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Chinese Premier Li Keqiang Punctures The Keynesian "Excess Savings" Myth

Tyler Durden's picture




 

Submitted by David Stockman via Contra Corner blog,

For two decades now mainstream Keynesian economists have been gumming about China’s remarkable economic boom and its accumulation of unprecedented foreign exchange reserves. The latter hoard has now actually crossed the $4 trillion mark.

But this whole narrative is PhD jabberwocky with a Wall Street accent. What the People’s Printing Press of China has been doing is simply passing the hot potato by converting the vast inflow of dollars, euros and yen emitted by DM central banks into a fantastic flood of RMB. This massive expansion of the domestic monetary system, in turn, enabled the greatest credit bubble in world history.

Stated differently, China’s total credit market debt outstanding did not explode from $1 trillion to $25 trillion in just the last 14 years because the sons and daughters of rice farmers working in export factories went on a savings binge, thereby enabling a healthy expansion of debt-financed investment.

To the contrary, the central banks of the world went on a money printing binge and the comrades in Beijing took the bait. Namely, they chronically and massively scooped up excess foreign exchange from trade and capital inflows and stuffed it into the vaults at the central bank. This was supposed to keep the exchange rate battened down and the growth and export miracle ramping.

In age old fashion this mercantilist gambit seemed to work for a while—indeed, a long while of nearly two decades. But all the time the aging autocrats who ran the system, and who had learned their economics from Mao’s Little Red Book, were  actually swapping the labor of their young people and resources of their land for debt emissions of the profligate West. And in the process they were steadily inflating a fantastic credit bubble that financed the construction of anything that could be imagined by local party cadres and “businessmen” alike—-airports, bridges, highways, high-rises, office towers, train stations, fast rail, shopping malls, new cities, endless factories.

But the massive construction site within China’s borders defied the laws of economics and plain old rationality.  It is literally impossible for an economy to record double-digit GDP growth year-upon-year in which 50% of the gain is due to “fixed asset” investment in public infrastructure and private real estate and industrial capacity. The reason is that no society could sustain the level of consumption forbearance and mass austerity that would be required to fund such massive investment out of honest savings.

Instead, the party overlords got lured into a dangerous economic Ponzi. They sent more and more freshly minted credit—-20-35% more in some years—down the state controlled banking system where it was parceled out to state controlled enterprises, local party rulers and independent entrepreneurs.

These recipients turned it into cement, rebar, fabrications, office towers, coal mines, power plants and port facilities—-without regard for sustainable rates of return. And when returns disappointed or failed to materialize at all—such as in the empty new cities, malls and luxury apartment buildings— more credit was advanced to keep these “investments” solvent. That is, new debt was issued to pay interest on the old.

So parallel to the downward cascade of credit was an equal and opposite upward back haul of fixed asset GDP.  In short, Beijing could hit its national GDP target nearly to the decimal point year after year because its was printing GDP through the machinery of a credit driven command-and-control economy, not presiding over anything that resembles a sustainable capitalist economy.

In a sense, after the disastrous failure of Maoism, the party dictatorship has maintained its lease on life only be synching-up with the global central banking swindle that has been underway for four decades now—but especially since 1994 when Greenspan panicked after that year’s bond market route.

The giant issue facing China, however, is that it is at the end of the money-printing chorus line. It has now absorbed so much excess debt from the West and thereby inflated its credit Ponzi to such an insensible extent, that even its current rulers can see the hand-writing  on the wall.

In a recent speech, in fact, Premier Li let the cat out of the bag, calling China’s massive hoard of foreign exchange for what it is—-a vendor loan to foreign customers who buy but do not sell; who consume but do not produce. Suddenly, what has been ballyhooed for two decades as evidence of the Chinese miracle is officially labeled a “big burden”.

Actually, it has been a burden all along. The comrades have presided over the erection of a Ponzi of such immense and convoluted magnitude that they have no hope of unwinding it without a thunderous “hard landing”

 May 11 – Reuters: “China’s war chest of foreign currency reserves has become a headache as its continued rise could stoke inflation in the long term, Premier Li Keqiang said… pledging to reduce the country’s trade surplus. China’s foreign exchange reserves, the world’s largest, grew by $130 billion in the first quarter, to a record $3.95 trillion… ‘Frankly speaking, foreign exchange reserves have become a big burden for us, because such reserves translate into the base money, which could affect inflation,’ Phoenix New Media Ltd quoted Li as saying… ‘From China’s perspective, macroeconomic controls could face tremendous pressures if the overall trade is imbalanced.’ China will take steps to reduce its trade surpluses with the rest of the world…”

 

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Thu, 05/22/2014 - 21:55 | 4787187 Slave
Slave's picture

SHTF worldwide. NWO rises.

