I harp and harp about malinvestment on this blog incessantly. I write about it during breakfast. I write about it over my lunch breaks. I write about it when the kids go to grandma's house. If you were to scrape this blog for the word "malinvestment", you would probably be able to wallpaper your rooms with a printout of all of the posts you would find.
And here is why I focus on it so much! From the article:
"China was the great saviour of the world economy in 2008. The launching of an unprecedented stimulus package sparked an infrastructure investment boom. The voracious demand for commodities to fuel its construction boom dragged along oil- and resource-rich emerging markets.
The Chinese economy has now hit a brick wall. Economic growth has dipped below 7pc for the first time in a quarter of a century, according to official data. That probably means the real economy is far weaker.
The People's Bank of China has pursued several measures to boost the flagging economy. The rate of borrowing has been slashed during the past 12 months from 6pc to 4.85pc. Opting to devalue the currency was a last resort and signalled the great era of Chinese growth is rapidly approaching its endgame."
The Chinese economy has now hit a brick wall. Economic growth has dipped below 7pc for the first time in a quarter of a century, according to official data. That probably means the real economy is far weaker.
The People's Bank of China has pursued several measures to boost the flagging economy. The rate of borrowing has been slashed during the past 12 months from 6pc to 4.85pc. Opting to devalue the currency was a last resort and signalled the great era of Chinese growth is rapidly approaching its endgame."
So, rather than let individuals make mutually-enriching exchanges, thereby spurring investment in things that had the maximum marginal utilities, the Chinese central bank and government colluded to create trillions of remnibi of malinvestment. Like two guys stranded on an island that spend all day constructing dozens of pointless huts, instead of a fishing pole or hunting tools, things will be ok until they aren't; their malinvestment will come back to haunt them, sooner or later.
And I suspect it's now "later" for the world. The article gives just a few examples; the author probably could have gone on and on:
"The oil price is the purest barometer of world growth as it is the fuel that drives nearly all industry and production around the globe. Brent crude, the global benchmark for oil, has begun falling once again after a brief rally earlier in the year. It is now hovering above multi-year lows at about $50 per barrel.
Iron ore is an essential raw material needed to feed China’s steel mills, and as such is a good gauge of the construction boom. The benchmark iron ore price has fallen to $56 per tonne, less than half its $140 per tonne level in January 2014.
... Billions of dollars in loans were raised on global capital markets to fund new mines and oil exploration that was only ever profitable at previous elevated prices. With oil and metals prices having collapsed, many of these projects are now loss-making. The loans raised to back the projects are now under water and investors may never see any returns.
... In the US, Professor Robert Shiller's cyclically adjusted price earnings ratio - or Shiller CAPE – for the S&P 500 stands at 27.2, some 64pc above its historic average of 16.6. On only three occasions since 1882 has it been higher – in 1929, 2000 and 2007."
Iron ore is an essential raw material needed to feed China’s steel mills, and as such is a good gauge of the construction boom. The benchmark iron ore price has fallen to $56 per tonne, less than half its $140 per tonne level in January 2014.
... Billions of dollars in loans were raised on global capital markets to fund new mines and oil exploration that was only ever profitable at previous elevated prices. With oil and metals prices having collapsed, many of these projects are now loss-making. The loans raised to back the projects are now under water and investors may never see any returns.
... In the US, Professor Robert Shiller's cyclically adjusted price earnings ratio - or Shiller CAPE – for the S&P 500 stands at 27.2, some 64pc above its historic average of 16.6. On only three occasions since 1882 has it been higher – in 1929, 2000 and 2007."