• The China Bubble

      Tyler Cowen, professor of economics at George Mason University, on the growing bubble that is China's economy:

      China has been building factories and production capacity in virtually every sector of its economy, but it’s not clear that the latest round of investments will be profitable anytime soon. Automobiles, steel, semiconductors, cement, aluminum and real estate all show signs of too much capacity. In Shanghai, the central business district appears to have high vacancy rates, yet building continues.

      ... there is a lack of transparency. China’s statistics on its gross domestic product are based more on recorded production activity than on what is actually sold. Chinese fiscal and credit policies are geared toward jobs and political stability, and thus the authorities shy away from revealing which projects are most troubled or should be canceled.

      Put all of this together and there is a very real possibility of trouble.

      The folly of Chinese "planners" should give the Obama Administration pause as they pretend to spend America out of a recession.  But it won’t.

      The next problem: When the Chinese bubble pops, we will feel the pain of trillion dollar deficits. Again, Saturday Night Live seems prescient:

      It would be a mistake to assume that just because borrowing costs are now low, we can postpone fiscal responsibility and keep running up the tab — with the aid of Chinese lending. The history of financial crises shows that turning points can come swiftly

      Cowen blogs further on his column at Marginal Revolution.