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China’s Monumental Debt Trap - Why It Will Rock The Global Economy
Submitted by David Stockman via Contra Corner blog,
Bloomberg News finally did something useful this morning by publishing some startling graphs from McKinsey’s latest update on the worldwide debt tsunami. If you don’t mind a tad of rounding, the planetary debt total now stands at $200 trillion compared to world GDP of just $70 trillion.

Source: McKinsey
The implied 2.9X global leverage ratio is daunting in itself. But now would be an excellent time to recall the lessons of Greece because the true implications are far more ominous.
Today’s raging crisis in Greece was hidden from view for many years in the run-up to its first EU bailout in 2010 because the denominator of its reported leverage ratio—national income or GDP—–was artificially inflated by the debt fueled boom underway in its economy.
In other words, it was caught in a feedback loop. The more it borrowed to finance government deficit spending and business investment, whether profitable or not, the more its Keynesian macro metrics—-that is, GDP accounts based on spending, not real wealth—-registered a falsely rising level of prosperity and capacity to carry its ballooning debt.
Five years later, of course, the picture is much different. Greece’s GDP has now shrunk by more than 25%. The abysmal picture depicted in the graph below explains what really happened. Namely, that the bloated denominator of GDP came crashing back to earth, exposing that Greece’s true leverage was dramatically higher than the 100% ratio reported in the years before the crisis.
In economic terms, the graph below simply documents how the false prosperity from Greece’s hand-over-fist borrowing binge was purged from the GDP accounts after the debt party came to a halt in 2009. Needless to say, the reason the Greek story is so relevant is that this condition is nearly universal, meaning that the 2.9X leverage ratio for the global economy pictured above is also drastically understated.

The fact is, since 2010 Greece’s total debts outstanding have risen only modestly. The reason that the debt-to-GDP ratio shown below has gone parabolic is that Greece’s phony boom time GDP has been sharply deflated.

To be sure, today’s Keynesian pettifoggers insist these pictures reflect a big policy mistake. Namely, that the consequence of “austerity” policies forced on Greece by the Germans was the evisceration of its “aggregate demand” and therefore an unnecessary intensification of its debt burden. By allegedly causing Greece’s GDP to fall, austerity policies forced its leverage ratio to keep rising—-even after a lid was placed on its borrowing.
That contention is not just baloney; its a stark example of the incendiary circular logic by which the Keynesian apparatchiks of the world’s governing class and their fellow travelers on Wall Street are pushing the global economy and financial system to the brink of disaster.
Put a ruler from the beginning to the end of the graph above, and you get a doubling of nominal GDP and a 14-year CAGR of 5.5%. That’s probably more nominal growth than could reasonably have been expected from the Greek economy at the turn of the century—–given the debilitating inefficiency and corruption of its long standing crony capitalist oligarchy and Athens’ devotion to mercantilist waste, bloated state payrolls and unaffordable welfare state pensions, among countless other economic sins.
Accordingly, the huge bulge in reported GDP from 2001-2009—reflecting a 13% annual gain—–did not even remotely reflect sustainable output growth; its was merely the feedback loop of exuberant debt financed spending that had not been earned by new inputs of labor, productivity and entrepreneurial activity.
Accordingly, the big hump of GDP recorded during the pre-crisis boom was phantom GDP; it was not remotely sustainable, and it most surely does not represent “aggregate demand” lost owing to “austerity” policies. Instead, the subsequent deflation merely tracks the permanent evaporation of public and private spending that could not be supported by current production and income.
The truth of the matter is that production and income come first. “Spending” or GDP growth can only exceed production growth when leverage ratios are rising. Indeed, the very concept of “aggregate demand” is nothing more than an academician’s word trick. It has no substance beyond the sum of changes in production and changes in leverage.
Consequently, when Keynesian economists jabber about “stimulating” or “recovering” putatively lost “aggregate demand” they are talking about an economic unicorn. Aggregate demand can only be accelerated beyond production by new borrowing, and that can’t happen when balance sheets are tapped out.
Needless to say, Greece is only the poster child. The McKinsey numbers above suggest that “peak debt” is becoming a universal condition, and that today’s Keynesian central bankers and policy apparatchiks are only pushing on a giant and dangerous global string.
Moreover, bad as this is, its only half the story. Not only do unsustainable debt booms eventually stop, as depicted in Greece GDP accounts above, but they also generate enormous deformations and malinvestments while they are inflating. That is, they cause economic waste in the form of capital investments which are latter written down or abandoned because they do not produce sufficient returns to cover their front-end financing cost; and they also result in the allocation of labor to activities and occupations that disappear when the debt boom ends, generating unemployment and skill redundancy that lowers output and efficiency.
In Greece’s case, its debt binge got up a full head of steam at the time of the 2004 Summer Olympics in Athens. I was there that summer and marveled at the skyline of construction cranes, the oppressive din of jackhammers and the bustling constructions sites that were so numerous and expansive that traffic had virtually ground to a halt.
The Greek government spent something like $15 billion on the Olympics, but that was just the tip of the iceberg. With cheap euro denominated debt literally falling from the northern skies of the French and German banking system, there was no end to the commercial construction of hotels, retail, offices and apartments designed to feed on the alleged multiplier effect of the Olympics and the belief that they were a catalyst for permanent growth.
Below is an epigrammatic picture of the 2004 Olympics boom today. In a narrow sense, the whole boom was a debt fueled national vanity project that is not atypical of these promotional event schemes. But it illustrates a crucial point that has universal application in today’s global financial Ponzi. Namely, that the value of assets generated during the debt boom can shrink drastically or disappear entirely after the party ends if they do not produce useful services and a commensurate cash flow.
By contrast, the debt is fixed and contractual until its is written off and holders of the paper take a current loss. Upon that liquidation event, of course, balance sheets shrink and paper wealth evaporates. That’s why debt booms are inherently and ultimately deflationary.
