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Paging Edward Hugh: Demographics do not explain the recent rise in Chinese savings

by Brad Setser
June 19, 2006

Louis Kuijs’ latest analysis seems to suggest – based on my reading — that three common perceptions of China are more myth than reality.    

Myth one: foreign direct investment has been a big driver of China’s growth.   

The reality: most investment in China has been financed domestically.   FDI accounts for no more than 10% of total investment.    That is consistent with the analysis in Goldstein and Lardy’s critique of Bretton Woods 2 as well.   Obviously, that FDI is concentrated in China’s export sector, so foreign firms account for a much larger share of exports than of total investment.     

Analysis based on the total amount of FDI may understates its impact, as innovations that start with foreign firms diffuse through the economy.

But there is little doubt that most investment in China is financed domestically.  FDI this year will probably by something like $70b or so.  That is small relatively to the $1300b in total investment that Stephen (a bit more bearish once again?) Roach expects in China this year. 

Myth two:  China’s state banks do little more than finance investment by China’s unprofitable state-owned enterprises.

The reality: There is some truth to the argument that state banks finance money losing state owned enterprises.   But it also may be a somewhat dated argument that ignores some recent reforms.  Jon Anderson of UBS consistently argues that there reforms have increased the profitability of (many) Chinese state firms.   And Kuijs’ data suggests China’s increasingly profitable state-owned enterprises finance lots of investment out of their own retained earnings, without having to turn to the banking system.   A surge in business savings, according to Kuijs, is why overall national savings have risen so strongly in the past few years.  Some of that surge comes from a surge in private profits.  But a decent chunk of it comes from a surge in the profits of state-owned companies.   And rather than paying out dividends, state-owned enterprises plow their current profits into new investments.

Incidentally, some of the big state commercial banks seem to have been rather active in the mortgage market recently.

Myth three:  China’s current account surplus comes from its demographics, not from its policies.

The reality:  According to Kuijs, policies – not demographics – explain the recent surge in Chinese savings.   

Kuijs highlights two sets of policies, both in his paper and in the earlier powerpoint.   First, those profitable state enterprises need to start paying out dividends, not just empire building.    Second, China shouldn’t finance large capital investments at the local level with revenues transferred from the center.  This pushes up government savings.   Far better for the government to finance a bit of health care – and start to provide some of the social services that now–profitable state-owned firms don’t want to provide.

I am probably stating Dr. Kuijs’ arguments a bit more starkly than he would, but that is one of the advantages of a blog – I can opt for a more provocative framing. 

Kuijs isn’t the only one with interesting things to say about China recently – check out Yu Yongding’s latest paper

 You don’t have to read too far between the lines to figure out that Yu believes that China has put too high a priority on maintain a (de facto) exchange rate peg (and keeping domestic interest rates low to reduce incentives for money to flow into China) and too low a priority on other objectives.    He thinks China needs tighter monetary policy and looser fiscal policy (seems right to me) – and realizes such a policy mix is inconsistent with targeting a weak RMB.    He isn’t quite that blunt: he just notes “the multi-objectives of China’s monetary policy have deprived the ability to the PBOC to implement a relatively tight monetary policy” … and calls for “reform” to “China’s macroeconomic management regime.” 

Kuijs doesn’t really discuss monetary policy.  But there is one point of disagreement between Yu and Kuijs.   Kuijs emphasizes the growth in Chinese corporate profitability over time – and the failure of Chinese firms to distribute retained earnings.   Yu thinks corporate profitability is now falling, as big increases in input costs have not been passed on.  But a host of factors – liquid banks, ambitious local governors and the like – have led investment growth to accelerate even as corporate profitability falls (see p. 17 of his paper).   

They may be looking at the data over different time frames.   Or they may be looking at different sets of data.  No one seems to have a great grip on how profitable Chinese state firms really are.  Or what exactly should count as a state-owned firm.   Stephen Roach:

China, however, is far from a normal economy. Despite over a quarter century of impressive reforms, it remains very much a "blended" economy — a mixture between state- and privately-owned enterprises. While the ownership balance continues to shift dramatically away from the state, the latest statistics put state-owned enterprises at about 35% of Chinese GDP. Moreover, that share undoubtedly understates the degree of state control in the newly privatized — or "corporatized" in Chinese parlance — segment of the economy. Even after public offerings, the state still maintains sizable majority ownership stakes in most of its so-called publicly-listed, privately-owned companies. 

