China Sneezes and World Could Catch a Cold – Double Dip accelerating

Telegraph today

indicators of industrial activity have weakened in recent months as Beijing tightened credit and investment curbs to cool the economy and fight inflation, prompting forecasts of a decline in Chinese demand for oil, iron ore and other imports…
Chinese factories expanded in May at their slowest pace in at least nine months, two purchasing managers’ indexes showed, reinforcing evidence of a slowing economy.

…import strength could help to ease concern that the world’s second-largest economy might be headed for a hard landing.

I have written elsewhere on here the real reasons China has been tightening Credit, even though growth has been slowing. It faces a huge property bubble pop, with the risks of a meltdown of its overextended banks. China has in the last few months embarked on the largest exercise in QE in history to ensure its banks remain capitalised – it is hoping for a soft landing induced by interest rate rises.

A soft landing would ease asset price pressures for the rest of the world. It would not be an unmitigated bad thing. But if Chinese consumer spending is curbed by a sharp downturn, and the need to squeeze savers to rebuild bank balance sheets, then imports may fall.

This is not going to help those countries hoping for export led recoveries.

Today Robert Schiller joined the notable band of economists warning of a US double dip

the world’s biggest economy is at a tipping point, warned Robert Shiller. “Whether we call it a double-dip or not, I think there is a risk,” he told Reuters.
A further fall in prices of up to 25pc in the next five years “wouldn’t surprise me at all”, Mr Shiller said, given the amount of unsold homes in the US and the thousands of people who are behind with their mortgages. Japan saw prices fall for 15 years, he noted.

Whilst more bad news in the UK showed evidence of a savage retrenchment in consumer spending

People are expecting spending cuts and economic decline, and although incomes have fallen debts have not been cleared and remain to be paid, at the same time key costs such as energy and VAT have risen.

The Big Money Index from AXA also showed a dramatic fall in financial confidence over the past 12 months. One in five Britons have admitted to regretting some of their pre-recession financial decisions, while 25pc of people have been forced to dip into their savings and investments, particularly among the older population.
Eric Lhomond, the chief investment officer at AXA, said: “Confidence in the economy and people’s personal financial optimism have fallen dramatically over the last year. Paying off debt and reining in unnecessary spending continues to be a priority for Britain.”

As Jeremy Warner writes

Western policymakers are at a loss. In textbook Keynesian fashion, they’ve chucked everything up to and including the kitchen sink at the economic crisis, but, beyond a little pain relief, it’s failed to work as prescribed. With their actions fast running up against the limits of political and economic acceptability, is there anything more they can do?…
As in Japan, in its two “lost decades”, policymakers are powerless against the flood of debt. The adjustment still has a long way to go.

At the times Keynes wrote his textbooks national debts were owned within the nation, hence selling a debt created high powered money to circulate through the economy, compensating for the liquidity shortage of banks. Today it is bought by countries with savings surpluses as Ben Bernake has said:

Effectively, governments have acted as financial intermediaries, channeling domestic saving away from local uses and into international capital markets.

If you want to see good video projecting what might happen over the next 18 months see here.

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