China Crash: You Can’t Keep Accelerating Forever

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As I noted in last week’s post “Is This The Great Crash Of China?”, the previous crash of China’s stock market in 2007 lacked the two essential pre-requisites for a genuine crisis: private debt was only about 100% of GDP, and it had been relatively constant for the previous decade. This bust however is the real deal, because unlike the 2007-08 crash, the essential ingredients of excessive private debt and excessive growth in that debt are well and truly in place.

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About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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16 Responses to China Crash: You Can’t Keep Accelerating Forever

  1. janm says:

    The Japan line looks like it should be from 1970, not 1980, unless you have some way of knowing the future.

  2. Bhaskara II says:

    El Erian says,

    “Some commentators have rushed to describe the recent global stock market turmoil as “historic” and “unprecedented,” yet its evolution has been quite traditional so far.</b."

  3. JohnSmith says:

    @Prof Keen:
    Do you have data about the unemployment rate in China? So you could plot the change of debt against unemployment rate (like you did for US and Japan)?
    I am asking because if correlation is near to -1 (like in US or Japan), then you get close to a linear relationship and employment seemed to be financed by new debt. If not, then the real economy seems to be more robust against debt bubble bursts.
    ( and btw. where did you get the data actually from?)

  4. Steve Keen says:

    The recorded unemployment rate in China is 4.09%; a year ago, or was 4.09%. And the year before that…

    Needless to say I decided against running my standard regression.

  5. Steve Keen says:

    You didn’t notice that I said I mixed their data forward 18 years to coincide with the 2008 crisis?

  6. Steve Keen says:

    Whoops sorry! Thought you were talking about another graph. Yes you’re right; I’ll fix that.

  7. Steve Keen says:

    Thanks! Post fixed on both here and Forbes. Sorry for the tone of my first reply–I read it on my phone rather than PC and didn’t check the original before replying. Muchos gratias.

  8. Tim Ward says:

    Perhaps the Chinese authorities are truly on top of this, and have read Professor Keen and others that have studied the history of debt.

    If the Chinese authorities instituted a wide scale debt jubilee, could they fix the problem and get on with high growth rates?

  9. TruthIsThereIsNoTruth says:

    What might possibly happen is that the news reading machine learning hft algos will have learnt the correlation between Steve Keen’s crash predictions and actual crashes, pick up on this story and spark a global market rally.

    It is just as plausible as normalising specific poorly measured economic variables for cross system relative comparison in an interdependent complex multi variable system giving an indication in regards to the specific timing of a crash.

  10. JohnSmith says:

    “You can’t keep accelerating forever”
    I have the feeling we must, because:
    Again about the relationship between unemploymentrate (U) and the change-in-debt (dD)-to-GDP-ratio dD/GDP:
    If there is a stable (almost) linear relationship between them
    as Prof Keen’s plots (like with US and Japan) indicate:
    U = -a*(dD/GDP)+b
    with constants a,b >0. And we wanted to achieve a constant unemploymentrate U, then we need to have a constant ratio dD/GDP, i.e. :
    dD = c* GDP
    with a constant c.
    So if we wanted the acceleration of (nominal) debt to vanish: ddD =0,
    then GDP needs to be constant over time. …

    (Remark: If Prof Keen used d(D/GDP) instead (i couldn’t figure), then we had the conclusion that this value needs to be constant and its differential (the acceleration) would vanish, i.e. D/GDP needed to be a linear function in time)

    Any comments?

  11. JohnSmith says:

    In one sentence (in the first case above) it seems like:

    A constant unemployment rate, a vanishing debt acceleration and a growing economic product don’t go together.

    (Sorry for double post)

  12. Steve Keen says:

    It’s complicated by the fact that 140% of GDP worth of debt is corporate and only 40% of GDP household, but yes they could.

  13. Sherman says:

    Steve I don’t agree with your implication that China is going into a period of stagnation like Japan and the West have.

    To start with, when Japan hit trouble, it was already a developed economy. China is still very much in the developing stage, and therefore has a lot of growth potential. There’s still somewhere around 100 million people in poverty last time I checked. This alone leads me to think that the current problems are temporary.

    In Japan’s case, I’ve been reading a bit about the idea that in our current scarcity based economy, growth has a limit, and Japan may be approaching that limit.

    I’m not disputing your basic thesis about private debt, but you’ve said yourself that China has means to deal with this problem which Western style economies don’t have. I also question if this stock market crash is having much of an effect on the real economy. At least some of the growth slowdown is policy driven.

  14. JohnSmith says:

    There should be different effects then on how debt is spent.
    Perhaps it might be clear to the readers here, but does anybody know (quantifiably) where to find/read how big the impact of corporate debt on unemployment/gdp/etc. is in comparison to e.g. household debt (e.g. house loans) or margin debt (or in an even more differentiated way)? Or are they because of indirect effects all the same?

  15. Pingback: Is the Chinese Economy a Giant Ponzi Scheme? | Modern Monetary Theory: Real Economics

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