One Guy Typing

The Underwater Desert

Fun, or not so fun, fact of the day, via the Economist.  The entire state of Nevada is underwater in terms of residential real estate; the value of the outstanding loans is greater than the total value of every residential property in the state.

Housing Bubble, with Chinese Characteristics

Not all investment is created equal, as this video from China makes clear.  The amount of waste in the Chinese stimulus package is pretty scary, especially given the history of bad investments in China being paid for by lowering consumption, not what the world needs right now.

China is still a poor country per capita and can less afford a wasteful housing bubble than we could.
True there is an on-going secular move from the country to the city. But that doesn't mean building parallel duplicate housing to already existing, functional and in use housing is a good idea. It's sheer folly, one that will cost the country considerable growth in the coming years.

China is enjoying its demographic dividend right now, but is projected to age pretty quickly. They can ill afford to waste capital or the coming decade on projects like this:

The State of Nature

Over at the American Scene Pascal-Emanuel Gobry lay out pretty much my view of the relationship between the market place and government:

(O)ne thing that often bothers me about US defenders of free markets is how easily they (and we) forget that free markets are created, maintained and curated by, well, the government. Free market conservatives often behave as if free markets are like a state of nature in which ham-fisted government arrives after the fact and wrecks everything when, in fact, it is the opposite. In a state of nature, you have permanent war. Traders and entrepreneurs can only exist once you have a Leviathan to enforce things like private property, money and contracts — all things created and maintained by the State. The rules of the market are set by the State. And if the State doesn’t intervene — justly — in the markets, you cannot have a free market.

This contrasts with what I call Sunshine and Lollipop Conservatives who believe in Rousseau's noble savage, if there were no rules everything would be all sunshine and lollipops with birds chirping and so on.  Of course, to really believe this you have to have a very naive belief set about how human's interact with each other.

Bubbles U

A few years ago, while the credit fueled housing bubble was building, the powers that were were blind to it, calling it mere froth.  Now, everyone is looking for the next bubble.

And it may be at a college campus near you:

Is it possible that higher education might be the next bubble to burst? Some early warnings suggest that it could be.

With tuitions, fees, and room and board at dozens of colleges now reaching $50,000 a year, the ability to sustain private higher education for all but the very well-heeled is questionable. According to the National Center for Public Policy and Higher Education, over the past 25 years, average college tuition and fees have risen by 440 percent — more than four times the rate of inflation and almost twice the rate of medical care. Patrick M. Callan, the center's president, has warned that low-income students will find college unaffordable.--

Consumers who have questioned whether it is worth spending $1,000 a square foot for a home are now asking whether it is worth spending $1,000 a week to send their kids to college. There is a growing sense among the public that higher education might be overpriced and under-delivering.

In such a climate, it is not surprising that applications to some community colleges and other public institutions have risen by as much as 40 percent.

Over at Reuters Felix Salmon argues that the US rate of car ownership has room to come down, based on a comparison of cars per thousand households compared to similar countries (why a thousand instead of one hundred, I don't know).

True, but part of the equation is number of households.  And that's a function of population and people per household. Population is likely to slowly increase over the medium term, at least.  It will be interesting to see what happens to people per household, which had been trending down.

I'd bet heavily the current sales pace is unsustainably low beyond 2010. In a way it's like the bet on Treasuries, if the US Gov't can't make good it's an indication of severe stress such that no else is likely to be able to either.  Similarly, given the lack of effective options for most US households in the short term, a sustained sales pace below 10 or 11 million would be a sign of severe economic stress on households that would bode ill for everyone.

But, as Ryan Avent points out global auto demand should be just fine:

But check out that league table. Even a very progressive, transit friendly place like Denmark has 408 motor vehicles per thousand population — a low rate for a developed nation. Meanwhile, Brazil has 81 vehicles per thousand people. India has 12 per thousand people. And China has 10 per thousand people. Yes, American consumption rates are likely to approach the upper range of the other developed nations, but so what? If Brazil, Indian, and Chinese rates of vehicle ownership get anywhere near the lower end of the developed nation range, then we’re talking hundreds of millions of new automobile sales. This relates directly to the point I made earlier today concerning oil prices — it’s not about us. I’ve been known to worry about excess automobile capacity in the past, but I’d worry about it more if China weren’t so busy building highways.

Unwinding

Over at the Financial Times  Barry Eichengreen is worried about the global trade and savings imbalance unwinding too quickly, which could in fact be fairly destabilizing.  Economies aren't very good with rapid change, at least from the standpoint of most people living through it.

Whether there is a permanent reduction in global imbalances will depend mainly on decisions taken outside the US, specifically in countries like China. One’s forecast of those decisions hinges, in turn, on why these other countries came to run such large surpluses in the first place.