Thu, 05/22/2014 - 21:57 | 4787190 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

The Fed should be proud of it's protege, People's Bank of China. May they rot in hell both of them.

Fri, 05/23/2014 - 05:52 | 4787723 BigJim
BigJim's picture

I fucking love David Stockman. The man must have decided to devote his entire life to lifting government carpets and letting the sunlight illuminate the skulking things writhing beneath.

Keep away from hot tubs, David!

Fri, 05/23/2014 - 09:59 | 4788304 post turtle saver
post turtle saver's picture

backdraft

Thu, 05/22/2014 - 21:57 | 4787192 NoWayJose
NoWayJose's picture

China actually got the surplus by being one of the only bastions of capitalism left on the planet. Imagine a country where an entrepreneur can actually get a loan, can open a factory, can improve a product or figure out how to produce it cheaper, and can have access to a worldwide distribution network. That's not Keynes.

Thu, 05/22/2014 - 22:50 | 4787298 asiafinancenews
asiafinancenews's picture

Forex Accumulation is the product of an unbalanced economy which requires currency manipulation to remnain competitive.

Thu, 05/22/2014 - 23:04 | 4787324 ThomasMalthus
ThomasMalthus's picture

NoWayJose's idea of capitalism is crony capitalism.  Because, you know, bribes are a market that should be free too.

 

Anyway, since China won't be getting good return on their dollars, which country(ies) do we think they'll be invading?  My bet is on Taiwan.  (Guaranteed to be portrayed as nationalism to quell the dissent from the sinking economy.)  WTO is going down, hard!

Thu, 05/22/2014 - 23:15 | 4787344 NidStyles
NidStyles's picture

Not sure I would be listening to a guy calling himself Malthus. 

Fri, 05/23/2014 - 03:00 | 4787591 vato poco
vato poco's picture

Hey now, don't be hatin on Malthus. That silly dead fucker has only been wrong for 200 or so consecutive years now.....the way economists look at it, a) that hardly constitutes a trend or anything and b) he's gotta be due to be right soon!!

Fri, 05/23/2014 - 05:55 | 4787725 BigJim
BigJim's picture

I'm betting you're a 'early is wrong' kinda guy.

Fri, 05/23/2014 - 11:09 | 4788569 A Nanny Moose
A Nanny Moose's picture

Best time to fly is after a plane crash.

Thu, 05/22/2014 - 23:56 | 4787430 SAT 800
SAT 800's picture

LOL. You're the very definition of clueless. Forex accumulation is the result of manufacture and foreign sales. Manufactured products sell for more than the raw materials costs; this is called "Value Added"; it's brutally simple. You do show signs of having absorbed some mass media apologetics, tho.

Fri, 05/23/2014 - 01:06 | 4787518 asiafinancenews
asiafinancenews's picture

Wow.......don't spend China's payment all in one place! :)

Export-dependency is a condition which qualifies as an "unbalanced" economy.  Read, think, and then understand.

Fri, 05/23/2014 - 05:35 | 4787710 new game
new game's picture

pegged to ? dolla/ MANIPULATED. could have been a one sentence read.

ManiPULATION, of economy via pegging yuan to dallor...

Fri, 05/23/2014 - 06:02 | 4787730 BigJim
BigJim's picture

 Forex accumulation is the result of manufacture and foreign sales. Manufactured products sell for more than the raw materials costs

You're both right. The Chinese have out-produced the West and have consequently been able to out-sell them. But the Chicom's capital controls have distorted what would usually happen in such cases: the workers and entrepreneurs would have held the foreign currency earnings themselves; to spend them, they would either have had to import stuff from overseas, or sell them to buy RNB (thus pushing up the price of RNB, making Chinese exports less competitive) to buy locally.

Something that gets ignored in the whole 'Chinese labour is slave labour' debate is that Chinese entrepreneurs started off from a much lower cost base, in that it was not only wages but land rent and taxes that were much, much lower than competition in the welfare-warfare debt-addled West.

Fri, 05/23/2014 - 00:01 | 4787438 SAT 800
SAT 800's picture

Imagine Federal Politicians who are so cynical and so greedy they are willing to sell that access to a worldwide distribution network; knowing that it will result in the impoverishment of their own country. Well; really, they don't have any country; they're country is the dollar. Remember this well; when the opinion manufacturing machinery starts grinding on the idea of Hillary for President. Bill Clinton wasn't an ignorant Negroe Marxist; he knew exactly what he was doing.

Fri, 05/23/2014 - 07:21 | 4787834 fattail
fattail's picture

Especially when you can rape and pillage the region's resources and environment with a little graft and influence.  Also helps if the labor supply is so large that wages and conditions are so low and pitiful it is almost slavery.

