and worse even than coal, in terms of its greenhouse gas emissions. The effect on forest soil, especially if it is peaty, only exacerbates the disparity. The peat dries out and oxidises.

Yet the Government persists in regarding biomass burning as zero-carbon and therefore deserving of subsidy. It does so by the Orwellian feat of defining sustainability as a 60 per cent reduction in emissions from fossil fuels. As Calor Gas puts it: “This is a logical somersault too far, conveniently — for the sake of cherry-picking the technology — equating 40 per cent to 0 per cent.” (Calor Gas supplies rural gas and is understandably miffed at being punitively treated while a higher- carbon rival industry is subsidised. […]) Moreover, unlike gas or coal, you are pinching nature’s lunch when you cut down trees. Unfelled, the trees would feed beetles, woodpeckers, fungi and all sorts of other wildlife when they died, let alone when they lived. Nothing eats coal.

So, compared with gas, the biomass dash is bad for the climate, bad for energy security and dependence on imports, bad for human health, bad for wildlife and very bad for the economy. Apart from that, what’s not to like?

June 19, 2013

Even the Chinese statistics office couldn’t accept these numbers

Filed under: Bureaucracy, China, Economics, Government — Tags: , , — Nicholas @ 07:57

In the Wall Street Journal‘s ChinaRealtime section, an amusing story about a local Chinese government whose official statistics were so unrealistic that the central statistics office called them out on it:

It’s typically advisable not to accept Chinese economic data at face value – as even the country’s own premier will tell you. Figures on everything from inflation and industrial output to energy consumption and international trade often don’t seem to gel with observation and sometimes struggle to stack up when compared with other indicators.

How the figures are massaged and by whom is as much a secret as the real data itself. But in an unusual move, the National Bureau of Statistics – clearly frustrated with the lies, damn lies – has recently outed a local government it says was involved in a particularly egregious case of number fudging, providing rare insight into just how we’re being deceived.

According to a statement on the statistics bureau’s website dated June 14 (in Chinese), the economic development and technology information bureau of Henglan, a town in southern China’s Guangdong province, massively overstated the gross industrial output of large firms in the area.

[. . .]

The statistics bureau doesn’t say why Henglan inflated its industrial output numbers. But indications that a local economy is sagging could reflect poorly on the prospects for promotion of local officials, and China’s southern provinces have been particularly hard hit by the global slowdown in demand for the country’s exports. Factories have closed, moving inland and overseas in search of cheaper labor, denting local government revenues.

“When governments are looking to burnish their track record, that can put the local statistics departments in a very awkward situation,” said a commentary piece that ran Tuesday in the Economic Daily (in Chinese), a newspaper under the control of the State Council, China’s cabinet. The article said that one of the biggest obstacles to ensuring accurate data is that the agencies responsible for crunching the numbers aren’t independent from local authorities. Moreover, it argues that penalties for producing fake data were too mild to act as a deterrent.

June 16, 2013

Chinese banks have a “hidden second balance sheet”

Filed under: China, Economics — Tags: , , — Nicholas @ 10:40

It’s been a while since I posted one of my links to articles about the Chinese economy. Time to redress that now:

“There is no transparency in the shadow banking system, and systemic risk is rising. We have no idea who the borrowers are, who the lenders are, and what the quality of assets is, and this undermines signalling,” she told The Daily Telegraph.

While the non-performing loan rate of the banks may look benign at just 1pc, this has become irrelevant as trusts, wealth-management funds, offshore vehicles and other forms of irregular lending make up over half of all new credit. “It means nothing if you can off-load any bad asset you want. A lot of the banking exposure to property is not booked as property,” she said.

[. . .]

Fitch warned that wealth products worth $2 trillion of lending are in reality a “hidden second balance sheet” for banks, allowing them to circumvent loan curbs and dodge efforts by regulators to halt the excesses.

This niche is the epicentre of risk. Half the loans must be rolled over every three months, and another 25pc in less than six months. This has echoes of Northern Rock, Lehman Brothers and others that came to grief in the West on short-term liabilities when the wholesale capital markets froze.

Mrs Chu said the banks had been forced to park over $3 trillion in reserves at the central bank, giving them a “massive savings account that can be drawn down” in a crisis, but this may not be enough to avert trouble given the sheer scale of the lending boom.

Overall credit has jumped from $9 trillion to $23 trillion since the Lehman crisis. “They have replicated the entire US commercial banking system in five years,” she said.

The ratio of credit to GDP has jumped by 75 percentage points to 200pc of GDP, compared to roughly 40 points in the US over five years leading up to the subprime bubble, or in Japan before the Nikkei bubble burst in 1990. “This is beyond anything we have ever seen before in a large economy. We don’t know how this will play out. The next six months will be crucial,” she said.

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