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Aaron Back says this time China is likely to feel the effects of the volatility in the stock markets. The surge in the stock markets added about half a percentage point to GDP growth in the 1st quarter of 2015, according to Capital Economics. GDP growth in the 1st quarter 2015 was 7%. Capital Economics says removing the boost from the stock market to a sluggish economy would mean a loss of 1 percentage point in GDP growth. Equity issuance was one way China hoped to reduce high debt levels at companies, and that avenue would the be that much harder to access to reduce debt levels. Margin financing is about $354 billion, or 3.5% of GDP according to Goldman Sachs, posing another source of problems and potentially affecting growth if stock losses lead to defaults. Declining investor sentiment and confidence in management of the economy would be another casualty in this situation. Only 10% of Chinese households own stocks compared to 50% in the U.S., yet Aaron Back says the effects of this are likely to be felt in lower economic growth and shaken confidence in the economy....

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The Congressional Budget Office report in 2011 shows after tax resource flow that a family has to pay for consumption, a better approach to measuring the growth in incomes since 1970 including government help to lower income people and gains in the stock market for upper class Americans. This report shows after tax resource flow for the top 1% in the U.S. tripled from 1970 to 2011. For the middle fifth of the distribution families experienced real net income gains of 36 percent, and the bottom fifth of the distribution real net income gain of 50 percent.This suggests gains of about 10 percent a year if averaged over 30 years for the top 1 percent compared to 1% a year for the middle fifth and 1.5% for the bottom fifth. The report was done in 2011 and this could skew the results. Between 2011 and 2015 the stock market recovered and this would suggest a much higher gain for the top 1% of incomes and the top 10%, while also providing improvement in incomes for the middle fifth and the bottom fifth as unemployment decreased. Working class and minimum wage slowly recovered, and interest income on savings extremely low, with large student and other household debt, so that even at 10-12% gains per year for the top 1%, and 1-2% for the middle fifth of the distribution and 1.5-2% for the bottom fifth the last three decades have not been good for working class and middle income Americans compared to the the period 1950-1970 early postwar period recovery....

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Sharp drop in oil prices in Dec. 2015.

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Krugman points out that the U.S. Federal Reserve's forecasts in March 2012 show the U.S. will experience low inflation and high unemployment for many years. These forecasts are in sharp contrast to the expectations in the equity markets based on an uptick for a couple of months of unemployment numbers. The Fed's own statements suggest the improvement in hiring may be temporary and a response to the overreaction in hiring in 2009-2010 to the financial crisis, and not a lasting improvement. The Fed pointed out that the long term unemployed are at about 40% of the total unemployed and the share of the population that is working in March 2012 has barely budged from 58% in 2009.

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The memo to U.S. president Reagan written by his economic advisors in November 1980 before his first inauguration. Inflation was running at 13% and the economic problems looked as intractable as they do today. Advisors included Milton Friedman and George Shultz. The memo called for setting steady policies for the long run to encourage investment and growth, and at the same time steady monetary policy. This is different from the repeated quantitative easing efforts by the Federal Reserve responding to financial markets, and the Obama administration's stimulus efforts that have not led to long term growth. On the long term perspective the memo said: "The need for a long-term point of view is essential to allow for the time, the coherence, and the predictability so necessary for success." The memo was released by George Shultz.

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After overly aggressive bank lending following the financial crisis of 2008 China is now badly overextended. China has also learned from the U.S. experience about the risks inherent in growth generated from a credit boom. In 2009-2010 China was also getting less bang for the buck in terms of the increase in lending needed to generate growth compared to earlier periods. Orlik says don't expect China to help the global economy the way it did in 2009-2011, and that there is no Plan B for China.

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John Taylor on the dangers of a loose U.S. monetary policy and the effects this had in fueling a housing bubble in Spain, Ireland and other EU countries. Taylor points to the bubble ocurring in emerging market economies from low interest rates. Taylor says the ECB's interest rate moves in 2003-2005 were affected by the Fed's low interest rates. He estimates the ECB set rates about two percentage points too low leading to housing bubbles in EU countries. A similiar process is taking place today with the Fed's near zero interest rate policy. Taylor points to interest rates in a group of 18 emerging market economies- including Brazil, China, India, Mexico and Turkey, which have held interest rates on average about 5 percentage points below widely used benchmarks fueling a doubling of global commodity prices between 2009-2011. The U.S. Fed's policies make it harder for central banks in emerging market economies to take aggresssive action against bubbles developing in these countries. Taylor says his does not mean that the Fed should not pay attention to the U.S. unemployment rate and long term unemployed, but should keep in mind the negative effects of slowing demand in emerging market economies and in the EU as a result of its monetary policy of keeping rates at near zero for long periods of time. This feeds back to the U.S. economy at a critical time....