Needless to say, the abandoned multi-million dollar Athens stadium pictured below is worth nothing, yet the debt which funded it has not been liquidated. It still hangs somewhere in financial hyperspace—- having been transferred by the EU superstate politicians and bureaucrats from the accounts of the banks or bond investors which originated the funding to Greece’s make pretend IOU accounts at the IMF and EU.
Call this financial constipation—-the end result of the current global game of “extend and pretend”. It amounts to a financial Ponzi in which current debt is serviced with more debt, and in which the unsustainability of the entire edifice is obfuscated by the zero interest rate policies and massive debt buying campaigns of the world’s central banks.
When bad debts are not liquidated—– we already know that you get a Greece calamity with $350 billion of debt that cannot possibly be serviced or repaid by its now ruptured economy. But what will only become evident with time is that the entire global economy is not too far behind. It is now burdened with $200 trillion in debt, but owing to debt-bloated GDP, its true leverage ratio, like that of Greece in 2009, is far higher than the 2.9X computed in the McKinsey charts above.

So now we get to ground zero of the global Ponzi. That is the monumental pile of construction and debt that is otherwise known on Wall Street as the miracle of “red capitalism”. In truth, however, China is not an economic miracle at all; its just a case of the above abandoned Athens stadium writ large.
The McKinsey graph on China tells it all. For the moment, forget about leverage ratios, debt carrying capacity and all the other fancy economic metrics. Does it seem likely that a country which is still run by a communist dictatorship and which was on the verge of mass starvation and utter impoverishment only 35 years ago could have prudently increased its outstanding total debt (public and private) from $2 trillion to $28 trillion or by 14X in the short span of 14 years? And especially when half of this period encompassed what is held to be the greatest global financial crisis of modern times
And don’t forget that most of this staggering sum of debt was issued by a “banking” system (and its shadow banking affiliates) which is bereft of any and every known mechanism of financial discipline and market constraints on risk and credit extension. In effect, it is simply a vast pyramidal appendage of the Chinese state in which credit is conjured from thin air by the trillions, and then cascaded in plans and quotas down through regions, counties, cities and towns.
When it reaches its end destination it finances the building of anything that local politicians, bureaucrats and red capitalists can dream up. That includes factories, roads, ports, subways, bridges, airports, malls, apartments and all the rest of the construction projects being undertaken on Beijing’s Noah’s ark.
Undoubtedly, the plentitude of ghost cities, malls, apartment buildings and factories that are everywhere now evident in China do not look much different than Greece’s Olympic stadiums did circa 2006—-that is, gleaming but silent. It will take another decade for the weeds to spring up and the rust and decay to become visible.
So it might be a good time to get a grip on the China Ponzi. There is virtually not a single honest price in the entire $28 trillion tower of debt shown below. When loans to coal mine operators got in trouble, for example, the so-called “bankers” at the big state banks simply invited their clients in the side door where they paid back the “bank” with a trust loan at 18% interest—-which “loan” was then resold to bank customers at 12%.
Hence, no NPLs and no need for new loss provisions. Indeed, China’s big state banks book billions of profits each quarter—notwithstanding the absurd extent of the nation’s credit pyramid.
Likewise, how did the local party cadres use the loans that cascaded down the system to their town? Why they established non-governmental development agencies—thousands of them—- that paid hugely inflated prices for city lands in order to build empty luxury apartments and zoos that are bereft of both people and animals. Meanwhile, local governments run huge GDP enhancing budgets that are funded by the false revenue of hyper-bloated land sales.
The skunk in the woodpile is self evident even in the simplified chart below. At least prior to the 2008 crisis, it could be said that part of the China boom was being financed by the Fed and other DM central banks which enabled their domestic consumers to borrow themselves silly, thereby fueling the China export boom. That’s pretty much over in terms of growth owing to the tepid recoveries and outright economic stagnation in the US, Europe and Japan.
But never mind. The aging black-haired men who learned their economics from the Mao’s Little Red Book had a solution. They would lift GDP and jobs by their own bootstraps, dispensing virtually unlimited credit to build public pyramids, otherwise known as infrastructure, at rates not seen since the Egyptian pharaohs.
Thus, since the eve of the crisis in 2007, China’s GDP has doubled, expanding by $5 trillion in 7 years. But as shown below, it took a $21 trillion expansion of debt outstanding to accomplish that outcome.
That’s right. The China Ponzi took on $4 of debt for every new dollar of freshly constructed GDP. And “constructed” is exactly the correct term because all of this new debt funded a orgy of construction—-much of which is for public facilities that will never produce enough user revenues to service the debt or which are essentially owned by local governments which have no tax revenue.xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

Source: McKinsey
In any event, China’s $10 trillion of GDP is exactly at the Greek bulge stage. Its not replicable and sustainable unless the bosses in Beijing truly do intend to pave the entire country.
In fact, the Chinese economy is addicted to construction, and its rulers can’t seem to let go—-even as they recognize they are heading straight toward the wall. At the present time, nearly 50% of GDP is accounted for by fixed asset investment—–that is, housing, commercial real estate, industry and public infrastructure. This ratio is so far off the historical and comparative charts as to be in a freakish class all of its own. Even during the peak “take-off” phase of economic development in Japan and South Korea this ratio never exceeded 30% and did not dwell there for long, either.
So China is caught in a monumental debt trap. Its rulers fear social upheaval unless they keep pumping GDP—and the associated rise of jobs, incomes and financial asset values—-with more credit and construction. Even then, they know better and have therefore hop-scotched from credit restraint to credit curtailment almost on alternate days of the week.
But now the edifice is beginning to roll over. Housing prices are falling and new footage put under construction has dropped by 30% over the last three months—something which has not even remotely happened during the last 15 years. At the same time, the consequent cooling of demand for construction materials and equipment is evident in China’s faltering industrial production numbers and the global commodity deflation that has resulted from its vast excess capacity in steel, shipbuilding, cement, aluminum, copper fabrication and all the rest.
