While everyone is staring at Greece...

Sure Greece is on the cusp of civil war (reports of army and police units having views that differ to the PM). But some interesting news from China's Auditor General.

I've written about China's debt problems here and here.

Lots of articles about it globally but I'll go with Mike Shedlock's blog post as it has some good other onwards links as growing evidence of a growing storm.

http://globaleconomicanalysis.blogspot.com/2011/06/chinas-top-auditor-warns-of-chinese.html

Local governments had an overall debt of 10.7 trillion yuan ($1.65 trillion) by the end of 2010, said China's top auditor on Monday in a report to the National People's Congress.

He warned that some were at risk of defaulting on payments.
It was the first time the world's second-largest economy publicly announced the size of its local governments' debts. The scale amounts to more than one-quarter of its GDP in 2010, which stood at 39.8 trillion yuan.

Concerns are rising that the problem of local government debt could destabilize the financial system of the country if it is not managed properly, especially after the central government's tightening of the housing market, which could affect local fiscal revenue that is highly dependent on land sales and make debt repayment more difficult.

As long as credit bubbles expand, no one heeds warnings like that issued by China's top auditor. Then when the bubble bursts, everyone cries they were not warned, they were taken advantage of, and they deserve a bailout.

One thing's for certain, when China's credit bubble pops, it will rock the world.

I suggest you read Mish's post and all the links to civil unrest,  empty cities etc.

Bonus video from Hugh Hendry...

Dateline.

Myth Busting.

Leith Van Onselen (aka Unconventional Economist) at Macrobusiness wrote a corker today demonstrating why Property prices have hit the ceiling and cannot outsrip incomes. You can read it here.

Ah yes, the tired old property doubles every seven to 10 years myth. To illustrate the absurdity of Mr Armstrong’s claim, I took Melbourne’s median dwelling price ($465,000) against Australia’s average full-time earnings ($67,215) as at March 2011. I then used the Rule of 72 to extrapolated the house prices forward by 7.2% and 10.28% per annum respectively (i.e. the growth rates required to double every seven or 10 years), and extrapolated average full-time earnings forward by 4.4% per annum, which is the average rate of growth since 1990. The results are presented in the below table.

Click on graph to expand

As you can see, a growth rate of 7.2% per annum delivers a median dwelling price of around $226 million in the year 2100 against an average income of around $3.1 million, producing a dwelling price-to-income ratio of nearly 73 times!

A growth rate of 10.3% per annum delivers a median dwelling price of around $2.8 billion in the year 2100 against an average income of around $3.1 million, producing a dwelling price-to-income ratio of nearly 912 times!

Clearly Mr Armstrong does not understand the laws of compounding. In fact, the only way that his ‘doubles every seven to 10 years’ claim could ever be met is if the Reserve Bank and Government abandoned inflation targeting and allowed both wages and house prices to grow in concert via inflation (like in the 1970s). In such an event, the dwelling price-to-income ratio would be largely unchanged, but house prices could continue growing strongly in nominal terms whilst remaining steady in real terms.

I, however, disagree with his opinion that Australian will not crash (like Ireland, Spain, USA etc). Thats fine, opinions are like arses, we all have one.

History shows that bubbles don't flatline, they deflate.

I wrote about this in April - History Never Repeats.

Consider a fall of just 0.8% a month will give you a -32% haircut over 4 years. Is that a crash? Call it whatever - it won't be pretty and it WILL take out some of the banking sector.

Don't forget the optimism of US Fed's Bernanke:

2/15/06 – Hearing before the Committee on Financial Services

“Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise.”

2/15/07 -  Semiannual Monetary Policy Report to the Congress

“Despite the ongoing adjustments in the housing sector, overall economic prospects for households remain good. Household finances appear generally solid, and delinquency rates on most types of consumer loans and residential mortgages remain low.”

Boomers Bailing (?) #1

A quiet ending week it seemed in choppy traders markets in FX and equities as the knob gobblers at the world's banks try and kick the [inevitable] Greek default down the road a few months.

She's dead Doctor! No she is not, she just has no pulse or brain function, lets put her on life support!

So lets focus on domestic issues while we wait. I watched Wall Street: Money Never Sleeps last night and Gordon Gekko's book promotion speech on 'new' greed is gnawing at me.

There are three types of property investor in Australia:

1. The newbie idiot that believes we have a shortage, even though persons-to-dwellings ratios make crashola California and Ireland (a list of real estate bubble crashes, to name but two) look supply tight. This idiot believes the shortage spruik from the paper, the paper that makes squillions in real estate advertising;
2. The prudent (lucky?!) investor that bought many years ago (before 2000) when rental yields were 7%, capital growth was CPI (a sustainable 10% total return) and banks were prudent in not feeding bubbles and tethering consumers to debt peonage. When I mean prudent, I meant the (at the time) conservative pursuit of yield to pay off your loan over the long term and not the pursuit of quick capital gains (speculation) ;
3. The idiot hanging in there for a bubble comeback as a credit dries in a credit fuelled bubble. Think, pissed as a tick on cheap punch, the girls have gone home, booze has gone and is waiting with three losers at 3AM for some booze and chicks to miraculously appear. This fool believes the shortage crap of Point 1, but believes the market will 'comeback' and the party will last forever. The mega loser that will eventually appear (post Ireland, Spain, California, Florida et al 40% crash) on Today Tonight and A Current Affair screaming for a bailout. These clowns can't fathom that a household that brings in $100,000 (very comfortable income situation) simply cannot repay a loan for $700,000 and have electrical power, a car, clothes and eat. The blood from stone analogy is lost on them.

