The farcical cliff

Ben Bernanke seems to have a way with coining terms that can leave everybody in utter confusion. First, it's quantitative easing and now it's fiscal cliff. As the fiscal cliff looms ahead, we are being led to believe that failure to overcome the cliff will land us in recession. The cliffhanger is the showdown between the Democrats and Republicans. Both have different views on how the fiscal cliff should be handled. To reduce the deficits, the Republicans want to cut entitlement spending while the Democrats want to increase taxes. However these are all distractions serving to demonstrate that the politicians' primary job is to spin no-brainer issues into newsworthy material.

It's easy to figure out the Western thought process because it tends to be binary: either black or white, always insisting upon a solution and with little tolerance for grey areas. Since both parties are adamant that they're on the right track, both will not budge from their entrenched positions, more so when one side is still smarting from the recent election defeat.

Even without this fiscal cliff, Obama's ability to throw money at the economic problems will be severely crimped given that his administration's $1 trillion odd deficits in each of the last 4 years have not yielded any long-lasting recovery. That isn't surprising considering that we're in the second half of the Fourth Kondratieff Wave.

If you are presented with this situation, how should you approach it? To tackle this seemingly tough problem, you need a pattern as a guide. For this there is no better pattern than the Monopoly board game. The other thing that we need to know is where we are in the Kondratieff Wave cycle. There are 2 actually, the uptrend first half and the downtrend second half. With just these, you can foretell, like no economist can, how events will unfold.

The first half of the wave is when you start playing the Monopoly game. This is the most exciting part because everybody is eager to grab properties. So when the banker pours money into the game, it will keep circulating in the game as assets are being purchased and sold. But when you reach the second half, the excitement starts dwindling down. There are no more properties up for grabs. If you're losing, you'd rather be in jail since every move you make costs money. Any money poured by the banker will end up with the sole winner.

What has this got to do with our present predicament? Almost everything, in fact. All the current economic difficulties can be easily explained by the Monopoly game. So any deficit spending now will ultimately end up with the few winners. As the government will eventually be weakened by continual deficits, it must start getting the money from the winners, the rich, that is, to fund its spending. But the rich with their footloose wealth can run rings around the taxman. Ask Mitt Romney how. One is to park their financial wealth in offshore tax havens with ultra low tax rates. The other is to recast their incomes as capital gains which also attract a much lower tax rate. As long as capital controls are absent and tax law is riddled with loopholes, the ability of political leaders to control the national economy and by extension the national politics is tenuous.

What about the Republicans' proposal to cut entitlement spending while maintaining the current tax rates? Without increased spending, the economy will quickly go into a tailspin. The Republicans' contention is that the lower tax rates will encourage the rich to invest and create jobs. That's a load of bull. Again we seek the help of our Monopoly pattern. When the game has settled down to a predictable pattern, the winner will just collect rentals. He has no need to build new hotels. After all, with the present investment, he's already winning. The proof is in the statistics. Another of the various income imbalance charts that I've been plugging just to highlight the real cause of the depression is shown above (this one from The Financial Times).

If the government doesn't wrest the wealth from the rich, there's no new spending to perk up the economy. The rich fail to grasp that whatever spending the government makes, be it on entitlement, military or whatever, will ultimately end up in their bank accounts. So it is in their interest to pay more tax. They can play the Monopoly game much longer, and keep winning while at it.

Both groups of politicians can't comprehend this simple concept. As a result, they both agree that the deficits have to be reduced. For comparison, the 2012 US Federal deficit was estimated at US$1,089 billion. The fiscal cliff, if not addressed, will reduce the deficits by US$535 billion. The fiscal cliff is not the issue. The real issue is the amount of the deficits. The amount that they can agree will be substantially less than US$1 trillion. So fiscal cliff or not, it's highly conceivable that the US economy will slump in 2013.

Recriminations between the two parties will intensify with the worsening state of the economy, causing them to dig their heels deeper. One will insist that entitlement spending discourages people from working while the other will claim that reduced taxes do not trickle to the economy at large. This is an exercise in futility as the solution is not to be found in the Fourth Kondratieff Wave. Future economic growth has been forecast to be anaemic, meaning that the economy cannot outgrow the debt. To artificially boost growth, the economy really needs bigger spending but there's no longer any economic sector that can bear ever increasing spending. All have been squeezed dry, that is, except the rich.