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The People's Bank of China's decision to reduce the reserve requirement for deposits at banks by 0.5% is not likely to have much impact, as banks already have enough money to lend. The problem is more a lack of demand for loans as the economy slows. Inflation fears restrict the use of growth tools such as lowering interest rates and the housing bubble limits the use of construction spending to increase growth. Political uncertainty with a leadership transition, and economc uncertainty in Europe also limit options.

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Prof. Scott Kennedy of the Research center for Chinese Politics and Business, voices concerns of experts who think that the $585 billion stimulus and the doubling of lending this year, increase in exports by a third last month, all point to an economy that is expanding too quickly. Kennedy says that no one defies economic laws, that eventually endless growth can get get you in trouble. The concern is whether the overexpansion of credit and the size of the stimulus may have led to overreaction in stimulus spending. People's Daily newspaper of China said that China's leaders are moving much faster than leaders of developed nations. But the flip side of this is that in the rush to increase spending there may be a lot of wasteful spending resulting in many bad loans a few years from now.

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"China's Superbank," by Henry Sanderson and Michael Forsythe looks at the rise of China Development Bank to provide insights into the two decade real estate boom in China, and the trillions of dollars in loans made by state owned banks to finance China's state owned industries and infrastructure development. The authors say these loans based on land owned by the state, improved with roads and other infrastructure and then sold to industry, have helped finance China's urbanization and industrial development. But it has also created problems including eviction of farmers from the land by local government authorites increasing inequality, led to misallocation of capital on bad projects, and an unsustainable model of development focussed on state owned companies. A major side effect of this is not covered in the book. This is the impact of crowding out of credit for private industry in China, with privately owned business having to pay higher rates in the underground loan market or lacking financing. A major focus of the report "China: 2030" by the World Bank and China's official think tank Development Research Center is on reversing this development to come up with a sustainable development model. The report was supported by World Bank chief Zoellick and China's new prime minister Li Keqiang. "The Great Rebalancing," by Pettis, a finance professor at Beijing University, looks at the other side of the financing of China's boom- the low interest rates on savings for China's consumer. This reduces household incomes and reduces purchasing power as the interest rates are lower than the rate of inflation. Lower value of China's currency also reduces the purchasing power for China's consumers. Estimates show the low interest rates cost China's workers and consumers somewhere in the range of 3 to 8% of GDP annually in bank deposit income. This money is funnelled through the banking system to make more loans for infrastructure and growth at the state owned companies, concentrating exraordinary level of financing in one direction. As a result the consumption share of GDP in China has actually fallen in the two decades of hyper development. This is about 34% compared to 50-55% for other Asian economies....

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Research from Australian National University shows steadily improving conditions for migrant workers in China. Migrant workers were able to spend more time in cities- an average of 8.9 years. The hukou sysem ensures migrants return to rural areas when they have to raise a family. About 252 million migrant workers work in factories and construction jobs in urban areas. Migrants with children leave them with grandparents back home. Improving the conditions of these workers is important to reduce the wage and income disparities in China and to reduce inequality. About a fifth of the migrant population now has pension and health benefits. Creating a balanced economy with domestic consumer spending making a larger share of GDP also requires improving wages and benefits of migrant workers. Incoming prime minister Li Keqiang says in a statement on a government website: China "must take migrant rural workers and gradually change them into urban residents. This requires that we push forward household registration reform." If done seriously this will create a new kind of China as these migrant workers are integrated into urban society after years of being shunned and ignored by China's educated middle class. Professor Meng's research at Australian National University of migrant workers shows the proportion of migrant workers with unemployment insurance increased from 11% in 2008 to 21% in 2012. The research shows similiar figures for health and pensions. Improving their living standards also make it attractive for more young people from rural areas to migrate to cities increasing urbanization....