No 2 Investor has seen growth 5 to 7 fold in 15-20 years. $100K to $700K scenarios and knows that youngsters can't afford to join the stupidity and only a few greater fools are buying (high volumes, low turnover) its time to bail....to quote the Steve Miller song, "go on, take the money and run".

With than in mind I'm going to occasionally run regions with reality check examples as folk try and beat the flooded market but low volume turnover scenario and 'price to sell' (aka take the money and run).

I'll work clockwise around Oz (while I wait for the GrecoEuro metdown that will take out Spain - then you'll know credit pain and the Depression).

North Queensland

Port Douglas.

2 Bed, 2 Bath, 1 Car unit in a resort complex.
87 Port Douglas Road (Sabbaya Resort)

$250,000, REDUCED by $189,000 (43.05%) on 14 May 2011
Sabaya - Sacrificed!!

12 Months ago Port Douglas' median unit value was over $400,000 a pop, Today its just around $220,000. Hello loser, this is just starting. Where is the slick agent that sold you this lemon?

Cairns

4 Bed, 2 Bath, 2 Car Garage - House

5 Tyrconnell Crescent, Redlynch

High $300,000s REDUCED by $105,000 (25.93%) on 16 May 2011

SOLID INVESTMENT - GREAT HOUSE, GREAT AREA, SECURE FOR YOUR FUTURE!!

4 Bed, 2 Bath, 2 Car Garage - House
38 Loridan Drive Brinsmead.
High $300,000s REDUCED by $100,000 (25%) on 15 Jun 2011
An Impressive Brinsmead Family Home

If you think I lie, check the addresses yourself: http://www.refindhouseprices.com/

For those in group 3 hanging out (for the recovery without credit):

Coming soon: Central Queensland, Fraser and Sunshine Coast.

Edit: I've amended point 2 above as Avid points out in the comments I'm probably giving them too much credit.

Greece is Cactus

Ugly graphs.

Drachma anyone?



Sovereign Debt for Dummies

Greece Today...

From a year ago...

Just ticketyboo...

UK Debt Bombshell (just watch those numbers tick over!) 

• Britons owe £14,764 for every man, woman and child
• That's more than £32,124 for every person in employment
• Every household will pay £2,123 this year, just to cover the interest

Tunnelling to Freedom

You can't make this stuff up. Standard and Poors has just downgraded Greek debt to CCC rating, which is junk. 

Greece owes approximately €95 billion of Greek government debt maturing between now and the end of 2013 along with an additional €58 billion maturing in 2014.



So, tomorrow June 15th,  the Greek Parliament is going to vote on austerity measures. The agreement includes tax increases, slashing of wages and pensions and the lay-off of approximately more 100,000 civil servants in the next few years. Unfortunately, the population aren't very happy (this is the population where over 30% expect an imminent civil war) . And have organised a mega-strike blockading the parliament.

Greece: General Strike

Greece will paralyze on Wednesday, June 15, as labor unions from public and private sector will launch a general strike. Even the shops will be closed 12.00-3.00 p.m. in a protests against the strict austerity measures that force on their knees millions of Greeks without a prospect of recovery. Public administration services, banks, state-run enterprises (DEKO) and municipalities will be closed for 24 hours. Public hospitals will operate with emergency staff only. No planes will land or take off,  no ferries and boats will leave the ports. No news and live broadcasts. No trains of OSE and no Proastiakos.

Public Transport workers will launch only work stoppages to facilitate strikers to join the big protest in downtown Athens. The demonstration will start at 11 a.m.

Buses will operate 9 am 9 pm, Trolley buses 8 am – 10 pm, Tram 7 am – 11 pm, Urban Train (HSAP) 8 am – 9 pm.

Protests will start already at 7 in the morning as the “Indignant” Greeks plan to “block” the Parliament. On Wednesday, the Mid-Term Austerity Package will be discussed at the Economics Committee. 

The Greek Parliament have decided on a contingency in case the austerity vote gets up: Tunnels.

Parliamentary Tunnels

The Greek Government has hired Foreign Workers to Clean out the Underground Tunnel Leading from the Parliament to the Sea Port of Piraeus in Preparation for an Evacuation of all MPs.

I just became aware of this report from Kontra channel here in Greece. Apparently, a tunnel that leads from Lykavitos to the Greek parliament, and from there to the sea port of Piraeus, is being cleaned out by foreign workers in preparation for the possible evacuation of Greek MP’s in the event of a storming of parliament ahead of wednesday’s vote on the new memorandum.

The situation here is getting completely out of control. I really don’t know how much longer the people will be willing to wait this thing out. The mood here in Athens is one of intense disillusionment with a government that seems increasingly detached from its own people.

Like I said, you can't make this up.

The Block

A TV reality show on Channel 9 Australia trying to coerce the brainless into becoming the buy and renovate suckers.

It appears all is not as it seems thanks to The Stubborn Mule.

