Thursday, May 5, 2011


Interest rates are low, but for how long?

The are no clear/easy solutions to the government's mounting debt load, which is likely to foster debate for some time.

Long-term bond yields have been coming down recently, hinting at an economic slowdown.

China's central bank has said that controlling inflation is its top priority. Inflation was recently estimated at 5.4% in March, the third straight month it exceeded the government's target of 4%. And similar to many things coming out of China, I would suspect the real numbers are higher than this headline figure. China has already raised its one-year lending rate to 6.31%, and more hikes are coming -- you can be sure. So inflation is a big problem in China, and the tightening cycle is likely to reach worrisome levels in order to deal with it.

A coincident issue is the property bubble China is experiencing in real estate. The property bubble there is said to be of epic proportions, and we know how the recent real estate bubble in the U.S. ended. It wasn't pretty. China has raised reserve requirements at its biggest banks to a record 20.5%, and implemented several other measure aimed directly at speculation in real estate lending. It is extremely hard to deal with bubbles and engineer a soft landing afterward. Economists liken it to landing a plane in a parking lot. Central banks don't have a great track record in this regard, and China's central bank is experiencing this for the first time in recent history.

The third major issue I see is all of the excess capacity being built. China's controlled economy is building massive infrastructure, office buildings, housing, commercial developments, etc. as far as the eye can see. This is due to the millions of residents moving from the rural parts of the nation into the industrialized economic centers. The problem is, they are all extremely poor. Most can't afford any of the things that are being built, and so they lay idle. At some point, this, too, is likely to become a problem, and my worry is that all of the above come to a head at the same time.