US Following China?


I’ve written a few posts about the dilemma China is in.  Their industrial base has become reliant or always was reliant, on government intervention in various forms.  From direct stimulus to make-work projects.  But, they’re hitting a snag because as they make more capital available to the masses, the price of land is increasing.  Their economy is slowing so the government wants to intervene again.  But, the more they do, the more the land prices increase, creating a bubble.  This is one of the costs of government intervention.  Damned if they do, damned if they don’t. 

So today, we see this in the US ……

Home prices accelerate by most in seven years

The S&P/Case Shiller composite index of 20 metropolitan areas climbed 10.9 percent year over year, beating expectations for 10.2 percent, the survey released on Tuesday showed. This was the biggest increase since April 2006, just before prices peaked in the summer of that year.

Now, don’t get me wrong, we wanted to see a slow gentle increase in the home prices, as a reflection of a slow economic recovery, but, this is much too fast.  And, I believe the pace will quicken.  Why?

It will quicken because the stock markets are nervous the Fed will quit the stimulus.  So many are looking for a different place to put the money.  So now, even if the Fed decides to continue with the QE, we’ll see much of the money flowing to housing.  Especially considering the at the Fed is buying up all of the trash housing notes. 

Repeat after me, “The Sequel”. 

Who will win the race to the bottom?  The US?  The Euro zone?  Is China making their move? 

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14 Responses to US Following China?

  1. philjourdan says:

    You are correct. As the money leaves the market, it has only 2 places to do. Land, and over seas. But overseas is not for the moderately well off, nor are there many places over seas that will not feel the same effect.

    So land is the one constant. But it will not last.

  2. tckev says:

    Who will win the race to the bottom? The US? The Euro zone? Is China making their move?

    Or are they all chasing each other’s tail as they slide down the slope?

  3. kelly liddle says:

    I am still optimistic it won’t be China. Look at the government spending there it is low and even stimulas is old fashioned building things like ports, hydro electric and high speed rail. What exactly does the US have to show infrastructure wise from all the deficit spending? Same applies to many Euro countries.

    • DirkH says:

      Infrastructure like high speed passenger rail constantly loses money. So is it a boon or a burden? Here in Germany so many things are subsidized one way or the other that all that the Germans squabble about is the distribution of subsidies. None of them gets the idea that lower subsidation would enable lower taxes. They abhor the thought. They really do, they think they have a natural right to have their theatre visits paid for by me.

    • kelly liddle says:

      I think that high speed rail might make money in China the construction costs will be less and the competition, planes will still cost the same roughly as they do in developed countries. Even if this is not the case it is still better than just throwing it away in welfare. With Australia’s recent budget they said they will spend $24 Billion on infrastructure over 5 years, the total budget is about $1.8 trillion over that time and a large percentage of that is welfare. I know what I would prefer. In Australia and the US and I am guessing Germany did do large infrastructure projects that made sense in the past but now welfare is more important.

      • DirkH says:

        The high speed rail in China is largely a white elephant for a simple economic reason: The train tickets are more expensive than the sum of the hourly wages a worker could earn if he used the time he saves by using the high speed train for working. So it is more economic for workers to use slower means of transport.

        Whether you throw the money away for welfare or for a high speed rail or for subsidized theatre performances makes no difference. Gone is gone.

        Germany continues to invest in its infrastructure as always. Welfare payments are down as the EU implosion towards the centre of the new Reich has reduced our unemployment greatly.

        For instance we still have some original Organisation Todt Autobahns, still built from concrete blocks – asphalt was scarce in the Third Reich – and these are currently being renewed. And of course, the existing high speed rail lines require expensive maintenance as they require monolithic concrete foundations – while concrete is on its way out in the Autobahns, it is required for high speed rail – you need to keep thermal expansion and contraction of steel rails down and that requires to embed all the ties in monolithic concrete foundations.

        Do not underestimate the upkeep cost of rail lines, especially high speed rail.

        • kelly liddle says:

          I did assume once high speed rail is built it is very low cost for maintenance so you have taught me something.

        • philjourdan says:

          Interestingly, so did the creators of the DC Metro. When built, it was state of the art. And they made it low maintenance. So much so, that many died when it broke down.

          Public transportation that is not thought of as a constant investment will always be the source of big problems. The Airlines learned that the hard way. Government still does not. They have no profit motive.

      • DirkH says:

        And as for the cost of air travel vs. high speed rail: Air travel is probably cheaper due to the simple fact that not much infrastructure maintenance on the ground is necessary.

        Of course Keynesians love roads, bridges and railroad tracks because they grew up watching WPA propaganda films and imagine this creates loads of employment. Maybe they should be consequential for once and require all the boondoggles to be built without machinery, then it would make sense.

        Also, erect wind turbines with human labor only. That would do wonders for unemployment. The Romans had cranes with large hamster wheels. They didn’t use beasts of burdens, they had slaves in the hamster wheels.

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