Channel 9′s high rating renovation show The Block just finished its successful second series on Wednesday night. It concluded with an auction of the four properties that the contestant couples had spent 8 weeks, and in excess of $80,000 each, renovating. The prize for the contestants was the “profit” of whatever they made at auction in excess of the stated reserve. The reserves were varied to reflect unique features of each apartments such as views, an outdoor living area or double garage. The idea was that the couple with the best renovation skills would see their apartment achieve the most above the reserve.

But buried in the self-congratulatory articles, no doubt generated by Channel 9′s PR department, are some sobering facts. Put away the Kristal and maybe open a cask of Ben Ean and take a seat. The entire unrenovated apartment block was bought for $3.4m. The total amount spent on renovations (not including the couples’ labour) was $470,000 (including $100,000 on common areas). That makes $3.87m. The total sale price was $3.89m. So the total profit was a pretty modest $20,000. And that doesn’t include stamp duty (about $200,000) or agent’s commission ($78,000 @ 2%) plus, let’s say, legal costs of $2,000. So, in reality, the washup of The Block is a loss of $260,000. They don’t mention that in the publicity.

You get that? The properties sold AT A LOSS OF $260,000.

More revealing than the illusion that this was a profitable business from a renovators point of view is that the total reserve price was $3.55m. Now I’d expect the total reserve to at least equal the break-even cost of the apartments, or $4.15m. In fact it was $600,000 below the actual cost of buying, renovating and selling The Block. If in a very public show like this, with 1.2m viewers, the agents can so blatantly quote below the break-even reserve then what hope for the tens of thousands of buyers in suburbia struggling to match house ads with reality? It’s enough to do your block in.

Great investment. Probably way over the heads of the 1.2M viewers that lap up such rubbish.

Special Relationships

 

 

The Australian Dollar and Japanese Yen (AUDJPY) versus the All Ordinaries (XAO - Australian Stock Index). Symbiotic since 2003.

 

Last 4 Years:

 

 

• The AUDJPY will fall to meet XAO; or
• XAO will rise to meet AUDJPY; or
• A bit of both, falling AUDJPY and rising XAO until they mate.

 

If you wanted to short the Australian Stock Market in previous bear moves, the selling of AUDJPY (effectively buying Yen with the Aussie) was an easy way.

 

Beware long term that if the Fukushima catastrophe and cover up goes south (and Japan as an economic entity) so may the relationship.

 

 

 

 

 

Edit:

1. The Australian Stock Exchange Volume is tiny compared to the Foreign Exchange (FX) Market.
2. Yesterday $4.1B worth of Stock Changed hands at the ASX.
3. In 24 hours $300B worth of Australian Dollars were traded in FX  with approximately $60B being AUDJPY.
4. AUDJPY market is a 15 TIMES BIGGER MARKET than Australian Stocks.

 

...just so you know who is the driver.

Fukushima Whistleblower

Embedded video and worth your while:
http://www.abc.net.au/7.30/content/2011/s3240273.htm

Hows it going today?

Ski Sapporo at night will be a new marketing campaign. It will glow in the dark by winter.

叫球 (Call the Ball)*

* Is a request to sight the lights from the multi-colored optical landing system that shows a pilot to be on the correct approach path or how to correct his/her approach path. 

Now its getting interesting. China aircraft carrier confirmed by general

An aircraft carrier is not a defensive platform. Its a force projection platform (I'm sailing over to YOUR waters and launching air power against you).

I assume it will take J20 Stealth Fighters.

For history buffs Japan's first Carrier Akagi was launched in 1927 (and sunk at the Battle of Midway 1942)

Chinese Bears

A now all too familiar tune.

And a one, a two, a three and four....

1. Prosperity,
2. Greed driven credit binge,
3. Real Estate speculation,
4. Meltdown.

AFTER years of housing prices gone wild, China's property bubble is starting to deflate.

Residential prices are heading downward in some major cities, damping some undesired real-estate speculation but raising the prospect that the Chinese economy may slow more rapidly than anticipated with profound consequences for global growth.

Real estate is a foundation of China's phenomenal growth record in the past two decades, and its health is crucial to China's construction, steel and cement sectors.

Real estate is also a favoured investment of Chinese looking to get better returns than bank deposits pay.

Local municipalities and provinces depend on rising prices for land sales as well to fund infrastructure projects.

World Bank economists warned at a Beijing press briefing that a real-estate bubble was among the biggest economic risks China faces.

Already, in nine major cities tracked by Rosealea Yao, an analyst at market-research firm Dragonomics, real-estate prices fell 4.9 per cent in April from a year earlier.

Last year, prices in those nine cities rose 21.5 per cent; in 2009, the increase was about 10 per cent, as China started to recover from the global economic crisis, with much steeper increases toward the end of that year.

A downturn in property and apartment prices would harm Chinese industry and investment, and crimp consumer spending.

China is a "housing-led economy", says UBS economist Jonathan Anderson, who estimates that property construction alone accounted for 13 per cent of gross domestic product in 2010, twice the share of the 1990s.

While China's anticipated growth is still well above that of other large economies, any reduction could have deep consequences.

The global economy is now even more dependent on China for demand for anything from commodities to luxury goods, given the tepid recovery in the US and Europe's continuing sovereign-debt problems.

If the Chinese housing market slows faster than people had expected, the impact would be felt in a number of markets that export heavily to China.

Many Latin American and African economies have shifted their focus toward Chinese demand for their raw materials, and many Western firms, including US retailers and fast-food chains, now bank on Chinese consumers feeling wealthier to make up for stagnating sales elsewhere.

