News headline in the Wall Street Journal this morning informs us that “Greek Bailout in Peril.” Seems those frugal Germans and pesky French want private boldholders to take a bigger haircut without using the “D-word” (default).
Expect future breaking news headlines like “Sun Rises in the East,” “Obama Politicizes Easter Egg Hunt,” and “Tim Tebow Keeps His Faith.” Or perhaps we should suggest a remake of Groundhog Day, with Bill Murray playing Dominque Strauss-Kahn trapped in a bank lobby filled with Ghanian creditors.
Meanwhile, our favorite economic columnist, Robert Samuelson, noted yesterday that while all eyes are fixed on the slow-motion Eurozone disaster, it is China’s economy that ought to have us worried:
There are warning signs. Economist Nicholas Lardy of the Peterson Institute cites three. First, Europe’s slump has weakened China’s trade; Europe buys about a fifth of its exports. Second, housing is showing signs of a bubble and is deflating. Finally, China’s government will have a harder time deploying a stimulus than during the 2008-09 financial crisis. Government debt rose from 26 percent of gross domestic product in 2007 to 43 percent of GDP in 2010.
Among other things, it seems China has been experiencing a—wait for it—housing bubble. Uh oh:
China has vastly overinvested in housing, argues Lardy in a new book (“Sustaining China’s Economic Growth After the Global Financial Crisis”). The main reason, he says, is that financial policies prevent savers from realizing adequate returns on their money. The stock market is seen as rigged. Government regulations keep interest rates on bank deposits — the main outlet for savings — low. From 2004 to 2010, they were less than inflation. Frustrated savers invest in housing, where prices are not regulated.
The result seems a classic speculative bubble. . . A popped real estate bubble could exert a big drag. Housing construction exceeds 10 percent of GDP. That’s historically high, says Lardy. At a similar stage of economic development, Taiwan’s housing investment was 4.3 percent of GDP. In the recent U.S. real estate boom, housing peaked at 6 percent of GDP.
Happy new year. Now let’s see if I still have a gold dealer on speed dial. . .