WELL, LOAD UP ON drugs and bring your friends, because New Zealand is being talked up as the “rock star” economy for 2014.
This, by the way, is predicated on three things underlying what economists call “growth” that these groupies see as fairly foregone conclusions:
- The dairy boom.
- The housing boom.
- The Canterbury RebuildTM
But there are problems with each of these—the first problem being in the way these alleged economists measure growth.
YOU SEE, IF IT is to mean anything at all, then “growth” must surely mean a process by which we all get wealthier. And while this has certainly been true of the dairy boom—local dairying having increased production to try to keep up with rapidly increasing Chinese demand—the same cannot be said of either the housing boom or The Rebuild*. Here instead, we’re not selling commodities to an increasingly willing seller, we’re simply consuming them ourselves.
The housing boom represents consumption based on debt. The Rebuild* represents the downside of what’s called the Broken Windows effect. What that means is that instead of using our accumulated wealth and capital to produce increasing real prosperity (an on-going process of accumulation producing more wealth and capital) in Canterbury at least this accumulated wealth and capital is being consumed simply to try to get the place back to where it was before (and to help pay the hugely inflated insurance premiums that have leapt up everywhere as a consequence of the earthquakes’ massive destruction of wealth and capital).
It is only by the miscalculation grotesquely called Gross Domestic Production that this wealth-consuming gross domestic consumption is regarded by economists as “growth.”
It’s like measuring the popularity of a rock star by the number of lines he puts up his nose.
SO THAT LEAVES OUR rock star relying for groupies on the continuing dairy boom. A boom based on selling commodities to an increasingly wealthy China, a China undergoing an historic, world-changing Industrial Revolution.
A change we all have our fingers crossed continues. We all hope.
China’s prosperity has increased so rapidly that while world production of the dairy commodities being demanded by China’s new middle classes has increased, so too—unusually—have prices and profits. But with increasing profits comes increasing participation, and ever-increasing supply from both here and overseas. And to increase that supply many new dairy farmers have not only endured the costs of converting from sheep and beef, but existing dairy farmers have been adding to their costs of production – by buying in supplemental feed for their cows, for example, instead of just relying on grass.
If China’s demand continues, this is no problem at all for our rock star beyond keeping our rivers clean and finding new ways to find and pay for ways to irrigate all these dairy farms. The productive consumption endured by farmers will be repaid in spades.
But what if Chinese demand doesn’t continue.
If it doesn’t continue, there will be a lot of farmers left standing around like that young rock band after their difficult second album has bombed, all those paternity suits are coming in, and they’re in hock up to their skinny necks to their dealers and record company.
Like Keith Richard’s dealers, this continued and even increasing demand is utterly reliant on prosperity continuing. But as the likes of George Soros are beginning to notice,
To Soros, the main risk facing the world isn't the euro, the US Congress or a Japanese asset bubble, but a Chinese debt disaster that's unfolding in plain sight.
"There is an unresolved self-contradiction in China's current policies: restarting the furnaces also reignites exponential debt growth, which cannot be sustained for much longer than a couple of years," Soros wrote…
"There are some eerie resemblances with the financial conditions that prevailed in the US in the years preceding the crash of 2008," Soros wrote. "But there is a significant difference. In the US, financial markets tend to dominate politics; in China, the state owns the banks and the bulk of the economy, and the Communist Party controls the state-owned enterprises." He added: "How and when this contradiction will be resolved will have profound consequences for China and the world."
And, too, for our rock star of 2014.
Here’s Patti Smith:
* The RebuildTM : a phrase that reveals the top-down thinking of central planners, who move with glacial pace their wonders to under-achieve; used by planner-types instead of rebuilding, a word describing a process in which people just get on with it. (Or would have been allowed to just get on with it.)
NB: That graph above accompanies some excellent analysis of NZ’s growing dairy exports by Rodney Dickens:
- Insights into the dairy export boom and some interesting implications – RODNEY’S RAVING
And for more on China…
- “The failure by Chinese banks to recognize misallocated investment must overstate past GDP growth, in the same way that this overstatement must be reversed in the future…
“The failure of many economists to recognize that wasted investment has a cost – even as they recognize that investment has been wasted – has caused them both to misunderstand the relationship between wealth creation and GDP and to understate the future impact of this overstated GDP.
“Debt matters, and the only time it can be safely ignored is when debt levels are so low, and the borrower is so credible, that it creates no financial distress costs and has a negligible impact on demand. Neither condition applies in China…”
Will the reforms speed growth in China? – Michael Pettis, THINKING MACHINE BLOG
- “To further your continuing and evolving story that China has major un-used infrastructure that puts loads of unsustainable debt [that] could cause major problems…”
A [Further] Report on China's Ghost Infrastructure – EPJ
- “The "eerie resemblances" - as Soros previously noted - to the US in 2008 have profound consequences for China and the world - nowhere is that more dangerously exposed (just as in the US) than in the Chinese shadow banking sector...”
The Real China Threat: Credit Chaos – ZERO HEDGE
- “You may have missed it, but China had no less than three minor liquidity crises last year…”
The Shadow Cast Over China’s Banking System – Dan Denning, DAILY RECKONING AUSTRALIA
- “What has been surprising to me is that many analysts – some of whom, but not all, recognize how difficult implementation is likely to be – expect that the reforms will unleash such a burst of productivity that growth rates in China will be maintained or even raised from the current GDP growth target of 7.5%…
“This, I think, is extremely implausible.”
Michael Pettis Warns China Bulls "It Is Almost Impossible For Growth To Remain This High" – ZERO HEDGE
- “So while global markets celebrated the taper, China’s central bank was trying to keep the credit ship from keeling over. Expect more such activity, because this relates to China’s attempts to rebalance its economy. ‘Rebalancing’ is a sanguine way of looking at it. More realistically, the Chinese economy will experience a rather harsh economic ‘adjustment’ in 2014 as it tries to move away from investment-related economic growth, without popping its credit bubble, which this year inflated to historic levels.
“That’s going to be very hard to do, because part of the adjustment process is to let insolvent firms go bankrupt. It’s these bankruptcies that cause the credit crunch…”
The Bear Stearns Moment for China’s Economy? – Greg Canavan, DAILY RECKONINING AUSTRALIA
- “On balance, the news from [top Chinese leaders after the annual Central Economic Work Conference to set policy goals for 2014, and a Central Urbanization Work Conference] is good for current and future residents of Chinese cities—but bad for those investors who may still be bullish on commodity prices.” [Emphasis in the original.]
The Hangover From China’s Urbanization Boom – ZERO HEDGE