Sign of the times?

8 06 2011

The Chinese do love their skyscrapers. A lot. Enough to build one every five days for the next three years.

A few things hit me as I was reading about China’s building spree. First, how jaw-droppingly awesome that feat of construction is (or will be). The logistics are just amazing–imagine the hundreds of tower cranes that will need to be in round-the-clock operation across China to make this happen. Think of the millions of tons of concrete and steel. It’s simply staggering.

Plus, the world's largest Pink Floyd Laser Light Show?

But there’s a potentially dark side to this. As I was reading the Telegraph article, I recalled a rather extensive piece I saw on the Mises Institute website a year or two ago relating skyscrapers to economic busts. Sure enough, the Telegraph mentioned the pioneering study by property analyst Andrew Lawrence, which seems to show that numerous 20th century economic downturns were proceeded by the construction of a landmark skyscraper. A full breakdown of the study is available here and is certainly worth a look if you have the time.

There are a lot of bizarre supposed economic “indicators” out there, most of which seem to be based on superstition. But the “skyscraper index,” while not perfect, is scarily accurate. See below:

And China next?

If it seems to work where other indicators fail, it’s probably because it rests on at least a shred–and maybe more–of economic reality. From the article on Mises:

The common pattern in these four historical episodes contains the following features. First, a period of “easy money” leads to a rapid expansion of the economy and a boom in the stock market. In particular, the relatively easy availability of credit fuels a substantial increase in capital expenditures. Capital expenditures flow in the direction of new technologies that in turn creates new industries and transforms some existing industries in terms of their structure and technology. This is when the world’s tallest buildings are begun. At some point thereafter, negative information ignites panicky behavior in financial markets and there is a decline in the relative price of fixed capital goods. Finally, unemployment increases, particularly in capital- and technology-intensive industries.

Sound familiar? That’s because this is basically what happened during the American housing boom (with a few ugly incentives added to grease the rails to destruction). Just substitute “cookie cutter suburbs” for “world’s tallest building.” And China isn’t just building empty suburbs; they’re building empty cities.

No one can predict with any accuracy what exactly will happen to China, or when. If Western nations and the so-called Asian Tigers can be taken as examples, the cheap credit issued to fuel rapid economic grown will only lock China into the same pattern of vicious boom-and-bust that plagues the world’s more mature economies. If the skyscraper index is to be believed, this destructive pattern may begin to unfold in China sooner than any of us think.

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