Friday, November 14, 2014

Central Planning Nightmare: China and Ghost Cities

For decades in the 60s and 70s, the CIA overestimated the size of the Soviet Union GDP by a wide margin. Part of it was because of an ongoing "red scare" due to the actual superiority in the number of nuclear missiles that they possessed. Even the likes of Paul Samuelson gave the Soviets undue credit for their centrally-planned economic "success" in numerous editions of his economics textbooks. But when the Soviet Union fell apart, the ruble crashed so hard that the Russian people became the poorest people on the face of the earth - bar none.

Even now after decades of "recovery" the size of the Russian economy is only $2 Trillion vs $14 Trillion for the US or about 10% of the size of the US economy.

The myth of central planning "success" was exploded for everyone to see (except the likes of Obama). The fact is that central planning ultimately leads to collapse and poverty. But it's that collapse and humiliation that has resulted in the rise of Hitler-like Putin, who is trying to reclaim Russian pride by his macho saber-rattling and military adventures in Eastern Europe. I say Hitler-like, because Hitler's rise was due, in part, to the humiliation that Germany suffered as a result of the Versailles treaty after WWI and the burden of reparations payments. Putin and Russian citizens feel the same type of humiliation due to the collapse of their empire and resulting chaos and poverty. Putin apparently vows to recover their honor in ways that upends the Post Cold War peace.

Like coverage of the Soviet economy, over-stating and over-hyping the apparent success of the Chinese economy is happening now. News headlines proclaim that China is now the world's largest economy, etc, etc. And liberal commentators are happy to point out the apparent "success" of their centrally planned economy to support the argument for more central planning in the US. Ironically, it's the introduction of Capitalism by Deng Xaoping that is responsible for the success of their manufacturing sector. But over 50% of recent year's of Chinese GDP "growth" has been debt-financed government "investments."

What counts as "GDP" includes government spending to construct China's ghost cities and other projects that are mandated by bureaucrats in Beijing -- whether there is demand or not. No need for marketing analysis, economic modeling or any economic justification! They are mostly empty and depreciating. They call 'em ghost cities for a reason!  When they are demolished, will the Chinese reduce their reported "GDP" to account for that? Not a chance. And what happens to the debt? It's still there or "absorbed" by the government.

To fund this construction, gargantuan spending has bought Chinese debt to levels that usually indicate debt saturation and even crisis in a shockingly short period of time. See here. There's only so much debt even a centrally planned economy can take on. All developed and developing economies are now debt-saturated. China has arguably reached that level too.

China's Manhattan and Paris Ghost Cities

China, known to copy(and monetize) everything that they can get their hands on (including what they can steal via cyber-espionage), have built cities that resemble Paris and Manhattan at a cost of about $50 Billion each.  Take a look at a preview film from NBC News about the "Manhattan duplicate."  The link to the full story and write-up is found here.  It's worth a look!

Welcome to "GDP growth" in China:

Empty "Copy" of Paris in China. Mimicking is the sincerest form of flattery?

How do you think all of this going to end?   

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