China and Causality
The New York Times has a fascinating story about an apparent general glut in China. Inventories are skyrocketing and production orders are being cancelled left and right. Which of the following theories is most appropriate to the situation?
- Such a situation is impossible.
- Excessive savings and underconsumption have caused disastrous lack of demand, which can be remedied by government spending.
- Overinvestment in infrastructure creates diminishing returns to capital investment, in turn causing a collapse of investment and thus of demand and ultimately a severe crisis.
- Excessive credit in the economy has created overinvestment in ultimately worthless enterprises and infrastructure, which can ultimately only be resolved by a purging of excess goods and capacity.