Blue Marble Sustainable Investing

If it Looks like a Duck - Chinese Real Estate

Its not like we have not had our share of bubbles in North America. And we are not unfamiliar with the results. But what happens when a bubble on the other side of the world collapses and its effects ripple like a tsunami the world over? This is what is happening in China right now. And like the real estate collapse in North America and Europe it is following the same pattern.

Chinese real estate is perhaps the most expensive on the planet. At an average of $ 1,160 USF per square meter against an average annual family income of about $ 7,500 USF per year it is almost 5 times more expensive than New York at $ 2,059 and $ 72,000 respectively.

China has been putting the brakes on real estate lending and has implemented some measures designed to let the market cool but at this stage, very similar to the 2008 real estate markets in the United States and Europe, speculation is rather rampant.

The debt loads behind the real estate market in China are lower than the US and Europe but at the current price levels real estate has a long way to fall even if it were to fall in line with Tokyo or New York. However it may just be that there are enough wealthy speculators to keep the market going for a long time but the end result will be a crash. Signs of collapse are already starting to show in prices and everyone, including the Prime Minister are stating that China has a real estate bubble.

So if European and North American debt levels were not enough to give investors serious pause for concern, the potential for a Chinese real estate crash should be. Where do you think they get all the commodities and durable goods to produce all the materials required for putting up massive real estate developments? That's right, a lot of it comes from North America and Europe as well as Asia.

European and North American consumers helped create the debacle that is China and it will be European and North American consumers and businesses that pay the price when it has its first major collapse.

Far From Safe

I am sure by now that you all know I think debt levels the world over are way too high and they pose a latent threat to recovery and to the economic futures of many countries the world over.

So in this post I just wanted to make people aware of a couple of items. The first is a book I am currently reading and the second is a news article I read a couple of weeks ago that has been haunting me ever since.

The book I am reading is called "This Time it's Different - Eight Centuries of Financial Folly" and while the title seems a somewhat whimsical, I have been completely surprised by the content and the quality of the information within.

The authors, Carmen Reinhart and Kenneth Rogoff have complied debt and debt default statistics for countries spanning 8 centuries. And they have provided some very interesting and compelling research surrounding this very important topic. While I am not done the material yet, I can say that when you look at the current debt situation the world over it becomes very apparent that we have seen this movie before and the ending was not a "happily ever after" one.

Next, and very much in line with the discussion on the book I am reading, is an article that appeared on the Bloomberg website on July 12, 2010. A small article for this publisher but its import is staggering. Essentially the US Federal Government, through its co-Chairman of the National Commission on Fiscal Responsibility and Reform, Erskine Bowles, has told States that they cannot rely on the Federal Government for budget bailouts.

States in the US have seen tax revenues plummet during the recession and they have not come back despite some recovery. This has led many States to look to the Federal Government to make up budget shortfalls. Apparently this is no longer possible.

The question that arises from this situation is what will the Federal Government do if a State looks as though it is going to default on its debt?

G8G20: Austerity and Hypocrisy

The G8/G20 meetings in Toronto and Muskoka have come and gone. But their legacy will be around for many years. As will the memory of the shameful vandalism and thuggery performed by the Black Block who are simply petty criminals disguised as agents of change. There are two legacies that will fall out of the meetings. One to Canada and one to the world. 

For Canada, its legacy will be one of hypocrisy. It was President Obama who wanted the group of countries to continue stimulating their economies although at the cost of ever increasing debt burdens or in the absence of borrowing to simply turn on the printing presses and keep the cash flowing. However, as much as President Obama wanted this to happen it was not to be. Prime Minister Harper and the rest of the fiscal conservatives won and austerity and deficit and debt reduction became the mantra.

That the meeting cost over $ 1 billion for security alone with the final and complete cost likely to never be known to Canadians is hypocrisy at its greatest. Prime Minister Harper fought for and won debt and deficit reduction at meetings Canada had to borrow to pay for. If ever there was a dreadfully clearer example of hypocrisy this was certainly it.

For the world the legacy is far more troubling. Having the wealthiest countries on the planet commit to debt and deficit reduction raises the potential for a deflationary cycle in the presence of a tepid recovery, large debt to GDP loads and very high deficit to GDP budget shortfalls. The parallels to the 1929 crash are becoming eerily similar. The initial fiscal stimulus simply delayed what was to come. While the time period is different, people have not changed and the austerity measures that eventually led to the Great Depression seem to have reappeared. Remember, it was not the initial fall of the stock market that caused the Great Depression, it was the actions of the next three years that did so.

So with the close of the meetings Canadians and citizens the world over will eventually feel the effects of a meeting that cost too much, accomplished far too little, and has simply become a prelude of things to come.

Japan - Turn on The Yen Press For Crying Out Loud

There has been no shortage of concern regarding the massive amount of public debt that Japan is accumulating. But should there be? In my humble opinion the answer is no.

For the past 15 years at least Japan has been stuck in a debilitating cycle of deflation, continuous stimulus attempts and debt accumulation as a result. What is perplexing to me is why one of the few countries that could benefit from printing money does not do so.

The country has massive foreign reserves (over 1 trillion USF), runs a current account and trade surplus, has spare industrial capacity, some of the lowest interest rates on the planet, and most of its government debt is held in Japan. Oh, and it is running a large budge deficit and has been in a deflationary cycle for years now.

Of all the countries I can think of, Japan is best suited to start printing Yen. In this case a little inflation would go a long way to solving some of its problems.

First, it would reduce the the amount of government debt outstanding. For a country that spends almost 40% of its annual budget on interest payments, even at the low interest rates it obtains in the market, it would seem to me to be a good way to reduce that bill.

Second, it would devalue the currency and either force Japanese interest rates up or in the absence of that it would increase exports. Maybe both would happen. If Japan was smart and it paid down the short term debt first the increase in interest rates might not hurt it so bad. And the additional foreign reserves from increased exports could be used to buy back Yen lending a base to the currency. 

Third, maybe putting some cash into domestic bondholders' hands might force them to start looking to invest that money in projects that increase their rate of return and start growing their economy.

Finally, by printing Yen Japan could start to solve its foreign reserve problem which is a problem of riches. As the Yen appreciates the value of its USF foreign reserves falls. So why not depreciate your home currency by printing Yen and then sell your USF foreign reserves in the open market for a better rate and buy your home currency? There are too many people sitting on USF foreign reserves and one day when everyone figures out what a basket case financially that country is there may be a rush to the exits.

I am sure there is much more to all of this. Some complications that would preclude using basic economics to help solve the ridiculous cycle that Japan has been stuck in for many many years. Maybe it is time to try something different to get a different result.