The excruciating debt trap in China was addressed recently by the redoubtable Ambrose Evans-Pritchard of the Telegraph, who has never seen a deflation crisis that he believed could not be relieved by the central bank’s printing press. But in the case of China, even he has thrown in the towel:
China is trapped. The Communist authorities have discovered, like the Japanese in the early 1990s and the US in the inter-war years, that they cannot deflate a credit bubble safely……
China faces a Morton’s Fork. Li Keqiang has made it his life’s mission to stop his country drifting into the middle income trap. He says himself that the investment-led model of past 30 years is obsolete. The low-hanging fruit of catch-up growth has been picked.
For two years he has been trying to tame the state’s industrial behemoths, and trying to wean the economy off credit. Yet virtuous intent has run into cold reality. It cannot be done. China passed the point of no return five years ago.
Needless to say, this stunning conclusion from one of the world’s greatest and most erudite believes in the power of money printing has enormous implications for the global economy and financial system. It means that China is the New Greece—-but one sporting 40X more GDP and 70X more debt.
Indeed, last year China spent upwards of $5 trillion on fixed asset investment—-a figure that is greater than the sum total for Europe and the US combined. Behind that towering number is an immense caravan of cement, structural steel, glass, copper and all the rest of the industrial commodities.
So when the China Ponzi finally crashes, the deflationary gales will propagate violently through the global economy and financial system. China’s $28 trillion tower of debt will come tumbling down in the process; and a world floating on $200 trillion of the stuff will not be far behind.
By Ambrose Evans-Pritchard
China is trapped. The Communist authorities have discovered, like the Japanese in the early 1990s and the US in the inter-war years, that they cannot deflate a credit bubble safely.
A year of tight money from the People’s Bank and a $250bn crackdown on shadow banking have pushed the Chinese economy close to a debt-deflation crisis.
Wednesday’s surprise cut in the Reserve Requirement Ratio (RRR) – the main policy tool – comes in the nick of time. Factory gate deflation has reached -3.3pc. The official gauge of manufacturing fell below the “boom-bust” line to 49.8 in January.
Haibin Zhu, from JP Morgan, says the 50-point cut in the RRR from 20pc to 19.5pc injects roughly $100bn into the system.
This will not, in itself, change anything. The average one-year borrowing cost for Chinese companies has risen from zero to 5pc in real terms over the past three years as a result of falling inflation. UBS said the debt-servicing burden for these firms has doubled from 7.5pc to 15pc of GDP.
Yet the cut marks an inflection point. There will undoubtedly be a long series of cuts before China sweats out its hangover from a $26 trillion credit boom. Debt has risen from 100pc to 250pc of GDP in eight years. By comparison, Japan’s credit growth in the cycle preceding its Lost Decade was 50pc of GDP.
The People’s Bank may have to cut all the way to zero in the end – a $4 trillion reserve of emergency oxygen – but to do that is to play the last card.
Wednesday’s trigger was an amber warning sign in the jobs market. The employment component of the manufacturing survey contracted for the 15th month. Premier Li Keqiang targets jobs – not growth – and the labour market is looking faintly ominous for the first time.
Unemployment is supposed to be 4.1pc, a make-believe figure. A joint study by the International Monetary Fund and the International Labour Federation said it is really 6.3pc, high enough to cause sleepless nights for a one-party regime that depends on ever-rising prosperity to replace the lost elan of revolutionary Maoism.
Whether or not you call it a hard-landing, China is struggling. Home prices fell 4.3pc in December. New floor space started has slumped 30pc on a three-month basis. This packs a macro-economic punch.
A study by Jun Nie and Guangye Cao for the US Federal Reserve said that since 1998 property investment in China has risen from 4pc to 15pc of GDP, the same level as in Spain at the peak of the “burbuja”. The inventory overhang has risen to 18 months compared with 5.8 in the US.
The property slump is turning into a fiscal squeeze since land sales make up 25pc of local government money. Zhiwei Zhang, from Deutsche Bank, says land revenues crashed 21pc in the fourth quarter of last year. “The decline of fiscal revenue is the top risk in China and will lead to a sharp slowdown,” he said.
The IMF says China’s fiscal deficit is nearly 10pc of GDP once land sales are stripped out and all spending included, far higher than generally supposed. It warned two years ago that Beijing was running out of room and could ultimately face “a severe credit crunch”.
The gears are shifting across the Chinese policy spectrum. Shanghai Securities News reported that 14 Chinese provinces are preparing a $2.4 trillion blitz on infrastructure to combat the downturn, a reversion to the same policies of reflexive stimulus that President Xi Jinping forswore in his Third Plenum reforms.
How much of this is new money remains to be seen but there is no doubt that Beijing is blinking. It may be right to do so – given the choice of poisons – yet such a course stores up even greater problems for the future. The China Development Research Council, Li Keqiang’s brain-trust, has been shouting from the rooftops that the country must take its post-debt punishment “as soon possible”.
China is not alone in facing this dilemma as deflation spreads and beggar-thy-neighbour currency wars become the norm. Fifteen central banks have eased monetary policy so far this year.
Denmark’s National Bank has cut rates three times in two weeks to -0.5pc in an effort to defend its euro-peg, the latest casualty of the European Central Bank’s €1.1 trillion quantitative easing. The Swiss central bank has been blown away.
Asia is already in a currency cauldron, eerily like the onset of the 1998 crisis. The Japanese yen has fallen by half against the Chinese yuan since Abenomics burst upon the Pacific Rim. Japanese exporters pocketed the windfall gains of devaluation at first to boost margins. Now they are cutting prices to gain export share, exporting deflation.
