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The global economy has three main pillars: the United States, the European Union and China. America was where the crisis began, with a housing market bubble that corrupted the financial sector. Europe is where the crisis now has its locus, amid fears that the single currency could break apart. China, despite steaming ahead since the slump of late 2008, may be next.
The fact that China is now pivotal says much about developments in the decade since it emerged as a fully fledged market economy as symbolised by membership of the World Trade Organisation. Financial meltdown in the west and east Asia's rapid growth have altered globalisation's terms of trade, leading to a shift in the balance of power as fundamental as that of a century ago.
Back in 2001, the running of global affairs was still firmly in the hands of the United States, Europe and Japan, but even then there were signs of change. China had already enjoyed two decades of spectacular expansion by the end of the 20th century and that has continued in the first 11 years of the 21st. Economic power translates into political clout and China now has a seat at the top table when the great powers meet in conclave, as they did at the G20 in Cannes last week.
Unsurprisingly, the focus of events was the unfolding crisis in the eurozone but it was hard to escape the sense that power had shifted from west to east over the past 10 years. It was not just that Nicolas Sarkozy and Angela Merkel were holding out the begging bowl, pleading with China to dip into its foreign currency reserves to provide capital for Europe's bailout fund. Nor was it that China's leaders felt entirely comfortable lecturing Europe on the need to get its act together when it was not so long ago that it was the other way around.
Rather, it was the mixture of bemusement and derision with which China viewed last week's events: the referendum in Greece that never was, the ratcheting up of market pressure on Italy, the looming recession, the inability to follow through on the rescue plan announced in Brussels 10 days ago. Comparisons were being made with the way in which Asia coped with its financial crisis in 1997-98 – and they were not flattering to Europe.
One small vignette perfectly summed up how small-minded and weak Europe has become as a result of its relative economic decline. Officials working on the summit communique were discussing Sarkozy's plan for a financial transaction tax (FTT), the proceeds of which the French president believes should be used to boost aid budgets and to help poor countries adapt to climate change.
Germany, despite an unimpressive recent record on development assistance, likes the idea of an FTT but only because it wants to use any money raised to reduce its budget deficit. So Merkel's sherpa argued that any mention of linking the so-called Robin Hood tax to aid should be removed from the text. In the end a compromise of sorts was agreed so that the communique finally read: "We acknowledge the initiatives in some of our countries to tax the financial sector for various purposes, including a financial transaction tax, inter alia to support development."
The words "inter alia" were included at the insistence of the French but mean that even if Sarkozy manages to put together his coalition of the willing for an FTT it will be up to individual countries what they do with the additional dosh. It is a fair bet that very little of it will show up in higher aid budgets, making it easier for China to portray itself as the friend of developing countries by bankrolling their infrastructure projects. Yet Europe's weakness represents a problem for China as well as an opportunity. Beijing's export-led model of economic growth depends on having a ready market for the goods being churned out by Chinese factories, so the impending recession in the eurozone will have an impact.
To an extent, the backwash from Europe – and from the still-tepid recovery in the US – will be beneficial, since it will encourage China to rely more heavily on domestic demand as a source of growth. That will mean allowing its currency, the yuan, to float higher on the foreign exchanges, encouraging consumers to buy cheaper imports while making exports dearer. In the short run, such a move will help defuse protectionist sentiments in the US. In the longer run, it will lead to a rebalancing of the global economy.
But it won't happen overnight, not least because China's economy is more fragile than its near double-digit growth rate would suggest. Back in 2008, when the crisis broke, industrial production collapsed around the world.
Chinese unrest
Chinese factories were mothballed and the workers laid off. China's communist leaders well understood the potential for serious social unrest so they ordered Chinese banks to keep the economy moving by expanding credit. At one stage, the annualised increase in credit growth in China hit 170%, almost certainly the biggest such surge there has ever been.
