Category Archives: Dubious statistics

What if China’s GDP is Seriously Overstated?

Michael Pettis has released one of his carefully reasoned posts, this one on the dark art of guesstimating what China’s GDP really is, given the notorious unreliability of its official data.

The strength of Pettis’ approach sometimes works to his advantage. He does a great job in breaking down his arguments to clear, easy to understand, step-by-step reasoning. That tends to make his posts pretty long. In this case, that meant that the part I though was most provocative came towards the end, when impatient readers might have figured they had gotten the drift of his gist and moved on.

In this one, he starts with the last GDP release, and in particular, the implications the fact that its alarmingly high investment rate continues to increase at a stunning clip. But he then turns to the rather tiresome debate as to when China’s economy will overtake that of the US, and discusses the possibility that the GDP figures touted now could well be overstated by a considerable degree:

Ian Fraser: Myopic Metrics and Blind Alleys for High Finance – and Big Oil, too

By Ian Fraser, a financial journalist who blogs at his web site and at qfinance.

Hitching your wagon to flawed or “dozy” metrics is never a particularly good idea. We saw this in the build up to the global financial crisis. RBS’s obsession with earnings growth, whilst paying no attention to return on capital, is just one idiosyncratic example; spurious “credit ratings” of structured products are another, and pervasive. It was financial institutions’ blind faith in flawed metrics, and their penchant for burying risk, through the use of deceptive risk models such as Value At Risk, that, as much as anything else, encouraged a generation of bank CEOs to lead their institutions over a cliff.

Equally flawed metrics are now driving risky, and indeed sometimes even desperate, behavior in the oil and gas sector.

Connecting the Dots Between China’s Falling Consumption Level and Its Banking Crisis

One of the striking features of China’s continuing growth as an economic power is its extreme (as in unprecedented in the modern era) dependence on exports and investments as drivers of growth. Even more troubling is that as expansion continues, consumption keeps falling as a percentage of GDP.

As countries become more affluent, consumption tends to rise in relationship to GDP. And the ample evidence of colossally unproductive infrastructure projects in China (grossly underoccupied malls, office and residential buildings, even cities) raises further doubts about the sustainability of the Chinese economic model.

The post crisis loan growth in China, in tandem with visible signs that a meaningful proportion of it has little future economic value, has stoked worries that Chinese banks will soon be struggling with non-performing loans. China bulls scoff at this view, contending that China’s 2002-2004 episode of non-performing loans was cleaned up with little fuss (I never bought that story and recall how Ernst and Young was basically bullied by the Chinese government into withdrawing a 2006 report that NPLs at Chinese banks were a stunning 46% of total assets of its four largest banks. Note estimates of the NPLs as a percent of total loans from that crisis vary widely, even excluding Ernst, from 20% to 40%).

The latest post by Michael Pettis links the two phenomena, the fall in Chinese consumption and the cleanup of its last banking crisis. If his analysis is correct, this bodes ill for any correction in global imbalances.

JP Morgan Markets Its Latest Doomsday Machine (or Why Repo May Blow Up the Financial System Again)

By Richard Smith

Readers of ECONned will be very familiar with the name of Gary Gorton, author of ‘Slapped in The Face by the Invisible Hand’, which explores the relation of the so-called shadow banking system to the financial crisis. His work is pretty fundamental to understanding some of the mechanisms which made the crisis so acute. Now he’s done an interview, which I would like to have a growl at.

