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How China Broke The World's "Bubble Machine"
Submitted by Bill Bonner via Bonner & Partners (annotated by Acting-Man.com's Pater Tenebrarum),
Magical Money System
U.S. stocks still going up. What does Mr. Market know that we don’t know? Plenty. He knows everything. Millions of facts. Millions of opinions. Millions of guesses. A damned know-it-all. Mr. Market is always right; there is no higher authority except God Himself So, if Mr. Market says stocks should go up, who are we to argue?
“Don’t fight the tape,” is another old-timer expression on Wall Street. When stocks are going up, you don’t want to be short. When they are going down, you don’t want to be long. As simple as that sounds, it doesn’t help you much. Because you never know which side the tape is on.
DJIA, daily. At some point, the “tape” is going to mislead those “millions of well-informed investors” – click to enlarge.
Mr. Market is a cunning, wily, and tricky fellow. He’s perfectly capable of leading investors up and up… only to knock them down from a higher place. Also, he’s known to give out the word that it’s “all clear” in the stock market… while brewing up the storm of a century.
Or you may hear him singing the blues about how awful everything is… and then discover that he’s been buying the entire time. So, even though the Dow has been trending upward… we’d be careful about drawing any conclusions. Mr. Market could be up to his old tricks; the tape could reverse at any time. And we kinda think it will.
Friend and economist Richard Duncan points out that the booms and bubbles of the last 35 years had a particular cause. They weren’t the product of Mr. Market’s caprice or of investors’ shrewd judgments. Instead, an almost magical money system drove consumption, production, and asset prices to new highs all over the world. What a hoot! Wages rose 10 times in China. Stocks rose 16 times in the U.S. But now the party is over…
Wheels A’Turning
Here’s how it worked: Once the world’s money lost its golden anchor in 1971, things got a little funny. Americans spent money they never earned and never saved – dollars created “out of nothing” with nothing more than keystrokes on a computer.
Much of this new money went overseas, where foreign nations – notably China – had to print their own currency to keep up with it. But you’ve heard this story before. China makes. The U.S. takes. In the process, a glut of dollars ends up in the hands of the Chinese feds as foreign exchange reserves.
China – M2 (black line) and M1 (red line). The cows are coming home…and there are suspicions that they are highly unpleasant cattle from hell – click to enlarge.
The buildup of these reserves is both the cause and the measure of the globalized boom the world has enjoyed since the early 1980s. As Americans bought more goods from China than they sold to China, they sent more dollars to the Middle Kingdom. These dollars boosted the world’s money supply… and set heads a’spinning, wheels a’turning, and chimneys a’smokin’.
China (and other countries) filled the orders and banked the dollar sales. Of course, you can’t easily spend dollars in China. So the Chinese central bank, the People’s Bank of China (PBoC) exchanged merchants’ and manufacturers’ dollars for renminbi at a fixed rate (otherwise, the demand for renminbi would push up its exchange value – something the Chinese have been keen to avoid).
This left the PBoC with lots of dollars. What could it do with its stash? Buy U.S. Treasury bonds! As China recycled its export dollars into U.S. government debt, it lowered U.S. interest rates and increased the amount of money bidding for U.S. financial assets.
That – roughly – is how we got to where we are today. China’s supply of foreign currency reserves rose from zero in 1979 to $4 trillion in 2014. Worldwide, reserves grew by $12 trillion.
Broken Bubble Machine
Here, you can easily see the difference between this new credit-based system and the gold-backed system it replaced. You could never add $12 trillion to the world’s money supply in the same way if it was linked to gold. All the gold ever mined has a present value of only about $6 trillion.
This big increase in the global money supply was what set off the booms and bubbles of the last 35 years. But now, what’s this? The bubble machine is broken? The PBoC is no longer adding to its dollar reserves. Instead, it is offloading them. About $400 billion has been clipped from China’s foreign exchange reserves since 2014.
China’s foreign exchange reserves accumulation is going into reverse – and that affects the global liquidity situation.
This drop is a big change for China… and for the world’s financial system. Imports into China – mostly raw materials – are dropping at a double-digit rate. Exports are rolling over, too.
There is nothing like easy money to cause people to make mistakes. Americans overspent. China overproduced. Now, Americans can’t step up their buying (they owe too much already)… and China has too much capacity.
China’s growth, by the way, has been heavily concentrated on building factories and infrastructure – capital investment. China spent $4.3 trillion on fixed capital investment in 2013 – 10 times more than in 2000. But when you produce too much already, building more factories only makes the situation worse. Prices fall; on a year-over-year basis, producer prices in China haven fallen every month for the last three and half years.