The result was over-investment on a colossal scale: not just in industrial capacity but in property. China is now awash with factories that will struggle to make a profit and with a glut of overpriced housing. Historically, an uncontrollable rise in credit has been the single best indicator of a financial crisis, as the west knows from its own recent experience.
Can China buck this trend? Well, it is interesting that many of the arguments along the "this time it's different" line propounded in the US in the mid-2000s are now being trotted out again. The fundamentals justify elevated property prices, just as they did in the US. There is exaggerated confidence in the ability of the People's Bank of China to finesse a soft landing for the economy, just as there was in the ability of the "maestro" Alan Greenspan to prevent the American bubble popping a decade ago. There are booming echoes of the sub-prime crisis: too much leverage, property being sold at distressed prices, and evidence of wrongdoing.
The authorities in Beijing are now responding to signs of weakness in the property market in classic Greenspan fashion: they are relaxing the constraints on credit that were imposed both to mop up excess liquidity in the banking system and to bring down inflation. This, sadly, no more guarantees a soft landing than did Greenspan's decision to solve the problem caused by the collapse of the dotcom boom by creating an even bigger bubble in the US housing market. As an analyst noted last week, China is like a plane with engine trouble circling round an airfield until the fuel runs out.
A crash landing is likely but not necessarily imminent, because loose monetary policy may disguise the underlying problem for a while, as it did in the US. Nor will it permanently impair China's economic development; America had plenty of spectacular boom-busts when it was emerging as a superpower in the late 19th and early 20th centuries.
It does mean that Europe's problems come at an unfortunate time for China, which is facing the twin problems of over-investment and overheating, and is vulnerable to even a relatively mild double-dip recession in the west.
Comments
6 November 2011 5:06PM
Read:
Democracy: Cause of Debt Problems
http://www.newworldparty.org/2011/08/democracy-cause-of-debt-problems.html
6 November 2011 8:07PM
The Chinese economy is going to go through a crash because it has suffered under the same lies of the Western economy.
Loans and Debt has fuelled growth in the West for the last 20 years. You can tell this because since 1992 (in the UK and US) interest rates have been way below their averages since WWII.
This debt was used to expand the "retail - import" side of the US, EU and UK economies with the main beneficiaries of the manufacturing China (and recently India).
So what is the problem? Whilst the Chinese have, in 20 years, raised 400 million people out of poverty, they still have 800 million in poverty, and the average Chinese wage is still only $12,000 a year - now take out the millionaires and billionaires in China and the actual salary levels are much lower. So they have no effective internal market. As the article writer says, the Chinese have continued to build factories to try to lift the other 800 million out of poverty through exporting.
But the US and the EU drives most of the world market and their economies will be stagnant for another decade to come.
China are most definitely rich and have billions of US$ in surplus, but they are going to find that you can't stimulate a country where 2/3rds of the population are poor and they need the US and EU as much as the US and EU need cheaply manufactured goods.
6 November 2011 8:36PM
sheep, wolves, and clothing to disguise those both.
Was that power shifted over huge copper transmission cables on landscape-friendly pylons, or non-electrically, in an oil/lpg super-tanker that managed to dodge all the Somalian pirates?
6 November 2011 9:02PM
Hang on, this opens up the possibility that China will not be able to function as the importer of last resort.
Haven't we had reputable institutions like the independent, oh so independent, OBR predicting that exports to Asia would balance the books to justify their modelled UK economic growth and Guardian journalists arguing that the future for British exports lies in Asia not the EU. If China cannot manage a sustainable expansion in its imports this may be a problem. Perhaps India will bale us all out.
6 November 2011 9:21PM
When all money is created as debt, and the rich 1% corner most of it, the problem is that the other 99% cannot or will not pay it back, unless governments intervene on behalf of the rich.
Vote out all incumbents, whether Democrat or Republican, because they have all been bought off by the rich 1%
6 November 2011 9:23PM
The Chinese will never be a major importer of anything except raw materials, in order to make stuff with cheap labour to be exported to the West.
Chinese workers on average cannot afford to buy much of anything.
