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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  • janm

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

  • Bhaskara II

    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.”

  • Bhaskara II
  • John­Smith

    @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?)

  • 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.

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

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

  • 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.

  • Tim Ward

    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?

  • TruthIs­ThereIs­NoTruth

    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.

  • John­Smith

    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?

  • John­Smith

    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)

  • 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.

  • Sher­man

    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.

  • John­Smith

    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?

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