Re: Chinese economy

From: muditha (muditha_at_email.com)
Date: 11/09/04 

Date: 9 Nov 2004 03:08:16 -0800

> A "hot" economy means that it is growing at a pace beyond the system's
> capability of keeping it up for a long time. If you keep running a
> motor engine for a long time at high revs, eventually it will break
> down. Same for economies. What happens when an economy overheats?
> First of all, investments, both debt and capital, are done without
> proper due diligence, caught in the exitement of hypergrowth. In other
> words, irrational exhuberance takes hold. Money is assigned to
> projects doomed to fail, and overcapacity is build in several
> industries. This overcapacity will eventually lead to very damaging
> war prices, and to loan defaults, and maybe to bank failures.
> So it is not bad for an economy to continuosly grow, as long as it
> doesn't grow too fast. When there is too much money to invest,
> investment is done carelessly, increasing business risk. To cool down
> the economy, the central bank withdraws money from the economy by
> raising interests (among other monetary maneuvers). When interest
> rates are higher, some investments are less profitable than just
> keeping your money in the bank, so banks are less prone to lend money,
> and since money is now more expensive, less companies are willing to
> take loans.

Thanks a lot but I have a small question,
How can a country decide when its' ppl. start wasting money in
unneccesary investments? Are there any specific indicaters a gvt. can
take a look into?

Thanks a lot.
Muditha.

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