China’s yuan is loosely pegged to a rocketing US dollar. Its trade-weighted exchange rate has jumped 10pc since July. This is eroding the wafer-thin profit margins of Chinese companies and tightening monetary conditions into the downturn.
David Woo, from Bank of America, says Beijing may be forced to join the currency wars to defend itself, even though this variant of the “Prisoner’s Dilemma” leaves everybody worse off. “We view a meaningful yuan devaluation as a major tail-risk for the global economy,” said.
If this were to happen, it would send a deflationary impulse worldwide. China spent $5 trillion on fixed investment last year, more than Europe and America combined, increasing its overcapacity in everything from shipping to steels, chemicals and solar panels, to even more unmanageable levels.
A yuan devaluation would dump this on everybody else. It would come at a moment when Europe is already in deflation at -0.6pc, and when Britain and the US are fast exhausting their inflation buffers as well.
Such a shock would be extremely hard to combat. Interest rates are already zero across the developed world. Five-year bond yields are negative in six European countries. The 10-year Bund has dropped to 0.31. These are no longer just 14th century lows. They are unprecedented.
My own guess is that we would have to tear up the script and start printing money to build roads, pay salaries and fund a vast New Deal. This form of helicopter money, or “fiscal dominance”, may be dangerous, but not nearly as dangerous as the alternative.
China faces a Morton’s Fork. Li Keqiang has made it his life’s mission to stop his country drifting into the middle income trap. He says himself that the investment-led model of past 30 years is obsolete. The low-hanging fruit of catch-up growth has been picked.
For two years he has been trying to tame the state’s industrial behemoths, and trying to wean the economy off credit. Yet virtuous intent has run into cold reality. It cannot be done. China passed the point of no return five years ago.
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Whelp, its Freaky Friday at the 'Hedge
China will just print money to get rid of the debt when the time comes.
lol...Krug-Man-Ho, Debt Czar!
China had hyperinflation in the 1940s. They can take this type of pain. If it resets their economy, they will do it. Thousands of tons of gold in PBOC's hands may ultimately let them issue a new gold-backed yuan, once the debt pile is purged.
command economies............absurd.
This McKinsey report was originally commissioned to run around to the world's bankers and get them pumped up. Look how much business you will need to do in the next 30 years! Oops, now it has a different impact altogether...
I'm sorry Dave, I can't do that.. Why? you'll jeopardize the mission.
"China’s yuan is loosely pegged to a rocketing US dollar. Its trade-weighted exchange rate has jumped 10pc since July. This is eroding the wafer-thin profit margins of Chinese companies and tightening monetary conditions into the downturn."
Bankers: And finally, monsieur China, a wafer-thin mint.
China: No.
Bankers: Oh sir! It's only a tiny little thin one.
China: Fuck off, I'm full.
We know how it ends.
As I've been reading right down through all these comments - riveting actually - I've been wondering, what about all that massive amount of gold China is accumulating? Surely it will help China greatly when it all comes down, right?
Not really, China's swap with Russian Ruble will get China everything external it needs. Internally just print yuan.
The gold is more for industrial purpose and tradition.
Of course they will. The real question is what will happen to their currency?
Do people on here actually read the articles?
Here David Stockman explicitely denies everything that Syriza claims as the result of the greek situation.
we wil,we will... ROCK YOU!!!!
Believe it or not, I am sitting here listing to Riders On The Storm by the Doors and drinking beer . . . while I read all the crazy shit.
And I gave myself a +1 for having the foresight and wisdom to actually have beer in the frig on a Friday night. Lots and Lots of Beer!!!!! Chinese be Damned!!!
Bruce Jenner is on his way to keep you company.
Bruce isn't so bad. He had this to say about Obama's nobel peace prize: "“He’s done nothing,” Jenner said. “He’s done absolutely nothing.”
So you see, even a crazy eyed transgender squirrel finds a nut once and a while.
Isn't it Brucina now? I wonder if he can still find his own nuts or if they have been permanently and irrevocably hidden. Something about a frige full of beer that gives total clarity to the conundrums of life.
I'm on my third bottle of Chimay Triple. I read the article here and my only real concern was that there might be no more Chimay if it all collapses :(
You are entirely correct. It's about time we all get our priorities straight.
One of the best beers ever made.
What a funny name for an "asset". REAL estate. It is about as real as how much you pay taxes on it or how much the government/corp needs it. Real anything is something not currently available planet-side.
I posted this to a comment a guy made but it is more relevant here.
Its never going to happen - the blow up. Its never going to be a rational free and unfettered market and the Keynesian machinations are just getting started. This party can go a lot longer than any of us here care to think. It reminds of the piece in Taleb's black swan on probability. The context was a person's age and it went something like this - If a person lives to 75 then there is (x) probability they will live to 90. And those that live to 90, the probability they live to 100 is (x), and so on. Taleb was trying to illustrate how government projects fail to get off the the ground and that the expectation that its going to be done at a declared such and such a time - is actually nonsense and that the longer time passes without the project being implemented, then the longer that duration of inaction will persist, to the extent that in all likelihood, it simply will not occur.
Same thing here. Look how long Venezuela et al have lasted without falling apart into social and economic chaos. By definition, one would have thought those economies should have collapsed decades ago. Nope, hasn't happened. So, why do we, every day think the US or China or whomever is going to be any different? Way I figure it, I will be in the ground before anything remotely resembling social disintegration occurs. Its like going long the VXX - hasn't worked, isn't working - and in all lielihood is never going to work - the longer that it doesn't! Not going to happen - and not becuase of an intervention to the intervention - its just for any socialist economy that has lasted 100 years, it will in all probability, as per Taleb above, last another 100 years.
Derivative/shadow bank failures - whatever - all of that shit does not transcend the perseverence of an existing social/economic trend. Think like Taleb and it almost makes me want to sell my PMs and go long the SnP. Of course, the other part of Taleb's message is the tail risk and the expected value of an unlikely event - always being greater - also - than we care to imagine. cheers
In the end we are all dead anyway...