 

Thu, 05/22/2014 - 22:07 | 4787202 I Write Code
I Write Code's picture

I have no idea what you just said.  They saved it?  They spent it directly on infrastructure?  They passed it down as reserves in a fractional banking system?  And now, something has changed?  And this was good, or bad, or what?

Maybe you're trying to say something like they didn't just print money, they earned it first, and this is, um, good, or bad, or obsolete, or what?  Maybe now they want to follow our example and just print, but they're afraid of that, or if they just print what do they do with these trillions in greenbacks?  Is that a *problem*, really?

Thu, 05/22/2014 - 22:39 | 4787270 Frilton Miedman
Frilton Miedman's picture

He said China is going to have a hard landing...with lots of inflation, because Keynesian spending has caused them to be producers rather than consumers, yeah, that's it.

Fri, 05/23/2014 - 00:48 | 4787493 hobopants
hobopants's picture

Those reserves have us by the balls while they vaccuum up gold and form bilateral trade agreements with Russia and the rest of the world.

They have the infastructure to produce whatever they want now and the population to consume it, the only thing lacking is energy and natural resources which they can get from Russia and elsewhere through trade.

Their biggest issue is how do they get rid of the Dollar without starting up a War or unsettling global trade, and they seem to have hit upon the right course of action, do it slowly. 

Thu, 05/22/2014 - 23:42 | 4787391 OC Sure
OC Sure's picture

It was driving me crazy too attempting to understand exactly what so many articles are trying to convey (not just Stockman's) and found that not everyone is using the same terms in the same manner and that above all the confusion of the terms works to tyranny's advantage. Exasperated, I started writing the terms myself and identifying precisely what they mean. Here is a sample of the origin of Money and Counterfeit:

"...What modern economics calls the banks' multiplier effect or leverage is not the production of money but instead the creation of counterfeit. That is it is not the representation of the measure of work performed. Instead it is the impersonation of work performed; it took no labor to produce the measure of the multiplier and leverage, all it took was a pen stroke or an enter key. It represents no productive work and is therefore not money but instead it is counterfeit. Money is the measure of work a person does to produce their product which satisfies the demands of other producers. Counterfeit is the impersonation of productive work done when actually none has been performed. The purpose of counterfeit then is to represent the illusion of trading something for something when in fact it is the trading of nothing for something. Whomever trades nothing for something is a thief..."   

- http://ocsure.blogspot.com/

I hope you enjoy the full context from which this passage was taken. It is a quick read. Have a peek and tell 2 friends to tell 2 friends. Tyranny won't be stifled successfully if we continue to accept their terms. The purpose of their terms are to make the mind numb so the body will obediently succumb. 

Thu, 05/22/2014 - 22:12 | 4787213 DavidC
DavidC's picture

Meanwhile the overnight markets slowly bleed higher...

DavidC

Thu, 05/22/2014 - 22:15 | 4787222 deflator
deflator's picture

 Are they still distributing free televisions in China to increase internal consumption? Nothing like the warm glow of an idiot box to make people need, want and desire.

Fri, 05/23/2014 - 06:08 | 4787731 BigJim
BigJim's picture

Wife Yin, watching 'Dallas': Oi! Husband Yang! Why not we got Gucci loafer???

Husband Yang, startled midst blobbing-up: Shutup, Wife Yin! I go buy $4 Genuine 'Gucchi' loafer at market tomorrow!! For all family!!

Thu, 05/22/2014 - 22:23 | 4787241 Oldwood
Oldwood's picture

Do they keep their IOUs in a lock box like our SSI payments? I'm sure we are good for it.

Thu, 05/22/2014 - 22:23 | 4787244 magnetosphere
magnetosphere's picture

wtf.  china's explosive growth is due almost entirely to massive exploitation of heretofore inaccessable coal reserves far from the eastern coast.

Thu, 05/22/2014 - 22:31 | 4787256 Oldwood
Oldwood's picture

I can't help but wonder, when the Chinese finally stop taking our credit and demand we make good for our debt, if our kind and considerate government will simply send them the keys to my house? Seriously, who's debt is it anyway. Our government is a corporate entity with no actual ownership of assets that is not OUR property. Maybe they deed over the grazing rights to vast federal lands in Arizona to the Chinese?

Fuckers

We have no idea how bad this will fuck us over. Its not even like we have a nationalist president or state department that would give a shit. Anything for the brave new world order.

Thu, 05/22/2014 - 23:12 | 4787336 ThomasMalthus
ThomasMalthus's picture

However... we promised to pay back the Chinese in USD, which by the way we have an unlimited supply.  They'll get their money back, but it will be worth much less than when we borrowed it from them.  In the end, they gave us a bunch labor and natural resources FOR FREE.  LOLOLROFL!