One view is that their surpluses were a corollary of the policies favouring export-led growth that worked so well for so long. China’s leaders are understandably reluctant to abandon a tried-and-true model. They can’t restructure their economy instantaneously. ... They need time to build a social safety net capable of encouraging Chinese households to reduce their precautionary saving. If this view is correct, we can expect to see global imbalances re-emerge once the recession is over and to unwind only slowly thereafter.

The other view is that China contributed to global imbalances not through its merchandise exports, but through its capital exports. What China lacked was not demand for consumption goods, but a supply of high-quality financial assets. It found these in the US, mainly in the form  of Treasury and other government-backed securities, in turn pushing other investors into more speculative investments.

Curiously, Eichengreen's two hopes only apply if one believes the second scenario.  As Michael Pettis's blog, for example, has thoroughly chronicled, the first scenario 'policies favoring export lead growth' is surely correct.  In fact, it is difficult for me to see how any serious observer could believe otherwise. 

So, Eichengreen's two hopes are meaningless since they apply only in a world that doesn't exist.  China can not turn their growth model around quickly, and there are entrenched interests resisting any serious move to do so. 

While over rapid changes are disruptive, imbalances need to rebalance, that's why we call them that. Imbalances are unstable, and destablizing, and the longer they continue the more so. We should be worried that the imbalances will not unwind quickly enough, not the other way around.

What China Wants, What China May Get

Two interesting bits of writing on China today, which is becoming a bit of an obsession.  But all economic roads seem to lead there these days.

The first is from uber-economist nerd Brad Setser, where he differs (politely) with his former mentor Dr. Nouriel "Doom" Roubini in Roubini's NYT op-ed on China.  The gist of it is the cost-benefits of "reserve currency" status, which the US is still shakily holding onto:

In the second conception of global financial order, China should allow its currency to appreciate, offset the drag from slower growth of exports with aggressive policies to stimulate domestic demand (including the rapid implementation of a broad social safety net, even if this produces sustained budget deficits) and bring its current account surplus down. China’s government would no longer steadily accumulate large quantities of dollar reserves. More balanced trade flows would allow the RMB to eventually float – allowing China to direct domestic monetary policy toward stabilizing China’s own economy rather than stabilizing its exchange rate.

The US would get less subsidized financing to be sure – but according to this view, large inflows from China and other emerging economy central banks have proved to be a mixed blessing. Dollar pegs prevented a necessary adjustment in the dollars’ value relative to a host emerging economies, keeping the trade deficit up. That changed the composition of US output, as the US shifted out of the production of tradable goods and services – and instead specialized in home construction and creative financial engineering. And, well, the US financial sector wasn’t able to effectively intermediate large inflows from the world’s central banks. US financial institutions – and European ones running large offshore dollar balance sheets – were stuck with a lot of credit risk from lending to increasingly indebted American households, as the world’s central banks were far more willing to take currency risk than credit risk. And now – as Martin Wolf likes to note – there is a risk that a new buildup of dollar (and euro) reserves will finance an unsustainable buildup of government debt in the US (and Europe).

(Emphasis Added)

IE- Reserve currency status distorts our economy by making things we sell to the world more expensive than they otherwise would be, meanwhile it makes debt and things we buy from the world cheaper than they would be.  This is great if you are an indebted financier, less great if you make steel or something.

Given the wage gaps between the US and the emerging world and growing productivity there, losses in tradeable goods was inevitable compared to say the sixties.  The extent and speed of that loss, however, has been magnified by an overly expensive US dollar.  It's also made it easier for the nation to get into debt and long term not producing things others want to buy while charging what you buy from others doesn't work so good.

However, it makes overseas vacations cheaper, so there are always trade offs...

And from just plain Uber-Economist Paul Krugman we get another China article.  This time on the mountain of carbon spewing out of China's economic miracle and what we may have to do about it:

China’s emissions, which come largely from its coal-burning electricity plants, doubled between 1996 and 2006. That was a much faster pace of growth than in the previous decade. And the trend seems set to continue: In January, China announced that it plans to continue its reliance on coal as its main energy source and that to feed its economic growth it will increase coal production 30 percent by 2015. That’s a decision that, all by itself, will swamp any emission reductions elsewhere.

So what is to be done about the China problem?

Nothing, say the Chinese. Each time I raised the issue during my visit, I was met with outraged declarations that it was unfair to expect China to limit its use of fossil fuels. After all, they declared, the West faced no similar constraints during its development; while China may be the world’s largest source of carbon-dioxide emissions, its per-capita emissions are still far below American levels; and anyway, the great bulk of the global warming that has already happened is due not to China but to the past carbon emissions of today’s wealthy nations. ---

Historical injustice aside, the Chinese also insisted that they should not be held responsible for the greenhouse gases they emit when producing goods for foreign consumers. But they refused to accept the logical implication of this view — that the burden should fall on those foreign consumers instead, that shoppers who buy Chinese products should pay a “carbon tariff” that reflects the emissions associated with those goods’ production. That, said the Chinese, would violate the principles of free trade.

