In a recent blog I touched on issues of definition with respect to savings, debt and money supply. A recent blog by Michael Pettis also touched on excess savings in high growth, debt driven, over extended gross fixed capital investment led cycles…phew. Today Jesse Colombo @thebubblebubble tweeted that “bubbles can form with 100% down payments. Credit is not necessary to form a bubble”.
It is an interesting point. You can get a localised bubble without credit/debt expansion and this is where consumption demand and/or asset focussed demand plonks itself overly on one particular sector of economic activity or asset class. This would draw resources/demand away from other asset classes or other economic sectors. But it would show up in relative demand for other asset classes and other areas of demand. In other words some areas would deflate and others would expand. The damage as the bubble burst would be due to misallocation of resources, if this impacted capital and human investment allocations, or merely a revaluation of asset classes.
The present bubble has also been fuelled by excess asset focussed money supply growth, growth that has remained pretty much focussed on assets and that has not fully entered the production function (P/C/I/S).
But, China is a special case: we have experienced a vast increase in gross fixed capital formation that has drawn resources, business activity and debt/broad money supply growth to one component of economic growth. The debt that has been created to fund this outsized activity has effectively been transformed via an undeveloped consumption function into very high levels of saving. Within imbalanced immature economic structures it is plausible to have high levels of saving driven by excessive money supply creation. It is therefore possible at one level to have a property bubble with much lower levels of apparent leverage.
The problem of course is that the capex assets underpinning the savings and hence the investment/property assets purchased are themselves highly leveraged. If these assets are underperforming assets, as Pettis suggests, we have a problem. What may appear on the surface as a low level of mortgage debt is in fact a very complex and dangerous debt spiral. In other words the quality of equity is a much more complex definition.