The Aftershock Investor: A Crash Course in Staying Afloat in a Sinking Economy by David Wiedemer, Robert A. Wiedemer, Cindy S. Spitzer Read Free Book Online Page A
and a hard place, just like Greece. Either we embrace austerity and let the bubbles fall, or we try to pump up more bubbles, which will temporarily keep the other bubbles from popping but make the final pop much worse. We think this is an easy choice for politicians—pump up the bubbles! This is also why there will be more and more discussion about how government debt and money printing isn’t so bad, but actually very good. Of course, this is nuts, but when times get tough, people tend to go a bit nuts.
What’s the solution? That’s easy—don’t blow up the bubbles in the first place. Once you have one, there is no easy way out of a bubble, no soft landing. After you have a bubble, the only choices are pop it now or pop it later. Both are painful. One is painful now; the other is even more painful later. These bubbles were a mistake to begin with and, unfortunately, there is no easy way to correct that mistake now. Ultimately, we will have to focus on increasing productivity to grow the economy rather than blowing bubbles. Increasing productivity is not just the best way to grow an economy; it is the only way to grow an economy in the long term.
Since Greece doesn’t have the ability to pump up two more bubbles, it is facing a vicious downward spiral in its economy. Its unemployment could jump far higher than it is today—maybe even 30 percent within the next 12 to 18 months. Fueled by growing joblessness, businesses will lack confidence to invest and consumers will lack confidence to spend. It’s a bad downward spiral that doesn’t end quickly.
A Greek default on its debt won’t solve the problem either. Much more is hurting the Greek economy than having too much debt. The big problem is the inability to borrow as they did before to pump up the debt-fueled spending bubble that was so critical to their growth. Without a bubble to drive growth, the only option is increasing productivity. And, for Greece, that is likely to be a very slow process.
China: A Short-Term Threat to the Party
China’s construction boom is unprecedented in human history. By some estimates, as much as 50 percent of their GDP is now driven by fixed investment, a large part of which is construction. Far from encouraging a more consumer-driven economy rather than export-driven, consumer spending as a percentage of the economy has actually decreased while the construction part of the economy has become absolutely dominant. Even at the height of our housing bubble, construction was only 17 percent of our economy. At its height during Spain’s housing bubble it was 23 percent, and in Dubai it approached 30 percent at the peak of its speculative construction boom.
Some people feel this construction bubble is unsustainable, although not surprisingly most people do not see it as unsustainable and think it can go on for many more years. For those who think it will slow down, a lot of the discussion surrounding the fall of this construction boom revolves around whether it will have a soft landing or a hard landing. Massive state-controlled and -directed bank lending, which was fueled in part by printed money, has been the driver for all these construction projects. Hence, many believe that it is well within the government’s ability to control the slowdown.
However, there is also the possibility that the Chinese government can’t so easily control economic growth, especially if the growth is based on an economically unsustainable driver. In fact, using nonmarket methods, such as forced bank lending, to create construction projects for which there is no market demand could easily make a downturn even harder for the government to control when it begins to go bad—as it inevitably will.
China’s growth over the past couple of decades has been driven by the government’s opening up the Chinese economy increasingly to market competition and market forces. However, its growth in the past few years has come from just the
What’s the solution? That’s easy—don’t blow up the bubbles in the first place. Once you have one, there is no easy way out of a bubble, no soft landing. After you have a bubble, the only choices are pop it now or pop it later. Both are painful. One is painful now; the other is even more painful later. These bubbles were a mistake to begin with and, unfortunately, there is no easy way to correct that mistake now. Ultimately, we will have to focus on increasing productivity to grow the economy rather than blowing bubbles. Increasing productivity is not just the best way to grow an economy; it is the only way to grow an economy in the long term.
Since Greece doesn’t have the ability to pump up two more bubbles, it is facing a vicious downward spiral in its economy. Its unemployment could jump far higher than it is today—maybe even 30 percent within the next 12 to 18 months. Fueled by growing joblessness, businesses will lack confidence to invest and consumers will lack confidence to spend. It’s a bad downward spiral that doesn’t end quickly.
A Greek default on its debt won’t solve the problem either. Much more is hurting the Greek economy than having too much debt. The big problem is the inability to borrow as they did before to pump up the debt-fueled spending bubble that was so critical to their growth. Without a bubble to drive growth, the only option is increasing productivity. And, for Greece, that is likely to be a very slow process.
China: A Short-Term Threat to the Party
China’s construction boom is unprecedented in human history. By some estimates, as much as 50 percent of their GDP is now driven by fixed investment, a large part of which is construction. Far from encouraging a more consumer-driven economy rather than export-driven, consumer spending as a percentage of the economy has actually decreased while the construction part of the economy has become absolutely dominant. Even at the height of our housing bubble, construction was only 17 percent of our economy. At its height during Spain’s housing bubble it was 23 percent, and in Dubai it approached 30 percent at the peak of its speculative construction boom.
Some people feel this construction bubble is unsustainable, although not surprisingly most people do not see it as unsustainable and think it can go on for many more years. For those who think it will slow down, a lot of the discussion surrounding the fall of this construction boom revolves around whether it will have a soft landing or a hard landing. Massive state-controlled and -directed bank lending, which was fueled in part by printed money, has been the driver for all these construction projects. Hence, many believe that it is well within the government’s ability to control the slowdown.
However, there is also the possibility that the Chinese government can’t so easily control economic growth, especially if the growth is based on an economically unsustainable driver. In fact, using nonmarket methods, such as forced bank lending, to create construction projects for which there is no market demand could easily make a downturn even harder for the government to control when it begins to go bad—as it inevitably will.
China’s growth over the past couple of decades has been driven by the government’s opening up the Chinese economy increasingly to market competition and market forces. However, its growth in the past few years has come from just the
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