6 November 2011 10:14PM
Chinese workers on average cannot afford to buy much of anything.
Because what [ Made in China] you can buy for 20 pounds would cost 80 pounds in China itself, although the average income is $5000 per year in China.
6 November 2011 10:37PM
It's a runaway train, the collapse contagious.
In a game of Play Your Cards Right too many people shouted higher when they'd have been better shouting lower.
China can still buy the West cheap.
6 November 2011 10:42PM
Looks like they have followed the west into a property and credit boom and bust, the only way is down,
http://www.youtube.com/watch?feature=player_embedded&v=rPILhiTJv7E
6 November 2011 11:52PM
Why should we care? Our "special relationship" with the Yanks will surely guarantee a seat at the high table for eternity.
7 November 2011 4:00AM
Larry seems to be moving towards the point where he comes out of denial that the growth that was beneficial when the body economic was maturing has now become a cancerous one that is threatening to consume its host.
About time, too.
He is edging up to where he can articulate that the operation to start that contraction of the pursuit of rampant consumerism is going to have to be a radical one.
I am so old that I remember the discussions about what should be done since we had reached the Limits to Growth (Meadows at al 1972) and how we foresaw that, by the end of the century, living standards of those times would be maintained with the working week reduced to 2 or 3 days on average.
How optimistic we were to think that because that was the sensible response it was the one that would be adopted.
7 November 2011 4:42AM
So, are Chinese good guys or bad guys?
7 November 2011 5:05AM
Comparisons were being made with the way in which Asia coped with its financial crisis in 1997-98 – and they were not flattering to Europe.
The reason why europe will take longer to resolve its problems is that unlike Asian countries, particularly China, we live in genuine democracies. A fact that annoys western leaders as disparate as Cameron and Merkel who would rather act without consulting their voters. The former denies his electorate a referendum and the latter now wants to bribe hers with tax cuts.
China is now awash with factories that will struggle to make a profit and with a glut of overpriced housing.
i seriously doubt that Chona will suffer a housing bubble on the scale of the UK or the USA. As 90% of Chinese have what in the West would be sub-standard accommodation. When Sarkozy says British journalists do not understand Europe then they certainly do not understand China. I guess Larry has overlooked VW's decision to invest 14billion euros in China in the coming decade. Are the Germans not reading The Guardian?
A crash landing is likely but not necessarily imminent, because loose monetary policy may disguise the underlying problem for a while, as it did in the US. Nor will it permanently impair China's economic development; America had plenty of spectacular boom-busts when it was emerging as a superpower in the late 19th and early 20th centuries.
So having led us up the hill Larry now leads us down again, backtracking all the way on his previous arguments.
7 November 2011 5:09AM
They do have one "advantage", no social welfare to fund - ironic being a communist country (everbody's equal just some more than others) and as their mining industry demonstrates, they have a very indifferent approach to health and safety (and so costs incurred)
7 November 2011 6:22AM
America had plenty of spectacular boom-busts when it was emerging as a superpower in the late 19th and early 20th centuries.
Those were accelerations and then lesser accelerations of an ever-upward trend in production, because more and more easily-won resources were then pouring forth from within Earth.
The difference now is that production has peaked as resources have become harder to win.
And from here on in, any booms and busts will be riding on a trend of contraction.
Underlying all Larry's articles there has been this assumption that, if only the tweaking was done properly, all that was necessary to keep 'growth' as we have known on the go was a bit of tweaking.
Taint so, Larry.
And it is high time that you cottoned on.
7 November 2011 7:21AM
Bad guys, or have you forgotten Tianinmin Square, or they execute more people than any other country, or they have a one party state, or they do not have freedom of information (google), or they manipulate their own currency, or Tibet.............
