Tuesday, February 18, 2014

How China Fooled the World

The BBC is sounding the alarm on what was already known:  there will be a crash in the Chinese economy.  Of course!  All economies playing the keynesian game will crash, and it will be felt relative to the others.

The show is available here.

Quotes from the presenters via Mish:
I visited China at the time and witnessed mobs of poor migrant workers packing all their possessions, including infants, on their backs and heading back to their villages. It was alarming for the government, and threatened to smash the implicit contract between the ruling Communist Party and Chinese people - namely, that they give up their democratic rights in order to become richer.
Wait wait!  What you saw on one visit exposed the entirety of the Chinese economic situation?  hmmm... too much of a leap.  And you know the mind of the officials?  And that mind is concerned about a social contract involving democracy, and rights given up?  The Chinese peasant is jealous of his democratic rights?  All this sounds unlikely.

Yes, of course the Chinese economy is in a huge bubble, and don't they know it!  The took the other side of the USA bet and ended up with modern infrastructure, while USA is left with our pensions and wealth spread all over the ground in the middle east.  It is hardly a question of anyone fooling the other.  If anything, China outsmarted USA officials at their own game.

Yes, there is a huge bust coming.  But the question is who will have the manufacturing capacity and credit to rise like a phoenix?

Two men are hiking when they see a bear cub ahead, and hear a roar of a she-bear behind.  O dear.  They are between a she-bear and her cub.  One man drops down and pulls off his hiking boots and begins to put on his Nikes.

The other man stupidly explains,  "You cannot out run a she-bear...!"

To which the now-Nike shod man replied, "I need only outrun you."

USA has boots on the ground.  The Chinese are wearing Nikes.

Feel free to forward this by email to three of your friends.


Anonymous said...

I've become convinced that the U.S. dollar, and Treasuries will never collapse (or have US dollar hyperinflation): They are the safest investments on planet Earth in history - they are the basis of America's power and hegemony. The bankers and big U.S. companies would never allow it.

John Wiley Spiers said...

In history? Wow... and there is no power or idea that can compete, nor internal hubris?

This does not matter?


"Remember, when President George Bush’s National Economic Council Director, Lawrence Lindsey, had told the country’s largest newspaper “The Wall Street Journal” that the war would cost between $100 billion and $200 billion, he had found himself under intense fire from his colleagues in the administration who claimed that this was a gross overestimation.

Consequently, Lawrence Lindsey was forced to resign.It is also imperative to recall that the Bush administration had claimed at the very outset that the Iraq war would finance itself out of Iraqi oil revenues, but Washington DC had instead ended up borrowing some $2 trillion to finance the two wars, the bulk of it from foreign lenders."

Anonymous said...

The government actually does not need to issue debt to finance it's operations - issuing debt or T-bills is an anachronism from when we were on the gold standard. Since 1971 thanks to Nixon, the U.S. federal government is "monetarily sovereign", meaning that it has control over and can create as many dollars as it needs (controlling for inflation of course (via interest rates) - there is indeed a limit). The government can never fail to pay interest on or redeem a T-bill - ever. How can a "currency issuer", which the US federal government is for the dollar, run out of currency that itself issues and controls? The U.S. federal government can never, ever become bankrupt and insolvent. Strange but very true.

Any nation that wants it's currency to be the world's reserve currency must run a budget and trade deficit. China runs massive trade surpluses, so no way can the renmimbi can be the reserve currency.

See also:


John Wiley Spiers said...

Now this is truly delusional. It may not become bankrupt or insolvent by its own estimation, in fact no bank does, but it very well may find no takers for its money or credit (can you say "fiat"?)

Also, how is this off-the-semi-gold-standard working out? Unemployemnt, real wages gone no where since the 1970s, wars, bailouts, inflation, QC failing... quite and economic system you are admiring there...

Anonymous said...

I'm not trolling and this is not delusional thinking. The above description is just mere observation of the factual way the present monetary system functions - it's called monetary sovereignty or modern monetary theory (or MMT). I'm definitely not an admirer of it, but it's the only school of economic thought that accurately describes our money system (The faculty at the Economics department at UMKC are the leaders in this subject from what I've been told). Whenever I question others about it (other financial bloggers, writers, academics - even Mish Shedlock himself), I can never get a clear cogent response refuting it and why it doesn't apply. There are indeed problems with Austrian economics and the gold standard as well, which I won't go into here since these discussions can be easily found by googling.

Back to your question of how is it "working out?" These problems are not due to the system being MMT per se I think, but that people are mismanaging it. The economy could be improved with an understanding of MMT.

If what you describe or want is better, a free or private money system I think, then sure, why not, I agree if it is better for society than MMT. Again, MMT just factually describes what is, not what should be. I think some people (like Austrians, Libertarians) have a philosophical bias against understanding MMT because they think that government should not have the involved role in economics than it actually has with the way our system is currently set up - so they either ignore, mock or attack MMT.

John Wiley Spiers said...

I'll take the bait...

Yes, MMT tracks our system now, but makes recommendations for change, which implies it is not the same thing.

If you feel it is maligned for the nincompoops mismanaging it, then you are arguing "if we can just get the right people in charge", the superman claim. Doubtful, especially when Tiberius puts himself forward as the much-needed defender of morals.

Finally, for some libertarians and all Austrians a government role in money is a non-starter. The fat that MMT assumes govt participation is the rub, a point they understand perfectly well.

Come up with MMT that assumes no violence-based state, totally voluntary, then they will listen.

Anonymous said...

Can you give an example of a country where the government has no role in it's money and is completely voluntary? Hong Kong?

John Wiley Spiers said...

Well if you properly define money, then almost every country has no role in it.

If you call speculative derivatives money, then my guess is every country in the world has a central bank, just as it has an airline (more or less). It is a matter of national pride.

Hong Kong changed its monetary system again back in the 90s (anticipating the handover) but it is pegged to the dollar, on the premise to win at he game you have to get in the game. Although Hong Kong maintains vestiges of the free market with multiple private companies each issuing their own currency at the same time, its business people are out to make a buck, and the USA is easy to beat, if you play the game.

Money is gold and silver, and few countries restrict that. Everything else is derivative, pyramid scheming, three card monte, etc, and wobbly indeed.

USA has had our present system for only a century, and it was the bloodiest century in history. I think the link is direct.

The question is not "is there a country in which a government plays no role in currency" but which countries will bounce back first, apres deluge, by staying out of banking.

Anonymous said...

Here is economist Steve Keen on the gold standard:


Money is a social contract or credit according to Keen.

Anonymous said...

Here is economist Milton Friedman on the gold standard: