TW: The "recovery" such as it is, is premised upon a couple of predicates: 1) inventories are being worked down and 2) places like China are still growing fairly rapidly. The first point is true but at best would mean the economy stops shrinking and either flatlines or grows very tepidly.
The second is really the basis for most of the commodity and stock market increases. As the pieces below mention, the continuing high single digit growth in China may prove ephemeral. Their banks directed by the national government are lending funds like drunken sailors whilst many of those funds are being directed towards investment- either materials or additional production capacity. Domestic consumption within China is not growing particularly well. For what purpose will all of those materials and additional capacity be needed in six months? The world is awash in production capacity, providing more only feeds the deflationary risk.
As for the loans drunken sailors end up hungover, drunken sailor loans end up as un-repaid loans (something we Americans have considerable experience with in the recent past).
From Michael Pettis' blog:
"...Hu Shilu, editor of Caijing...recently made a strong case against continuation of the current fiscal program when she wrote in an editorial this week that “a policy that encourages loose lending and investment is driving China’s economic engine down an old, unsustainable path.”
'Various signals suggested China’s economy had returned to a stable track by the end of the second quarter, giving us an opportunity to reassess macroeconomic policy. Data released by the National Bureau of Statistics showed that China’s GDP rose 7.1 percent in the first half of the year, and 7.9 percent in the second quarter alone. Apparently, China’s economy has bottomed out. These achievements could intoxicate Chinese policymakers. But we see no miracles here. In fact, economic growth recovery in China is being driven by investment. Some 6.2 percent of the country’s first half GDP growth rate can be credited to investment, while consumption accounted for 3.8 percent. The net export business contributed a minus 2.9 percent to the growth rate figure.'Hu makes the point that the “surprisingly high” Chinese growth is neither surprising nor cause for celebration. It is the automatic outcome of a huge stimulus, and the real question, as I have argued many times, is not whether high current growth indicates that China has turned the corner on the crisis (it most certainly has not, in my opinion), but whether the cost of achieving this growth is excessive and will lead to more difficult conditions in the future..."
http://mpettis.com/2009/07/more-public-worrying-about-the-chinese-stimulus/
From John Mauldin at Barry Ritholz' blog:
"...If I told you that the next US stimulus package would be $4.5 trillion dollars, mostly given to banks that would be forced to loan out the money quickly, do you think that might jump spending and GDP in the short term? Would you start looking for a few bubbles to be created? What about the dollar?
That is the equivalent of what China is now doing. The volume of credit that is flowing into China isequivalent to one-third of their GDP. Banks that already have large problem-loan portfolios are now lending even more, in a very short time frame..."
http://www.ritholtz.com/blog/2009/07/the-statistical-recovery/
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