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From Miracle To Cataclysm: Why The Commodity Bust Will Last For Years
Submitted by Eugen von Bohm-Bawerk of Bawerk.net
From Miracle To Cataclysm - Why The Commodity Bust Will Last For Years
The Chinese J?ngjì qíj?, wirtschaftswunder, keizai no kiseki, milagro económico or whatever you want to call it, is neither a miracle nor distinctly Chinese. A basket case like Argentine managed to pull off a similar feat, albeit with more volatility, over a 42 year timespan beginning in 1870. Germany did even better between 1945 and 1970. And Japan had its own miracle from 1950 to 1990.
Giving the Beijing consensus, whatever that may be, credit for creating an unprecedented economic miracle is naïve and hse led pundits all over the world to make disastrously optimistic forecasts for what the future will bring. Commodity producers as far away as Latin America, Africa and Australia have poured money into capacity expansions with a very simple strategy; can’t sell it? Dump it in China, they’ll take it.
We have seen this, admittedly expressed more eloquently, first hand.

Source: Angus Maddison, International Monetary Fund, Bawerk.net
China is several countries centrally governed by a ruthless power elite with vested interest in maintaining the status quo. To expand their own power, wealth and status all they had to do was open up their borders to foreign capital and supplying it with slave labour. It is not very difficult, even a communist can figure it out. However, as the economy evolved it needed investments in infrastructure which was easily funded by stealing workers savings (financial repression on a scale the Yellen’s and Draghi’s of the world can only dream off) and funnelling it into state owned enterprises with lucrative government contracts. They didn’t even have to pay lip service to property rights as all property was and still is held by the state. In short, this stage of economic development involves resource allocation from the centre. As Michael Pettis argues in The Four Stages of Chinese Growth centralised capital allocation gets a tremendous support from the rent-seeking elite and are thus easy to implement.
There are obviously limits to this kind of growth and China’s exponentially increasing debt load suggest they have more or less exhausted the easy route toward “progress”. The next stage, based on social capital accumulation, efficient (individualised) capital allocation, limited political and elite interference and human ingenuity and creativity, all tied together into an objective, law-abiding incentive structure is an impossible task for the current political structure. Making the leap usually fails, despite all the talk off the effectiveness stemming from centralised dictatorship, the only true source of economic growth comes from the individual.
We have seen it before, several times. It is exceedingly hard to manage the transition from a top-down economy based on foreign demand to one that grows organically from the individual level. It usually ends in a massive bust, before moving forward at a third of the speed experienced prior to the crisis.
How the aftermath of the coming crisis plays out depends on how the elite reacts. Accept the inevitable, let the system reset and loosen the iron grip or desperately try to cling on to old ideas and power structures by bailing out every undeserving crony. In the first case the crisis is deep, but short lived. In the second it’s shallow, but everlasting.
Note that “Great Moderations” are the very antithesis to social systems. These systems need volatility to prosper. The Soviet Union had only one recession – in 1991.
China is probably at T-1 already. With electricity production/consumption, freight volumes and export all confirming a contracting manufacturing sector, substantiated by the PMI index and deflating producer prices the Chinese leadership is faced with a decision which will color the Chinese economy for decades.
Optimists point to the increased share of services in the Chinese GDP mix as proof positive things are jolly good and no change in course necessary. Even assuming services constituting 50 per cent of total GDP and growing at 7 per cent a year (both highly generous assumptions) a contracting manufacturing sector still leaves overall Chinese GDP at a modest 2 – 3 per cent annual growth; as opposed to the touted 7% propaganda.

Source: Angus Maddison, International Monetary Fund, Bawerk.net
As the deflationary excessive capacity kills every chance of ever repaying the mountain of bad debt piling up on the Chinese balance sheet the most tempting thing for the elite do is to double down on failed policies, such more infrastructure investment spending (paid for by the workers toil) and obviously suppress bankruptcies by bailing out failed industries (owned by the elite).
