The first year of a National (conservative) government has been able to say that economic recovery is on its way, is all smiles and champagne – as we managed to survive – see NZ Herald.

Economic recovery in terms of trade is an excellent mark of progress. The economic boom times we thought we were enjoying as property prices went up and up was due to international capital rather than money NZ was making itself, although growth in the local economy has been enormously encouraging, that is not the capital supply that underpinned our property boom.

The problem seems that prices have not dropped, but increased. If they had dropped, then a recovery would mean them adjusting, but despite the fact that there were no bail outs, property prices sort of held and are now rising again. In other words, if there is an adjustment, it is yet to happen. But the inevitable drift will inevitably be upward, so this is not so much a problem, but a risk to locally sourced capital availability. Real growth comes about by correct investment and if those investment decisions are not part of the locality, the rationales for decisions tend to lack local benefit. This does not really matter, we are living in a global economy, already.

The Government want to reduce its investments in the community and that path has been to subscribe to foreign ownership to keep demand stimulated as NZ people find better opportunities open up in the global market.

A population constriction, when the population is forcibly reduced by war, disease or policy requires a different set of release valves than a growing economy. Instead of inflation vs interest rates, it is deflation sets in because decreasing numbers of people create demand, in other words nobody is there to buy things. It is hard enough to sell your products into a niche in competition, but when your customer base erodes, there is a sense of that being economically troubling.

In the case of China, it is simple fact that can not be escaped. Is there a way that continually dropping demand can be harnessed as an economic imperative? Why buy today if the prices drop tomorrow? Why buy at all? When things get too cheap, it becomes an imperative. The rest of the world stocked up on cheap things the nearly universally smaller families enabled more people to go out to work.

Now that the two parents are being replaced increasingly by a single child, there will be an oversupply and slackening of demand in China’s ability to earn foreign exchange. The currency crisis now is shortening the market ahead of that expectation.

China may be surging ahead now to fund a future inevitable collapse of its manufacturing capacity. In a climate of reduced world demand, China keeps its currency shielded and thus its government is effectively creating a superstructure economy and shielding the population from wealth.

See Feer.com

China is resisting revaluation of its currency fearing that the reduction in export would seriously affect their economy. They are quite correct, the world buys predominantly products manufactured in China precisely as it is profitable to import them, and resell them at a large profit than to make more slender margins on higher priced goods.

Western economies believe that China is obliged to revalue its currency to swing the balance away from their importing excessive amounts of stock in the hope of reselling it at bargain prices.

The power heavy structure of the China’s centrally controlled but capitalist driven economy exerts control on the factors that reduce earnings per capita to sub-poverty levels unacceptable to the established liberalism of the West, while the economic unreality of world-wide markets accepting floods of cheaper goods not only displace other manufacturing centres but as China resists revaluing, and continues to exchange cheap labour for overvalued foreign exchange, the larger the impact when they do revalue.

And that is the point. As long as the population is engaged in this grand savings scheme and China hordes foreign reserves, the more capital flows into China. The revaluation must occur sometime, or internal changes in China may correct the imbalance, if for example the climate change agreements were to penalise China and the USA, they would have more to pay than others.

Another way of viewing the current situation is that China is on the rise of a bubble.

When competing against countries that have an equitably paid labor force, currency controls ensure that their own workers remain underpaid. Not floating/revaluing the Yuan provides the mechanism.

Reuters article