The problem with an effective stimulus

While the US is struggling to see the intended effects its stimulus would produce, the Eastern giant China is now wondering how to slow down what has been an overeager stimulus.  The US is still talking about deflating prices; China is now fearing another bubble. Westerners are urged to come up with plausible exit strategies for when the time comes that they are needed; the Easterners are seeking the same… sooner.

The opening for a newspiece from WSJ reads:

Exit strategies are the talk of China. Investors are trying to guess when Beijing will rein in the policy of low interest rates and easy credit it used to jump-start the economy.

The even bigger question is how China will exit from an economic model that is overreliant on government-led investment and exports.

Prior to closing, the same said:

But rebalancing the Chinese economy is a seriously long-term project — and may mean the government having to accept lower growth in some years than has become the custom.

More HERE.

I am unaware of the Chinese government’s willingness to accept the lower growth the writer above was suggesting, but as we have seen in the past couple of quarters, even SLOWER growth is unacceptable.  With so much power (and money) in their hands, the Chinese are just ready and waiting to do whatever is necessary to not impede, but push growth.

It was probably necessary that Bernanke a couple of weeks back outlined the Fed’s selected strategies when the time has come to exit.  But we probably shouldn’t even worry much about that, just yet.  China is the bigger concern, not that there’s a lingering belief that their administrators are incapable.  But if asset bubbles do begin to form again, we might see a modified version of  “when the US sneezes, the rest of the world catches a cold” scenario – this time coming from China. The country apparently won’t suffer from a recession if that happens, but the rest of the world that relies on them for demand might head back to that position (or more appropriately, stay there) and face demand slump.

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