The above link will take you to an interesting piece that appeared on Reuters this weekend. Much of the celebrated growth in China’s economy has been driven by debt-fueled infrastructure spending and other private investment-funded development in anticipation of western-style consumption by its 1.2 billion consumers – consumption that has yet to materialize. The article also notes that the explosion in property values there, while a boon to the developers, is taking a big bite out of the Chinese consumers’ ability to afford anything other than their cramped, overpriced living quarters. This should come as a surprise to no one, since the price of dwelling space reaches exhorbitant levels in every other densely populated area of the world, whether it’s New York City or the entire country of Japan. People who spend all of their income on rent and food have little left for the purchase of other products.
The economy picked up in the fourth quarter as a spurt of infrastructure spending orchestrated by Beijing broke seven straight quarters of a slowdown. Consumption’s contribution to growth fell in the fourth quarter for the third straight quarter even though retail sales were rising in each of the last three months.
Retail sales, or total consumption, continues to grow but consumption’s share of the Chinese economy is declining. It’s exactly what happens in a society whose population density is beyond that critical point where over-crowding impairs per capita consumption. It’s happening not only in China, but throughout the world as the global population continues to grow. While the sum total of the world’s economic output continues to grow, consumption’s share of the economy is declining as unemployment rises, making the world ever more dependent on deficit spending to maintain an illusion of prosperity. Deficit spending has grown to the point where there aren’t even enough investors willing to fund it, forcing all of the world’s central banks to accelerate their money printing to buy up their nations’ own debts.
And it’s all to no avail. Deficit spending is increasingly less effective in stimulating the economy because people living in cramped conditions can’t consume more products no matter how much money you give them to do it. China’s no different and the world is in for a rude awakening when the big plans for China’s economic growth go bust.