I know enough to have an informed view about capital flows into China, and Chinese reserve growth.  But not enough to have an informed view on current levels of Chinese corporate profitability.

Do read Kuijs, Yu and Roach.  I'll probably have more to say about Yu's paper later.


  • Posted by Guest

    Donald Kohn: “[T]he fact that China and some other emerging-market economies have resisted upward pressure on their exchange rates and are running trade surpluses has undoubtedly contributed to their disinflationary effects on the rest of the world. The prices of their exports are lower than they would be if market forces were given greater scope in foreign exchange markets, and they are supplying more goods and services to the rest of the world than they themselves are demanding. These imbalances are not likely to be sustained indefinitely. The elevated rates of national saving in these economies–and, in some, relatively restrained rates of investment–are not likely to persist in the face of ongoing improvements in the functioning of their financial markets, increases in the depth of their product markets, and fuller development of economic safety nets. As individuals in these countries are increasingly drawn to investing at home and consuming more of their wealth and as their real wages catch up to past productivity gains, the upward pressures on their currencies will intensify, their demand will come into better alignment with their capacity to produce, cost advantages will decline, and these economies will exert less, if any, downward pressure on inflation in the United States.” [/em added :]


  • Posted by Guest

    Inflation Ravages U.S. Wages, Fueling Angst at Bush’s Economy: Adjusted for inflation, the median income for the top 10 percent of U.S. households rose 2.3 percent between 2001 and 2004, covering much of Bush’s first term in office, according to the Federal Reserve’s Survey of Consumer Finances. For the other 90 percent of households — which earned less than $184,800 in 2004 — the median fell 0.5 percent over the same period.

    Inequality in America: The rich, the poor and the growing gap between them – The rich are the big gainers in America’s new prosperity.

  • Posted by Movie Guy

    Brad Setser – “DOR — I apologize for the $60b in fDI meme, i haven’t quite seized on the revised $72b for 05. But change $60b to $50-70b, with a slight upward trend over the past few years. as a share of GDP, it remains @ 3% i think. not huge. And certianly not rising as fast as overall investment. The surge in overall investment comes b/c primarily b/c of a huge increase in the $ value of domestic investment, not b/c of a $20b increase in FDI. Yes, there are intangibles. but it still seems to me that to explain China’s recent dynamism, you need to explain the surge in Chinese investment, not a surge in FDI. I think this is Kuijs point.”

    You don’t know what you’re talking about as relates to FDI effects.

    Kuijs’ paper was weak.

  • Posted by Movie Guy

    China Economic Net

    An excellent source for economic news stories – short and to the point. One page per article is the norm. Plenty of summary data, and governmental quotes or source identification. Easy on the eyes. Easy on those who have limited extra reading time.

    China Economic Net

    China Economic Net – Business / Macro-Economy

    China Economic Net – Business / Enterprise

    China Economic Net – Industries


  • Posted by Movie Guy

    FDI and High Technology Imports

    Interested, open-minded, or experienced enough enough to grasp the value of Foreign Direct Investment (FDI) and high technology transfer in China? These very brief articles help provide an economic appreciation regarding FDI’s initial value and extensive ‘go forward’ multiplier effects on the Chinese economy. Similarly, one can examine the substantial growth of high technology import contracts and patents.

    China’s Foreign-Funded Manufacturers and Other Enterprises

    2006-05-21: China Has Approved the Establishment of Over 500,000 Foreign-financed Enterprises

    2006-04-18: ‘Sanzi’ Firms (Joint Venture, Private and Totally Foreign-Owned) Take Up 75% of High-Tech Sector Income

    2006-04-13: What Makes China’s Foreign Trade Surplus

    2006-04-13: U.S.-China High Level Talks – Trade Deals Reflect Resolve to Cut Surplus

    China’s High Technology Trade Goals and Performance

    2005-12-28: High-Tech Trade Boosts Import-Export Business

    2006-06-20: Imported Technologies vs Independent Intellectual Property Core Technologies – Percentages Identified

    2006-01-11: China Maps Out High-Tech Development Plan

    2006-04-18: China Aims for 20% Rise In High-Tech Goods Trade

    2006-04-18: ‘Sanzi’ Firms (Joint Venture, Private and Totally Foreign-Owned) Take Up 75% of High-Tech Sector Income

    Import Technology Contracts in China

    2005-11-25: Technology Market Trade Volume and Technology Contracts – 2004

    2006-01-09: Technology Import Contracts – 9,902 Contracts in 2005

    2005-12-12: Trade of High-Tech Products in 2005 Up 26.8% Year-On-Year

    2006-06-20: China Signed 4,630 Technology Imports Contracts To Date in 2006 – An Increase of 57.2 Percent Year-On-Year