As an aside, I can't help taking a dig at the housing bulls, especially The Financial Times which came up with the following headline in its 28 November 2012 issue: "US growth hopes lifted by housing data", just after the Case-Shiller index for September 2012 had been published. Now I've updated it in my own chart above. As you can see, the pattern of housing price increase still remains. But the increase was very marginal in September 2012 and if you project it to the next month, prices will start dropping. If an eminent financial newspaper can betray its economic ignorance with such a premature headline, what can you expect of economic pundits and talking heads who are much less endowed in their cognitive faculties?

Consumptivity, not productivity

Economic growth worldwide is on a decline. Economists have been attributing this to the declining productivity which itself is a reflection of the much reduced impact of the new economy's technological advancement as compared to that of the earlier technology waves. Robert J. Gordon, an economics professor from Northwestern University, has produced a paper tracing the economic growth since 1300 (the two charts on the left below, reproduced by The Financial Times) as well as evidence of the declining US productivity (the two charts on the right).

This is typical of an economics professor pontificating from on high. There's actually nothing wrong with the rate of technological progress.  We know that productivity is the ratio of output to input. Economists can't explain why output declines or increases for the same level of input. To them, the link between input and output is a black box. But implicit in that link is the little known assumption that whatever can be produced will be consumed.

If only the economists had worked in a manufacturing setup, they would learn that a factory's main problem was not producing but selling. No production planner would produce goods that cannot be sold. He may produce for inventory but that can only be sustained up to a certain level, determined by the availability of his cash or credit. Beyond that, it's economic suicide.

If you come across anything inscrutable as the economist's productivity black box, the right way to address the issue is not to ignore it but to view it from another angle. The fact that the black box is termed 'productivity' is itself a cause of the confusion. Because of that, production output has always been the sole measure. Whether the factors of production are not producing because of something else doesn't count. Since we know that for a manufacturing setup, getting the goods out the door to the consumers is the main challenge, consumption is thus a better measure than production. Now if we instead label the black box 'consumptivity', then a whole new vista opens up. The problem is no longer solely production but extends to consumption.

But how do we prove that the problem lies with consumption? In this regard, we can rely on two plausible explanations. One is population growth and the other is falling income as a result of technological progress and globalisation. We can show two population charts, the movements of which mirror those of the two leftmost charts above.

The first is the rate of population growth (left chart from Wikipedia). The shape is similar to that of the GDP growth rate. Even though the GDP growth chart tracks the growth of the UK GDP (for the First Kondratieff Wave) and the US GDP (for subsequent Kondratieff Waves), the impact of that growth has trickled to the whole world as reflected in the global population growth rate.

If you observe this population chart carefully, you'll notice two kinks. The first, between 1900 and 1950, is the result of the two major wars in which more than 16 million and 60 million deaths were recorded for WW1 and WW2. The second reveals the folly of China's Great Leap Forward, which lasted from 1958 to 1961. Upwards of 30 million lives were believed to have perished by famine. However these kinks did not alter the secular trend of the pattern. It goes to show that long-term trend can be easily foretold years in advance. Even now, we can foresee the future outlook of economic growth just by looking at the population growth rate. Neither sixth sense nor fancy forecasting tool is needed. Also with patterns, we won't be blindsided by any black swan, which anyway is a lame excuse offered by those who fail to recognise obvious patterns.

The next chart maps the global population since 0 CE (Common Era). It corresponds to the GDP per capita chart above, that is, the second chart from the left. Even if you use total GDP instead of per capita, the same pattern would appear as the populations of the UK and the US have always been on the rise. These two charts are strong enough proofs of the close link between economic growth and population growth. It's not just a case of one causing the other; it's more of  a mutually reinforcing relationship. But now the population growth is starting to give in as a result of lower fertility rates; the opportunity cost of raising a kid is a main contributing factor.

Next we need to explain the productivity behaviour in the two right panels of the top charts. For this we have to rely on our 4C. The first C of this Fourth Kondratieff Wave, that is, the capacity driver  is the computer. It's fitting therefore to label this wave as the Intellectual Revolution. But on its own, it cannot power economic growth in a big way.

We thus need the second C, the internet, to act as the communication driver. We all know that the internet started becoming common in the mid-1990s. That's when the productivity measure began to improve. But how was this improvement possible when the population growth rate for the US and the whole world was slowing? To counter this headwind, we need the third C, the currency as represented by the debt increase. Notice that the first wave of debt increase on the left chart was initiated by President Reagan through government borrowings but the second wave was kicked off by President Clinton through private sector debt, both towards the end of their first terms in 1983 and 1995 — that's how both got reelected. However the impact of this debt increase on productivity could last until 2004 as productivity began declining from 2004 onwards, as indicated by the second panel from the right of the top charts above.