While this will cushion the blow in the short term, it is destined to lower the overall growth for a long time to come. Japan’s clumsy handling of the bust in the 1990s is a perfect example. The European and American response to the GFC are also textbook examples of how not do deal with a crisis.
As China faces it’s most important crossroad since Deng Xiapoing opened up the country we more or less know the path they will take and by extension we know real (as in not the numbers provided by the Ministry of Truth) growth rates will disappoint sell-side analysts for years to come.
But it gets even worse. China also faces a demographic tax that alone is enough to reduce growth rates considerably. The potential labor force is already growing at a slower pace than the overall population and will even shrink from 2017. In 2015 the median age in China was 37 years, and will move steadily upwards, to 39 in 2020 and 41 in 2025. See appendix for details on Chinese population and aging.

Source: United Nations, Bawerk.net
It is also interesting to note that Japan went through the exact same demographic shift just as its bubble burst and the need to adjust the economy toward one of aging as China is about to undergo. Japan failed miserably, China will too.
So where does all this leave us? The Chinese economy will soon move into contraction, its leaders will panic and jump in with both feet. Fiscal and monetary stimulus, bail-outs, more political control, increased use of censorship, talk about patriotic duty and who know what else.
What we do know is that it will look like this.

Source: International Monetary Fund (IMF), Bawerk.net
The Glasenbergs of the world will all be greenspaned*
* greenspaned; losing credibility overnight “The pro-cyclist got caught using drugs and was greenspaned”
Appendix
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awesome saturday morning bitchez
One fact not in the charts . . . the US exported most of its industrial base to China
Regardless of what problems China has with their economy, at least they have the basis for one
"...even a communist can figure it out." Booyah!!!
Then there is the war option. China has no treaties to comply with, no one to overwatch them. And they have plenty of excess resources.....and people.
So the solution seems simple ...
According to the population graphs, just kill everyone over 50.
Only a Chinese solution, of course.
/s
Old people will die of heart attacks when they find out the 401k system was flawed.
Trust banks with your lives and your dreams will die.
A bunch of empty factory buildings and warehouses falling apart in a couple of years is not the basis for anything. We still have a bunch of empty factory buildings and warehouses all across the rustbelt.
We still have the Packard Factory:
https://commons.wikimedia.org/wiki/File:Packard_Plant_Ruins.jpg
Maybe they could spruce it up a bit and shove all those Syrian refugees they plan on importing into it.
They'll be back
The US is the 2nd largest industrial producerr in the world. If you believe Chinese stats.
Sure, but in ANY reset scenario we don't HAVE to.
Simply put, I can make my own burgers. I don't have to buy them from you.
That's very simply put, but extrapolate that to nearly everything, and that's the underlying truth. We don't really NEED anyone else in a true reset scenario.
Even better after seeing Hillary's campaign literally collapsing. Watch this and try to resist the small smile that tugs at your lips.
https://www.youtube.com/watch?v=qensOdm_xv8
AWESOME!
What small smile would that be?
Jesus H Christ. Don't you guys spell check anything? This is painful reading
Whats speling? My iPhone takes care of everything.
ZH articles have always had spelling errors and the answer is they do not spellcheck as they re trying to get the article out ASAP for our reading pleasure. I excuse them.
The spell checker is broken, that's all.
consider it a AI check.
Gramar and speling is usualy gud frum our silicon brothers.
Fulck you spellchecker.
Sum of us use tablets, and it's just how the words roll.
Siri
Dragon Dictate, perhaps ...
Wonder which the Tyler's use ???
IMHO, there is a great deal of difference between a typo and an obvious idiot error in grammar and usage.
And then, of course, there is sacarasm - of which some are facile, and others not. May have someting to do with race and IQ and culture. Or a total failure of most to look at the screen before hitting the Save box.
An interesting weekend. Happy Blood Moon.