It will absolutely happen, because it already has happened. What's playing out now is how this already-collapsed global economy gets recognized. The debts are unsustainable and unservicable with a functioning market, so they broke the market to keep the show going. A broken market can only work so long before misallocation forces it to either collapse or implode.
Plenty of historical precedent. How it happens is still a mystery, but we seem to be pretty solidly on the deflation followed by hyperinflation plan in almost every case. I think the moves by a number of CBs to return gold to the homeland and acquire more is just screaming they see the same outcome as I am describing, and that collateral will be key to surviving the changeover.
People holding government debt are going to be completely obliterated, and likely people holding fiat in general will as well. Socialist economies still have to pay for shit and incentivise people to work, and without money that goes up in smoke -- and I'd say Venezuela is leading the pack in "fuckedness" right now, rather than having lasted without falling apart. That people are having to use their hands to wipe their shit and that soldiers are patrolling the lines going into grocery stores is evidence enough.
Absolutely correct. Ironic that some imagine it taking a long time to play out, when the collapse has already begun.
The correct question is not when it will begin, but when the real acceleration begins. And it won't be long now.
Some times the “Long Enough Time Line” isn’t that long. But, all the gold held by central banks, governments, and empires that are now defunct and and part of history is still in existence.
Right, the dam broke in '08. They've been papering over the leaks (debt deflation) with gov. debt. They will continue until people flee the currency. Japan will be first, IMO. The FED's plan now seems to be the last CB standing.
3 x, baby, 3x. we are very close. either repudiat debt, or the boot comes down on the plebs necks. violence is the one outcome or dominance by hitler types.
will not be fun for anyone at national ground level zero.
i'm not doubting or challenging any of your arguments - i'm with you. i agree. but this process of decline, or, bubble blow up, or whatever you want to call the descent - can go on a lot longer that we care to imagine. putting it another way, things can stay fucked up for a really long period of time.
i don't for one second challenge the math. but government is really good at papering over the math - and its effects seem to last a fuck of a lot longer than expected. it just seems to me that there is always some new shell game being offered - some new distraction that turns into a cult - then a trend - then status quo and the next thing ya know - 10 years "have gotten behind you".
slow quiet liquidations of debt, some confiscation of rights, and another fabricated bull run and the next thing you know they'll be screaming "its a miracle!!"
Venezuela, Seek, it is true and shitty like that in a lot of other places too. I know and I agree, and yet the government(s) prevail, imiseration rises and still nothing. people - just muddling through.
yeah - i don't disagree it won't happen, but, I sure do disagree on the endless threads i have read since 2000 that the reset is just around the corner. nuu uh.
they keep changing the goal posts, the rules, and the money - and that changes everything.
have a great weekend.
Government does a great job of preventing market mechanisms from working, but they can't overcome physics. Maybe most of us are simply wrong about the mechanism of collapse. It is sort of like squeezing a water balloon. It always pops out somewhere. If government shuts off all concievable collapse mechanisms, then something else must happen - a mechanism they haven't accounted for. Everyone knows about hyperinflationary collapse, because it has happened so many times in history. By enforcing a debt-based fiat system, government has closed off hyperinflation as a collapse mechanism. What about hyperdeflationary collapse? Such a thing has never happened before because it never could. But the big innovation of the last half-century, namely the replacement of paper currency with electronic currency, makes hyperdeflation possible. With no physical representation, there is no way to get currency out of a banking system, and therefore no way to escape negative interest rates. Thus rates are no longer bounded by zero, but can go all the way toward negative infinity. Negative rates are already here. As rates accelerate in the negative direction, governments remove paper currency from circulation and go all-electronic. CBs keep lowering rates, and negative interest taxes away savings at an ever increasing rate. Loans have negative rates too, but the value of things like houses depreciate faster than the negative rate on your loan, so you cannot win. You can buy physical commodities with your diminishing currency to protect your holdings, but someone must hold the currency - it cannot leave the banking system. The accelerating negative interest consumes all savings until all money is taxed away to the vanishing point. In the end, no currency units are left.
Agreed, Seek. The thing is people need to feel the pain in a very personal, direct way before they acknowledge the depth of this problem or any problem at that. That's why it's almost impossible to get our message through to most people, in spite of the many cracks appearing around us at an ever increasing pace. By definition, you warn someone while he still has the means to protect himself and can get out of harm's way, implying that he's still in a pretty decent shape financially. Unfortunately, you only get through when disaster really strikes individually - in which case it is mostly too late.
Most, if not all members of the ZH-community are very much aware of what's coming our way, but we are but a ridiculously small percentage of the general public to do so (which will be a problem, because being the prepared one amidst a bunch of unprepared, panicking individuals won't be a picknick - one of my main preoccupations when SHTF, I can tell you that). Why do we see what they don't, long before this thing can hit us on a personal level? Outsiders will say it's because we're gloom and doomers, and I genuinely believe there is a bit of that in our makeup. But far more important, IMO, is that we're better than most at combining a modicum of common sense with some knowledge of history and a general sense of alertness and realism. We don't do escapism over here.
There's another phenomenom at work. Only last week I was walking through the European quarter in Brussels, passing by the many buildings of the EU, including the main one at the Place Schumann. It was lunch hour, suits were filling the streets, you could hear all kinds of languages, everybody was looking very busy and extremely important. So when you look at these impressive people and look up at these impressive buildings, almost instantly there's something of a "wow"-factor at play. You easily get a sense of " these people sure seem to know what they're doing and, boy, these buildings really emanate power and money". It's not all that hard to get overwhelmed by such surroundings and forget it is all built on ever growing and ultimately unsustainable debt.