Investment to GDP ratios compared. A lot of the debt-financed investment in China is malinvestment (with its infamous ghost cities an especially glaring example; this is like Keynesian pyramid building) – click to enlarge.
Adding output capacity – often done with the connivance of local governments – was largely financed on credit. Bank loans have risen threefold since 2007. These loans must now be going bad. Nonperforming loans should be shooting up. Recession should be coming. Instead of driving the world economy forward, China should become a drag on the whole world economy.
What does this mean? China can’t allow its industrial economy to sink without a fight. It will have to devalue the renminbi to try to get more market share for its exports. It still has 80% of its workers earning less than $10 a day. A lower renminbi will reduce real wages further and make China’s exports cheaper than ever.
And then, what about the rest of the world? As the renminbi goes down, the dollar, yen, and euro will have to go up. Commodities – priced in dollars – will stay down. U.S. corporate profits will fall. The stock market “tape” will go down. Consumer prices, too, will remain low… or go negative. Deflation. Deflation. Deflation.
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Mr. Market has been crushed, smashed, trashed, fooled, conned, scammed, and smeared but in the end he will bounce back and win the game.
The market can only do its job, when it is left to do so, in a free economy. The Fed will never back off and leave the market to do its job - which is why there is no market left. A proper market will not exist until the civil war is over and all the current central planners are hanging from piano wire.
I suspect that we will be buying more Chinese bearings and hub assemblies in the future. Quality is improving, and NO ONE can touch their prices. Not even close.
Just like Saudi putting US oil out of business by flooding the markets with cheap oil and willing to put up with the pain while doing it. It's a Fight Club business model.
"You could never add $12 trillion to the world’s money supply in the same way if it was linked to gold. All the gold ever mined has a present value of only about $6 trillion."
First, was the issuance of $12 trillion absolutely a good thing for everyone? Ultimately, no.
Second, of course having gold as an anchor of some kind for the dollar would have inhibited the issuance of dollars. However, gold could be revalued in terms of dollars today with the stroke of a pen.
Obviously parties that have relatively less gold or more debt might object mightily, but it is mathematically possible.
After the current system melts down, gold may get another look.
I look forward to that day. Can't wait to see Mr. Yellens bloated blue face with white hair swinging in the wind.
Mr. Market was screwed by Mrs. Cantral Casino a long time ago.
Governments take out debts, and send them to their Central Bank, who put them on their Asset Sheet.
Then the Central Banks create currency in amounts equal to the face-value of the debts.
It works just like you putting money into a checking account and then writing checks equal to the amount in the account, and using them to pay for things. The only difference is that the governments of the world are conjuring up those debts, and the money that draws upon them, from THIN AIR, while you and I have to do something others consider useful to get the money.
China didn't build those empty Cities because people demanded their existence any more than Congress expanded the Debt by $1 Trillion/yr because they had urgent spending requirements.
They took out the debt, so they could create the currency.
In China's case this is how they have been boot-strapping the economy over the last 30 years.
In the US case, this is how they keep the post-1971 Dollar, TBill, and everything that represents from defaulting.
You must invert your thinking from where it applies to your household spending, because UNLIKE YOU GOVERNMENTS NEEDN'T DO ANYTHING TO EARN THE MONEY.
It is simply a hair-brained scheme to create currency unconstrained by reality, on the theory that pretense creates reality.
But it doesn't.
If it did, then CON men wouldn't be stealing, but creating.
+1 Great post.
Seems that in the US at least we have a huge bubble machine.
Oh, BTW, anyone else see this:
http://yournewswire.com/us-israel-conducted-war-games-in-russian-plane-c...
The US and Israel were conducting war games near the place and at the same time the Russian jet was shot down.
It is ISIS because ISIS is Israel and the CIA.
I agree. We are in a devlish downward deflationary spiral. Houise prices and the stawk market will correct big time since they are th eonly ones that have been manipulated strongly to resist market forces so far.
Anytime an article about "why the market is overvalued" begins with "back in 1971," it's pretty safe to assume that the article is complete BS.
WE GET IT, you're pissed you missed the post-2009 rally, and you're pissed your short positions are all going to zero.
So you assume Bonner has been "short the market from 2009"?
I'd say your obviously wrong and full of shit but I think you have establised that fact already.
@ MD 20 weeks here?
Go back to your play pen. You don't know shit about real money, gold or Bill Bonner.