7 November 2011 7:40AM
Have watched predictions of a China crash with interest for a while (building ghost cities/factories, construction being allegedly a huge proportion of GDP, housing asset price bubbles, shadow banking systems etc.). Always the people who know China were basically reassuring - saying 'they can manage this' - the benefits of state-managed capitalism and tight political discipline and a massive internal market to manipulate. But the parallel you make with the blind faith in Greenspan c. 2007 is a good one - so feeling less reassured now. A few things to ponder: what happens to the dollar if the Chinese run out of cash to prop it up? (strongly suspect the US would be very happy to see it fall a bit and get their exports more competitive); if China loses steam would that be in some way good for other exporters (e.g. Germany) - or is it bad for everyone? To what extent does growth in Africa (pretty good in a lot of places right now) run out of steam if China does not need as much in the way of raw materials?
In the long run 2 big things - globalisation means Asia will rise and Europe will fall a bit whatever the bumps on the way; & we would be in much better shape if Bush had not wasted $3tn on a pointless war.
7 November 2011 7:59AM
This dream of a Chinese housing crash is absurd. The deposit on a first property is 30% and 50% on a second, therefore negative equity is virtually impossible. There is no colossal mortgage debt in China, 100% mortgages, based on seven or more times salary do not exist. A large percentage of property loans are repaid in 5 years. Many properties are bought for cash by parents for their children.
China is a cash economy, not a debt based one like the US and UK. Even their credit card system requires a deposit to the value of the card limit. It's a convenience not a loan.
7 November 2011 8:18AM
The global economy has three main pillars: the United States, the European Union and China.
The global economy has one pillar (China), one morass (the EU), and one black hole (the US).
There is exaggerated confidence in the ability of the People's Bank of China to finesse a soft landing for the economy, just as there was in the ability of the "maestro" Alan Greenspan to prevent the American bubble popping a decade ago.
Slight difference: The US has over $10 trillion in debt and is printing Weimar dollars like crazy while China has over $3 trillion in reserves and is doing all it can to keep the value of the Yuan down.
The US has had serial financial crises ever since Nixon sold all the gold in Fort Knox to pay for the Vietnam war and floated the greenback. China has had nothing but uninterrupted growth since it launched its model of state-controlled capitalism.
7 November 2011 8:23AM
I really don't see the point of this fact-free China-bashing article. Is there a pay-per-bash pay scale at the Guardian?
7 November 2011 8:51AM
I am not entirely sure the economic issues facing China are of the nature or magnitude you argue. That of course does not mean that they are not serious or of no consequence for the rest of the globe. There is still a lot of room for growth there and its not entirely evident how this will be achieved without some form of political reform. Membership of the WTO points towards that direction...
7 November 2011 8:53AM
East or the West, India is the best. We will bail out the whole world.
7 November 2011 9:01AM
Seems to me that the crucial question is how long is China going to buy US government debt. It now holds up to $1 trillion in its currency reserves at record low rates of interests. China's continuing purchase of US Treasurys keep US interest rates artificially low and helps pay for America's twin deficits (Federal Government and Current Account). Of course this will never be paid back and given the Fed's policy of debt monetization (inflation) China is sitting on a depreciating asset. Now both China and the US are aware that this game of China recycling its surpluses back to the US so that the US can go even further into debt is unsustainable, and yet ...
Tensions are growing between the two nations over the policy of the Fed and America's accusation the China is using covert protectionism by use of a managed float of its currency. China on the other hand is aware that the US is not seriously interested in ever paying back its debts on borrowed money. The head of China's credit rating agency - Dagong - a Mr Guan Jianzhong has openly accused the US adided and abetted by the New York based ratings agencies, S&P, Moody's and Fitch of openly welshing on their committments to maintain the value of China's Treasury holdings:
"The US has adopted what it calls a quantitative easing monetary policy, which reflects the decrease of its real national solvency, and the dramatic decline in the government's willingness to repay its debts. An international credit rating agency should respond to this, but the three American agencies chose to remain silent.
"In this way, they supported the US government in its plundering of creditors, by using its muscle to issue the international reserve currency. These agencies have betrayed international investors and their interests, proving yet again that they are the faithful servants of the biggest debtor nations."