Sorry, I forgot
/sarc
'teh' is the new 'the'
The commodity bubble was driven by easy fed money. The idea was to create the 2% inflation (fed's target) in order to prevent a depressionary spiral. All that cash floating around (ZIRP, QE) allowed speculators (Goldman, HBSC, etc) to corner the market on oil, gas, minerals, metals ... everything. That drove up other prices temporarily. Now that the stimulus has been stopped (QE), and China is slowing down, the speculative bets can't be made as easily - unless those companies want to put their own money on the line. Going forward, we "should" see more normal price discovery. A lot of this hinges on other factors. Home prices have to remain high and employment has to grow. To me, it looks like the fed sees an avenue back to normalcy and is determined to pursue that policy. I say good for them. If another credit crisis raises its head then everything would change.
Part 1 about QE causing the commodities bubble = true
Part 2 about normal price discovery going forward = not true
Unless...they want to buy up a lot of things on the cheap, using some of their FED stash(excess reserves). All part of the banksters' ongoing takeover of our economy.
Or currencies inflate rapidly due to the fact that they are merely IOUs of fiat paper and all of a sudden it is impossible to pay the supply chain for food and gas.
Yezzz, but whad about die goldensilverstaken?
Over forty years ago it was readily apparent that the common people of the West would suffer a diminution of their accustomed standard of living as a direct result of wage competition from the third world. I had hoped that the anticipated stretch of rough times would come to an end once the people of India, China, Indonesia, etc. emerged from subsistence farming into a semblance of a consumer middle class, and the West would then once again prosper in selling its goods and services to billions of new customers.
Instead, it appears that the elites in the emerging nations have managed to funnel much of the new prosperity into their own pockets at the expense of their own workers and citizens. So much capital has been misallocated that the necessary critical mass of new middle class customers has so far failed to emerge.
A lot of industrial capacity already present in the West was mindlessly duplicated in low-wage countries in the East, making it difficult for anybody to make any profits, and shifting attention and profit-seeking away from capital expenditures and into financial speculation encouraged by world-wide central bank interventions.
It is only the printing that maintains the very few shreds of superficial data that allow the establishment to foist the illusion of normalcy on the generally apathetic populace.
Be careful about wanting every person in the world to have a high standard of living.
"I had hoped that the anticipated stretch of rough times would come to an end once the people of India, China, Indonesia, etc. emerged from subsistence farming into a semblance of a consumer middle class, and the West would then once again prosper in selling its goods and services to billions of new customers."
Yea, I remember the 'Free-Trade' phonies, like Daddy Bush, saying the slaves would demand it. Yea, right. Tiananmen Square was put down with extreme prejudice. Then our jobs were given away to the killers.
https://en.wikipedia.org/wiki/Tiananmen_Square_protests_of_1989
"internet control"....whew! You can say that again! When I was there they took my passport number and almost fingerprinted me just to get access to the internet. BTW, there's no google there and in many places no Yahoo and in fact thousands of sites are blocked. Hotmail is the only way i could check my email there and keep in touch with family. There's also something called "We Chat" and "Skype" you can use to keep connected to the outside "free" world. Hard to log on to check for hotels, tourist info, etc...Pain in the balls! I don't know what they are so afraid of?
OR
this is their forray into economic war... adding to the chaos.. destabilizing everything... for transition.. Art of War...
we constantly were hearing about Putin playing chess while obummer is playing checkers..
why are we assuming this is just idocy? seems rather naive to me to do so... even, gasp... diversionary?
P < P + I
Because all power hungry elites fail this way. The Chinese are no different. By the way, who are they going to hurt? The U.S.? China has nothing America needs that it cannot get from someone else.
The Chinese elites have always been interested in country of their country and East Asia. The Western elites have always been interested in global domination.
Are you thinking what I am thinking...yep..now that China has tasted the fruit from the "debt tree" it is payback time..welcome to the world of capitalism..
