The S-Curve is an exponential growth and decay function. The downward curve can be, and usually is, a lot sharper than the upward curve, which means it’s not a truly symmetrical S. China’s down is probably going to be a lot sharper than its up has been. From Charles Hugh Smith at oftwominds.com:
This decline is inevitable in fast-expanding economies that depended on export growth and investment booms.
The fundamental context of China’s economy is that it has traced out an S-Curve–as did previous fast-developing nations such as Japan and South Korea.
Gordon Long and I discuss why there’s no easy fix to the S-Curve in our new video discussion Bull in the China Shop (35:25).
The S-Curve can be likened to a rocket’s trajectory: first, there’s an ignition phase, as the fuel of financialization, cheap labor and untapped productive capacity is ignited.
The boost phase lasts as long as credit-fueled production and consumption expand rapidly.
In the boost phase, investors and financial authorities can do no wrong. The high growth rate of credit and production overwhelms all other factors, as the virtuous cycle of expanding profits and production increases wages which then support further expansion of credit and consumption which then supports more production, and so on.
A vast tide of foreign investment fuels an equally vast expansion of fixed capital assets such as factories and new homes. (The chart below depicts the astronomical amounts of new square footage constructed in China every year.)
But then the fuel of financialization is consumed, and the previously fast-growing economy slows to stall speed. Depending on how much leverage, corruption and wealth has piled up in the boost phase, this phase may last a few years. This is the top of the S-Curve.
As the economy weakens, everything that worked in the boost phase no longer works: expanding credit no longer boosts growth, inflating yet another real estate bubble no longer generates a widespread wealth effect, and every effort to shift from being an export-dependent economy to a self-supporting consumer economy fails to achieve liftoff.
This decline is inevitable in fast-expanding economies that depended on export growth and domestic investment booms fueled by exploding credit and leverage. In the decline phase of the S-curve, doing more of what succeeded spectacularly now fails spectacularly.
To continue reading: Pity Poor China: There’s No Easy Fix to the S-Curve