As the United States and other advanced countries finally move to confront climate change, they will also be morally empowered to confront those nations that refuse to act. Sooner than most people think, countries that refuse to limit their greenhouse gas emissions will face sanctions, probably in the form of taxes on their exports. They will complain bitterly that this is protectionism, but so what? Globalization doesn’t do much good if the globe itself becomes unlivable.

The politics of this make it pretty inevitable, not mention the economics, as a local cap and trade policy would further incent the off shoring of energy intensive goods.  Bet on a Carbon tarrif authorization to make it into any Cap and Trade bill that passes (If you're wagering at home, that is).

Path Dependent

Harvard Economist Ed Glaeser's done some interesting work on housing bubbles, which is in part interesting because his original model turned out to be spectacularly wrong.  Originally, Glaeser predicted that cities, like say Las Vegas or Phoenix, that had room to grow and pliant zoning could not have bubbles because the extra supply would keep prices in check.

But, of course, there was no shortage of IPO's in 1998 and that hardly prevented the tech bubble.  All one needs for a bubble is a bunch of cash floating around and reflexive feedback loop of asset price appreciation. 

To his credit Glaeser has since revised his theories, to some extent.  And that's good, because there's a strong case that it shouldn't be too easy to build new housing.  Houses will be around for a long time, assuming they're built solidly, demanding public services to support the inhabitants and requiring infrastructure to support them.

It would be foolish for any local gov't to ignore the social costs of runaway inventory, (as Glaeser recognized after his zoning theory was disproved by events).  The most intractable assets and liabilities of any town, outside of its God given location, is its building stock. Further, the economic strength of any locality is strongly path dependent.  (It is much more difficult to get businesses or mobile professionals to move to a depressed tax starved city, than a healthy rival).  And letting a host of developers throw up a bunch of unwanted instantly vacant tract homes is a good way to become depressed and cash starved fast. Maricopa AZ, for example, seems unlikely to recover anytime soon.

Art Bubbles

Most Econ 101 students learn about efficient market theory as an analogy, understanding the world doesn't necessarily work that way.  Iit would seem professional economists, regulators and politicians stopped taking "efficient market theory" as an analogy and started taking it as gospel, blinding themselves to the credit bubble building.

But note, Minsky-ites aren't big fans of most specific regulations because we don't think things like "asymmetric info" or "principal-agent" are the primary causes of bubbles and busts, too much liquidity and the inherent instability of the finance system is.

Why do we think that? Because financial systems blow up with startling regularity, and have for hundreds of years. The symptoms, housing bubble, corporate debt, commercial RE, the South Sea Company or tulips, are often different but the cause is the same, too much lending chasing too few investments, irrational pricing and pro-cyclical balance sheets.

Take this example from Michael Pettis and the Chinese contemporary art market via http://mpettis.com:

"About a year ago I had dinner with a group of people which included a couple of gallery owners specializing in contemporary Chinese art. Not surprisingly, they were ebullient about the seemingly inexorable rise of Chinese contemporary art prices, and perhaps also not surprisingly, I was enough of a wet blanket to argue that we were soon going to see a total collapse in art prices.

Why? Because every serious financial bubble in history was, towards its later stages, accompanied with an even more ferocious bubble in art prices, and when the bubble burst, art prices were among those worst hit (I refrained from adding that although there are a number of young Chinese underground artists whose works I really love – stand up, Cult Youth Collective – for the most part I was very unimpressed with the commercial stuff getting most of the attention).

Needless to say most of the dinner guests were politely skeptical, and my pointing out the examples of the Japanese art market in the 1980s and the Arab art market in the 1970s – two markets that people don’t talk about much anymore, it seems – didn’t make much difference....

So what does the New York Times article say?

A global financial crisis has wiped out vast amounts of personal wealth, prompting a plunge in art prices. Suddenly bereft of visitors, galleries are laying off staff members, and the collectors who patronized them now worry that their art investments may prove a colossal folly. “It’s been a long, cold winter,” said Zoe Butt, director of international programs at Long March Space, which is closing two of its three Beijing galleries. “The era of Chinese contemporary art commanding such high prices is over.” "

 So next time art prices take off, move into cash.

Credit-Money

I recently came across the heterodox economic view of a credit-money system in contrast to the standard 'fiat money' the Conservative gold-bugs are always crying about. In essence it disputes the effectiveness of the Fed's ability to control the money supply as well as the behavioral models ascribed to bankers(they're not passively waiting for new deposits before they lend, for example).

I haven't worked the whole thing through yet, but it makes more intuitive sense to me than goldism or monetarism.

Here's the link, if anyone wants to talk me down feel free, especially since the implications for our present situation are not good.