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Friday, July 19, 2013

Paul Krugman, "Hitting China’s Wall": The Perfect Economic Storm

Will China soon be on the ropes?

In his latest New York Times op-ed entitled "Hitting China’s Wall" (http://www.nytimes.com/2013/07/19/opinion/krugman-hitting-chinas-wall.html?_r=0), Paul Krugman warns that China's "lopsided balance between consumption and investment" threatens future economic chaos. Specifically, regarding the effect of this ineluctable debacle on the West, Krugman writes:

"How big a deal is this for the rest of us? At market values — which is what matters for the global outlook — China’s economy is still only modestly bigger than Japan’s; it’s around half the size of either the U.S. or the European Union. So it’s big but not huge, and, in ordinary times, the world could probably take China’s troubles in stride.

Unfortunately, these aren’t ordinary times: China is hitting its Lewis point at the same time that Western economies are going through their 'Minsky moment,' the point when overextended private borrowers all try to pull back at the same time, and in so doing provoke a general slump. China’s new woes are the last thing the rest of us needed."

What doesn't Krugman say concerning China's woes?

Krugman doesn't tell us about China's demographic time bomb. As reported by The Economist in an article entitled "China’s Achilles heel" (http://www.economist.com/node/21553056):

"Between 2010 and 2050 China's workforce will shrink as a share of the population by 11 percentage points, from 72% to 61%—a huge contraction, even allowing for the fact that the workforce share is exceptionally large now. That means China's old-age dependency ratio (which compares the number of people over 65 with those aged 15 to 64) will soar. At the moment the ratio is 11—roughly half America's level of 20. But by 2050, China's old-age ratio will have risen fourfold to 42, surpassing America's. Even more strikingly, by 2050, the number of people coming towards the end of their working lives (ie, those in their 50s) will have risen by more than 10%. The number of those just setting out (those in their early 20s, who are usually the best educated and most productive members of society) will have halved.

The shift spells the end of China as the world's factory. The apparently endless stream of cheap labour is starting to run dry. Despite pools of underemployed country-dwellers, China already faces shortages of manual workers."

The effect on the West, specifically the United States?  Remarkably, there is no mention by Krugman that China owns more than $1.2 trillion in US bills, notes and bonds, or some eight percent of US debt. What would happen if China were hurriedly to demand repayment of these funds from the US? You don't want to know.

1 comment:

  1. 1) by 2050, we'll all be dead.

    2) If China wants their trillion$ back before then, I vote to barter: with California. Krugman can be the deal sweetener, on exhibit next to the Pandas somehwere in a Manchurian zoo. Pandas seem to reproduce at a higher rate than Krugman being correct about anything.

    K2K

    ReplyDelete