Fuckers?  If you mean we fucked over China, then yeah we are.

Thu, 05/22/2014 - 23:49 | 4787418 SAT 800
SAT 800's picture

I'm glad you enjoy paying the interest on the Treasuries the Chinese own out of your income taxes. The Commisars and the Peoples Army appreciate your contribution.

Fri, 05/23/2014 - 00:20 | 4787474 Telemakhos
Telemakhos's picture

Is that interest denominated in dollars?

Think it through—it matters in this context.

Fri, 05/23/2014 - 10:05 | 4788323 post turtle saver
post turtle saver's picture

what's the fed funds rate again... this term 'ZIRP' keeps getting thrown around I've noticed

Fri, 05/23/2014 - 00:03 | 4787447 Spitzer
Spitzer's picture

True but it's gone on for so long that the US is a hollowed out wasteland. This is how bad it is and they still have the reserve currency. It will look like Mexico in the 80's when the dollar falls

Fri, 05/23/2014 - 10:23 | 4788384 Oldwood
Oldwood's picture

So you think the Chinese are just going to accept us wiping out their saving values laying down? I'm not sure of their methodology but I think they will seek payment in some fashion commensurate to their perception of value. Our government's willingness to print is based on their desire to steal the wealth of our nation, not just from our pockets but the very ground on which we stand. Fuck over China, I think not. Fuck over us.

Fri, 05/23/2014 - 10:53 | 4788480 ThomasMalthus
ThomasMalthus's picture

I totally agree.  But I don't believe their value extraction will be financial.  In order to rebalance trade they HAVE to take a hit on their foreign reserves as their currency increases in value.

Instead, I believe their value extraction will be militiary.  Disputed territory with Japan... Vietnam... possibly taking Taiwan which they say is theirs anyway.  That's the alternative.  The WTO business of peace through commerce is falling flat on its face.  Setting up unbalanced trade was great for the elite that set this system up.  Now the peons will pay the price through war.  The upcoming decades will not be pretty.

Thu, 05/22/2014 - 22:42 | 4787283 ebworthen
ebworthen's picture

"...PhD jabberwocky with a Wall Street accent."

Love Stockman's writing. 

All China has to do is sell its U.S. Treasuries, make the Yuan the World Currency, and start a war.

Fri, 05/23/2014 - 03:00 | 4787592 thestarl
thestarl's picture

Even before my ZH days i understood perfectly well that China dumping their USD treasuries would be considered an act of war

Fri, 05/23/2014 - 06:16 | 4787735 BigJim
BigJim's picture

Apparently, the can't just 'dump' them; Rickards discusses this in 'Currency Wars'. I forget the details, but the US Treasury can stop wholesale 'dumping' of its debt via its control of some banking system choke-point.

Nonetheless, China could announce it'll be selling them off as quickly as the US Treasury will allow it to, which would have an interesting effect on the market's perception of the liquidity and store-of-value of this 'most liquid of investments' if the Treasury exercised its ability to stop/slow the sale.

I'm sure Mr Belgium, sorry, Mr Yellen would pick them up; both the Chinese and the US might do it all under the counter so the market doesn't get too roiled.

Fri, 05/23/2014 - 10:06 | 4788330 post turtle saver
post turtle saver's picture

more like an act of suicide, which is why they won't do it

Thu, 05/22/2014 - 22:48 | 4787292 alfred b.
alfred b.'s picture

 

    The fed is China's ragdoll...they keep their US treasuries attractive while capping the price of hard money!   China ain't complaining, for now!

 

 

Thu, 05/22/2014 - 22:50 | 4787299 pashley1411
pashley1411's picture

At its base, a country's base is the productivity of its capital and citizenry.  There is a godawful monetary whiplash coming, but China will continue to be a more productive nation afterwords.   Just under different ownership. 

 

Thu, 05/22/2014 - 23:01 | 4787316 Prairie Dog
Prairie Dog's picture

Yawn

Thu, 05/22/2014 - 23:00 | 4787317 AdvancingTime
AdvancingTime's picture

 Much of the recent growth in China after 2008 came from a massive 6.6 trillion dollar stimulus program that expanded credit and poured massive amounts of money into the system. This money encouraged expansion and construction with little regard as to real demand or need. Like a plane on autopilot China continued in the direction it had been on.

Now China finds itself in a credit trap. For years the people of China have had the habit of saving much of what they earn but the low interest rates paid at banks has not rewarded savers. With few investment options much of this money has drifted towards housing and driven housing prices sky high. The economic efficiency of credit is beginning to collapse in China and the unwinding of China’s giant credit spree could be very painful. More in the article below.

http://brucewilds.blogspot.com/2014/03/china-and-great-credit-trap.html

 

Thu, 05/22/2014 - 23:47 | 4787410 SAT 800
SAT 800's picture

China is not in a credit trap; this is nonsense. there will be a typical "bust" as a part of the "boom-bust" cycle caused by human emotional wiring; but they're not broke; we are.

