Korean Job Discussion Forums

[Manner of Speaking]

I was wondering if I could ask a question to anyone who was an Economics major in college, or who is knowledgeable about the subject?


On the weekend I was reading an article in the Korea Times to the effect that there is concern the Chinese economy is growing too fast. Apparently the economy there is 'overheating', and there are fears of a 'melt-down'.


Metaphors aside, I took Econ 101 a long long time ago, and I don't quite remember why it's bad if an economy grows 'too fast'. It might be partly because I'm from Canada...a place where an 'overheated' economy and full employment are institutionally impossible.


I understand the inflation aspect; if an economy grows very quickly, there is a risk that too much cash may end up chasing too few goods and services, in the short run. But inflation risk aside, if an economy is roaring along at 10% a year and pulling more and more of the population into full employment, how is that bad?


How does - or what happens precisely when - an economy 'overheats'? Is it primarily because of an increased risk of bad loans and/or investment defaults/bankruptcies? I'm honestly curious, and would appreciate any comments from people in the know. Thanks!

MOS

[Moldy Rutabaga]

MOS is already a knowledgeable guy, but I'll try to add my 2c.

Albertans tend to get worried about an overheated economy because they expect a federal grab of the money, or they have the more everyday problem of labor shortages and poor service in restaurants, or simply a too rapid expansion of people and houses which puts strains on the infrastructure of a city.

China likely has similar worries, that the growth in money, cars, houses, and affluence will strain the already overtaxed road and good systems of the cities, and exacerbate the problems of pollution and wealth disparity between city and countryside.

But more cynically, many commentators simply think that China doesn't want the country to get too rich too fast, because if China can't cry poor this will increase calls from other countries to let the yuan float higher. The regime only cares about the cost of an increased currency.

Every country wants growth, or claims to, but controlled and sustained growth, and the Chinese government would probably prefer controlled stagnation to uncontrolled growth, which is unpredictable and might lead to sudden collapse.

Ken:>

[ChopChaeJoe]

Boom and bust.

[pastis]

A big problem is speculative investment, or over-investment in certain areas. This is what happened in Japan during the famous bubble. The economy was kicking @ss for so long people thought it would never end. Investements continued even after prices became ridiculous. In Japan's case land values became so high they simply couldn't deliver (Tokyo was once worth more on paper than the entire U.S.). A lot of this over investment was funded by credit loans from Japanese banks.

In China's case I think it's more a danger of investing too much too quickly in certain parts of the economy (mainly infrastructure) without knowing if it's going to pay off long-term and not focusing enough of domestic consumption. When everyone starts throwing their money around haphazardly, just assuming all their investments will continue to make money, over-investment becomes a risk, and huge amounts of borrowed capital risk being suddenly wiped out (like in Japan) if there's a market downturn. This would of course bankrupt many people who would then default on loans, in turn killing off the banks themselves (= less investment = economy stops growing like in Japan).

[mindmetoo]

[wylies99]

Overheating usually means businesses grow too quickly, and the internal structures can't keep up with the other parts of the business. A classic is AOL/AOHell, in the 90's,in the US- lots of promises- their marketing programs were amazing ("free" internet access, disks everywhere, TV ads), but could the internal structure handle the number of customers? NO- and it drove millions AWAY from AOHell. In the short-term, AOHell gained millions of customers, but, in the long-run, AOHell LOST millions of customers, and earned a reputation as a terrible company for customer service.

It can be the same for a country in the business development stage- the country borrows A LOT of money, and then doesn't build up the infrastructure to ensure permanent growth. If something bad happens, the country will have problems making payments of the loans- and that will probably involve billions of dollars- enough to cause a crisis at major banks. This would cause investors to pull their money out of that country, (to protect themselves), and the economy would collapse. This would then cause economic trouble throughout the region, and, eventually, the rest of the world.

Inflation and deflation are very real possibilities in this part of the world, with the reliances on imports/exports


The Korean real estate "bubble" could burst- prices FAR above real values. Then something happens, (internal or external), and those who bought in with borrowed money, are trapped. Eventually the lenders are stuck holding the bag.

[Manner of Speaking]

[Ilsanman]

Also they're growing too fast and not dealing with social issues nearly as quickly. eg, sexual discrimination, illiteracy.

Sounds like Korea. It will boom and then crash and burn. During the recession, they will start to deal with those issues, like Korea is doing now.

Last I heard, the Chinese banks have lent out about every cent possible. That does not bode well.

[pastis]