Surge in Global Credit Driven by China: Deflationary Bust Coming

Since 2008 the growth in global credit has been on the back of China. Real estate led the way. Now what?

Inquiring minds should take a look at FT Alphaville article Chinese Real Estate, Charted. Here is the key chart.

Economic Model Built on Debt

Jim Chanos says says China has an Economic Model Built on Debt.

That is true for the entire global economy, but China is leading the way.

Chinese Real Estate Single Most Important Asset Class

In February, Jim Chanos told Business Insider that Chinese real estate to be the most important single asset class in the world.

There's an excellent video interview in the BI article where Chanos discusses the surge in credit fueled by unwarranted residential real estate speculation.

Inflation Deflation

Note the decline in US credit expansion in 2010. Mark-to-market, the recovery began in 2009 when Bernanke suspended mark-to-market recording of business loans.

My definition says inflation is an increase in money supply and credit, marked-to-market. With rules suspended in the midst of stress test lies, what's going on can only be estimated.

It's clear, for now, that we are in a period of global inflation. The markets act as if this credit can be paid back. It won't, and that is the fallacy of expecting an inflation boom in the future. The boom has been underway for a long time, fueled by FED, ECB, and BoJ QE accompanied by a surge in Chinese credit.

A bust will come, and it will not be inflationary.

Mike "Mish" Shedlock

Comments
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Stuki
Stuki

4 walls, a roof, some pipes and the hardware required to kind of hold it all together. Perhaps a floor. Or perhaps just a plywood box on a trailer..... It's not all that expensive. As well as being of a standard no lower than many of the mold, roach and rat infested shacks that are currently being rented/sold for fortunes in many parts of the country.

If you want, and can afford, fancier; nothing's stopping you from building a Passivhaus Mar-a-Lago replica out of vacuum insulated solid bronze. But even the above dwelling beats the heck out of being homeless.

And, once the floodgates open to unrestricted innovation/experimentation, there is no reason to believe price/quality won't drop just as fast in housing as in every other field where it has been tried.

Stuki
Stuki

Touche!!

Factory building, shipping and stacking container sized houses high and wide, is cheap as heck even now. And that is without the kind of innovation that would (going by experience from every other field, ever) stem from getting rid of all and any cost increasing regulations/restrictions on doing so anywhere someone may want to.

There is no reason to believe site building larger structures from prefabbed smaller modules won't see a similar cost decline. Ditto standardized utility hookups etc....

Take the cost and quality of a Toyota Corolla. Now imagine it being site built from sheets and bolts, by dudes with saws hammers, in your driveway. Which are only allowed to show up after you have spent half a million and a few years obtaining permits. Which can be delayed indefinitely, and which requires pointless legal battles with someone next door who happen to already have his Corolla. And who worry you also having one, will reduce the "value" of his by increasing supply, hence making the carless less desperate....

MntGoat
MntGoat

For some reason modular homes built in controlled factory environments have not taken off as much in US as they have in Japan, Germany and the Netherlands. This could seemingly require less time, labor and the quality of the home wouldn’t be subject to the weather as stick built is. If the permitting process and city/state zoning bureaucracy could be streamlined and made cheaper, and apartments and homes could be built much faster in factories, maybe this could add supply to bring down prices and rents. But like usual, there are a lot of “powers that be”, NIMBY’s, etc… that would fight this tooth and nail because it would lower the values of their current properties.

caradoc-again
caradoc-again

Something else to consider - the demographics. Japan was 1st with Germany, China & Southern Europe behind. We know what happened in Japan. What impact will the others have? USA is relatively better but not ideal too.