Thu, 05/22/2014 - 23:03 | 4787318 Prairie Dog
Prairie Dog's picture

Mr Angry of Greenwich, Connecticut, is disappointed with the world. Again. Ho hum.

 

Thu, 05/22/2014 - 23:06 | 4787322 Againstthelie
Againstthelie's picture

I am not sure, if the article is correct.

The Chinese foreign exchange reserves are the result of REAL productivity.

A chinese company produces goods and the revenue of these goods is higher than the costs. This creates the money inflow into China.

 

For how many years have we been hearing of the coming Chinese collapse? Could it be it's based on false models or assumptions?

The first mistake is that everything is compared to the USA. So also a crash in China must be like in the USA or the western ponzi world.

But the USA is a debtor nation, it consumes more than it produces. So any growth in GDP is not based on a country that is becoming richer, but only because of increasing DEBT in boom cycles.

Contrary to Chinas GDP, which also has credit grwoth, but the Chinese produce more than they consume and so the credit growth is based on REAL growth.

 

Therefore I'd argue, that as long as China has such huge trade surpluses, any implosion would be limited, because the credit IS based on a real growing economy.

Let's assume the housing bubble in China was that huge as everyone believes. Since the rising prices go into the GDP, then please explain to me, if the chinese economy was a bubble, why does it have such a huge trade surplus?

If it would be a bubble, let's say because of housing, then like in the US the GDP numbers would be blown up, but the trade deficit would show the real quality of the economy. And that would be a trade deficit.

But China has a trade surplus. This tells me, that the bubble cannot be that big, that it could threaten the economy, like the US bubble machine threatens the US economy.

 

There will be  recessions, severe recessions, but as long as the Chinese produce more than they consume, their economic base is intact and will recover. IMO very different to bancrupt bubble economies.

Thu, 05/22/2014 - 23:42 | 4787401 SAT 800
SAT 800's picture

You've got ahold of the right corner of the carpet. The false world view is that "Mercantilism" is "bad"; or out dated, or something; no good in general. It isn't. It works just fine. the British Empire was based on manufacturing and export. The American Success story was based on a two legged success story, the exploitation of a very rich virgin continent, and manufacture and export. Any attempt to accept any part of the modern economic thesis; as Stockman does, results in terrible cognitive dissonance. When the light goes on in your head as a result of studying real history; all of a sudden everything is very simple and easy to understand. Several statements that Stockman makes are nonsensical on their face. But the underlying situation is this; our most important product is inflation; of course the chinese had to keep up with the inflow of dollars by printing their currency; this is obvious. this is what is meant by the export of inflation; it's not optional it's obligatory. But they aren't operating in any kind of false economy; we are. The FRN's they have access to buy real things; iron ore, coal, oil, electronics fabrication lines, copper; and of course Gold. The FRN's we've indebted outselves with are destined to buy misery and disaster. Being too rich is not such a bad problem. Congress and Bill Clinton sold us, all of us, the American citizens to China. By granting most favored nation trading status; at the behest of and on the payroll of the multinational Corps. of course. Manufacture and export is the magic in the modern history books; the high standard of living magic; failure to manufacture and export and live like a king on your credit card always ends the same way. Always. there are no exceptions. I suppose Stockman, from a Freudian point of view, has some sort of terrible drive to carefully ignore these rather obvious facts. Economics is actually very simple.

Fri, 05/23/2014 - 00:08 | 4787456 SAT 800
SAT 800's picture

It occurs to me that maybe I didn't make this simple enough. the situation was this; the American Citizen was taking home in his paycheck, entirely too large a cut of the Capitalists profits. So they hired Bill and Hillary to fix it; and a few Senators, of course. And they did. They fixed it. Okay? You understand now? Good.

Fri, 05/23/2014 - 00:11 | 4787462 Spitzer
Spitzer's picture

It is.

But how do you explain the one way flow of goods and the absents of any business or credit cycle in the last 30 years ?

How come the market cannot correct these hugely unbalanced forces ?

Fri, 05/23/2014 - 06:40 | 4787752 BigJim
BigJim's picture

 But the USA is a debtor nation, it consumes more than it produces. So any growth in GDP is not based on a country that is becoming richer, but only because of increasing DEBT in boom cycles.

Contrary to Chinas GDP, which also has credit grwoth, but the Chinese produce more than they consume and so the credit growth is based on REAL growth.

The US was a creditor nation back in 1929. How did that turn out?

The false world view is that "Mercantilism" is "bad"; or out dated, or something; no good in general. It isn't. It works just fine.