    Patent Applications in China

    2006-05-29: Comparison of Foreign and Domestic Patent Applications

    2006-02-05: China’s Patent Applications Rocket in 2005

    2006-05-15: Patent Applications Over 115,000 in First Quarter, 2006

    Automobile Manufacturing Industry in China

    2006-06-01: China Encourages (Requires) Independent Innovation of Auto Industry, Including Foreign-Funded Manufacturers Direct Support


  • Posted by Guest

    Emerging Markets Watch: According to the IMF, emerging economies account for 48% of global GDP (in PPP terms), and these economies are growing at an average rate of 7% versus 3% for the developed economies. Thus their share of the global pie is large and growing.

    With their economic importance increasing one would expect the fixed income markets to move at least roughly in line with economic activity. That is, increased economic activity should go hand in hand with a broadening and deepening of fixed income markets, and investments in these countries would be expected to be an important component of any global fixed income allocation.

    But at present these countries are significantly under-represented in relation to their economic importance. Chart 2 shows the IMF estimates for share of global GDP compared with those countries’ representation in the Lehman Global Aggregate index (as a proxy for fixed income investors’ exposure). Amazingly 96% of investments are concentrated in countries that make up only 52% of world GDP – and the slower growing countries to boot!

    India: The SEZs Rush – India has witnessed a huge rush from private sector companies keen to set up Special Economic Zones (SEZs). The new SEZ law was approved in February 2006, and the government has already received over 100 applications.

    Despite the recent pick-up, India’s share in world goods exports has been very small – at 0.9% for 2005 – due to the widely known gaps in the business environment. SEZs, however, can quickly help create high-quality infrastructure in pockets, providing a liberal and supportive business environment, and thus kick-start the much-needed push for manufacturing exports.

    Although SEZs as a concept appear to be the right solution to encourage India’s manufacturing exports, the government’s current approach may not be the best way to achieve the much-needed push to boost India’s manufacturing.

    We believe that a large number of new SEZs being planned are primarily aimed at winning tax benefits; losing tax revenues at a time when the government’s fiscal deficit is already high is not the best idea.

    The new SEZ law is unlikely to address the critical issue of labour flexibility. The most restrictive central government regulation is that which requires all employers with more than 100 employees to gain compulsory government approval (normally a long drawn-out process) before retrenching workers or closing part of an enterprise. This provision has not changed since 1982. The original draft of the new SEZ law intended to give state governments the freedom to allow implementation of flexible labour laws within the SEZ area. However, before the final approval from the lower house of parliament, the government was forced to drop this clause in the face of leftist opposition.

    The government has also indicated that it will not allow the movement of existing businesses into SEZs. We believe that given the tax savings, companies may choose the new SEZ route for expansion plans that they otherwise would have pursued outside the SEZ area. Many proposed investments could be mere substitution of investments that would have otherwise taken place outside the SEZ area. The new SEZ investments are unlikely to provide the much-needed fillip to Indian small and medium manufacturing sector competitiveness.

  • Posted by Dave Chiang

    To Brad,

    It almost seems to me that your website Blog has overly-focused on China’s macro-economics. Regardless of what Western pundits criticize, the Chinese aren’t going to follow the dictates of the US Treasury, IMF, or World Bank (ie. all based in Washington DC). For the past 30 years, the IMF Neo-liberal Economists and their Western media pundits have always been proven wrong and completely biased against the Asian Industrial model.

    A more productive economic Blog topic would involve informing Americans to prepare for the inevitable stagnant economic growth and rising inflation. As a result of Bush’s tax cuts and deficit spending and Greenspan’s rock-bottom interest rates of the early 2000s, the US economy is at risk of a stagflationary cycle.

    A more productive topic for US residents would be a discussion on how to protect one’s personal wealth from economic mismanagement policies by the US government and Federal Reserves. The intellectually dishonest attempt to blame the Chinese for fundamental US Economic issues does a disservice to the Economic profession. The Chinese economy should be banned from further discussion by American Economists.


  • Posted by bsetser

    MG — Investment has gone from something like 40 to something like 50% of Chinese GDP (subjct to DOR’s caveats about the stats) over the past few years. FDI has maybe gone up by 1% of GDP over that time (I haven’t done the calculation, but i am reasonably good at eyeballing data). It explains maybe 1% of the 10% increase …

    and if DOR is right and JVs are out of style, that implies one $ of FDI is no longer leveraging an additional $ of investments by Chinese JV partners. It may be doing the same thing through indiret channels.