 Got that? A "housing-led economy" .

Standard Chartered Bank estimates that China's so-called tier-two cities, such as Dalian and Tianjin, may have 20 months of housing inventory by year end, putting "substantial" pressure on prices.

Standard Chartered forecasts price cuts of 10 per cent to 20 per cent "in many cities".

A number of analysts think official data, which has continued to show a slight rise in prices, understate the slowdown as the government can affect the numbers by pressing developers to withhold or add high-value properties to the market depending on what it wants the data to show.

Partly as a result of the Chinese real-estate slowdown, prices for key industrial metals used in construction have softened.

Spot copper prices have lost 5 per cent since early March, and have now fallen to around 69,000 yuan ($10,000) a tonne after racking up 34 per cent in gains between June 2010 and March this year.
Major steelmakers have been consistently cutting their product prices since February.

Chinese officials, facing widespread anger from ordinary citizens who can no longer afford to buy a home, have sought to slow the rise in housing prices.

Since January 2010, the Chinese government has introduced a number of measures to stem speculation, including boosting down-payment requirements on mortgages for second homes to 60 per cent from 40 per cent, barring state-owned enterprises outside the real-estate sector from investing in property and lifting the amount of cash banks must hold in reserve 11 times—essentially reducing funds banks can lend.

"In some ways, (real-estate) prices are really crazy," said Guo Shuqing, chairman of China Construction Bank, in an interview last week

.

He says the cost of apartments in big cities is well beyond young couples' means.

Beijing has one of the most expensive real-estate markets in the world relative to the income of its citizens.

Calculations based on Soufun data show that in the opening months of 2006 an average-price new apartment in China's capital would cost around $US100,000 — the equivalent of 32 years' disposable income for the average resident.

By 2011, the average price had more than doubled to $US250,000, but relatively modest increases in income mean it would now take 57 years of saving for the average resident to cover the cost.

In Shanghai, apartment sales tumbled 37 per cent in April, to 11,000 units, compared with 17,500 units in January, according to the Shanghai Real Estate Trading Centre.

With business so slack, Midland Realty, a unit of Hong Kong-based Midland Holdings, closed eight of its nine offices in Shanghai.

57 years income for an apartment!!! Thats like an apartment in Australia going for $3.4M!!

Zhang Kai, an agent at Home Link in middle-class neighbourhood Tuanjiehu said the number of sales had dropped by half since February and monthly rents for small apartments jumped to about 3000 yuan in June from 2500 yuan a month earlier.

Many apartment owners don't want to sell, he said, because they are waiting for prices to turn around.

Loss of full Time Jobs Continues

22,000 full time jobs lost in May.

57,200 full time jobs lost in April.
_______________________________________________
79,200 full time jobs lost in 2 months.

Thats offset by rises in part time work so the Unemplyment rate remains steady.

You can't pay the mortgage working 8 hours a week at Coles.

Someone say 'Boom'?

Priceless

As a Queenslander I reckon I've seen $100K in 'equity' wiped off my house value in 2 years ($500K to $400K by guesstimation).

I've got a small mortgage and no other debt but you don't have to venture out very far to see $50K vehicles (on dead money repayment schemes) in driveways and Hardly Normal staying alive on don't pay till 2013.

On the Housing millstone $100k loss in two years is only $136 A DAY wiped off the asset sheet.

Throw in a big loan, say $350K and you pay $40 a day extra for the privilege of paying a bank [to stay in the house] as opposed to a landlord [to stay in the house] for your bragging rights.

The SUV is $40 a day for a depreciating asset trophy to your ignorant gullibility to respond to marketing campaigns targerting your fragile ego and inadequecies.

Total? $216 A DAY to live the dream!

And THEN we get to the Credit Card and Hardly Normal's letter saying it pay up time from 2008's crap purchases. Rates? Insurance on SUV and the financial millstone with a gabled roof, 4 beds and 2 baths? Rego? Electricity?

Priceless!

HELP! HELP! JOOOOOOOLIA SAVE ME!

(Translation: I'm a dumb fuck who made some stupid decisions based on vanity, greed, laziness, herd mentality and limited intellect and you must save me or I won't vote for you)

Double, Double Toil and Trouble; Fire Burn and Cauldron Bubble

China's debt binge hides an imminent crisis

For the past few years, China-watchers have worried about the mountainous debt levels being carried by local governments. Now, it appears, Beijing has finally resolved to take action.

Last week, there were reports that China’s regulators were planning to shift 2-3 trillion yuan ($US308-$US463 billion) of debt off the balance sheets of debt-laden local governments, in a bid to reduce the risk of a wave of defaults that could threaten the stability of the world’s second largest economy (Beijing will be burned in provincial bailout, June 3).

The reports said that as part of Beijing’s overhaul of local government finances, the central government would pay off some of their debts, while state banks would have to write off some of their bad debts. They added that Beijing also intended to lift the current restrictions that prevent provincial and municipal governments from selling bonds. This will allow local governments to improve their finances using more transparent sources of funding.

There’s little doubt that Beijing needs to come up with a plan for dealing with local government debts. Local Chinese media reports suggest that local governments’ financing vehicles – hybrid structures that local governments use to get around restrictions that limit their ability to borrow money directly – now owe Chinese banks around 10 trillion yuan.

