Thursday, August 20, 2009

China's Boom or Bust: the Paradox of Easy Money

The Chinese perpetual growth machine chugs along, leaving many commentators shaking their heads (The Coming Chinese Meltdown at PrudentBear), and some nodding in approval (such as The Secret of China's Economic Miracle by Ellen Brown.

According to my analysis, typical economists do not understand the benefits of the state controlled banking system (that China has and Ellen Brown recommends), but free money advocates like Ellen Brown do not understand the dangers of government control.

The benefit of state banking are clear and persuasive: control over credit, done for the public benefit, allows a remarkable immunity to the laws of finance that govern private banking systems. Bad loans piling up seems to be a huge problem, right? Not so much to the Chinese. When the bank is the government, just write them off, and start lending again.

The Chinese system is remarkably like the core action of my Jubilee People's Bailout, and is living proof that it works. Instead of letting bad debts and tight money constrict the real economy, just write the debts off and supply more money. Viola, economic growth continues! It really is that easy. The Chinese are proving it right now in the sheer incredible volume of loans that the government is forcing, literally requiring by law, banks to issue into the productive economy. Hence, Chinese growth continues even as the rest of the world contracts, despite supposed Chinese reliance on exports.

The problem with this permanently state-run system is the issue of malinvestments and waste. The free market is necessary because it gives real signals about available resources. If the government continually pumps the system full of money, those profit and loss signals are lost. In a free economy, the business cycle is a natural response to too much malinvestment, as prices collapse, companies fold, and everyone tightens their belt and retools into profitable areas. If government floods the economy with cash at every sight of problems, malinvestments are never cleared out, meaning true and sustainable profitability is never reached.

With its tight controls on capital flow and currency trading, along with state planning and bailouts, the Chinese economy today is much like the old Soviet economy. The big difference is that the Soviet block was firewalled off from the economy of the free world. China today is like a parasite on the free world's economy, sucking in the world's resources in the effort to delay the day of reckoning that eventually befell the Soviet system. The problem for us is, this time, we are not firewalled off, so our markets and way of life have become hostage to Chinese malinvestment and economic reality-denial.


Anonymous said...

I wish you would explain how our response to this "credit crisis" differs from China. To the uninitiated it looks exactly the same. We took away all the bad debt and stuck it in the Federal Reserve. Voila it's gone. Same thing with bad mortgages,the "homeowner" defaults and the money is returned to the bank by the government. It looks like debt jubilee to me.
The past 10 years have been all about malinvestment with no consequences. It's been almost impossible for any companies to go out of business no matter how defective their product ( both in the US and China).
Even if all this debt goes up in smoke it seem to me we will go through the same cycle all over again unless someone in economics starts discussing that little issue of productivity.
Thank you for your comments on this blog. You are verbalizing a lot of my thoughts for the past few years.

Justin said...

Morgan, thanks for the comments, I'm happy to hear you appreciate my analysis.

As for your question: The main difference is that our stimulus is based on rolling our debt over, while taking on even more debt in the name of stimulus. The bad debt has been transferred to the government balance sheet, not truly gotten rid of. The government is only using its money-creation powers to shore up bank balance sheets. We, as a people, are in more debt than ever, the opposite of true debt jubilee.

That's why I call my proposal the People's Bailout, as opposed to the Banker's Bailout we are currently witnessing.