It works just 'fine' when it's voluntary. To understand why, reduce the mercantalist 'system' down to its smallest unit - a person. The analogy of a mercantalist person would be someone who produces more than s/he consumes, and either hoards the excess or lends it out at interest. If the hoarded savings are in the form of something perishable, then wealth is being destroyed; if they're in something like gold (in an unmanipulated PM market) then it's fine, even if the gold is just sitting under a mattress, it benefits other gold holders by pushing up the price of gold very slightly by reducing the supply side of the supply/demand equation. If the savings are lent out for unproductive consumption, then the chances are considerable that the full value of the principle is at risk (ie, wealth is being destroyed); if the savings are lent for productive enterprise, then the principle will be returned with interest, society benefits from increased production, and everyone is better off.

So this is 'voluntary' mercantalism - a person decides to produce more than they consume. However, there is involuntary mercantalism, too. In our analogy, involuntary mercantalism is exemplified by slavery. The slave produces more than s/he consumes, with the benefit of the excess going to his 'owners'... who may then deploy the excess to consume or invest as they wish. Chinese mercantalism is more like this, and operates not via old-style chattel slaver, or new-style slavery via monetary feudalism and high taxation as in the West, but via capital controls and currency laws. Much of the excess capital that arises from China consuming less than it produces is accruing to the government, which is both hoarding in the form of perishables (USTs) and unperishables (gold), as well as being 'used' in a mixture of productive and unproductive enterprises.

So yes, mercantalism 'works', for the same reason slavery 'works' - for the elites who are extracting value parasitically from those who are producing it.

Fri, 05/23/2014 - 09:16 | 4788162 Againstthelie
Againstthelie's picture

The US was a creditor nation back in 1929. How did that turn out?

Excellent reply. Destroyed my thesis in one sentence.

I checked it with FRED: http://research.stlouisfed.org/fred2/series/M07047USM144NNBR

A trade surplus does not prevent an even bigger credit bubble. My thesis was wrong.

Thanks.

 

Fri, 05/23/2014 - 09:56 | 4788295 BigJim
BigJim's picture

No worries, there's always more to learn on this subject, as I keep discovering every time I think I have a handle on it ;-)

Fri, 05/23/2014 - 12:45 | 4788962 OC Sure
OC Sure's picture

BigJim, This is very well thought out and I find it to be true. However there is a crucial variable that has gone unmentioned and it relates to this:

"If the savings are lent out for unproductive consumption, then the chances are considerable that the full value of the principle is at risk (ie, wealth is being destroyed)"

We must ask savings of what? Undoubtedly you are referring to the savings of money; that is the representation of productive work. Our economies are saturated with the opposite of savings though; that is to say a large volume of the currency exchanged is not the result of productive work but instead its source is from theft; that is it is counterfeit and not money.

So instead of savings being lent out for productive consumption, savings, or the representation of productive work (money), are stolen for unproductive consumption.

The tyranny of modern economics is counting on the fact that no one mentions the hidden variable that I have just described. Currency conducts the unit of exhange but understanding the source of the current therefore defines whether the unit of exchange originated as money or counterfeit.

Knowing whether a currency is money or counterfeit loosens the grip of tyranny.

Thu, 05/22/2014 - 23:20 | 4787351 q99x2
q99x2's picture

At least they have new cities and bridges. We have...well we do have the education of the brain of q99x3. Imean 2 q00x2 M'fer. Ok. back to my homework.

Thu, 05/22/2014 - 23:27 | 4787368 malek
malek's picture

 a fantastic credit bubble that financed the construction of [...] endless factories.

Funny why I see that as a good thing, contrary to David Stockman!

Thu, 05/22/2014 - 23:44 | 4787405 SAT 800
SAT 800's picture

Yes; I think Stockman is in a position where Psychologically he can't afford to understand the obvious.

Fri, 05/23/2014 - 00:13 | 4787464 Spitzer
Spitzer's picture

I agree. But if you are building factories to service demand pulled from the future in the form of debt, for 30 years.... Can you say overbuilt ?

Fri, 05/23/2014 - 00:28 | 4787478 malek
malek's picture

I am not arguing they not might have overbuilt.

But from where they started (almost no factories!) their side of the deal was pretty good, with at least a bigger percentage going into real infrastructure for themselves and not just consumption.

And on a side note, I am actually surprised no one has yet claimed here that those factories are all of the poorest quality and will fall apart within weeks... to warp the facts until they fit your wanted result.

Fri, 05/23/2014 - 02:55 | 4787588 Spitzer
Spitzer's picture

yeah i mostly agree

 

even thailand got some good highways out of 1997

Fri, 05/23/2014 - 00:04 | 4787449 SAT 800
SAT 800's picture

What kind of credit bubble is based on world reserve currency in the Bank? The babbling about credit bubbles is insane on the face of it.