    I fully accept that there has been a huge shift in electronics assembly and increasingly electronics components manufacture over the past few years, largely due to FDI (mostly Taiwanese).

    But domestic investment has increased substantially at the same time — and that is worth exploring too. cheers

  • Posted by Movie Guy

    Going forward, direct and accountable FDI in China should decline, but high technology imports and their effects on the Chinese economy will increase substantially. Both situations are to be anticipated.

    It doesn’t matter if FDI in China declines somewhat as long as high technology import contracts increase, as technology growth is performing as expected and called for in China’s five year plan. The multiplier effects are immense and widespread, driving a noteworthy portion of domestic investments and savings.

    Those who attempt to compare FDI to domestic investment totals with a simple accounting numbers to numbers spreadsheet comparison are lost from the start. It doesn’t work that way. You have to kick in the projected and known multipliers for the FDI numbers. Those experienced in economic development projects know this, but apparently the point is lost on some economists and analysts who lack the hands on experience.

    Similarly, those who attempt to compare, as a gauge, FDI investments in the United States to those of China are equally incorrect in their assumptions in many instances. New FDI in the USA which does not involve the introduction of new technology and products or new manufacturing/backrooom operations will typically not match the FDI performances in China. Not even close. Why should it?

    Let’s say that a foreign firm buys a U.S. corporate asset or three such corporate assets. What happened? Ownership transfer and the typical downsizing or growth changes applied to such an FDI transaction. No big deal in terms of massive economic growth. China is an entirely different story for most FDI projects. New capital, construction, technology, markets, products, you name it. Huge growth. Potential for significant modification of the economy.

    How many FDI firms, FFE, or FIEs are in China? Thousands upon thousands. The impact is significant and growing.

    How many FDI firms or FIEs has China authorized to be put in place? More than you can imagine. See one of the links above. Over 500,000.

    This is not an attempt to slight domestic investments or improvements in China. Certainly not. Rather, this is posted in an effort to open a few to the world of FDI reality. It’s time to catch up.

    If you hire an economist to run your forecasting and analysis in your corporation (just assume you own one), you want that economist to understand economic development initiatives (inbound and outbound) including FDI projects. If your economist doesn’t even make an attempt to understand FDI reality, cut him or her loose and hire another one. Quickly. Otherwise, you will lose money.

    FDI in China is a very big deal.

    And, yes, it is my opinion that China’s FDI dollars will decrease, but the stage will already been set for substantial continued growth. It’s similar to setting a forest on fire. Try to put out if you wait too long.

    The game going forward is high technology information and product imports. The next surge in growth will be evident.

  • Posted by Guest

    DF: Do any of you know of a blog adressing the wage/productivity gap issue, the risks of the global asset and credit bubble…

    Check out this missive of Andy Xie at Morgan Stanley, more on the latter topic than the former.

  • Posted by Joseph Wang

    I’d argue that the biggest thing that China can get from FDI isn’t technology, its management know how. Once you have Chinese figuring out how to run a high-tech company like IBM or a stock market, there is more than enough indigenous talent to produce its own technology.

  • Posted by ReformerRay

    David Chiang can be counted on to revert to “dollar hegemony” as a key reason for trade imbalances.

    Apparently, the term refers to the tendency of economic agents all over the world to continue to possess dollars and seek additional ones.

    If that is the meaning of the term, it is clear that the U.S. military, the Federal Reserve Board and any other U. S. agents are absolved from blame in creating the situation he deplores. Independent economic agents make their own decisions as to which currency to hold. Official Washington has done nothing to really influence these decisions since the Paris Accord in 1985.

    Economic agents seek dollar denominated assets for a variety of reasons of their own choosing, depending upon their objectives, not the objectives of the U. S.

    I happen to agree that the continued strength of the dollar encourages the U. S. trade deficit and that this trade deficit is bad for both the U. S. and its trading partners. But currency value is beyond the control of the U. S. government, even if it wanted to influence the value.

    The only action open to the U.S. government, aimed at reducing the trade deficit, is to restrict imports.