The technological  improvements of this Kondratieff Wave turn out to be more vicious than virtuous. Now we don't need as many workers as before. Work that used to require simple logical decisions by the workers can now be handled by microprocessor powered sensors, remotely controlled using SCADA systems. At most, only one person is needed to supervise the running of the SCADA system. For work requiring an army of workers, outsourcing and globalisation have sent the jobs to other corners of the world.

Productivity has actually tremendously increased, if only all the potential output can be consumed. But this was not happening as from 2001 to 2004, the labour force participation rate (left chart from the BLS) started declining. This pattern continues to this day.

Business corporations are caught in this vicious circle of lower consumption yielding lower income which again leads to lower consumption as workers spend less and less. The productivity slackens as workers remain on the payroll but not producing to their full extent because there are limited takers for their output. To improve productivity, the corporations retrench more workers which further worsens their buying power. Those still working end up in the low paying and low productivity service sector.

Such is the fate of mankind. In its quest for progress, it finds the answer but one that puts itself in a state worse off than before.

Realty Distortion Field

In an economic depression, weird and eerie things transform into the new normals. Zombies — banks which should have been dead and buried long ago — continue straggling and threatening to pull the world economy into the grave. Madmen — fund managers always in search of abnormal returns — keep switching huge amount of funds between investment assets, only to discover that normal now means negative returns while abnormal means bigger negative returns.

Steve Jobs was famous not only for his creativity but also of prevailing upon his team members that the unreal could be real. He distorted reality to bend people to his will but you cannot fault him because he delivered what he had boastfully promised. This reality distortion feat has also become the new normal, none more obvious than the supposed recovery in the US housing market at a time when prices should be dropping with the ebbing credit quantity.

Housing or real estate is one economic sector that has generated a distorting effect on the true direction of the economy. Because house prices will always climb to stratospheric heights just preceding an economic depression, post-crisis house price drops exceeding more than 50% are typical. It's easy to see why house prices steeply climb in the first place. In the mad search for abnormal returns, housing is the last bastion offering such returns primarily because it's sheltered from foreign competition. Furthermore, most buyers steadfastly hold on to the view that land and buildings, like precious metals, are assets that won't depreciate in value. As a Mark Twain quote oft-used by real estate agents has it, "Buy land, they're not making it anymore."

Events over the last four years have disproved that belief. Many countries were hard hit, especially those that had relied on real estate to drive their GDPs (see The Economist chart at left). In the US, house prices climbed 83% from 1997 to 2006. However, among countries that had property booms, the US property boom was relatively mild. That doesn't mean that the price correction will be more subdued than those experienced by other countries. So far, only Ireland appears to be the hardest hit. But Spain, with the most overbuilt homes in Europe — 675,000 homes built annually between 1997 and 2006 — has seen prices dropping by 32.4% from their peak in December 2007 to the end of 2nd quarter 2012. With more than 2 million unsold homes and housing debts in the balance, housing price drops will continue to bedevil the Spanish economy.

As for the US, the chart at left from the 2012 Economic Report of the President, shows that the current housing bust is worse than that of the 1930s Great Depression. Even the Case-Shiller index is not above distorting the numbers as any depression related declines would usually exceed 50% of the housing peak values. The nominal price drop from 1925 to 1933 as registered by the Case-Shiller index was 30.4% but because the economy was also suffering from deflating prices, the real drop was 12.6%. Both numbers don't seem plausible given the drastic plunge in credit quantity then.

One finance blog argues that the Case-Shiller home prices during the Great Depression are not actual sales data, but hypothesised. In fact, a study of home prices in Manhattan during the Great Depression found that prices dropped by 67%.

This big drop is more credible given the features of the mortgage at that time. Back then all mortgages were of short duration, from 5 to 10 years. A mortgage required a down-payment of one-third of the purchase price. Interest was paid every 6 months while the principal was paid in one lump sum, known as the balloon payment, at the end of the loan period. Usually instead of the balloon payment, the mortgage was rolled over into a new one at the prevailing interest rate. The banks also had a call provision inserted into the mortgage, so that they could at any time demand immediate payment. A severe credit crunch caused the banks to trigger that provision in the depths of the Great Depression, fostering the sharp descent in home prices.