Thu, 05/22/2014 - 23:49 | 4787420 Stockmonger
Stockmonger's picture

David Stockman is a master of erotic bear porn.

Fri, 05/23/2014 - 00:14 | 4787467 Zeta Reticuli
Zeta Reticuli's picture

China has new infrastructure, and that includes much manufacturing. America is spending its money on interest payments for borrowed money and wars that benefit only Israel. . China also has the people to occupy those empty homes. You build housing first. You don't wait until they are living in tent cities and under highway overpasses. As more jobs become available, the rural residents will be moved into more urban areas and give up very inefficient farming jobs.China has a transition plan and it is working. Not perfectly, but it is working. What is America's plan? They don't have one.

Fri, 05/23/2014 - 10:13 | 4788353 post turtle saver
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you can pick the concrete off of that new infrastructure with your hands right down to the cheap low-grade steel rebar... most of it will return to dust in 20 years

they wouldn't know a building code if it jumped up and bit them in the ass

Sat, 05/24/2014 - 00:20 | 4790616 Zeta Reticuli
Zeta Reticuli's picture

You keep believing what your handlers tell you. I live in a new Chinese building and I watch new ones go up all day. You are a good American citizen. You believe what are told to believe.

Fri, 05/23/2014 - 04:13 | 4787652 dag
dag's picture

China and Russia have inked a $300 billion oil/gas deal to be paid in rubles and rmbs.

Iran is also arranging trade deals minus US dollars.

Question:  If US dollars are not used in trade and commercial transactions, what will these countries do with the US dollars they accumulated? 

Fri, 05/23/2014 - 09:59 | 4788306 Oscar Mayer
Oscar Mayer's picture

They don't have 'dollars', they have 'promises to pay dollars'...ha ha ha, joke's on them...

Fri, 05/23/2014 - 04:26 | 4787665 trebuchet
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Chine will reduce its trade imbalance:

1. intensify its an outward govt sponsored investment programme (consultants, language teachers and educationalists take note, growth market in: "doing business the american way, european way, etc etc etc ")

 where will it lead? no one selling (Easily) to the chinese where does that lead? JVs and takevoers abroad... China begins a raid on on the S & P 500, DAXX - hostile takeovers,   :D   BIG BOOM For Goldman, new bankers, M & A with chinese specialisms... )

Plus continues expansion into its secondary markets (SE Asia, LAt-AM) and acquisition of resources.

So far  people selling have underestimated Chinese intelligence and overestimated its willingness to buy. 

It is a reluctant purchaser in most cases .....  this is a path it feels it has to travel, not wants to travel.

2. lend its money to new supply markets (recycle the foreign currency) 

After Gazprom deal comes China inward lending to expand russian resources. Mongolia, Central Asia, Iran, Afghanistan and if it can get away with it, N. Korea.

This is an inter generational can-kicking exercise

 

3.  The bogey in the basket: change capital controls, begin foreign currency denominated loans to its domestic market. 

e.g. Provincial bad bank of  district 13, with 20% NPL takes on New capital denominated in Foreign currency and makes a SMAll % of loans (under tighter restricted lending criteria). Local currency depreciates, foreign loans marked to market, domestic denominated loans not. RESULT: Improvement in RWA/capital ratios

 

Shit i should work for Goldman and open a Beijing office.  Oh wait..... they are already there.....

 

Fri, 05/23/2014 - 10:21 | 4788379 post turtle saver
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yep, '80s Japan playbook

Fri, 05/23/2014 - 05:12 | 4787696 Obamanism
Obamanism's picture

Gold, Silver, Platinum  is the key to puzzle. What are the only things the Chinese are buying and taking delivery of?

They are converting their "to be inflated" foreign reseverses for assets, aka Warren Buffet and George Soros, they will then crash the Dollar and the yaun with the rubel be the fait currencies (backed by gold) of choice.

If the yaun is 100% backed with gold and the dollar is useless, imagine 100,000 yaun for 1 oz of gold. Life in China would be pretty good.

Fri, 05/23/2014 - 05:57 | 4787728 theprofromdover
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This why they are buying all the mineral wealth in Africa, most of the real estate in the major cities of the West, and all the framland of the world

Getting rid of these dollars.

Fri, 05/23/2014 - 06:59 | 4787778 Fix-ItSilly
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China should never have been allowed into the "free trade" globalisation trade system.  Slave labor, pollution, capital controls and currency manipulation are all anti-free trade.  No shared values with the West and all a parasitic basis for trade.

The West needs to establish import tariffs.  Solves jobs and world pollution (and for those that need to say the mantra, global warming) problem.