Many of the loans date from the lending spree that the banks engaged in as part of Beijing’s massive economic stimulus program in late 2008 to counter the effects of the financial crisis. This saw trillions of yuan flowing into local government financing vehicles, which then spent the money on new investments, such as building new highways and airports.

But not all of these loans to these vehicles were channelled into worthwhile investments. In many cases, the projects simply don’t – and never will – generate sufficient revenue to service the loans. In some cases, local governments used the money to increase their land reserves. Others embarked on social projects, such as creating new parks or planting trees. In other cases, loans were likely to have been squandered on bad investments or on corrupt payments.

The problem is that at this stage, no one knows how much of this 3 trillion yuan in problem loans the banks will be forced to shoulder. Essentially, Beijing faces a choice. It can bailout the local government vehicles, and rescue the banks. Or it can force the banks to bear the brunt of the losses, and then assist them by, say, forgoing dividend payments, or giving them tax credits for bad loan write-offs, and contributing to any future capital raisings by the banks. Alternatively, Beijing may choose a middle course, taking over some of the bad loans directly, but also forcing the banks to swallow some of the losses.

In his latest report, Societe Generale’s strategist, Dylan Grice, predicts that Beijing might adopt the approach it used in recapitalising the Chinese banks in between 1998 and 2005. In that case, Beijing set up asset management companies to buy the bad loans, and they pay using non-tradable government-guaranteed bonds that don’t show up in official measures of Chinese government debt.

But, he says, that’s a long way from solving the problem. “A bailout of $463 billion is half the size of the TARP, introduced by Paulson at the nadir of the 2008 crisis, for an economy which is only one-third the size of the US. So adjusted for GDP, China has just announced an emergency bailout of one and a half TARPs!

“If we calibrate the magnitude of the economic crisis with the size of the bailout, one and a half TARPs implies a financial crisis one and half times the order of magnitude of 2008.”

Papering over the problem, he warns, doesn’t make it disappear. “While we can't predict where complex systems will go, we know that the longer their volatility is artificially suppressed, the more emphatic will be its release when it does come. It is more likely that China has one and a half times (and counting) the 2008 financial crisis ahead of it.”

Chinese, Japanese, Money Please

Leith van Onselen at Macrobusiness has posted an outstanding article on Chinese credit issuance. Chinese Banks Feeling the Heat.

Chinese banks’ aggressive credit expansion in the past two years greatly facilitated China’s strong economic recovery during the global financial crisis. Since the beginning of 2009 until now, total loans at Chinese banks grew by 65%. In other words, close to 40% of their total loans were lent out in the past two and a half years, especially in 2009 when the world was in a financial crisis. China’s financial system is highly leveraged with the ratio of bank loans to GDP already hitting 120%, higher than the peak level of Japan during its financial bubble. This ratio could be even higher if offbalance sheet loans are factored in

• Close to 40% of their total loans were lent out in the past two and a half years
• China’s financial system is highly leveraged with the ratio of bank loans to GDP already hitting 120%

Did someone say credit fuelled bubble?

The rapid westernisation and industrialisation over the last 20 years has indeed been something to behold.

Impressive.

Has any other non Western nation experienced such rapid industrilisation, westernisation and modernisation?

Japan early 20th century.

http://eh.net/encyclopedia/article/mosk.japan.final

Japan achieved sustained growth in per capita income between the 1880s and 1970 through industrialization. Moving along an income growth trajectory through expansion of manufacturing is hardly unique. Indeed Western Europe, Canada, Australia and the United States all attained high levels of income per capita by shifting from agrarian-based production to manufacturing and technologically sophisticated service sector activity.

Still, there are four distinctive features of Japan's development through industrialization that merit discussion:

1. The proto-industrial base

Japan's agricultural productivity was high enough to sustain substantial craft (proto-industrial) production in both rural and urban areas of the country prior to industrialization.

2. Investment-led growth

Domestic investment in industry and infrastructure was the driving force behind growth in Japanese output. Both private and public sectors invested in infrastructure, national and local governments serving as coordinating agents for infrastructure build-up.

• Investment in manufacturing capacity was largely left to the private sector.
• Rising domestic savings made increasing capital accumulation possible.
• Japanese growth was investment-led, not export-led.

3. Total factor productivity growth -- achieving more output per unit of input -- was rapid.

On the supply side, total factor productivity growth was extremely important. Scale economies -- the reduction in per unit costs due to increased levels of output -- contributed to total factor productivity growth. Scale economies existed due to geographic concentration, to growth of the national economy, and to growth in the output of individual companies. In addition, companies moved down the "learning curve," reducing unit costs as their cumulative output rose and demand for their product soared.
The social capacity for importing and adapting foreign technology improved and this contributed to total factor productivity growth:

• At the household level, investing in education of children improved social capability.
• At the firm level, creating internalized labor markets that bound firms to workers and workers to firms, thereby giving workers a strong incentive to flexibly adapt to new technology, improved social capability.
• At the government level, industrial policy that reduced the cost to private firms of securing foreign technology enhanced social capacity.

Shifting out of low-productivity agriculture into high productivity manufacturing, mining, and construction contributed to total factor productivity growth.

4. Dualism

Sharply segmented labor and capital markets emerged in Japan after the 1910s. The capital intensive sector enjoying high ratios of capital to labor paid relatively high wages, and the labor intensive sector paid relatively low wages.