It also happens that JP Morgan, originators of those not unmixed blessings, Value-At-Risk and Credit Default Swaps, are also thinking hard about how to get rehypothecation going in the grand style. They know a volume business with a cheap government backstop when they see one; they are on a marketing push, and presumably they have the systems and processes that go with it. That would be a Doomsday Machine…

Another nasty surprise from Ireland’s Anglo and AIB, via the EC

Tucked away in the EC’s press release on aid for Irish banks, we find this little gem: Anglo Irish Bank will furthermore receive a guarantee covering certain off-balance sheet liabilities (derivatives, clearing transactions and transactional arrangements) that will ensure that Anglo Irish Bank can continue its daily activities as a going concern. There’s nothing here […]

Google Rates Website Wonkiness

This post’s headline misrepresents the apparent intent of a new Google filter in its advanced search function. Per the SearchEngineLand report, “Google Lets You Dumb Down Your Search Results With “Reading Level” Filter,” the aim is apparently to allow web surfers to steer clear of pages that might be too taxing.

With Friends Like Moody’s…

Good to see Moody’s rebuilding its franchise. Their aura of mystery is still reassuringly intact, two years after the subprime CDO ratings fiasco; as a bemused Firedoglake notes, in connection with two diametrically opposed, and politically charged, opinions about the tax cuts and their projected effect on the US credit rating: Can someone tell me […]

Bill Black: No, Mr. President, you did not negotiate a winning tax deal

By Bill Black, Associate Professor of Economics and Law at the University of Missouri-Kansas City and a former senior financial regulator

This column analyses Obama’s claim that he got the better of the Republicans in the negotiations.

The administration (implicitly) argues that its claim of extraordinary negotiating success represents a miraculous accomplishment given the facts that the Republicans were holding all legislation hostage to their non-negotiable demand that the Bush tax cuts for the wealthiest of Americans be extended and the administration’s irrevocable decision that it could not call the Republican’s bluff because the economy would likely sink back into recession unless tax cuts for the middle class were immediately passed…..

The third problem is that no element of the claimed miracle is true….

Wikileaks Disses Chinese GDP Stats

We’ve harrumphed more than occasionally on the dubious quality of Chinese official releases (see discussions on GDP, inflation, and other drive-by-data-shootings for a selection of past grumblings).

So we are delighted to see that Wikileaks is on this beat too. From a March 2007 cable on a discussion between Clark T. Randt and “Fifth Generation Star Li Kequiang”:

Bloggergoof

I claimed the other day, from memory, that the Landesbanken plus Deutsche had dumped EUR35Bn in the Iceland crash. That’s a spectacular claim, but unfortunately not at all true. A bit of polite throatclearing from commenter Hubert got me to dig through the bankruptcy wind-ups of Kaupthing, Glitnir and Landsbanki. Based on a wikileak of […]

Jim Quinn: Lies Across America

Yves here. While Quinn has a deliberately (some might say overly) provocative style and I quibble with some of his supporting arguments, his overarching observation, that America is wedded to an economic model past its sell by date, and that model has damaging social and political consequences, is one I believe will resonate with many […]

Systemic coupling round-up

Time to count up the systemic implications of the Irish crisis, following up on some of today’s links and other news. First, the usual contagion to Portugal and Spain is now in full swing, propelled by another barrage of bumbling Euroannouncements: Weber announced that if necessary, the EU would increase the ceiling of the EFSF […]

Ramming home the lesson from Ireland

Spotted this just after today’s Ireland post. I reckon NC’s UK and US readers and others will have got the idea of ‘extend and pretend’ , aka ‘forbearance’ already; always good to see it getting called out again though.

“Waiting for Godot”, or “Endgame”?

No formal announcement yet, but some presumably well-sourced rumours about the size of the Irish bailout (EUR 85Bn), and the rate (7%, via the redoubtable Twitterer on all matters Irish @LorcanRK). While we await the budget statement, there are reasons to suspect, or hope, that the bailout, like Godot, will never come, because it’s failing […]

Robert Shiller Advocates and Engages in NewSpeak and Dubious Analysis in NYT Piece

As an article in today’s New York Times makes clear, Robert Shiller has joined a group of behavioral economists that is advocating the use of propaganda and the sublter forms of manipulation of the public that Walter Lippmann famously called “the manufacture of consent.” In one sense, this ugly development is coming full circle. Lippmann […]