Written By Basilio Chen

VN:F [1.9.16_1159]
Rating: 0.0/5 (0 votes cast)

The answer is yes but the question is at what cost.

Two school of thoughts should be considered, the Austrian School that endorses the free-market approach and the more widely used Keynesian approach.

For the Austrian School, read Ludwig H. Mises (1881 – 1973) , a prominent figure in the Austrian School of economic.  His best known for his work on praxeology.

A government directed stimulus can add to the economy however it is a rather innefficient effect at all times.  On the other hand, Austrian School experts will also say that no matter government or private sector, any time an economy is over stimulated, the investment return suffers from being efficient and at worst from a bubble leading to a financial crisis.

In recent times, after the financial crash of the dotcom (private investment) bubble in 1999-2000, the US government stimulated the economy and the resulting effect was the Real Estate bubble to follow in 2007-2008.

This model seems to replicate in places outside of the USA as well.  China has been receiving major foreign direct investment (private and others) to the extend that China is the magnet for the majority of investment taking over the prior position of the USA for invesment.

Since 2008-2009, China government also has been providing stimulus into its economy (which in many respect is different than the one in the USA and Europe).  The result can be seen in the following chart.

The first is the large Assets represented by the Balance Sheet of the People’s Bank of China (China’s national central bank).

 

You can see that as more financial assets built from 2004 to present, it did not have much effect in the Industrial production.  Increasing investments when the world economy is saturating and demand is winding, does not necessarily create new production although it can produce excess supply and inventory. 

In addition, since 2009, much of the capital has gone to infrastructure and real estate development where demand is not yet near.  Many cities in China have ample supply of inhabited apartments and many highways are under utilized with no visible sign of major utilization.  On the opposite side, traffic in all major cities have major congestion while highways and superhighways remain with little to no traffic (who is paying for the infrastructure cost of these superhighways now).  It is clearly possible that demand will come in the future and this would be good investment however, infrastructures require costly maintenance to be paid when there is no high demand seems to be capitally inefficient.