Controlled Demolition

Alright. Let’s try this whole decoupling thing again. Let’s see if the world – especially the developing/emerging economies – can carefully extricate themselves from the fiscal tar baby in Washington D.C. It’s rewarding for doing so will be economic growth that’s not depending on growing American debt. The future will be right and everything will be fine.

That’s one story line, anyway. Last time it was offered up as a global narrative, it was exposed for being wishful thinking. The world’s financial markets were too interlinked and the world’s economy too dependent on American consumption for the planet to escape the subprime housing bust. Surely this time is different.

Well, maybe it is. For one, its two years down the track. And just this week China’s purchasing managers index moved into bullish territory. This is, by wire service accounts, a sign that China doesn’t necessarily need America to be China. We’ll see about that. China’s manufactured goods have to be exported somewhere, or consumed internally. Has that model been rebalanced in the last two years?

While we’re on the subject of China, it appears a great number of buildings are being put to death prematurely for the sake of building new ones. It’s a kind of controlled demolition carnival that generates new demand (stimulus!) Building glassy new edifices is stimulating, especially for building materials like cement and steel. You can find the full story here, filled with pictures like the one below.

Destructive Destruction

Destructive Destruction


But does this picture really show what it purports to show? That is, is it really what it seems? The article suggests that some of the construction boom in China (which drives Aussie resource demand, the price projections for which the government still hasn’t released) is activity for its own sake. It amounts to busy work designed to keep people employed and keep GDP figures ticking over.

To be fair, we have no idea if that’s true. China is a big complex country. Growing economies have a habit of bulldozing old buildings and factories and putting new ones up instead. It’s only weird and unproductive/a sham if you’re destroying new buildings in order to put up an even newer building.

Whether or not China’s construction boom is grounded in reality or is a derivative of the great global credit bubble is one of those open questions that seems to have vanished from the public debate. For example, today’s papers are full of stories about the RBA and interest rates. Blah blah blah. It seems like you’d want to know if the chief destination for your exports was headed for a bubble implosion or not.

In financial markets, maybe October is the month we’ll find out if the global economy has decoupled from the American engine. Economist John Hussman thinks the current market is a Fed-driven Ponzi scheme designed to distract investors from a mountain of delinquent debt. In a recent note to clients, Hussman wrote:

The U.S. financial system appears to be a nicely painted dam, behind which a massive pool of delinquent debt is obscured. A significant correction in valuations and resolution of the growing backlog of delinquent debt may finally restore strong ‘investment merit’ to the U.S. stock market, but only after a greater amount of pain and adjustment than most investors seem to anticipate.

Hussman went on to contend that people never prepare fully enough for a crisis. We all think we’re smart enough to head for the exits early – before getting crushed in a bottleneck at the door. Hussman writes that, “In countless situations people prepare exclusively for near-term outcomes and don’t look very far ahead. They myopically discount the future at an absurdly steep rate.”

Applied to Australia, people are diligently preparing for the near-term outcome of higher interest rates. But the future holds some far bigger risks, one big one (debt default or devaluation) from America and one big one (bursting credit/real estate bubble) in China. How do you prepare for those outcomes?

Well, for one, you probably don’t want to discount them at such “an absurdly steep rate.” Economists are already back to voicing mealy mouthed platitudes about the recovery and the health of the financial systems. These are the same clowns who missed all the warning signs up to 2007.

But don’t worry! The government will protect you from yourself. If you have a few minutes, read this article reviewing Kenneth Minogue’s new book, The Servile Mind: How Democracy Erodes the Moral Life. We’ve ordered a copy. But this quote is worth keeping in mind as you’re hectored and lectured to about the need for putting a price on carbon dioxide emissions:

Many of us have unsound views about people of other races, cultures or religions, and the distribution of our friends does not always correspond to the cultural diversity of our society. We must face up to the grim fact that the rulers we elect are losing patience with us.

Debt, intemperance and incompetence in rearing our children are no doubt regrettable – but they are vices, and – left alone – they will soon lead to the pain that corrects. Life is a better teacher of virtue than politicians and most sensible governments in the past have left moral faults to the churches.

The point is that governments have no business telling us how to live. They are tiresome enough in the exercise of authority. They are intolerable when they mount the pulpit. Nor should we be in any doubt that nationalizing the moral life of the people is the first step toward totalitarianism.

Give me liberty and cheesburgers any day.

Dan Denning
for Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

Leave a Reply

2 Comments on "Controlled Demolition"

Notify of
Sort by:   newest | oldest | most voted

“Of all tyrannies, a tyranny sincerely exercised for the good of its victims may be the most oppressive. It would be better to live under robber barons than under omnipotent moral busybodies.”
CS Lewis


Fiscal tar baby is putting it lightly. The US economy is not going to enter into decent growth for a number of years. Too much damage done in the Bush years, unfunded wars, ear marks and tax cuts. The damage is done, obama won’t be able to repair it and the repubicans dont have the ability or the integrity to try.

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to