History of bubbles.
http://www.zerohedge.com/news/2015-07-27/when-will-we-ever-learn/
Fed sees 2 bubbles
http://michaelekelley.com/2015/02/20/fed-warns-of-two-bubbles/
o Commercial Property higher than pre-2007 level.
http://nreionline.com/finance-investment/cre-prices-are-now-officially-above-pre-recession-peak
o Global Corporate Debt Market hits $5 trillion.
http://fn.dealogic.com/fn/DCMRank.htm
I'm thinking this monetary madness won't end until the common folk wheel out the guillotines.
The common folk have absolutely no idea they believe what they're told.
In EITHER the case of China or the US (or any other country today) the degree to which you increase the money supply in this manner is the degree to which the economy built with these fiat currencies are unsustainable...because these businesses form and grow not to the degree they satisfy the real demands of real people but they benefit to the degree they please the money-printers from which the currency springs.
In EITHER the case of China or the US (or any other country today) the process of doing this is one where YOU MUST BORROW INTO EXISTENCE MORE CURRENCY THAN REAL PRODUCTION WARRANTS. Why must you? Because if production exceeds debt-currency creation then you have more 'stuff' chasing the same or less currency - causing prices to fall, which means that earnings 'numbers' are smaller, which means debts are harder to repay (rollover) meaning the whole currency-banking system collapses as the debts backing the currency default. No. The system REQUIRES ETERNALLY RISING PRICES... so that it is always easier to take out a debt than to pay from savings.
In such an inflationary environment, if they print too much, then prices will rise. If prices rise, then it is easier (in terms of real stuff) to roll-over yesterday's debts so as to create even MORE currency tomorrow.
EXCEPT if they print WAY TOO MUCH...then prices rise faster than wages, people suffer, and they may rebel or abandon the currency.
AND THERE IS A MORE INSIDIOUS THREAT TO THIS SYSTEM...
The only portion of the economy under such a system that is real is *SOME* of the part that satisfies real people's real demands. The rest is synthetic, existing only to catch some of the monetary overflow from authorities.
YET that *REAL* economy is the one that has to pay the interest on the debts backing the currency. They are the only ones who can. Because they are the only ones engaged in *REAL* production that doesn't depend on money-printing. And the bankers and government must CONTINUALLY rollover yesterdays debts PLUS INTEREST in order to avoid default.
Because Money doesn't flow the the real economy as fast as they create it, this means that the INTEREST SERVICE BURDEN to that real economy must eternally grow.
Until, eventually, it can't pay it anymore.
Money velocity stops.
Defaults begin.
Money disappears.
And the monetary authorities have to find things to spend huge amounts of money on, like war, pork-barrel spending, 'Shovel-ready-jobs', and 'Ghost Cities' .... to justify taking out debts large enough to counter-act the defaults and keep total credit growing...so that total currency can continue growing... so that they can stay ahead of default.
Except, the interest portion of the accumulated debts are compounding, while that representing the real economy is only, at best, growing arithmetically.
So, you see, default is inevitable in such a system. The only question is who will be blamed, and who will be holding the bag.
maybe so except the Ghost cities part that everyone laughs at. I think it's perty smart meself.
Take an up and coming currency and economy, capture all the industrial capacity and peg the currency . Then lever up to the MAX and pour all this money you can into infrastructure, build Shanghi, Bejing into massive cities full of skyscrapers seemingly overnight by levering up. And when you can't build enough new bullet trains, harbors and buildings while the getting is good, build out anything for the far foreseable future but for god sakes KEEEP Building while the spice flows and the getting is good..
And now that you have the future towns built, remove that one child law and tell them billion chinamen to get back to Fuckin. There is your future GDP, and nobody, but NOBODy can out-fuck the Chinese.lol
Now the economy slows, the bills come due from the massive buildup and all the loans and leverage. De-peg the currency, make a nice show that you are trying to save it and buy up all the gold on the planet and tell your billiion people to buy it too!
Then pull the plug on the old currency and let it got down the toilet and the trillions of bad loans? well they just default and go away and after the currency is trash, issue a new backed currency and you own the planet. And Guess what? It did not cost you one THIN DIME. ALL FOR FREE. HA.
The Freakin Chinese invented fiat currency, you think you will beat them at that game? Yea Right. You've been played sucka, along with your fiat lovin central banks.
And don't worry, That Poker faced Xi will never let on like he even knows anything. You could give him a a billion ounces or kill his grandmother in front of him and you would still get the same exact expression while he raises his tennie tiny glass of Sake and toasts your dumb ass while trying to keep from laughing uncontrollably inside.
The Committee To Ruin The World was headed by Alan Greenspan, Robert Rubin, and Lawrence 'Larry' Summers, not China.
American exceptionalism credits are due.
