The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

China Fog

02/16/2020

Due to the coronavirus outbreak, estimates of China’s GDP growth are dropping fast.  Starting the year at a relatively modest 6%, most forecasts are now in the 0 – 1% range.  This is a huge drop in short time.

While I have great sympathy for the thousands of sick and dead, I feel a certain sympathy for their policy makers, who are trying to jump-start the Chinese economy — one that was already weakened by the trade war.  We normally see the world through the prism of Austrian economics, Keynesian economics, or Supply-side economics.  Each has advantage and disadvantages and should be used for different economic situations.  But, what’s the current situation in China?

At this point, China does not even know the size of its workforce.  Workers are understandably afraid to return to work.  And when will they return?  Many may never return.  As the few factories continue to run, they are exhausting their parts supply and cannot restart until their parts inventory is replenished.  The demand for goods & services is plummeting, while supply is being exhausted.  Their recently reorganized bankruptcy system will soon be overloaded.

In our country, we lack the political will to shift between the appropriate economic policies on a timely basis.  Into the breach, the Fed uses monetary policy to save America from its leaders.  China now has a similar problem.  Their leaders do have the political will but don’t know their current economic situation.  The Chinese central bank is stepping into the breach, increasing their money supply by a whopping $380 billion in just the last two weeks.  That will maintain liquidity but will do little to jump-start the economy.  Like the U.S., China’s total debt is too high.  Unlike the U.S., China’s does not have a reserve currency, limiting their options.

I can imagine the Chinese military getting involved, forcing workers back to work and limiting any return to their native countryside.  From the Chinese viewpoint, the only benefit from the pandemic is that it shut down the Hong Kong demonstrations.

While the eventual impact of coronavirus is foggy and  not knowable, it is certainly not helpful when the world’s second-largest economy stumbles.  Not the end-of-the-world but a good time to “Buy American”!

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