Fri, 05/23/2014 - 08:08 | 4787936 AdvancingTime
AdvancingTime's picture

It is clear we are not playing on a level field!

Fri, 05/23/2014 - 10:57 | 4788507 Zerozen
Zerozen's picture

So what you guys are saying is you're all for free trade, unless the initial economic/financial conditions happen to be not in your favor. Then you're all for protectionism.

Fri, 05/23/2014 - 08:05 | 4787931 AdvancingTime
AdvancingTime's picture

Today a big topic is the huge growth in inequality. Those who look closely understand that it is not the 1% at the top stealing the icing off the cake, but the much smaller .1% or .01% that are skewing the numbers and overreaching. This is also happening in China!

I contend this goes hand in hand with the massive growth in crony capitalism and corruption. Much of this can be attributed to the ability of those in control "changing the rules" and positioning themselves to benefit at every corner. In our busy and complex world we have found it impossible to watch all the moving parts. More on this subject in the article below.

http://brucewilds.blogspot.com/2014/05/how-empires-collapse.html

 

Fri, 05/23/2014 - 09:12 | 4788107 falak pema
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so as Piketty says : even in a planned mercantilist economy when R>>G, the shit WILL hit the fan !

china's cloning of US fiat's hegemony, two faces of the same R>>G coin.  

Built on the Oligarchy scam paradigm--not attributable to Keynes's ghost as falsely asserted by shamanist scammed and linguistically shammed allegations. 

Some jams are truly full of mouldy bacterial concoction. ZH seems to have a propensity to serving them up to the crowd.

Now its time for monetary austerity; aka making the Rentier capitalists deflate their stashed hordes of fiat accumulation in FIRE assets and go to reset into the real economy based on a more renewable energy paradigm before the oceans engulf Atlantis and Pacificus. 

Fri, 05/23/2014 - 10:38 | 4788427 Oldwood
Oldwood's picture

So are we to transition from one economic clarion (Krugman) to another (Piketty) to keep the leftist printfest alive? I guess when the landing gear falls off, the only choice it to fly higher and higher.

Fri, 05/23/2014 - 11:19 | 4788618 falak pema
falak pema's picture

IF you know how to obtain reset and turn OFF the neo-con hyper liberal FIRE asset levitation tap, that is fed by the FED fiat juggernaut, just shout.

And, Piketty is not an actor of this scam he is just the messenger of a long term trend. He points to CAUSALITY not to SYMPTOMS.

Don't put him in the same boat as Krugman who is an active proponent of QE which is the reason why R>>G  and the rentier chasm explodes.

 

Fri, 05/23/2014 - 09:23 | 4788189 Spungo
Spungo's picture

I don't understand why foreign reserves are such a burden. If I sell my car to you, what do you think I do with that money? I spend it or invest it. I don't sit on it and do nothing.

$4 trillion can buy a hell of a lot of resources. You could probably buy the entire city of detroit for less than 1 billion. You could buy mineral rights in every country. You could buy oil rights in every country.

Fri, 05/23/2014 - 10:30 | 4788404 AnAnonymous
AnAnonymous's picture

In 'american' economics, the kind of savings that matter were performed by people who failed to consume their resources as fast as 'americans' can do, they were the type of the Indians, the negroes etc...

People are in this kind of savings no more. This is an 'american' world. Any speech over another type of savings is nothing more than 'american' speech.

Fri, 05/23/2014 - 10:45 | 4788450 Spungo
Spungo's picture

"They don't have 'dollars', they have 'promises to pay dollars'...ha ha ha, joke's on them"

Actually the joke is on us. What is the average maturity date on US debt? It's something like 2-3 years. That's the paper China has. As the debt is monetized, the inflation would cut into the value of those by maybe 10% per year for maybe 5 years at the most. After that, they're done. They're home free, they have dollars in hand, they can buy America. The fed is the one holding all of our long term debt. That's what Operation Twist was. The fed was buying long term bonds and selling short term bonds. Who was on the other side of that transaction? The Chinese were. 

Fri, 05/23/2014 - 10:56 | 4788500 mrmarx
mrmarx's picture

This article is a bit incoherent. Mr. Stockman does not seem to understand that China has run massive trade surpluses and current account surpluses and therefore, by simple Freshman-level econ must run a capital account deficit. They have not been importing capital from the Fed, BOJ and ECB but in fact have been exporting massive amounts to those developed markets. The savings glut in China was a big cause of the financial crisis. And to say that "sons and daughters of rice farmers working in export factories" were the savers shows a complete lack of understanding of the Chinese economy. Yes, it is a bubble and it will crash due to repressed interest rates leading to massive misallocation but overall the flow of funds conceived in this article is ass-backwards. I suggest reading Michael Pettis for the scoop on China.

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