The same applies for your POTUS. The man is surrounded by an army of advisors, he goes from point A to B in an awesome vehicle, accompanied by an equally awesome motorcade. Whenever he visits his army, he's confronted with state of the art technology and the ultimate professionals at waging war. He's got helicopters and Air Force One at his disposal at all times. In fact, he sees the exact opposite of what we see, because he's constantly looking at, using, sitting in, listening to tangible and incredibly advanced or well informed or important looking buildings, ships, things, people, you name it. That is reality for him, not some digital entries in the red zone at the Fed. He might hear about the unsustainability of debt, but he sure as hell doesn't get to feel or experience it. For now. Until the last curtain will slowly start to slide off its rod.
And until then, you and me will be the dumb fucks in all this.
Pareto,
I've lived the past three years in Thailand. It's blowing up now. Coming apart fast.
Russians gone and market in free fall.
I speak fluent Spanish and lived 15 years in Colombia, 5 years in Asia.
You do not have not a clue about what you're saying.
S.A. and Asia have been in a controlled colapse for some time now. It already fell apart.
In Colombia, Venesuala et al. the bankers wipsaw the markets and fleese the sheep at will. They control the chruch, government and business. Trust in the system is gone. People are on the edge and armed.
In Asia it may be worse. Open revolt is going on in all of Asia. Hong Kong is boiling. PI and Thiland are lawless and China is the most currupt place on earth. Ready to blow when the debt bomb goes off.
Want the truth?
Jesse Colombo has done mind blowing work for Forbes on the bubble that is poping now.
Search for his work and see the truth.
To say it won't happen is to deny math. Math always wins.
Hey I just see this shit everyday but I'm no match for your view from Kansaa.
You are the expert!
I'm going for some Pad Thai and then maybe chase a pretty girl.
I do notice people are lining up at the gold stores buying bullion. Must be Friday.......
saw a report that oid venezuala has -some- condoms, but now for hundreds of dollars !
Give it another year before it all breaks down...actually...
I was 31 in 2007... still a young stud...
Now we’re 2015... and I have problems with my back and sex is down to 4 times a week and the sixpack I once had is gone...
Weird... somehow I hope we can end this crisis pretty soon because I’m tired of it.
today I was at a meeting where with my 38 year old experience.. I was the oldest one in the room..
3 chicks in their 20’s and all I could think of was how I could take them out for drinks...
And it might have been my age but they where talking and I was staring at their tits like for 30 minutes and I didn’t have a clue what we where talking about. And damn... they had nice ferm tits...
and it was weird... especially as we where’s skyping with US partners and in the bottom screen I could see myself with a few cracks in my forehead... And I was thinking to myself... man I look old...
Imagine... another 8 years like this and I’m 46... FUCK THAT!!!
This weekend I need booze, send the kids to my parents and I’m having sex all weekend. This is all gething to depressing for me!
I just drank I full bottle of wine and I still don’t feel any better...
This shit is all taking to long. I’m starting to think that the blue pill is fucking way more fun that this bitter red one...
I'm way ahead of you and can NOT imagine two sentences more inapropriate in the same paragraph as "I’m having sex all weekend. This is all gething to depressing for me!"
Here man, have a mood swing: https://www.youtube.com/watch?v=36m1o-tM05g
keep calm and buy bitcoins
I read zero hedge every day and i see how much you post, you might be drowning too much in the negative. Have fun while you still can wtih different hobbies but prepare as well. I still have a positive attitude even though i know whats coming is going to be gnarly as hell. hope you feel better nodebt.
I read zero hedge every day and i see how much you post, you might be drowning too much in the negative. Have fun while you still can wtih different hobbies but prepare as well. I still have a positive attitude even though i know whats coming is going to be gnarly as hell. hope you feel better nodebt.
You probably just need a nice sit down chat with Ned Flanders to get you back on track.
Lay off the excess booze, get the sixpack back and 46 is not that bad, trust me. ;)
Most importantly, having 46 not that bad increases your chances significantly to have 56 not that bad, which in turn increases your chances significantly to have 66 not that bad, which...
Depending on your condition it will be a tough 2-3 years to get back into good shape, but staying there is much easier than the buildup. Start now and you'll be pretty well on your 40th birthday already.
Change the name to "Iran Contra corner" and I think we'd get more play here.
Throw in a hot secretary "sending out the memo from The Stockman."
Right now this stuff is real ho-hum.
I'm just not diggin it.
Know what I mean, bro?
The uneasy feeling that something is very wrong but not quite within reach is gone now. Binging on ZIRP debt will not produce lasting infrastructure. Living within one's means is a high goal. So much of what David Stockman communicates gives the tools to Think Globally, act Locally.
Monty Python, guess I'm now a fan of Rand
If you build it they will come.......and squat, pay no rent, and never ever leave.
The kids back from college?
David: The original sin and original ponzi is unchecked fractional reserve banking. ALL financial assets are essentially fraudulent and the system is certain to collapse in real terms. But, those of us who see it need only raise cash and buy physical gold with all the fraudulent TBTJ financial assets (and Central Banking did not cause the problem... It had just responded poorly. It should have bought gold in USD terms rather than giving TBTJ financial assets to front run the boom bust cycles and effectively steal even more from the general populace).
David, your total on China is light. Total bank footings have moved from $8 trillion in 2008 to $26 trillion at the end of 2013. Shadow Bank lending has moved from about $1 trillion to about $4 trillion in the same time period. This would put total footings to $30 trillion from $9 trillion in 5 years. U S bank footings have moved from around $10 trillion to about $12 or $13 trillion in the same time period (say $3 trillion) as we printed $4 trillion. Our crisis is largely responsible as we asked for help from China and they announced a $486 billion infrastructure spending program in 2008. What we did not know is that they sent the word out to their banks to put the money out and lending doubled from 2008 to 2009. This could not be done without taking the loans that you turned down the year before or it is all government related. Many local governments borrow for infrastructure, low income housing, etc. A lot of that would show up in bank numbers but not official governement numbers. The banks in China do not do a lot of small business lending; trusts and Wealth Management Products do more of this and there is a lot of lending from business to business and individuals to business or other individuals. Much of this lending would not show up in the numbers. The banks like large borrowers and some are State Owned Enterprises but a lot of this new lending has been done to local government related entities. Bill Gates mentioned that China used more concrete in four years after 2008 than the United States in the last century.