Dualism contributed to income inequality and therefore to domestic social unrest. After 1945 a series of public policy reforms addressed inequality and erased much of the social bitterness around dualism that ravaged Japan prior to World War II.

The parallels are remarkable. Dualism is the catalyst.

After the Tokugawa government collapsed in 1868, a new Meiji government committed to the twin policies of fukoku kyohei (wealthy country/strong military) took up the challenge of renegotiating its treaties with the Western powers. It created infrastructure that facilitated industrialization. It built a modern navy and army that could keep the Western powers at bay and establish a protective buffer zone in North East Asia that eventually formed the basis for a burgeoning Japanese empire in Asia and the Pacific.

Central government reforms in education, finance and transportation

Jettisoning the confederation style government of the Tokugawa era, the new leaders of the new Meiji government fashioned a unitary state with powerful ministries consolidating authority in the capital, Tokyo. The freshly minted Ministry of Education promoted compulsory primary schooling for the masses and elite university education aimed at deepening engineering and scientific knowledge. The Ministry of Finance created the Bank of Japan in 1882, laying the foundations for a private banking system backed up a lender of last resort. The government began building a steam railroad trunk line girding the four major islands, encouraging private companies to participate in the project. In particular, the national government committed itself to constructing a Tokaido line connecting the Tokyo/Yokohama region to the Osaka/Kobe conurbation along the Pacific coastline of the main island of Honshu, and to creating deepwater harbors at Yokohama and Kobe that could accommodate deep-hulled steamships.

Not surprisingly, the merchants in Osaka, the merchant capital of Tokugawa Japan, already well versed in proto-industrial production, turned to harnessing steam and coal, investing heavily in integrated spinning and weaving steam-driven textile mills during the 1880s.

Geographic economies of scale in the Tokaido belt

Concentration of industrial production first in Osaka and subsequently throughout the Tokaido belt fostered powerful geographic scale economies (the ability to reduce per unit costs as output levels increase), reducing the costs of securing energy, raw materials and access to global markets for enterprises located in the great harbor metropolises stretching from the massive Osaka/Kobe complex northward to the teeming Tokyo/Yokohama conurbation. Between 1904 and 1911, electrification mainly due to the proliferation of intercity electrical railroads created economies of scale in the nascent industrial belt facing outward onto the Pacific. The consolidation of two huge hydroelectric power grids during the 1920s -- one servicing Tokyo/Yokohama, the other Osaka and Kobe -- further solidified the comparative advantage of the Tokaido industrial belt in factory production. Finally, the widening and paving during the 1920s of roads that could handle buses and trucks was also pioneered by the great metropolises of the Tokaido, which further bolstered their relative advantage in per capita infrastructure.

Organizational economies of scale -- zaibatsu

In addition to geographic scale economies, organizational scale economies also became increasingly important in the late nineteenth centuries. The formation of the zaibatsu ("financial cliques"), which gradually evolved into diversified industrial combines tied together through central holding companies, is a case in point. By the 1910s these had evolved into highly diversified combines, binding together enterprises in banking and insurance, trading companies, mining concerns, textiles, iron and steel plants, and machinery manufactures. By channeling profits from older industries into new lines of activity like electrical machinery manufacturing, the zaibatsu form of organization generated scale economies in finance, trade and manufacturing, drastically reducing information-gathering and transactions costs. By attracting relatively scare managerial and entrepreneurial talent, the zaibatsu format economized on human resources.

But...

Emergence of the dualistic economy

With the drive into heavy industries -- chemicals, iron and steel, machinery -- the demand for skilled labor that would flexibly respond to rapid changes in technique soared. Large firms in these industries began offering premium wages and guarantees of employment in good times and bad as a way of motivating and holding onto valuable workers. A dualistic economy emerged during the 1910s. Small firms, light industry and agriculture offered relatively low wages. Large enterprises in the heavy industries offered much more favorable remuneration, extending paternalistic benefits like company housing and company welfare programs to their "internal labor markets." As a result a widening gulf opened up between the great metropolitan centers of the Tokaido and rural Japan. Income per head was far higher in the great industrial centers than in the hinterland.

The deja vu is getting spooky.

And the dualism?

China's billionaire explosion

The World's Billionaires list that Forbes published on March 10 - the eighth such list that Flannery has contributed to since he opened the company's Shanghai bureau in 2003 - featured 115 people from the Chinese mainland, compared to 64 in the previous year.

Wages in China

Annual average income for employees in Shanghai reached around 65,000 CNY (10,000 USD) in year 2011. Average salary for software engineer/developer in China is around 100,000 CNY (15,400 USD). More experienced software senior developers receive around 150,000 CNY (25,000 USD) and more.

Factories are increasing payments to workers. Governments are raising minimum wages.
The incomes of factory workers are still low compared to the workers in United States and Europe. The hourly earning in southern China is only about 80 cents per hour.

Billionaires, Poor wages (by global standards) and Peasants. Dualism? Thats Treblism (is that a word?).

What happens next? It pops...

Export Led Boom and Bust

The export-led boom was broad-based. All industries benefited. Among them, marine transportation and shipbuilding were extremely profitable and expanded most strongly. Between 1913 and 1919, total manufacturing output rose 1.65 times while individual industries enjoyed the following output increases: machinery (3.1 times), steel (1.8 times), chemicals (1.6 times) and textile (1.6 times).


