Is It Really That Bad?

Nouriel Roubini's article in Forbes recently has raised some questions by readers.

He talks about the danger of a global L shaped recession instead of a U shaped one. He also talks about the strength of the economy of China. The following excerpt is important:

Even correcting for the effect of the Chinese New Year, exports and imports are sharply down in China, with imports falling (-40%) more than exports. This is a scary signal, as Chinese imports are mostly raw materials and intermediate inputs. So while Chinese exports have fallen so far less than in the rest of Asia, they may fall much more sharply in the months ahead, as signaled by the free fall in imports.

The trouble with China is that has an enormously export dependant economy with low levels of internal consumption and a high savings rate due to lack of social safety nets. With the Chinese economy being so US export dependant, recovery is difficult to impossible without the development of increased internal consumption. Of course, now that manufacturing has slowed down, and unemployment has risen, why would the Chinese consume more and save less? A good indicator of what has happened is the shipping cost indicator the Baltic Dry Index. It has dropped from the 8,000 to 11,000 range to the current level of 2,225. The cost of shipping has collapsed. Roubini alludes to this as the raw material imported now have fallen drastically. The famous economist also assumes that by governments spending more on various capital projects that the economy will pick up. I am not convinced that will work. Most Keynesian economist are interventionists and we have little evidence so far that any of this economic tinkering has produced any positive results.

Something our famous economist has not mentioned is the issues with Gross Domestic Product reporting in the US. There is fairly strong evidence that the numbers are inflated for domestic reasons. If we consider the numbers reported by Walter (John) Williams of we see a country that essentially has seen no real economic growth since 1990.

You will note that the "readjusted" blue line hardly goes above zero in the entire time since 1990. This is not the sign of a healthly economy. I fail to see how this will change until the structural economic problems in the United States are corrected by the market. All the mucking about by government has only delayed the inevitable.

Eventually, the Chinese are going to wise up to this game and not pour their hard earned savings into an economy of artificially propped up consumption as the USA. When that happens, we will see a Treasury Bond Auction failure. Then, look out below......