  • Posted by Guest

    “…Last summer, the government raised the [qualified foreign institutional investor] QFII ceiling from $4 billion to the current $10 billion–but Zuo says that’s not likely to be repeated in the near future. One reason is that China doesn’t need the cash. “Money isn’t the driver for the regulators to speed up QFII approval,” she says. Instead, the major reason for QFIIs is educational–local investment firms can learn about stock markets from their foreign counterparts…”

  • Posted by DOR


    Ah, now I see the FIEs-local conflict in a better light. Yes, the tax incentives for FDI are not available to local firms, which explains some of the round-tripping FDI. The “not everything for sale” (a la Dubai Ports in the US) is, I believe, an op-ed type of commentary rather than an FIE-local disagreement. Haven’t heard the concerns about smothering local firms and the labor and environment don’t seem to be an FIE-local disagreement at all.


    PRC FDI in 12 out of 13 years maintained forward momentum, vs. one reversal. If that isn’t moving steadily upwards, we face different gravitational forces on this side of the Pacific.

    “Claiming that $70-80 billion of FDI will have a greater economic impact than $1.3 trillion of domestic investment is not sensible.”
    —What would you offer as an alternative? Exports are the key job creator and MNCs are the key to exports. Oh, and regarding $1.3 trillion, repeat after me:

    “Assuming any of the data are close to accurate . . .”


    “How come there are so few economist pointing out that wages are too low in the USA to provide a sustainable level of spending.”

    Why would anyone think that the US standard of living is sustainable? Let’s face it: the typical US employee is overpaid (in a low cost-of-living economy) relative to the alternatives, and equally important, costs his employer too much relative to the alternatives.

    Oh, and DF, if you stop commenting, we all lose.

    Guest (whoever you are),

    RE: “Yes, expatriate-invested firms produce many Chinese exports, but they often do it by seizing control of export-oriented businesses from indigenous Chinese”

    Ha! That’s the best joke I’ve seen in years!

    Clearly the author (I realize it wasn’t you) has no idea who foreign investors in China are, nor the pre-FDI state of China’s manufacturing-for-export industry (non-existent, or close to it).

    Thanks for the laugh!

    Movie Guy,

    Thanks for the reminder: 552,700 foreign investment projects in China in 1979-2005.

    But, I want to repeat something else I said above: What is the dollar value of “Good enough for government work” vs. “Zero defects” ?


    Welcome back!


  • Posted by DF

    Thanks for support.

    DOr of course the US worker is more expansive than it’s alternatives (chinese) so is the chinese worker (vietnamese).
    Yet and that’s the point, both are UNDERPAID.
    THey are underpaid not relative to a moral standard, hey are underpaid relative to their productivity. They produce 100 and get paid 80. SO tell me how are they going to buy the 100 produced ?
    Answer, well they’ll produce more for the asset rich or the asset rich will lend to them, betting on their wage growth… Well since that wage growth is falling because of the arbitraging power of employers … The all system heads for a crash.

  • Posted by Joseph Wang

    DF: The trouble with that argument is that you’d expect if this were the case that Chinese workers would end up in debt to the United States when the opposite is happening.

    It’s also going to take a bit of convincing to argue that an assembly line worker is underpaid relative to their productivity. (But this argument is a bit circular since a lot of economists would argue that the amount that a worker is paid is by definition the value that they add to the product. To really make the argument, you are going to have to define how you are calculating productivity.)

  • Posted by DF

    1 it is normal for chinese producers to lend to the US consumer.
    One reason why savings are so high and household borrowing in china quite low is probably because productivity gains are so high in china that wages are rising fast even though they do not match productivity gains.

    2 Productivity is the value added divided by the head count. As simple as that. All I’m saying is that companies in the USA and in china have too much money after they have paid wages, so they either over invest or overlend or overpay their asset holders

  • Posted by Guest

    the biggest thing that China can get from FDI isn’t technology, it’s management know how

    Doing business in China: China has the raw material—smart, driven, educated people—it needs to push its high-tech ambitions. Yet managing those people while navigating an opaque bureaucracy and an unpredictable business environment matters just as much as writing code or designing hardware—and will determine whether China can move from the world’s workshop to becoming a serious force in global technology.

  • Posted by Joseph Wang

    DF: Question: You can solve this problem of companies having too much money by cutting a nice big check to the CEO and senior management. Would that be an acceptable solution to the problem you mention? I’m trying to understand whether your objection is about labor vs. capital or if it has something to do with income distribution. The two are very different (and I’m more sympathetic to arguments complaining about the latter). For the purposes of bookkeepping, money paid to CEO’s in the form of bonuses are counted as “wages” to “labor”.

  • Posted by DF

    The problem is income distribution and production distribution.
    More and more goods are being produced for people that do not have the means to pay them, more and more people are having money with no spending use available, few goods for them.

