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Red Ponzi Ticking—-China And The Dark Side Of The Global Bubble

Discussion in 'China & Asia Pacific' started by BMD, Aug 27, 2016.

  1. BMD


    Nov 20, 2012
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    Red Ponzi Ticking—-China And The Dark Side Of The Global Bubble, Part 1

    by David Stockman • August 25, 2016


    I am in the throes of finishing a book on the upheaval represented by the Trump candidacy and movement. It is an exploration of how 30 years of Bubble Finance policies at the Fed, feckless interventions abroad and mushrooming Big government and debt at home have brought America to its current ruinous condition.

    It also delves into the good and bad of the Trump campaign and platform and outlines a more consistent way forward based on free markets, fiscal rectitude, sound money, constitutional liberty, non-intervention abroad, minimalist government at home and decentralized political rule.

    In order to complete the manuscript on a timely basis, I will not be doing daily posts for the next week or two. Instead, I will post excerpts from the book that crystalize its key themes and which also relate to the on-going gong show in the presidential campaigns and in the financial and economic arenas. Another of these is included below.

    I am also working with my partners at Agora Financial on a new version of Contra Corner. More information on that will be coming later this month.


    …..Donald Trump is absolutely correct that China is a great economic menace. But that’s not owing to incompetence at the State and Commerce Departments or USTR in cutting bad trade deals.

    Nor is it even primarily due to the fact that China egregiously manipulates it currency, massively subsidizes its exports, wantonly steals technology, chronically infringes patents and hacks propriety business information like there is no tomorrow.

    If that were the extent of China’s sins, a new sheriff in the White House wielding a big stick and possessing a steely backbone—-attributes loudly claimed by The Donald—-might be able to reset the game. After hard-nosed negotiations, he might even obtain a more level and transparent playing field, thereby eventually reducing our current debilitating $500 billion import trade with China and retrieving at least some of the millions of jobs which have been off-shored to the far side of the planet.

    But as we demonstrated in Chapter 5, the world fundamentally changed in the early 1990s when Mr. Deng and Chairman Greenspan jointly initiated the present era of Bubble Finance. The latter elected to inflate rather than deflate the domestic US economy and to thereby export dollar liabilities in their trillions to the rest of the world.

    At the same time, having depreciated the yuan by 60%, Mr. Deng discovered that to keep China’s nascent export machine booming he needed to run the printing presses in the basement of the People Bank of China (PBOC) red hot, thereby sopping up the massive inflow of Greenspan’s dollars and keeping China’s exchange rate pegged to the US dollar.

    So doing, Beijing kept domestic wages and prices cheap and turned China into an export powerhouse by draining its vast rice paddies of history’s greatest warehouse of untapped industrial labor. In fact, in less than two decades it mobilized more new industrial workers than had existed in the US, Europe and Japan combined at the time in the early 1990s when Mr. Deng proclaimed that it was glorious to be rich.

    Unfortunately, that wasn’t the half of it. Greenspan’s dollar profligacy was inherently contagious. By the 1990s, the governments of most of the developed world were run by statists and socialists who were loath to see their exchange rates soar in the face of Greenspan’s epic flood of surplus dollars.

    So rather than harvesting social gains from the cheap American exports Greenspan had on offer, the new ECB and the BOJ reciprocated with monetary expansion designed to keep their exchange rates down and protect domestic industries and labor .

    Old fashioned economists were wont to call this a race to the currency bottom, and surely it was that. But what it really did was unleash a global tsunami of credit expansion and an economic race of another sort. Namely, to today’s nearly universal malady of Peak Debt.

    As we documented earlier, the combined central banks of the world have expanded their balance sheets from $2 trillion to $21 trillion or by 10Xduring the past two decades. So doing they drove the price of credit and capital to the subterranean zones of economic history and rationality, but they did not abolish the laws of economics entirely.

    To wit, the more you subsidize an economic resource, the more of it you get. That’s what happened with credit and capital when China and its global supply chain ran their printing presses fast enough to keep up with the Fed and its DM world counterparts.

    In less than two decades, public and private debt outstanding in the world rose six foldfrom $40 trillion to $225 trillion. On paper that represented a gain that was nearly 4X greater than the global GDP expansion during that period, but in fact it was far worse.

    That’s because as the global credit spree reached its apogee in recent years malinvestment and wasteful, inefficient fixed asset investment became rampant. In effect, the central banks of the world were enabling the “printing” of GDP which wasn’t wealth, wasn’t sustainable and wasn’t the fruit of genuine capitalist enterprise; it was only transient GDP ledger entries destined to become future year write-offs, losses and white elephants.


    The world’s central bank driven credit binge had a dual impact. In the developed world and especially the US it resulted in a vast inflation of household debt and leverage—-or the equivalent of an internal LBO as we saw in Chapter 6. Accordingly, the aging households of the DM world were able to live beyond their means or level of current production and income for nearly two decades, boosting mightily the call on exports from China and its emergent supply chain from South Korea and Taiwan to the Persian Gulf and Brazil.

    At the same time, booming global trade and export demand in combination with red hot central bank printing presses in China and the EM engendered the greatest CapEx boom in world history. Much of it occurred in China, but also in its satellite resource and mining colonies such as Australia and Brazil and in the global shipping and materials processing industries, most especially energy.

    Needless to say, there is no possible scenario in which global CapEx could have grown from an already elevated $1 trillion annual rate in the year 2000 to $3 trillion barely a decade later in a world of honest money and market priced capital. Instead, the world’s central banks enabled what old fashioned liberal economics a century ago called a crack-up boom.


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