The tensions between these nations can only increase, it is just a matter of time before (a) America imposes open tariffs against Chinese goods, and (b) China stops buying US dollar demoninated assets, or actually dumps what it has on world markets. This is going to be the big longer term issue in the world economy after everyone has forgotten and stopped obsessing about Europe.
7 November 2011 9:03AM
With what? Rupees?
GMAFB
7 November 2011 9:28AM
GERMANY announced today tax cuts and increased spending on healthcare and education....so the FINANCIAL TRANSACTION TAX is related to more revenue for less developed countries as expounded by President SARKOZY.
Also the proposed tax would track all offshore deals and OTC derivatives which go unchecked and unregulated. The CAYMAN ISLANDS and the BRITISH VIRGIN ISLANDS have thousands of companies registered including British banks to avoid/evade tax. Checkout PROTIUM the Barclays Bank subsidiary in the CAYMAN ISLANDS to offload their toxic debt.
Germany has achieved fiscal restraint and NOT printed nearly 300 billion POUNDS like HER MAJESTYS GOVERNMENT....thanks to Gordon Brown his buddy SIR FRED GOODWIN at RBS. Banks need to know we the taxpayer are not happy with their guaranteed bonus culture. Too big to save now applies in Britain after the banks waived the rules.
7 November 2011 9:46AM
The reason for this is that in the West the corrupt facist political sytem continues to reward complete and utter failure and does not bring to account of punish anyone for there gross ngligence and complete failures:
In the last week:
NOTW: Rebecca Brooks
Whilst executive editor Phone hacking happened on an industrial scale with 5800 phone’s getting hacked (Known so far)under her watch which led to collapse of newspaper and 100’s losing their jobs
Result: £1.7 million severance package, with use of exclusive office in London and chauffer driven limousine for two years:
MF Global: Jon Corzine CEO (Ex Goldman Sachs Exec)
For Bankrupting the company by taking extreme risks by speculating on European sovereign debt, at the same time comingling clients account to make up the collateral on the margins needed for leveraging the speculation on the soverigen debt leading to the loss of $1.5 billion for its customers.
Result: $12 million golden parachute
Freddie Mac: Charles E. Haldeman CEO
Freddie Mac receiving $6 billion of tax payers money every quarter as well as tens of billions in previous bailouts to stay afloat.
Result: $4 Million severance package
We all know what’s next , Bonus time in the city - One rule for the 1% another for the 99%
7 November 2011 10:03AM
One major problem is the way news gets compartmentalised, so the suicidal environmental consequences of economic growth tend to be ignored. Larry Elliot is better than most economists at making connections, but this dangerous indicator of economic wellbeing really needs to be abandoned. And,by the way, has anyone else noticed how the UK government seems to have abandoned all talk of its "happiness agenda" in favour of reverting to type by creating the maximum amount of misery for the largest number of people?
7 November 2011 11:06AM
Sun Tzu and The Art of War:
If a small state wants to take over a big state it should just be useful.
If a big state wants to take over a small state it should just be useful.
I think that applies to China
If a small state wants to take over a Europe it should just be useless and spend a lot of money.
I think that applies to Greece!
7 November 2011 11:19AM
I think also the OBR suggested salvation was going to come in the form of the citizens of the UK taking on another £2 trillion in personal debt to finance a recovery. They are fantasists.
7 November 2011 11:41AM
favabeans78
Ha Ha Ha
7 November 2011 11:54AM
Maybe the people arguing that China's playing a long game are right. What price the yuan as a reserve currency? The rest of the world may soon find out.
7 November 2011 12:02PM
Yes, the Chinese state spends 0.8% GDP on public health. IIRC, we spend 17% ! Not to mention the expense of the dole, etc.
7 November 2011 12:07PM
Does anyone get the feeling that standard economics (neo-liberal, let-it-rip, growth-driven) has run into the buffers? This may be the beginning of an extremely turbulent period in world history as a major adjustment has to be made to recognize the limitations of resources and the need to run an economy on sustainable lines.
7 November 2011 12:13PM
True, but completely irrelevant to the question of whether the housing market can crash. Not all housing crashes are like the one in the US, caused by mortgage holders defaulting. The problem in China is similar to the crash in Ireland, where mortgage holders were largely ok, it was the developers and land speculators who defaulted. While in China the average homeowner is not in much (if any) debt, it is the property developers and land speculators who are leveraged up to their eyeballs. Money for new developments are often borrowed with barely finished (and barely sold) existing developments as collatoral. Many huge developments are built for the sole purpose of providing an 'asset' for further borrowings. There is increasing evidence that developers are also bypassing the official banking system and investing foreign money (via Hong Kong banks) or going to the equivelent of moneylenders.
7 November 2011 12:27PM
Not sure about your data, so this is what I found in Wikipedia:
Between 1981 and 2005, the proportion of China's population living on less than $1.25/day is estimated to have fallen from 85% to 15%, meaning that roughly 600 million people were taken out of poverty.[1] The number of people living on less than $2/day is approximately 468 million, or 36% of the population, according to 2009 estimates.[4]
Weak domestic demand is partly ascribed to people's sense of insecurity (poor social welfare system) which leads to huge current account savings, and bubbling housing market, etc.
China is inevitably aging very soon, with much less youth workers, youth who are unwilling to take physical labour work, and continuously rising wages, the exporting model that China's relied on may no longer be effective in the near future. Plus, the percentage of people aged 65+ will rise from what is it now 7% to 12% in 2020, and nearly 25% in 2050, this does not mean a smaller labour population, but also a larger pure-consumer population.
7 November 2011 12:51PM
In 2008 at the height of the financial meltdown with LEHMANS CITIGROUP MERRILL LYNCH AIG and Goldman Sachs at the door of the Fed getting free money for jam...CHINA refused to push the eject button as requested by the Russians by dumping all US debt.
China has no wish to prove a point that the West is corrupt and run by shadow banks and hedge funds. What scares the masters of the universe is that China is not part of the status quo. If Israel dictates that a nuclear war with IRAN is the next thing on the menu America needs to comply. Why? Because Obama needs to be reelected with the blessing of the American-Jewish lobby. China does not subscribe to the cold warrior mentality. Britain also part of the same equation that Israel can do exactly what it wants based on fictitous claims that Iran is a threat to the world. Even SUN readers dont believe that mumbo-jumbo. The UN is not convinced that Iran has hostile intentions. The next war looms...based on manufactured lies.
7 November 2011 1:06PM
Yes it has Larry but not without risks as you highlight. Given that Credit Suisse's call on the Euro crisis is now looking much better than its competitors, its call (Sept 2011) on the Chinese property bubble is worth considering:
Also this from Reuters:
http://www.reuters.com/article/2011/10/10/us-china-debt-idUSTRE79901L20111010
This factor is often over emphasised in my view:
The main sources of capital now are BRICs, China in particular and the oil barons of the Middle East. China has the sovereign wealth to ensure that it can become a more significant player in financial services while the established market leading naitions are struggling for capital. It also has substantial commodity potential; in terms of food production, minerals inc rare earths. China is thinking long term on its resource advantages. Managing its rare earths supply to the global market gives its own telecoms and IT hardware a period during which that can grow against competitors; regulating Phosphorus minimises medium to long term exposure to food production costs.
There is also a lot of infrastructure China still needs. It has overinvested in some areas, typically high profile municipal and urban infrastructure but still has underinvested in others. It still has a huge latent demand (in trillons of dollars, remaning) in industrial and energy infrastructure and pollution control infrastructure that will continue to boost its productivity and employment further.