Clearly, this export-led boom was temporary (only as long as WW1 continued, which meant about 4 years). Japanese manufacturing was still internationally uncompetitive in cost and quality. Japan was capturing overseas markets under the special condition of the European war, which artificially boosted both the demand for and the prices of Japanese exports. Domestically, too, quick import substitution was possible because European goods did not arrive. In retrospect, most of the business expansion during WW1 was inefficient, excessive and unsustainable.


Because of the unprecedented boom, mediocre merchants and producers became suddenly rich and greatly expanded their enterprises. A class of nouveau riche called narikin emerged (in Japanese chess, narikin means a pawn becoming a gold general). They were often without culture or taste and fond of showing off their material wealth.


WW1 required very little military operation from Japan. Japan did not engage in any serious combat. But Japan had a military alliance treaty with the UK (1902-1923, with Russia as the potential enemy), so the government used this treaty as an excuse for capturing German-occupied territories in Jiaozhou Wan (around Qingdao) in China and islands in the Southern Pacific.

 

In 1918 when WW1 ended, a small business setback occurred. But the economy continued to do well in 1919. Then came the big crash of 1920. This postwar recession meant that the bubble had finally collapsed. Serious price deflation was recorded in many key commodities. Within the year of 1920, the price of cotton yarn fell by 60%, that of silk by 70%, and the stock market index plunged 55%. There was no downward price rigidity in those days. Macroeconomic adjustment was effected mostly in prices and less in output.


When the bubble ended, the lack of competitiveness and overcapacity of the Japanese economy, previously hidden under unsubstantiated exuberance, was now exposed. Most narikin were bankrupted. Their happy days were short.


After that and throughout the 1920s, Japan went through a series of recession and a few banking crises (the biggest bank runs occurred in 1927--see lecture 8). The economy slowed down significantly compared with the WW1 period, but no severe fall in output occurred. Domestic demand was not buoyant but steady. Recessions were frequent but short-lived. Prices remained flexible. Trade deficits returned and persisted, financed by the drawing down of the previously accumulated gold reserves. During the 1920s, the sky above the Japanese economy was neither sunny nor pouring. It was as if thick clouds gathered and stayed above the economy, depressing the economic mood of the country (a bit like now, since the 1990s).


Faced with the onset of a long recessionary period, it is noteworthy how the Japanese government reacted. It had two policy options: to rescue weakened industries and banks saddled with bad debt, or to eliminate inefficient units in order to streamline the economy despite transitional pain. The Japanese government chose the first option. In particular, the Bank of Japan provided emergency loans to ailing banks and industries to avoid further bankruptcies and unemployment. This policy eased the short-term pain but implanted a time bomb in the Japanese economy which exploded several years later.

So who else shares this view? Plenty but the Japan 1920s parallel was suggested by Hugh Hendry (2010).

“There are striking parallels with Japan in the 1920s, when ultimately the whole system collapsed,” said Hendry, 41, whose firm manages $420 million in assets. “China could precipitate a much greater crisis elsewhere in the world.”

Japan’s export boom collapsed after the war amid excess global capacity, slashing growth and sparking a stock-market crash and bank runs.

Hendry’s flagship Eclectica Fund, a global macro hedge fund with $180 million in assets, may gain almost $500 million from its options if China’s economy plunges into a recession, he said. The options cost the fund about 1.5 percent of its net asset value annually, Hendry said.

China’s vulnerability to a crash comes from the “inherent instability” created by a lending binge for infrastructure projects that’s “unprecedented in 400 years of economic history,” Hendry said. The country is also exposed to exports to a U.S. economy that could shrink from $14.6 trillion at the end of March to $10 trillion within 10 years, he said.

“China’s at the mercy of a credit bubble,” Hendry said. “Once you’ve unleashed the genie it’s out there. They are ultimately unstable and it’s that instability that creates their demise.”

China’s bubble may burst within a year or it may take three years, as Citigroup Inc. economists Willem Buiter and Shen Minggao estimate, Hendry said.

2012 - 2013 sits with me.

The narikin in caricature: he burns a 100 yen

note for light so the girl can find his shoes.

A Healthy Glow

Plutonium found in soil at Okuma

Plutonium that is believed to have come from the crippled Fukushima No. 1 power plant has been detected in the town of Okuma about 1.7 km away from the plant's front gate, a Kanazawa University researcher said Sunday.

It is the first time plutonium ejected by the stricken facility has been found in soil beyond its premises since the March 11 megaquake and tsunami led to a core meltdown there.

Not to worry.

Professor Masayoshi Yamamoto of Kanazawa University said the level of plutonium detected in soil in Okuma, Fukushima Prefecture, is lower than the average level observed in Japan after nuclear tests were conducted abroad.

Where abroad? Chernobyl?

Whats the penalty for being complicit in intergenerational mass murder?

I can't comprehend what is to be gained by the Japanese government down playing this and covering this whole fiasco up.

Reality Bites

In keeping the theme from the posts below, as if on cue, I find More companies collapse as economy slows.

Company collapses have risen and the economic slowdown and strong Australian dollar will put further pressure on businesses, an accounting firm says.

Australian Securities and Investments Commission (ASIC) data showed a 6.2 per cent rise in the number of companies that entered into external administration between July 1 last year and April 30, to 7,985, compared with the previous corresponding period.