To counter the lack of financing facilities, President Roosevelt, as part of his New Deal, created the Home Owners' Loan Corporation in 1933 to provide financing that stretched to 25 years. Another agency, the Federal Housing Administration, was set up the following year to guarantee loans made by the private sector for up to 30 years. That was how the present mortgage loans came to being. It doesn't mean that the new type of mortgage financing is resilient to any credit crisis. What it means is that instead of a sharp, sudden credit shock, you now get a long-drawn-out credit crisis that continues to hang in mid-air. Instead of a heart attack or a stroke, we now get cancer. The final outcome never differs.

Let's review the current Case-Shiller index (chart at left). I've drawn the vertical axis in such a way that tracks the % decline since the index's peak in July 2006. My target for the eventual bottom is a 50% drop from the peak. This is done by extending a red projection line linking the past troughs all the way to the 50% mark. At the rate the index is snaking, it's expected to reach the 50% mark only by the end of 2017. That's still a long, long way before we see any sign of a real recovery. However with the impending cutbacks in federal deficits, we can be certain that Obama will accelerate the process somewhat.

What about the latest apparent recovery in the housing market with the uptick in the number of housing starts and home prices? Look carefully at the chart above. The curve is about to reach its peak and turn the corner for the worse. If you're still skeptical, see another chart at left, this time depicting the month-to-month change in home prices. Now the pattern is as clear as crystal. In every single year since 2008, we have had a dead cat bounce. In normal times, it is said that a cat has nine lives. But in times of depression, even a dead cat has nine lives. The last presidential election should have been Romney's for the taking given the state of the economy. But alas, the economy was in a minor bull market as seen on the chart above. Give another two months and you'll see Obama's ratings dropping precipitously.

About the Mark Twain quote that I mentioned earlier, there's a need to shed some light on Mark Twain, the person. Mark Twain was well-known for peppering his writings and quotes with satire. He lost a large share of his book profits, about $150,000 or $4 million in today's dollars, not on land deals but on the Paige Compositor, an automatic typesetting machine. I guess it would be amiss if I didn't include this quote of his: "Get your facts first, and then you can distort them as you please." Well, he never said that we should buy land because the price would keep on rising.

Imbalance Sheet

Situations that appear serene and balanced on the surface can hide a deep undercurrent of suppressed tension and imbalance. In most instances, the state of imbalance however doesn't emerge suddenly but develops over time. If we're conscious of the unfolding pattern, we'd have spotted the eventual outcome long before it transpires.

A losing business can continue operating provided it has enough cash or, more likely, credit to sustain itself. It's only when banks and creditors refuse to extend further credit that leads to its collapse. That usually occurs when its debt to capital leverage has reached a dangerous level. The root cause of the collapse however is not the extreme level of its indebtedness but its loss-making operation.

A glimpse of a firm's accounting balance sheet, that is, its statement of assets and liabilities, can reveal a distressing situation if most of its capital assets are financed by external short-term borrowings. Likewise, for a national economy, a similar account of its assets and liabilities can also disclose a worrying condition if the assets are held by a small, prosperous group that's totally detached from the bigger but wretched group bearing the liabilities.

Other types of imbalance also exist in a national economy. For example, the exchange rate can become too expensive leaving the populace unable to produce and dependent on imported goods. Also, the power of technology can hasten the decline in middle class income, leaving a small minority at the top able to afford spending. These imbalances are the reason why an economy stops producing. By the time an imbalance makes itself felt, the economy would've already been in serious trouble.

Politicians and policymakers are naively exhorting their countrymen to be more productive as if this economic crisis is all about failing to compete. Improving productivity is a slow process that's ill-suited as a crisis solution. Moreover, it usually calls for major investment that's unlikely to be forthcoming when investors are fleeing the country. Any turnaround effort must therefore first rectify the debt imbalance through debt write-offs. If the debts are owed between residents of the country, a high inflation rate performs the same function as debt write-offs. An exchange rate imbalance can be addressed through a currency devaluation. The last imbalance, the technological edge, has no fix except for a new Kondratieff wave that will obsolete the existing technology. Because of this, the first two imbalances will keep on recurring even after they have been snuffed out. It also explains why an economic depression is inevitable.

How do we spot an imbalance in a country's balance sheet? First, we need to understand the assets and liabilities that need to be monitored. What we mean by assets are financial assets, the numbers in virtual bits and bytes stored digitally on the servers of financial institutions. They are not the tangible, physical assets that can be touched and seen, the values of which are unimportant since they move in sync with the ups and downs in the credit quantity.