You are confused son, capitalism has nothing on to do with this. If it did the creative destructive forces would prevent this massive misallocation of capital.
+100 You nailed it Doc. And everything one reads or sees as an explanation for recesssions, depressions, whatever - is a result of capitalism run amuk. Bullshit. Its never that. Its more about capitalism and its market clearing efficiencies being distorted by intereference and/or monopolization of various laws and mechanisms by the state. Economic imisseration has never resulted from voluntary exchange because by definition it cannot happen when and exchange takes place such that at least one person is better off, and no one person is made worse off. Economic immisseration arises out of direct manipulation and interference of this process - where incentives are distorted such that the actions from those incentive distortions lead to quite the opposite - unproductive behaviour.
We see this occurring under central bank policy and Lucas pointed this out in his classic critique that expectations will change alter under a manipulated currecny regime - that the optimal unemployment/inflation trade off will never actually materialize because of the incentive distortions created in both producer and consumer behahaviour. Samuelson didn't really have much use for the Phillips Curve - now the Keynesian mantra, and Friedman was sceptical even more so. And now 40 years later Lucas, unwavering in his observations in 1976, says casually in an interview with the WSJ, "that I don't think Quantitative Easing has done anybody much good in the real economy."
40 years.
And we still think its possible to create something out of nothing through a centrally planned monetary regime. State sponsored immisseration seen only as a result of capitalism and voluntary exchange by the media and by our educators is destroying prosperity - the very thing that arrives from the most efficient means of producing and exchanging scarce resources - voluntary exchange.
To hell with practicallity and reality.
This will get ugly and it will get bloody in my opinion. The pendulum has swung too far. The majority of the wealth held in the fewest of hands EVER.
There is no fix.
"There is no fix."
We could try capitalism. It is amazingly good at sorting out the mess left over from various interventionist schemes. It is indeed most interesting that virtually every system there is works better if it is not interfered with -- unless the system is actually designed to fail, like our current whateveritis.
2026: Neptune's out of Pisces (oil! oil! oil!) and Pluto's out of Capricorn (any material coming out of the Earth, period, ditto for land & RE)
of course by then the world could be a burnt out, biowar-infected cinder from Uranus in Aries (War! War! War!)
I wonder if the commodity bust that is set to last 'for years', is similar to the $DX rising to 120 and the 'strong dollar' for 'years to come'...?
The 'memes' as it were, regarding China have become comical... And all the fancy charts to 'back it up' no less... I have a more neanderthal view: When the 'trade' becomes lopsided (in this case, the 'China syndrome'), it's best to take the other side, or at least stay neutral.
It won't last for more then 5 years.
All those mines close down and maintenance is also shut down. Pro's will find other work and they won't be able restart any that fast.
So any recovery will alway cause a mayor spike in commodities because supply is death.
Also, when prices are low, people tend to go wastefull with their resources. That also creates shortages.
Bulldozing 40 square miles of industrial wasteland surrounding Detroit would create some jobs.Then work as farm labourers.Help! Obuma we need you!
40 acres and a mule.
Problem solved.
India, demographics look like a church steeple.
Massive thumbs up on this article. It encapsulates everything I've been saying about China for nearly 10 goddamned years. Nice going Eugen.
AUTHOR ARGUES THAT DEMOGRAPHICALLY DRIVEN DEMAND IN CHINA COLLAPSES WHILE OMITTING MOST IMPORTANT POINT: IT IS ALL THE RESULTS OF SPECIFIC POLICIES OF CHINA AND THE GLOBALIZATION OF THE WORLD.
Yes, world population will collapse but this will be a result of catastrophic decline in the standard of living (i.e. demand) and below even of sustenance and hence massive die-off , extinction of human species as a matter of policy of the global oligarchs. Some estimate within next 100 years 6 billions must die of starvation, disease and small percentage due to war. Exponential case of dark ages in Europe and civilizational collapse elsewhere.