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Su Liping, professor at Tsinghua Unversity, says there were 180,000 protests, riots and other incidents, protesting economic injustice in 2010. Most of the incidents were against land grabs, corruption and abuses by local officials, and unpaid wages. Inflation has hit the poor, migrant workers and people with low incomes hardest. Food prices were up 13.4% in August over the same month prior year. Pork prices were up 52.3%. Other problems are now meshed in with inflation. Local government debt in China, according to the National Audit Office, was 10.7 trillion yuan in June 2011. The National Audit Office estimates 23% of this, or 2.5 trillion yuan, depends on land for repayment. Analysts say China's local government made repayment in 2010 using the 2.9 trillion yuan in revenue from land sales. The same amount of land has to be sold in 2010 to make repayment. At lower prices even more land may have to be sold. The danger say Orlik and Jie, is that inflation and the pressure to acquire more land- and consequently more land grabs- will pose severe risks to the social contract in China....

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Central Huijin, part of China's sovereign wealth fund, China Investment Corporation, bought shares of China's four major banks in October 2011 to prevent steep price declines. China's bank stocks have lost about a third of their value in 2011. The four major banks- China Construction Bank, Agricultural Bank of China, Bank of China, and the Industrial and Commercial Bank of China- control two-thirds of the banking industry in China. In China's interlocking system of relationships between the state, the banks and the state controlled industrial companies, Central Huijin owns 35.4% of Industrial and Commercial Bank, 67.6% of Bank of China, and similiar stakes in the other 2 banks. It was created in 2003 to bail out China's banks after bad loan losses, and was transferred to China Investment Corporation in 2007. As part of the 2007 move bonds were issued by CIC to compensate the central bank. This means the banks pay dividends to CIC so that it can make payments on the bonds. Today the 4 major banks pay half of their earnings in dividends to CIC. CIC chief Lou Jiwei, says Central Huijin needs 300 million renminbi a day, or $47 million to pay interest on the bonds to the central bank. The 4 major banks are also under pressure from China's regulators to increase their capital reserves, because of large bad loans to local governments after the global financial crisis of 2008....

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Moody's senior analyst based in Beijing, Yvonne Zhang, says China's National Audit Office's estimate of the banks loans as part of China's total local government debt of 10.7 trillion yuan ($1.65 trillion) is understated. The Audit Office estimated bank loans to be 8.5 trillion yuan. Moody's says this is understated by 3.5 trillion yuan or about $540 billion. Moody's sees the delinquency ratio of these loans between 50 and 75%. With these figures it sees 8-12% of bank loans in China's banking system as non-performing loans.

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China's premier, Wen Jiabao, opened the National People's Congress, annual meeting of the Chinese parliament, by saying that China had lowered its growth rate to 7.5% from 8%. GDP growth for 2011 was 9.2%. Wen set an inflation target of 4%. The CPI index increased by 5.4% in 2011. Wen set 14% growth target for M2, China's broadest measure of money supply.

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U.S. Federal Reserve chairman Bernanke, says the Fed will keep interest rates low till unemployment reaches 6.5%, as long as inflation remains at about 2%. If unemployment reaches 6.5%, and this is because more people are dropping out of the labor market, he will take this into account. If unemployment stays high the Fed indicated in its statement that it would tolerate a higher inflation of 2.5%, as long as the longer term outlook was for inflation to be at 2%. Bernanke said this doesn't mean monetary policy is on autopilot, because the Fed will watch conditions carefully and will leave room for flexibility- keeping an eye out for new asset bubbles that could develop, and monitoring labor market conditions and inflationary pressures and inflation expectations. If inflation falls well below 2%, or unemployment rate falls mainly because of people dropping out of the labor market, the Fed may continue to keep interest rates low. This policy was announced as U.S. fiscal cliff deficit negotiations continued in Dec. 2012 with one scenario being considered by both political parties being going over the Jan. 1 deadline before coming to an agreement. Bernanke pointed to this, saying "this is a major risk factor right now." The Fed's activist policy in economic policy has given financial markets and business a measure of stability not provided by government and Congress. Fed policy is to buy $40 billion of mortgage securities, and $45 billion of long term Treasury securities for each month in 2013. It will fund the purchases by adding reserves to the banking system, which is to say that it will print money to buy more bonds. This is a major decision by the Fed in that the Fed has shied away from unemployment targets in the past. Bernanke described this action as a new"automatic stabilizer" in the U.S. financial system- if unemployment rises investors know this pushes the Fed's interest rate increases further down the road and would drive interest rates down, if unemployment drops sooner than expected, investors anticipating Fed's rate increases would drive long term interest rates up, to keep stable growth....