Liabilities, on the other hand, are always financial. In modern times, you don't owe others in terms of physical things. Even if you do, they'll be translated into financial terms. As assets and liabilities are just opposite sides of the same coin, we only need to monitor one, which in this case is liabilities, being the more convenient because the Fed publishes complete data on credit in its quarterly Flow of Funds Accounts.

If you recall the cash flow of a national economy in an earlier post, the cash flow is actually the debt movement of the economy. The balance sheet on the other hand is a snapshot status of liabilities and assets. As on the cash flow, we're interested only in debts on the balance sheet. So in effect, with the GDP — this being the economy's income statement — and the debt flow, you can assess the strength and portend the future of any economy. These are the speedometer and tachometer of the economy. Extending the car meter analogy further, you can add the house price index and the labour force participation rate (LFPR) charts to represent the temperature and fuel gauges. Unlike a car which breaks down from overheating, the global economy is grinding to a halt because of overcooling. The world economy doesn't have much problem with overheating because mankind's ingenuity will see to the expansion of capacity to meet any excess demand.

Let's bring on the latest charts to see how much further the world economy would have to struggle before succumbing to the forces of the economic depression. We begin with the US GDP which has just declared its third quarter figures for 2012. There's only one driver of growth: personal consumption. Both government spending and investment haven't shown any improvement. In fact, investment spending would have sagged had not residential investment, again incurred by consumers, risen. Regardless, home prices have much further to fall, despite the recent price uptick. In the lead to an economic depression, you'll come across many instances of the dead cat bounce.

The GDP growth since the 2009 recession also has been wriggling within a narrow band (blue line) with no sign of breaking out. With no more trillion dollar deficit in the pipeline, we can be sure where the GDP growth is headed in the coming quarters.

It appears from the first chart that the consumers are the driver of the GDP growth but the GDP components as computed aren't a true reflection of the real driver of growth because a significant proportion of government spending and business spending would end up as personal spending. In addition, the GDP records only spending and ignores any wealth destruction, such as loan write-offs — every time a loan is written-off, an equivalent amount of financial asset disappears.

To get the true picture, we need the debt chart, at left, updated only up to the second quarter 2012. A different picture now emerges. The government debt is on a relentless increase because of Obama deficits. But the household debt  is trending south together with that of the financials. Aside from the massive government spending, the major reason for the escalation of government debt is that it cannot be written off whereas household debt is still suffering from write-offs with much more expected in the future.

How do you explain the inconsistency between the household debt on the debt chart and personal consumption on the GDP chart? There can be only one plausible explanation: two groups of consumers are experiencing two diverging patterns, one flourishing from government spending spillovers and the other languishing under the burden of debts. Technological progress and globalisation also reward the former but assail the latter. Bloomberg has a revealing chart below that sums up the fortunes and misfortunes of the two groups. The pattern fits the 80:20 rule, the top 20% enjoying and the bottom 80% suffering. This pattern is spreading worldwide to any country that exposes itself to the ravages of globalisation.

This increasingly lopsided sharing of wealth is reflected in the worsening Gini coefficient, a measure of inequality, as shown on the The Economist chart below. But more ominous is China's Gini coefficient which has deteriorated at the fastest pace since 1980. Heralded by many as the next engine of growth, doesn't China look more likely to be a drag on global economic growth?

The view from the top

The maxim, "What gets measured gets done", is the root of many blinkered views in the business world. Only an enlightened maxim can trump this malign one. What better aphorism can you get than one from Einstein: "Not everything that can be counted counts, and not everything that counts can be counted."

In real life, there are many things that cannot be measured and of those that can be measured, the brain can only keep track of only a few. Take the analogy of driving a car. Of all the various gauges on the dashboard, only two are prominent — the speedometer and tachometer. Our eyes though should not be fixated on those meters but on the road ahead and the surrounding situation. Of course we can also use the analogy of the plane with its many gauges and the need to keep our eyes on them but if there were as many planes in the sky as cars on the road, flying would've been very frightening.

With the economy, we also need only a minimum of metrics. Our focus however should be on the unfolding situation which we can always glean by observing, and talking to people in business and on the street. That's why Jack Welch couldn't stomach the latest unemployment number because it doesn't jibe with the input that he's getting from other sources.