There is no economy in the equation of ruling elite, just look around, billions of people needlessly suffer for nothing, situation that results in collapse of earning/profits of globalists forcing CBs to print them. This is not about profits it is about extermination.
If author wants to learn something and not stuck into economic theories proven wrong many times he should start from this:
https://contrarianopinion.wordpress.com/economy-update/
The labor force is not an issue, China will simply outsource to even more desperate places like Africa. They learned it by watching the good old USA!
Yep! All we have here in the good old USA is salesmen and congressmen.
Comparing the growth of Argentina from 1870 to 1912 to that of China's from 1973 to 2015 is meaningless. Argentina was still a basket case in 1912, but China is the world's largest economy in terms of PPP in 2015. The author also totally ignores the fact that hundres of millions of Chinese have become middle class in the process. Their consumption power is enomours ($21 trillion domestic deposits) and will be the main force of China's farther development. The Chinese economy will not contract until every Chinese has access to flushing toilet and hot shower.
Long water treatment and sewage plat eqpt.
Commodity downturns often last decades, it's nothing new, they are know to last almost 3 decades some times, so it would be exceptional if a commodities bust and downturn lasted less than a decade simply because the boom occurs within a speculative financial misallocation and ruination of economic capacity (over-capacity) and thus long-term damage to investment conditions. It normally takes most of a generation before the next bunch of speculative chumps do it again.
But that's not the case where governments panic and blow an even bigger bubble, as a faux recovery, that still does not and can not take, due to it also just being more of the same thing that caused the downturn the boom/bust to occur in the first place.
So there can still be a rapid recovery to boom conditions, even at this late date in the debt cycle, but if there is, it will be even more stilted than the last return to re-blown bubble 'boom' conditions, and prices.
So don't go all-in on there not being yet another (abridged) v-shaped boom yet to come, as it can still happen, just like it happened in 2009, if there is enough panic to inject the stimulus for it, combined with low prices (which we have) and low commodity currencies (which we have) and low oil prices (which we have), and low inflation, (which we have).
The only ingredient missing for a boom is rapid global stimulus injection (from panic).
So don't assume this is all over just yet, as it may not be.
hmhmhm articles like this means we are getting close to a bottom in commodities!
When I say close I don't mean tomorrow, just a hard flush down should be coming soon!
Yes, we are closer to the bottom. As gold approaches $724, start loading up!
Falling commodity prices shows the stuff real products are made from are no longer in demand.
China is just the world's manufacturing base where real products are made.
The West used to buy these products but is no longer doing so.
China is an intermediary between raw materials and Western consumers where the raw materials are made into products for Western consumption.
China is suffering from the collapse of the West.
Exporting nations are reliant on the health of their export market and becoming too dominant actually heralds their own demise.
Ditto Germany.
Remember the days before 2008, before Central Banks had to try and get the world economy going again.
The "wealth creators" were the ones responsible for the boom times.
Where are the “wealth creators” now?
1) Did they all die?
2) When the going got tough did they retire to their luxury yachts waiting for someone else to sort out the mess?
3) Were they abducted by aliens?
Answers on a postcard to:
Our policymakers, BIS, Switzerland
False. Every Chinese I have met said their leaders have everything under control and will lead China to a future of prosperity and glory.
Look here, you rich people: Weep and groan with anguish because of all the terrible troubles ahead of you. 2 Your wealth is rotting away, and your fine clothes are moth-eaten rags. 3 Your gold and silver are corroded. The very wealth you were counting on will eat away your flesh like fire. This corroded treasure you have hoarded will testify against you on the day of judgment. 4 For listen! Hear the cries of the field workers whom you have cheated of their pay. The cries of those who harvest your fields have reached the ears of the Lord of Heaven’s Armies.
5 You have spent your years on earth in luxury, satisfying your every desire. You have fattened yourselves for the day of slaughter. 6 You have condemned and killed innocent people,[a] who do not resist you.[b]