I was at your second hearing with the Senate Finance Committee after the woodshed and was amazed with how you handled the information and the Senators. We visited walking down the hall after the hearing about the strong dollar hurting agriculture and manufacturing. What is interesting is that I sent out an email on China last week and would send it to you if you sent me a message at the above address. We are on the same page. I trade currencies and am short the Renminbi.
THE PERFECT STORM (see p. 59 onwards)
The economy is a surplus energy equation, not a monetary one, and growth in output (and in the global population) since the Industrial Revolution has resulted from the harnessing of ever-greater quantities of energy. But the critical relationship between energy production and the energy cost of extraction is now deteriorating so rapidly that the economy as we have known it for more than two centuries is beginning to unravel. http://ftalphaville.ft.com/files/2013/01/Perfect-Storm-LR.pdf
Stockman needs to read that.
In case you wonder how does momentum of pulling foreign investment out of a specific country is generated?
This is case in point. Articles like this. Meaningless dribble by people who don't know what they are talking about.
China is not an economic miracle at all; its just a case of the above abandoned Athens stadium writ large.
There are no mirracles in finance. There are no mirracles in China either, but this is just propaganda. There could be an argument to read a point you disagree with, but reading propaganda is just a waste of time.
"Given the debilitating inefficiency and corruption of its long standing crony capitalist oligarchy and Washingtons devotion to mercantilist waste, bloated state payrolls and unaffordable welfare state pensions, among countless other economic sins".
Sounds a bit too accurate does it not?
The truth of the matter is that production and income come first. “Spending” or GDP growth can only exceed production growth when leverage ratios are rising.
And THAT folks will be written on the finacial tombstone of the U.S.A.
This whole article could be describing the United States. It is almost more than I can bear to read.
Countries like Sweden and the Netherlands have a higher total debt-to-GDP ratio than China. The UK has a significantly higher total debt-to-GDP ratio than China if you include debt from the huge British financial sector.
But China has probably made too many unproductive investments. They should probably have built more farm tractors and less shopping malls and office buildings over the past 5 years. Peasants would probably have appreciated near zero interest rate loans for farm tractors. Broadband cables in rural areas would probably have been a great investment too. By doing that, lessons could have been broadcast over the Internet and less teachers would have been needed. It would have been easier to provide people in remote rural areas with qualified education. It would probably have been easier to spot talented students in rural areas. Another example is an improved electric grid more suited to electric vehicles.
There should have been better incentives for Chinese communist party officials to encourage productive investments rather than the opposite.
China should probably also try to transform liabilities to equity in the corporate sector.
Isn't the whole fuckin world now in a Debt Trap?
The UK had 250% debt at the end of WW2 and it didn't result in riots in the street BUT IT DID mean years of austerity, food rationing booklets and shortage of basic goods particularly imports. Also any ideas of maintaining an empire and a large army were quickly extinguished. Of course society was considerably more cohesive then which is important.
China´s 282 % figure is the total debt (government, financial institutions, non-financial corporate and households) while the British 250 % figure was just government debt. The current Japanese government debt seems to be about the same as for the UK in the late 1940s.
Why does he use
"pc" instead of %?
Did he write this on a phone and didn't want to go to the screen that has the fucking "%" sign on it?
China holds out the promise of GROWTH -
How many times have I head - well China's growth rate is down to 7% - but most countries would love to have 7% growth.
It is like a stock - as long as they show a high growth rate investors will pay up for it - but then some day the growth slows down and the stock loses 50% of its price over night.
When this drop in China happens Japan is going to get its ass kicked.
Brits use pc instead of %
China has no debt outside China.
China doesn't owe the US or EU anything.
Greece does.
Right - China is not interconnected to any other country - if they have have a debt crisis I doubt any one will even notice.
If they end up selling all their US treasuries the market will be happy to snap them up at negative rates.
We can always have the fed make a statement that it is contained and will not impact anything - you know like sub prime home loans or Lehman Brothers - totally walled off from everything.
China is interconnected - yes. But China does not have external debt. That means any adjustment to the great malinvestment inside China will be a combination of internal adjustment and a change in currency values. They aren't going to have a deflationary collapse, but they might be forced to inflate by direct printing instead of debt creation.
This is the end result of a debt money system when the world it inhabits becomes "full" and the world economy can no longer absorb (growth) more debt to pay off older debts as they come due. This ponzi has been running for about 3 1/2 centuries and is reaching it's end unless there is a serious write down of debts in any number of ways or combination thereof. If not, financial collapse is a certtainty with a global depression as far as the eye can see if debts are to be repaid in full to those institutions left standing. The interesting thing to remember is that under the debt/money system the bankers issue loans of money as debt from thin air requiring only the asset in the real world be pledged as collaterall in order for the client to receive the bankers counterfeit money. This is the part that really sucks and that eventually has to be put right.....the people versus the bankers or the bankers eventually end up foreclosing on all the assets and gain ownership of the world....or why they view the rest of us as occupying their planet.
Whaddayutalkinbout?
The Chinese will simply add hookers and blow to their GDP calculations, and their debt-to-GDP ratio will be just fine!
It gets tiresome listening to disgraced economists that lead us astray.
Stockman shows debt figures, but doesn’t show their mirror. Their mirror of course is the credit as money said debt instruments spawned.
