Last week the International Monetary Fund predicted that the Chinese economy would grow by 6.7% in 2009. They had earlier predicted that Chinese growth would be 8.5% in 2009. Back in November, the World Bank predicted that China would grow by 7.5% in 2009.
Meanwhile, the world's premier economic analyst, Nouriel Roubini of the RGE Monitor doesn't just say that China won't grow in 2009. He claims that China is already in a recession, despite statistics to the contrary.
In an article in Sunday's London Times, Michael Sheridan seemed to be saying that Roubini is correct. Here is a selection:
The American economist Nouriel Roubini said growth figures of 6.8% in the fourth quarter of 2008 masked the reality that China was already in recession – a view privately shared by many Chinese financial analysts who dare not say so in public....
All along the coast, angry workers besieged labour offices and government buildings after dozens of factories closed their doors without paying wages and their owners went back to Hong Kong, Taiwan or South Korea.
In southern China, hundreds of workers blocked a highway to protest against pay cuts imposed by managers. At several factories, there were scenes of chaos as police were called to stop creditors breaking in to seize equipment in lieu of debts.
In northern China, television journalists were punished after they prepared a story on the occupation of a textile mill by 6,000 workers. Furious local leaders in the city of Linfen said the news item would “destroy social stability” and banned it....
The World Bank and International Monetary Fund economists did not see this recession coming. They don't understand what is happening now. And they don't have any solutions.
How it Happened:
China and the other mercantilist countries (those countries that were maximizing exports and minimizing imports) were relying upon the United States to buy ever more of their products. But since the mercantilists weren't buying more and more American products, American consumers weren't earning more and more income. For a while, American consumers borrowed on their homes to buy imports. But when their home prices plummeted, they couldn't keep borrowing. This caused demand for the mercantilist countries' products to plummet.
What is Happening Now:
Businesses are laying off workers and cancelling their plans to invest in new production. As business investment falls worldwide, income falls, dragging down savings. Worldwide income will keep falling until savings, worldwide, gets as low as investment. Stimulus packages cushion the fall because they reduce worldwide savings, but they won't get the world out of the recession unless they stimulate business investment.
What is the Solution:
The solution is to create a new international system built upon balanced trade. The trade deficit countries could get out of the recession by balancing trade through Import Certificates which would increase their people's incomes and stimulate their business investment. The mercantilist countries could get out of the recession through government deficit spending, taking down barriers to imports, and increasing the credit that is available to their own people.
Disclosure: no positions