  • Posted by DOR


    Value of product = 100.
    Worker pay = 80
    Remainder = 20

    20 covers investment, cost of employment (beyond compensation), taxes, interest, profit.

    If you want an industry where 100% of the value goes to the worker, you’re looking for substance farming, nothing more. Pulling weeds with BOTH hands is an excellent way to double productivity.

  • Posted by DOR

    I meant “subsistence farming”.

  • Posted by groucho

    “The problem is income distribution and production distribution.
    More and more goods are being produced for people that do not have the means to pay them, more and more people are having money with no spending use available, few goods for them.”

    DF, who needs money when you can get credit? If Bernanke can keep Greenspan’s serial bubble blowing system intact, US households should easily be able to extract another 10-20 trillion in wealth from their “portfolios”. The trick is not to wait till assets have collapsed like in Japan. As soon as Bernanke sees inflation expectations consistently dropping he will have to put “the pedal to the metal”. If he blows hard enough, US consumers should be able to soak up all the excess production that china can muster. It’s the US consumer must out-consume all

  • Posted by DOR

    DOR, I don’t think you read me.
    THe historical mean of the share of wages / GDP is 60, right now it is closer to 50 in the USA and many european countries.
    10 points is a lot, and the worst thing is that it has been going on for a while now.

    DF, who needs money when you can get credit? If Bernanke ….

    You said it. If Bernanke … But Bernanke can’t … You need money because you can print money ad infinitum, but you can’t borrow ad infinitum. Sooner or later you have to stop adding to your debts.

    BWS note — this post was not from the usual “DOR” but from someone posting a comment in response to the usual “DOR”

  • Posted by wimpie

    “Sooner or later you have to stop adding to your debts”


    Unless you keep rolling them over at continually declining interest rates. How much credit can everybody handle at 0%. How about @ .01%, .001%, .0001%. Keynes objective was to bring capital to transaction costs only(0%+ fee). With all the automation in todays lending process, transaction fees are already becoming negligible and soon they will approach nil. At that point asset prices could approach infinity and wealth extraction could go on indefinitely. Central Banking has created a perpetual wealth creating machine. Now let me go look for a burger joint.

    I will gladly pay you tuesday for a hamburger today!

  • Posted by DOR

    OK, this is getting spooky . . . a post to me, about my post to DF that is signed DOR (but, without the e-mail address behind it).

    Wasn’t me, honest.


    Implicit in your assumption about debt roll-over is that the lender never, ever wants his money back. Realistic?

  • Posted by wimpie

    DOR, I re-read that post. I think DF might have written it.

    “Implicit in your assumption about debt roll-over is that the lender never, ever wants his money back. Realistic?”

    I’m no fan of central banking. But they certainly don’t need their “money” back. On the other hand, with this current global credit cycle, we can see that CB’s will take back what they have given and it can/will cause some serious adjustments. Under the current CB monetary system to keep debtors rolling over their liabilities at lower and lower rates you would have to adopt a more Friedman type money supply growth system instead of the current price inflation scheme.

  • Posted by DOR


    You may be right. I can certainly envisage a lender demanding repayment of a 3% loan and then turning right around and lending to the same borrower at 8%. Implicit is that the borrower isn’t as safe as before, which is certainly true in this case!


  • Posted by wimpie


    “I can certainly envisage a lender demanding repayment of a 3% loan and then turning right around and lending to the same borrower at 8%. Implicit is that the borrower isn’t as safe as before, which is certainly true in this case!”

    That is already happening in the US, where homeowners are doing cashout refi’s at higher rates. Obviously, they have a cashflow problem or expect one soon. So why not take out some more income from the best job on the planet…home refinancing.
    I do expect a credit crunch over the next 12-24 months. At that point the musical chairs stop and all players will have to look for a chair. I expect a tsunami of homes will quickly enter the market as players realize the game has changed. At that point the US should enter into a major recession with anybody’s guess how the global econmy will react and adjust.

  • Posted by DOR


    Many thanks for the very good news! I’m heading to the US this summer to shop for a place to live in my retirement. I don’t plan on buying for 6-18 months, and now look forward to a nice discount.

  • Posted by DF

    Yeah Dor, the post was from me, I don’t understand why I signed DOr…

    I’m glad you admitted that debt can’t rise forever and that you need real earned money to repay your debt once your creditors stop lending you. This is true for the individual consumer or for the USA as a whole.
    (real earned money meaning in this case exports)