The metrics for an economy are quite similar to those of a business. We've gone through the cash flow. Now it's the turn of the income statement, to be followed in the next post by the balance sheet. How do you derive an economy's income? Actually we don't need to. When you're at the micro level, that is, at the level of business, you can't see what's happening outside your business boundaries. But as you go up, that is, at the level of the national economy, you'll find that the economy is a closed system. Certainly, foreign trade exists but for most countries, the net impact — export less import — is relatively small.

In a closed system, someone's income is another's expense. Or one's profit is another's loss. So there's no point in looking solely at profit as a bigger profit could mean a bigger loss elsewhere. But you hardly hear losses elsewhere because only businesses post profits or losses. Take the profits of the US corporate businesses (see chart at left from The Economist). They continue to register ever increasing profits in the midst of a depression. But this good fortune would soon peter out once Obama runs out of deficit fire power. Well, it turns out that they are about to report pessimistic third quarter results. We can thus dispense with business income or profits since this is indicative of only one sector of the economy.

For the economy, the GDP which really is the total output of the economy is the best indicator. We only need to dissect its components. For a typical country, that is, not a city-state, the relevant components are personal consumption, government spending and private domestic investment. The exports and imports, although each may be sizeable, are small when offset against each other. For example, the imports less exports of the US over the years tend to range between 3 and 6 percent of GDP. If the number sways beyond this range, the drop in exchange rate will set it back. The problem with the southern euro countries is that, with no possibility of currency devaluation, they have straitjacketed themselves into a progressively worsening situation with no avenue of redress.

The chart at left shows the three main components of the GDP in real terms using 2005 dollars. I've  used two vertical axes because personal consumption is several times the size of the other components, this being the result of a quirk in categorisation. By using two axes, we can place the three components close together and magnify their movements. Though both axes start at different amounts, their vertical increments are identical. I've also chosen 2001 as the beginning year since this is the beginning of the depression in the US with the dotcom bubble burst.

With this magnification, we can see clear patterns. The steep increases in both debt-financed personal consumption and investment prior to the subprime crisis were never sustainable. This led to the crash in 2009. Government spending took up the slack in 2009 but it has been on a gentle decline since 2010. Investment, of which only a quarter is undertaken by households on residential properties, the rest by businesses, appears to have stalled in 2012. Only personal consumption by households still mindlessly climbs upwards. But households eventually depend on income from government spending and business spending to drive personal consumption spending. Now, the quirk in GDP computation that I mentioned earlier is the non-inclusion of business non-investment spending, the bulk of which is on payroll, for reasons of double counting. But similar spending by the government is included. That's why the GDP component spending is disproportionately skewed towards personal consumption.

Be that as it is, we can infer from the investment spending, three quarters of which is by businesses, the pattern of business non-investment spending since both would have moved more or less in a similar fashion. As investment is now stalling, shouldn't non-investment spending also flag? The third quarter results of major US corporations which are expected to be subdued portend dark clouds on the horizon for business non-investment spending and, by extension, household income.

The relative size of the GDP components for the US economy is typical of most other mature economies. Developing economies however have a different component profile. Their investment spending is proportionately much higher. The US investment spending as a percentage of the GDP is usually in the teens.

Not so for China. I've included two pertinent graphics, the first from The Economist and the other its sister publication, The Financial Times, to demonstrate how insanely weird is China's economy. This concerns its investment spending. Never in the history of mankind has economic growth been powered primarily by investment spending that's now touching 50 percent of GDP. China is fuelling its growth by adding more capacity. In the early days of the Kondratieff Wave, this may have been acceptable though still excessive. But we are in its waning days in which capacity would be least needed. If this were a car tachometer, China is in the redline zone with the engine about to seize. It would've been safer for China to heed Keynes's advice that the government should instead pay people to dig holes in the ground and then fill them up. At least there won't be deserted apartments and malls, and underutilised roads and railway tracks that would've been costly to maintain or demolish.

China's relentless drive for growth at all costs is the price being paid for the mistake that Deng Xiaoping made more than 30 years ago. In an interview then, Deng was asked whether wealth accumulation  contradicted socialism's doctrine. Deng assured the interviewer that China's wealth accumulation was unique because its wealth would be shared by all. Deng might have been politically astute but economically he was a neophyte. Once you allow wealth accumulation, you must be prepared to live with extreme inequality. Probably only the Scandinavians have found a way to equalise wealth with massive government transfers.

Mao Zedong was thought to have been a madman for carrying out the bloody purges of the Cultural Revolution. But let us reflect on the wise words of Kenneth Boulding, an American economist who was cofounder of the General Systems Theory: "Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist." Now, Mao doesn't seem that mad after all.