China will be exposed to the same market pressures that all nations are because they are inherent to capitalism and how it works, but it has a longer term planning basis and more resources than the West seems to understand; plus it now owns a big chunk of the West. That long term planning is not purely altruistic- it is hard to avoid the conclusion that is is done to ensure the survival of the Maoist government system by supplanting demand for liberty with economic well being. That in itself is another reason why Chinese long term economic planning should be better understood and respected in the West; there is a vested governmental interest in keeping positive growth, probably at all costs simply because this is perceived as an existential issue for that form of government. China is not alone here. Russia has realised that it now exterts far more power through the market than the Soviet Union ever did and is not shy to use that power for foreign policy gains. What the West used to do after industrialisation, the emerging economies will take advantage of. Everyone get used to it.
The problem China will eventually face is that the old unrestricted market growth paradigm is grinding to a halt - at least until decarbonisation of energy supply can decouple GDP growth from GDP growth restrictions caused by climate change and as a decarbonised energy platform make up for cheaper resource recycling from cheaper energy. In plain English, the biggest long term problem for China is the global problem: fossil fuel supply-demand imbalances and prices volatility and the barrier to change inherent in writing off fossil fuel capital infrastructure to replace it with clean energy infrastructure.
7 November 2011 1:15PM
The Chinese economy is a wooden titan. It rests on two things, cheap labour and a large external market (economy balance is 2/3rds exports, 1/3rd imports).
As the working population bulge from the one child policy passes (circa 2016), the advantage of cheap labour will begin to pass. It will pass even sooner if the Chinese have to stimulate their own internal economy.
The large external market is already beginning to shrink as the West's credit has dried up...
----------
The logical step in response to an aging workforce and shrinking external demand would be to stimulate internal demand. The problem is, this would put incredible strain on the planet's resources (we're talking the effective doubling of the consumer world to circa 2.5 billion).
7 November 2011 1:19PM
In a word, zavaell, yes
Because:
Neoliberal economics is a myopic ideology its damage is exacerbated by the passing political fashion for it with politicians. This is how is came about in my view.
It all starts with a non-science (economics) giving rise to a microeconomics based doctrine when global trends in population conflated with globalisation always dictated that in the real world, an accurate macroeconomic picture was essential to a viable economics.
In true science an evidential basis is required for progress and hypotheses are open to testing; as Popper demonstrated and Einstein stated with regard to relativity – one evidence based demonstration that his theory of relativity failed to describe events it was based would lead to its demise (in its initial form anyway). Compare and contrast that to the central plank of neo-liberal economics, efficient market theory: found wanting by expert economic analysis using real market data scores of times since its inception including devasting critique from former advocates. If the current possible-FTL neutrino experiment is reproduced, relatively may not be abandoned, but like Newtonian mechanics before it in the face of relativity theory, will need to be revised. Efficient market theory has been demonstrated unsound in scores of papers now but political support and misunderstanding of it continues is misuse in government approach to finance. That era is now drawing to a close; far too late.
Efficient market theory evolved from early success in application of statistics mechanics in physics and chemistry, but economics failed the key test of keeping it real. Once more complex mathematics was adopted, economists failed to understand what Popper and the scientific community did. Which is that mathematics can deliver an absolute proof which can be validated by checking its internal consistency but that a scientific hypothesis cannot. The killing irony is that a mathematical theory may be internally consistent; absolutely proven; but simply not represent reality. The last problem that economics suffers that most sciences do not, is its inherent political ramifications (most sciences have these) and the interest maintained in it by politicians (virtually no science discipline nor engineering suffers this). Political ideology drives much of economics; economics (from Marx to neo liberal economics) can and too frequently does drives development of economic theory. Politics by its very nature is subjective. Yes in a democracy, our elected representatives should influence what used to be called the political economy; but, if we want success and justice from it, founded in rational objective analysis and not blind doctrine. In the cold light of day, who but the indoctrinated would surrender their finances to a religious cult. Doctrine is doctrine whether the loon preaching it is a politicains or god botherer (or worst a combination of both). Political doctrine is a theology unless it is rigerously slef-examining. Thats why democracy it better: its foundation in political accountability assures progress and facilitates liberty unless its exercise is abused (which unfortunately it presently is more often than not).
