The Chinese Stimulus Plan to Save the World

"First home buyers are leaping aboard a sinking ship, with house prices set to fall about 20 per cent in the next two years," reports Natalie Craig in today's Age. Professor Quintin Grafton of Australian National University makes a point we've banged on about here before: prices can't grow infinitely higher than incomes.

"I wouldn't be surprised if overall we get a 20 per cent decline in nominal house prices over about the next two years," Grafton says. "First home buyers who don't have much of a deposit and can barely afford their mortgage payments on the current interest rates, they'll be in trouble."

"Ultimately," he says, "house prices have to be related to the ordinary prices that we pay for other goods and services and our incomes. In the past decade, house prices have gone up about 50 per cent in terms of that ratio. That is not sustainable, and certainly won't be sustainable as the recession bites."

Since it's May Day and we are moving to a world of State-run Capitalism, all hail the great idea that maybe China really will save the world after all. We're all looking for a few Dear Leaders. The Fed basically threw its hands up in the air earlier this week and said it's done enough. If banking-cartel capitalism with funny money won't work, maybe top-down capital allocation by government employees will!

"Copper rises on Chinese buy prospects," reports Reuters. Copper on the New York Mercantile Exchange was up two percent yesterday." It's like we were haemorrhaging before, and now it's like we're not really haemorrhaging. As a matter of fact, we are not even bleeding that badly," says metals analyst Charles Nedoss.

And if you ask Jim Cramer, "the Chinese are pulling everyone out," with their stimulus plan. Cramer and CNBC host Erin Burnett tripped all over each other's lines trying to out-praise the significance of Chinese buying. Have a look.

They were talking about an announcement made by Chinese Commerce Minister Chen Deming that Chinese citizens would be issued vouchers good for the purchase of washers and dryers and probably other household appliances and electronic goods. CNBC then put up a list of appliance makers that might benefit.

21st century prosperity: Three televisions in every house and a washer-dryer in every garage.

On a more serious note, Deming is on a road show of sorts around the world. Only instead of hawking a new IPO, he's buying. In Chicago, he announced $5.7 billion in deals between Chinese firms and U.S. suppliers of telecommunications gear, clean energy capital goods, auto parts, and other machinery. Then he went to Washington and announced even more deals with Ford, IBM, Dell and others. In total, Deming inked 32 deals for around $10 billion.

But don't think that the engine of global growth is suddenly roaring to life in Beijing. Chinese figures show that the country ran a $170 billion trade surplus with the U.S. in 2008. It exported $250 billion in goods to America and imported $81 billion in goods. There's a long way to go before China consumes at an American pace.

And by the way, if it did, we can't even imagine how much credit that would take, or what it would to the Earth's scare resources.

So long Chrysler. Apparently the solution to fixing the American car icon is to give the company to the unions and the Italians and Barack "There's nothing I can't do" Obama. They'll sort it out.

"Today must be a sad day for you as an American," said Money Morning editor Kris Sayce as we walked through the door.

"Why is that?"

"A great American died. Chrysler."

"Oh."

"You don't seem surprised."

"Well, Chrysler is like an eccentric relative that's been a nursing home for twenty years. Sometimes you forget they're there until something goofy happens."

Neither death nor bankruptcy are goofy, of course. Chrysler has 26,000 U.S. employees. But chapter 11 bankruptcy gives the company legal protection from creditors while it reorganises, sells assets, restructures its debt, and closes operations. You hope that what emerges is a competitive enterprise that builds cars people want to buy.

But if that doesn't work-if the company is simply operated so it can pay off pension obligations to its unionised workforce-there is always Chapter 7 bankruptcy. Chapter 7 bankruptcy is where the assets would be liquidated and distributed to Chrysler's owners (bondholders).

We wish it well. Chapter 11 can work. United Airlines spent three years in Chapter 11 and came out a little bit better off than before. There's no reason Chrysler can't eventually become the profitable world-class car company it once was. But that will only happen if the company takes an honest look at how its competitors in higher-cost labour markets have managed to do it. It also takes a long time.

Dan Denning
for The Daily Reckoning Australia

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