For the month of April there were 812 company collapses, a fall from March but still 10 per cent higher than in April 2010

Chartered accountants Taylor Woodings said factors hurting businesses included poor retail trade, weak demand for housing and low consumer and business confidence.

A 1.2 per cent fall in gross domestic product (GDP) in the March quarter may prove another negative influence on businesses, Taylor Woodings said in a statement today.

‘‘While the fall in GDP - the worst since 1991 - is being downplayed by many, including the (federal) treasurer (Wayne Swan) as a one-off due to the recent natural disasters, we believe it could signal a rise in corporate insolvencies,’’ the firm said. ‘‘A lag-effect on company collapses could be felt in the short to medium term.’’

The economic slump could also further dampen confidence and ‘‘breed new insolvencies’’, it said
.
‘‘In addition, we believe the impact of the high Australian dollar on company insolvency rates will continued to be felt, especially in the hospitality, tourism and manufacturing industries.’’
AAP

ANZ Job Ads Data - Cooling Labour Market

A key indicator of Australia's labour market and economy.

ANZ Job Ads Data May 2011

 

• Newspaper job ads fell by 2.7%
• Internet job advertising declined by 6.6%
• Newspaper advertising has now fallen for three consecutive months
• Internet advertising has fallen for two consecutive months.

Labour shortage Mr Swan?

As this graph from 2008 shows there is almost a perfect inverse correllation between the ANZ jobs data and the official unemployment rate 3 days later:

Unemployment data is out on Thursday @ 1130AEST.

Can't wait for the spin if Unemployment jumps to 5.0% - 5.2% and/or say 50,000+ full time jobs are lost

.

"Growth should recover strongly as mines return to more normal levels of production capacity. Unemployment is low and job creation is strong. Australia's terms of trade are at record levels and a strong pipeline of mining investment is now well underway."

"strong rebound [in the next quarter]as the economic impacts of the disasters ease and reconstruction picks up".

Tourism a Large Part of Your Local Economy?

3401.0 - Overseas Arrivals and Departures, Australia, Apr 2011

SHORT-TERM VISITOR ARRIVALS
In trend terms, short-term visitor arrivals to Australia during April 2011 (485,400 movements) decreased 0.5% when compared with March 2011 (487,800 movements).

The highest percentage decrease was recorded by Japan (21.2%).

SHORT-TERM RESIDENT DEPARTURES
In trend terms, short-term resident departures from Australia during April 2011 (636,100 movements) increased 1.9% when compared with March 2011 (624,200 movements). Currently, short-term resident departures are 10.4% higher than in April 2010.

SHORT-TERM RESIDENT DEPARTURES, Australia

So overseas visitors are flat to falling and the number of Australians that are now holidaying overseas as opposed to domestically has gone through the roof. Australians now spend $2B overseas compared to $1B last year excluding internet sales.

Lets keep it simple. 60,000 Australia tourists are not holidaying in Australia this year [that did last year]. 300,000 Australia tourists that holidayed domestically in 2001 (when the Australian dollar was hovering at about 0.50c) now holiday overseas annually.

And, if your region has traditionally relied on Japanese tourism...

Gotta love that high Australian dollar. Keep cheering for it to go higher.

Queensland Tourism's Logo 2011.

Absolut

I've always thought Whitlam and Howard were incompetent treasurers. Move aside fellas. From ABC.

Treasurer Wayne Swan has blamed the Queensland floods and Cyclone Yasi for the sharp contraction in the economy of 1.2 percentage points.

But he promised there would be a "strong rebound" in the next quarter "as the economic impacts of the disasters ease and reconstruction picks up".

He said the figures were a "backward-looking snapshot" of what occurred during the natural disasters."We expected we would take a very big hit from these events - and we have and we expected that when we put our budget together."

Calling the contraction a "temporary hit", Mr Swan said the fundamentals of the economy were strong and medium-term growth prospects were bright.

Lets look at some numbers. National Accounts.

Industry Gross Value added (Non-Seasonally Adjusted)

Mining

Mining
Sep 2010 Q: -1.6%;  Dec 2010 Q: -3.6%;  Mar 2010Q: -4.1%

Exploration and Support Services.
Sep 2010 Q: +3.2%;  Dec 2010 Q: +1.7%;  Mar 2010Q: -0.8%

Manufacturing

Food, Beverage and Tobacco.
Sep 2010 Q: -1.4%;  Dec 2010 Q: -1.7%;  Mar 2010Q: -1.2%

Textile, Clothing and other Manufacture.
Sep 2010 Q: -2.1%;  Dec 2010 Q: -3.3%;  Mar 2010Q: -4.5%

Wood and paper Products.
Sep 2010 Q: -2.7%; Dec 2010 Q: -1.5%; Mar 2010Q: -0.7%

Non Metallic Mineral Products
Sep 2010 Q: -0.8%;  Dec 2010 Q: -1.3%;  Mar 2010Q: -1.3%

Machinery and Equipment
Sep 2010 Q: -0.6%;  Dec 2010 Q: -0.5%;  Mar 2010Q: -1.6%

Manufacturing in Australia is getting hammered. Now factor  in for the June quarter the fall in national collective equity and wealth courtesy of the housing slide.

I can see some trends there that go past one quarter? Can the Treasurer?