Close attention has been paid to the fragmenting Eurozone, where social benefits funded by debt accumulation are bankrupting the entire aging continent. Less attention has been paid to China, where debt accumulation has financed not social benefits, but massive construction projects.
Financial strength is always ultimately found on the balance sheet of a nation, not the income statement. A nation with high GDP, i.e., strong revenues, may be funding that growth through massive borrowing. As the income statement racks up a string of impressive performances, the balance sheet may be steadily worsening.
Nearly two years ago, in “The China Bubble,” I pointed out numerous examples of asset inflation, primarily in real estate, that had already been going on for over a decade in China. Just like in the United States, these over-valued assets have been used as collateral to fund economic expansion. And just like in the United States, eventually people in China will stop buying over-valued assets and their price plummets. This is happening now in China.
One of the best economics blogs out there is “Global Economic Analysis” by Mike Shedlock. His recent post entitled “Real Estate Crash in China Underway: Foreign Funding Down 80%, Land Sales Down 57%, Starts Down 27%; Expect Chinese GDP to Plunge,” says it all. In his post, Shedlock references a report entitled “China Real Estate Unravels” by Patrick Chovanec, a professor at Tsinghua University’s School of Economics and Management […] Read More
As reported today in Capitol Weekly, in a post entitled “CalPERS ignores Brown, delays pension payment” by Ed Mendel, the amount taxpayers will have to fork over to CalPERS next year will rise by $213 million, to a total of $3.7 billion. Governor Brown, quite rightly, believes the full amount of the necessary increase should have been assessed, another $149 million, instead of being “smoothed” over the next twenty years.
But CalPERS – the largest of over 30 major government worker pension funds in California, only manages about a third of the the state and local public sector pensions. And CalPERS is basing their increase on a lowering of their projected rate of return for their invested funds by one quarter of one percent, from 7.75% down to 7.5%.
People may debate endlessly over whether or not government worker pension funds in America, now managing over $4.0 trillion in assets, can actually earn 7.5% per year, every year, for decades on end. We have argued repeatedly that this rate of return is impossible to achieve any longer, because (1) high returns in the past depended on debt accumulation, which poured cash into the economy, which stimulated consumer spending, investing, and asset appreciation – enabling more borrowing – all of which caused investment returns to grow at levels that cannot continue now that borrowing has reached its practical limit, (2) our aging population means more people will be selling their investments to finance their retirements – including the pension funds […] Read More
The California Labor Federation has a membership of more than 1,200 unions, representing over two million workers. And the first of seven key issues they list on their legislative agenda for 2012 is supporting high speed rail. As they put it, “Building high speed rail will grow our economy and create long-term jobs. An estimated 450,000 jobs in operations, maintenance, ticketing, and services will be needed to keep HSR up and running.”
It is difficult to imagine economic thinking more well intentioned yet fundamentally flawed. What private sector unions want, ideally, is to work cooperatively with government and industry to help create well paying jobs. But high speed rail will incur far more economic costs than economic benefits. Massive construction projects, using public/private financing mechanisms, have to benefit the economy. Otherwise they are examples of private gain – high paying jobs for workers who happen to belong to unions involved in the construction and maintenance of the project – in exchange for socialized loss – higher taxes that lower the disposable income of everyone else.
Policy activists who are critical of unions must understand that there are two crucial debates they are engaged in with unions. The first one is an economic argument – convincing union leadership that encouraging free market competition will lower the cost of living for everyone, and that when this happens all workers benefit. This is a tough sell, despite being entirely accurate. But the second debate, which regards what projects unions should be putting […] Read More