Economics allowed itself to be dominated by microeconomics and microeconomists became dominated by mathematicians building there own theories that began to deverge more and more from a real world on which population was building to the first point in human history where supply and demand for strategic commodities would be slip from the easy exploitation of its population. Even setting aside the environmental consequences of this exploitation, which themselves reduce GDP growth potential via downstream effects of pollution, this is a whole new global macroeconomy.
7 November 2011 1:23PM
zavaell - clarification
Once more complex mathematics was adopted, economists failed to understand what Popper and the scientific community did. Which is that mathematics can deliver an absolute proof which can be validated by checking its internal consistency but that a scientific hypothesis cannot.
By this I m saying that you can derive a mathamatical proof but not prove a scientific hypothesis. A scientific theory can only be disproven...
7 November 2011 1:29PM
Is this an advantage? The recession would have been far worse in the West if the automatic stabilisers of social welfare had not kicked in to maintain demand inthe economy.
China should use its surplus to underwrite the setting up of a social insurance system. Sure they don't have to do it exactly like anyone in the West, let them find their own way that aligns with 'Marxism with Chinese characteristics'. But they should do it.
7 November 2011 2:24PM
What people keep missing is that China have a valuable reserve, above and beyond any credit or currency issues: The Panda.
All hail the mighty Panda, saviour of us all.
7 November 2011 3:09PM
Why the bashing? So many hatred and jealousy for China. Get over it.. No matter what they will stay that way for more years to come and won't fall flat easily...They have their own way..
It's funny about human right violation comments, the US UK and Europe has done much worst thing...Look at Afghanistan, Iraq and Libya...
So please be fair...
7 November 2011 3:36PM
how many iraqis dead, exactly?
to paraphrase Cassius Clay / Mohammed Ali "no chinese ever called me a terrorist and droned my entire village"
a two party coin toss is significantly better because..........? Certainly the corruption is endemic.
and the Fed dumping dollars, or the BoE printing pounds is *not* currency manipulation?
7 November 2011 3:38PM
farm them and sell them for food. Yum.
7 November 2011 4:06PM
DANTE5...."China the wooden titan" experiencing growth this year of over a trillion dollars...with car sales over a million a month....and an internal market growing rapidly for US goods like APPLE and GM cars.
No wonder the top Republican senator requested that Congress not embark on currency manipulation legislation against China in the form of tariffs. US corporations have endorsed China as a production centre and invested billions. China would be shocked to read the accusations on this website. Ignorance is why we go to war and then try to explain ourselves later like IRAQ and AFGHANISTAN. The US financial crash also looks like planned obsolence by securitising trash and selling them to European banks with US credit agencies seal of approval. The jokes was on us for following this charge of the light brigade into the valley of death.
7 November 2011 11:22PM
All very fair an noble but who else is left to vote for? There is currently a vacuum of leadership in all industrlised countries. Moral and ethical standards at an all time low. The cracks on our economic growth model are apparent for all to see. but what its also very evident is the cracks in politics and democracy in general which in my opinion are not fit for purpose - the purpose being the wellbeing of the people not business.
Somehow we went thorugh this mad phase where we thought what was good for the markets was good for us all, as society and inviduals. Its clearly not.
8 November 2011 2:56AM
the world's 3 biggest economies - the EU, the US, China
they say that 65% of American economic activity is due to the retail sector.
spending up, economy doing well
trouble lies in the fact that 40% of US retail sales go towards the purchase of Chinese products -
so is the true measure of a healthy western economy the fact that China is doing well ?
how absurd
8 November 2011 4:16AM
Sounds like we're the "yellow man's" burden, meaning no racial offense.
8 November 2011 4:22AM
99% are not in debt. Most middle class people in Britain not own their houses, pensions and a little capital, normally amounting to over £1million in assets - are you advocating that these assets are rendered worthless?