The Looming Importance of Europe and China

March 15, 2012
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This blog, by definition, focuses on bankruptcy and creditors’ rights – that is, what happens when business conditions drive someone into insolvency.  Nevertheless, it is also important to develop a sense of what causes such adverse economics.  At the least, by observing the macro-economic world, one can have at least some warning of the economic waves rolling towards shore.  With this information, it becomes easier to guess whether to get out one’s surfboard and head for the beach or to gather one’s wits and sprint for higher ground. Accordingly, your blogmaster does spend some time, on a regular basis, reviewing economic trends that may in a week, a month, or a year adversely impact the economics of individuals and businesses.  For example:  The meteoric growth of China’s emerging economy has been an important economic reality for the past many years.  China’s boom has not only strongly pushed up raw materials prices but also helped to curb the position of American manufacturing.  Now, as we did with the rise of Japan in the Eighties, there are those who forecast that China’s rise is inexorable and will eclipse the American Century. Of course, nothing last forever, and economic trends are no exception.  There is growing, albeit anecdotal, evidence that the Chinese boom may be faltering.  Recent stories out of China indicate a stalling, or perhaps even a retrenching, of real estate prices.  The news also suggests that China may be facing the effects of excessive real estate speculation – at least in certain areas of the country.  News stories talk of real estate developments with few, if any, residents, of newly built industrial parks without resident industries, and of infrastructure developments, such as train stations, with little public usage. What this means, at the bottom line, is that China may have certain, perhaps significant, amounts of capital tied up in investments that cannot in the short run, or perhaps even in the medium run, pay off.  Whether this will produce the type of collapsing real estate bubble this country faced over the last several years, or that we faced between 1990 and 1992, remains to be seen.  At a minimum, it may be that talk of a Chinese Century may have to be postponed, if not abandoned. A different problem arises from Europe.  There, excessive sovereign debt is being treated with the medicine of fiscal stringency.  It is at least arguable that such stringency simply drives down gross domestic product and makes it even harder for a nation to pay down its public debt.  Nevertheless, the powers-that-be in Europe seem intent upon prescribing the medicine of fiscal stringency as a cure-all for the disease of excessive debt.  It remains to be seen whether this will cure nations of their fiscal profligacy or simply succeed in throwing the entire continent into recession. How does this impact the United States?  I’m no professional economist — just an interested consumer of economic news.  Nevertheless, I would hazard a few thoughts: 1.  A significant enough collapse of the Chinese real estate market could take down a number of Chinese financial institutions – both public and private.  This would have at least a modest impact on the amount of Chinese money that at present admirably assists this country in funding our own debt.  By the nature of supply and demand, the fewer Chinese who show up to buy United States government obligations, the higher the interest rates we would have to pay in order to sell debt.  A large enough withdrawal by Chinese investors could be catastrophic. 2.  The impact on Chinese exports is harder to determine.  On the one hand, if China falls into recession, its quasi-government controlled economy could pivot into an even stronger export orientation, with further manipulation of Chinese currency exchange rates.  This would necessarily impact negatively on American industrial production.  On the other hand, a Chinese recession, particularly if severe, could drive many Chinese manufacturers out of business and open market opportunities for American companies.  At the least, it might ease the pressure on American companies. 3.  As to Europe, I have read that American banks have a relatively modest exposure to European sovereign debt.  Thus, a collapse in the market for, say, Greek bonds, or those of Spain, might not have too much of an impact upon our financial system.  On the other hand, as Tevye would say, Europe is a great customer for American goods, and as the Europeans’ ability to buy our products diminishes, our manufacturing sector would be hurt. Again, I am not a professional economist, and these are simply the musings of a passionate amateur.  I would invite your reaction and comment to what I have said.  You should also make a point of following me on Twitter @JGlucksman.  I tend to post Tweets daily on the breaking economic news from Europe and China, and you may find it of interest.