The Fake Recovery of the Chinese Economy

The expected recovery of the Chinese economy is a “fake one” and this text will proof it. First I will let you know why figures would show a revival of the Chinese economy. Then, I will show you how this will negatively impact the economic long-term future of China. Last but not least I will explain the politics that lead to this destructive short-term thinking.

The Chinese economy is expected to grow up to 8% in 2009

While many Western economies are expected to contract with 2-3%, the Chinese economy is expected to grow with 8%. Well, most of this growth, as I read recently in some economic magazine, comes from a direct and indirect government spending. Estimates are that in case the government did not carry out the stimulus expected growth would be 3%, five percentage points lower. Then the next question would be: how is this stimulus composed? How can its effect be so big?

The effect of the stimulus is big because it is both direct and indirect. Direct by making sure the government spends more by hiring more people, providing more subsidies, spending more on healthcare and education, etc. Indirect spending is more interesting to mention. The Chinese government has forced its own state-owned banks to lend money like crazy. The banks have certain quotas on how much they should lend to companies! Currently banks are knocking on companies’ doors asking them to borrow some. The requirements for getting these loans are so few that the chances of getting the loans paid back are really small. Besides, most companies borrowing the money are state-owned, companies that have previously proven to default on their loans.

Let the next generation deal with it

The next generation will have to deal with two matters. First, it will face the government debt over which interest will need to be paid and which one will need to pay back. Secondly, they will have their money in banks that will not be able to pay them back their deposits. This is simply because the companies that are now borrowing will not be able to pay their loans back. Even if the banks will be bailed out (which has been done before in China), this will only lead to a limit on government spending in areas where it should be used (safety, clean environment) or this will increase government debt. In other words, we will not face the interest rates and government spending limits today, but they will definitely be faced in the future – say 20 years from now.

The political motive behind the huge increase in government spending

The goal of politicians in China is not to think about the long-term growth of their country, but to think about keeping people quiet. With keeping people quiet I mean making sure they do not start protests or go against the Party. This is the whole idea behind keeping this one-party dictatorship alive you see – as long as people are happy they will not bother the government. As long as the Chinese are focused on making money they would not be bothering the government. The Chinese government is keeping the economy going to keep the people happy, but with such short-term thinking a few years down the road problems will only be bigger, with the Communist Party directing its own failure.

President Obama and his Genius Stimulus BILL and the 'Sand Castle Building' Theory

(The first part is taken from the internet and slightly modified. The second part is written by myself.)

Let's run a mindboggling defecit that guarantees failure for my children's children and use that money for the illusion of wealth creation. GDP will certainly has the potential to rise next year, probably beginning in Q3 but it's a fake rise. The idea that building things that cost enormous amounts of money that you don't have making things better is even crazier than having a guy run the economy who can't figure out his own tax liability. The Obama stimulus plan can be basically summed up as follows: "if I give my 21 month son a 'job' working in the family sandbox and he makes a massive sand castle are we better off? Additionally I pay him off of one of my credit cards." Technically his business is bringing in money and thus conributing to GDP, but the money isn't real. It has to be paid back eventually! This means that money cannot be used for wealth creation in the future and instead of going into new goods it's going into NONSENSE. The economic stimulus package works exactly the same way. Robbing Peter's grandchildren to pay Paul is no way to practice macroeconomics. What are they teaching at the previously esteemed Harvard (or any university) these days?

Additionally all this 'job creation' is total and utter crap. The government doesn't create wealth it spends it. THE GOVERNMENT IS A COST CENTER. Creating 3,000,000 new jobs at let's say 40,000.00 per year just means that eventually American taxpayers will have an additional $120,000,000,000.00 in annual bills, not even thinking about including pensions and other benefits because then the number will get really scary. That's right he has proposed 120 billion dollars of perpetual new spending into what is really a depression. Where will this come from? Well, since businesses employ people and both people and businesses pay taxes it's likely that businesses will have less money to employ people as they will be paying for guys to stand at a construction site smoking a cigarette while leaning on a shovel. This can only mean less income for the government and higher taxes to make up the gap until total failure becomes evident; something which I predict grandchildren to witness.

This stimulus plan is stupid and will only bring long term harm to the economy. No matter how you look at it 'running a defecit' (wasting the taxpayers' money) with a national debt that basically equals GDP means: higher taxes, decreased business profitability and additional costs for future generations.

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Instead let's start making the economy effective and start to spend money in ways that make sense and promote the economy to become more healthy. Actuallywe learn in middle school that spending now means that you can spend less in the future. Therefore what in fact would be good is to just stop spending for a change. People refer to spending tax money to grow the economy while we should actually stop spending tax money to grow the economy. 'Borrowing money costs money (try explaining that to Obama).'

Get rid of all these taxes and what is left is companies that have more money to hire people instead of paying that money in taxes to the government that in turn hires more useless bureaucrats. Additionally, people who work more or better will get the equivelant seen in their pay. Useless people will be just accepted for how they are (useless) and will not be pushing the economy down with their low productivity so productivity will go up and we will have an unprecedented era of prosperity. Plus, our children will not be paying for current and future 'sand castle building' costs in a stimulus which has never proven to be economically beneficial. See, the less we spend now the more we can spend in the future, plus we won't be building sand castles in the hope to stimulate the economy. Let's start treating the roots of the problem instead of the symptoms.

Welcome to Johan's Economics Blog

Over the past few months I have been updating my friends on economics related topics. I figured it might be a good idea to create a blog in order to have a clear view on what I have written on economics so far.

Most economic news is inadequate or outright false. This blog aims to help you understand economics in simple wordings.

Please enjoy reading it. ;-)

Johan