So, any discussion about debt must include its credit as money. Otherwise, the discussion is meaningless. MEANINGLESS. USELESS. Credit figures further need to be broken down into what they are demanding and when. Who, What, Where, Why.
For example, long term debt will have its credit cycle in the economy for a long time. Long term public debt may be on the books and not demand usury. For example, public debts can call in their former credit-as-money in taxes, to then be respent into the commons. In this case, long term public debts act as floating money.
So, here we are again: by not discussing the money types, where money vectors, its velocity, volume and periodicity, we don’t know anything. Stockman and other economists make themselves look foolish. Worse, we never evolve to discussion of debt free money and the political role necessary for Fiscal Policy.
If China’s ghost cities are funded by one of the FOUR state banks of China, then that former credit could well have been released. In other words, China State Banks often FORGIVE their loans and their credit morphs and becomes floating money. This money is then available in the supply to pay private debt, thus decrementing the private ledger. Private debts are much more onerous than public debts; notice the low private debt figures of China. A public not in debt and with some savings, can then buy and sell their output peer to peer, rather than have it vector away to Oligarchy and rentiers.
Or, China could never repay their public debts, and any usury on it they simply cycle from State Bank to Treasury, and then reduce taxes.
Sovereign public debts are like your right pocket owing money to your left pocket. Hey Stockman, do you look down at your pants and yell at your pockets. Some debts simply don’t matter, others do.
Note that China’s private debts are low. They also have a lot of floating money as a component of their money supply. They have gamed the U.S. and other Western economies to steal jobs and knowledge. They do this with targeted loans and then forgiving said loans. They use their STATE banks to channel their credit. America’s former solar cell industry is now gone due to China gambit; Where is your outrage about that?
OK. China has a different kind of economy than that of private money BIS run WEST. Without understanding the role of their State Banks then your analysis is MEANINGLESS. Worse, it misleads our readers.
China can spend public credit to front load a supply chain, putting money into the pockets of labor. Building out ghost cities is no different than building and blowing up war material.
Or, how about ISIS now owning American military gear. Functionally, that is the same as a ghost city. Those cities may be occupied later, but initially it put money into the pocket of labor, and thus stimulated demand for other goods. This is a temporal dimension to money where demand must precede supply.
Oh that’s right – Stockman you are a supply sider. Are you feeling guilty now that privateers in the U.S. are trying to monopolize the commons and take rents? Are you feeling guilty now that China along with Wall Street, has shifted American jobs overseas. Stockman, you are guilty of this shifting away of America former know how and ability.
This is something you could not see, because you have been hypnotized into stupor by an American economics profession, bought and paid for by banker usury. You economists out there need to have the scales fall off of your eyes.
Every time you bloviate about China, you are whistling past the graveyard. With low private debts, and control of Channeling, and control of money supply composition, China state banks could easily turn on internal consumption. Their industries are now world class. They don’t need to export, and they also hold debt instruments against America and the West, a form of power relations – where they could crash our economies.
China’s forgiving of loans is a KEY factor making their markets efficient, this is something private credit-as- money cannot compete against.
China owns their debt to themselves for the most part. Greece does not owe their debt to themselves. HUGE BIG DIFFERENCE. Comparing the two economies shows a tremendous ignorance of how economies and banking operates.
Stockman,
Here Hudson describes a weakness to the Chinese economy, apparently something completely outside of your ability.
Please read. Not taxing land properly and allowing private debts to then point at banks is the weakness, something we in the West are now snared in.
China does have private banking money in their system, but they tend to sit on thier privateers and force them to be sane. Often you will see raising of reserve ratios to stop profligate lending.
Also, your comparing to Japan is nonsense as well, especially as the private land bubble was blown by Japan on purpose. See the movie, Princes of Yen.
http://michael-hudson.com/2013/07/china-avoid-the-wests-debt-overhead-a-...
China has been responsible for 50% of global GDP growth during the recovery and it is now completely evident that it was all done with debt and much was malinvestment. This means the engine for global growth is going to be extinguished not just slow down. Look what the slowdown in growth has done to oil, copper, steel, coal, iron ore, etc. The party is over. The U S consumer is not an engine, neither is Europe or Japan; global growth is going to be much slower.
China's debt is much higher. Just read that the Corporate bond market is $2.5 trillion with 34% of that represented by local government borrowing through corporations formed to build infrastructure, etc. This market has also exploded in volume. The big piece that is missing is probably the private lending of business to business or individuals to business or businesses to individuals. This is undoubtedly also to be measured in trillions of dollars. Central government borrowing needs to be added. McKinsey's $21 trillion shows up in just the footings for banks and non bank banks (Trusts and Wealth Management Products sold by banks but not in their numbers). Add a trillion more here and a trillion more there plus central government deficits, etc. and you will see that the change in debt in China may well approach $30 trillion since 2008. Why is this a big deal because the entire U S banking system is under $13 trillion---less than half the size of China's.
There was another article a couple of weeks ago that $6.8 trillion of assets in China were worthless. What would a $6.8 trillion hole do to the U S banking system? It would wipe out the capital of all the banks, about $1.5 trillion and then it would also take half of the bank deposits in the entire banking system (banks, S&L's, Credit Unions, Savings banks, etc.). FDIC has less than $100 billion to back up the banks----good luck with that; it would be gone too.
China has produced half the growth in global GDP since 2008; if that goes away, then there is no engine for future global growth. Look at the price of copper at 5 1/2 year lows; it is the best measure for economists of the global economy. The Baltic Dry Index just set a record low freight rate for bulk shipments. Steel is falling, coal is falling, ship building is weak. China's trade adjusted currency is tied to the dollar and is up about 10% over the last year. In 2008 in China a new dollar of borrowing was producing about $.90 of GDP but recent numbers indicate it is now $.17 per new dollar borrowed. This is patently unsustainable. China is a house of cards. The only question is the timing.