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A Real-Assets Model of Economic Crises: Will China Crash in 2015?

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  • Mason Gaffney

Abstract

Loosely derived from Henry George's theory that land speculation creates boom-bust cycles, a real-assets model of economic crises is developed. In this model, land prices play a central role, and three hypothesized mechanisms are proposed by which swings of land prices affect the entire economy: construction on marginal sites, partial displacement of circulating capital by fixed capital investment, and the over-leveraging of bank assets. The crisis of 2008 is analyzed in these terms along with other examples of sudden economic contractions in U.S. history, recent European experience, and global examples over the past 20 years. Conditions in China in 2014 are examined and shown to indicate a likely recession in that country in 2015 because its banks are over-leveraged with large-scale, under-performing real estate loans. Finally, alternative methods of preventing similar crises in the future are explored.

Suggested Citation

  • Mason Gaffney, 2015. "A Real-Assets Model of Economic Crises: Will China Crash in 2015?," American Journal of Economics and Sociology, Wiley Blackwell, vol. 74(2), pages 325-360, March.
    • Handle: RePEc:bla:ajecsc:v:74:y:2015:i:2:p:325-360
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    File URL: http://hdl.handle.net/10.1111/ajes.12093
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    References listed on IDEAS

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    1. Gabriel Palma, 2000. "The Three Routes to Financial Crises: The Need for Capital Controls," SCEPA working paper series. 2000-17, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.
    2. Reinhart, Carmen, 2008. "Reflections on the International Dimensions and Policy Lessons of the U.S. Subprime Crisis," MPRA Paper 11863, University Library of Munich, Germany.
    3. Guangye Cao & Jun Nie, 2014. "China’s slowing housing market and GDP growth," Macro Bulletin, Federal Reserve Bank of Kansas City, pages 1-2, August.
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    Cited by:

    1. Elliott Sclar, 2021. "The Infinite Elasticity of Air: New York City’s Financialization of Transferable Development Rights," American Journal of Economics and Sociology, Wiley Blackwell, vol. 80(2), pages 353-380, March.
    2. Franklin Obeng-Odoom, 2016. "The Meaning, Prospects, and Future of the Commons: Revisiting the Legacies of Elinor Ostrom and Henry George," American Journal of Economics and Sociology, Wiley Blackwell, vol. 75(2), pages 372-414, March.

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