We have to start saying NO to cheaper prices. This is at the the expense of quality and it creates a disposable mentality. If global warming is really an issue, manufacturers should have to produce things that can be passed down rather than thrown away. Party conversation today is not about global, and regional important events.....it's about the great deal that was had on some piece of crap that was probably not needed or wanted that will end up in the land fill within weeks. Where have our values gone???????
Naive
low prices are never rejected...what is coming cannot be stopped....you stand in front of the tide, the rest of us will prepare and observe your crusade from a safe distance.
I'm afraid that genie is out of the bottle.
It is not possible to revert to the status quo ante due to ripple effects. Trillions of dollars worth of innovations and investment that incorporates those innovations into the market's processes have been introduced into the equation. You can't rebalance just by changing that "we are willing to pay for quality" variable.
Afrter 'Deflation, Deflation, Deflation' comes the response which looks a lot like deflation but involves a bit of 'hyper'.
fuck me...I had to reject ZH invitation to receive ZH by email 3 times while writing this post.
Robots will give them their edge back.
And send the humans to war! Clean up the surplus!
I don't want another deflation fantasy article. I want me some real consumer deflation. Can I have some please.
Bravo. Cause and effect well explained. Debt wins again. Hard earned dollars continue to be diluted by debt dollars. Odds are stacked against the stacker. Difficult to stay upbeat when the we look forwad to; war, hyper-inflation, the contagion of blackswans popping bubbles. There isn't a hope in hell that responsible financial management comes soon. Why would it, the villians are in charge. If you think it is isolated to finance think again, we are being herded, distracted and neuted. Get a millenial off his mobile to understand, let alone fight it and you are dreaming. Nobody is interested yet they all toil over feeding the machine. I see piles of them in their office attire every morning, like zombies heading to their cubicles. Suckers with aspirations to get a bigger loan to buy a symbol of status. If you don't pay cash you can't afford. I guess, that's where my thining is wrong. Our poor kids have a lot to look forward to. "I had a dream..." that the next generation seeks a path truth, transparency and justice. Something which we will not. Yelling at the wind gives me little consolation. Anyway back to bread and circuses.
Who gives a crap about China? They're not the least bit interested in having Real Money (Gold-backed currency).
All they want to do, is to keep having depressed prices on commodities and key assets (US Real Estate in CA, WA, FL, NY) -- all paid in cash, so there is far less Gov scrutiny and traceability.
I therefore do not expect PM prices to go up for a long time, but do expect RE prices to keep going up or remain solid in the aforementioned states.
Rather than being over-weighted in PM, I'd use my DI (Disposable Income) to balance PM with other Real Assets that are actually more fun or useful than shiny metal: Art/Collectibles, vital RE, G&A, Liquor... Assuming you have DI to begin with.
p.s. Note to you adrenaline, alcohol and testosterone laden guys: Trophy GF's and 95% of US wives are Depreciating Asse(t)s*, which you merely rent, not 'own'. Rent, Spend, and Speculate accordingly. :-)
* Show me a beautiful woman, and I'll show you a guy who's tired of doing her.
To pop a bubble in Gold buggery:
You could never add $12 trillion to the world’s money supply in the same way if it was linked to gold. All the gold ever mined has a present value of only about $6 trillion.
This statement by author is correct, especially as shown by post Bretton Woods till 71 or so when we went off of Gold Trading standard.
What it ignores is that all trade is barter. Trade can be marked with a Bancor system. Bankors flux in exact volume relation to trade. All international trade is only barter. Ignoring hard facts in pursuit of gold buggery is dishonest. All money is law, which is another fact.
For example, under a bancor system China and Wall Street could never have gotten away with their gambit.
A country that is mercantile and exports too much (China?) is punished by having their surplus accumlated bancors taken away and given to somebody else. This is negative reinforcement, and required as feedback...all systems must have proper feedbacks.
Exchange rates of a country are related to bancors, and bancors in turn relate to goods and services traded internationally. Goods and services are fairly stable, as the sun shines down and cows grow and grain grows, etc.
This is your anchor. NOT GOLD.
Then, internal to each country, simply use non debt based sovereign money.
A non debt based money system is law, and law can be codified to stop raping earth. Debt systems rape the earth in pursuit of gains to pay the usury.
www.sovereignmoney.eu
It's not hard to understand let me explain it simply.
China has excess heavy industrial capacity. The U.S. has a dearth thereof. Which nation is more prepared for unrestricted warfare?
We have to start saying NO to cheaper prices. This is at the the expense of quality and it creates a disposable mentality. If global warming is really an issue, manufacturers should have to produce things that can be passed down rather than thrown away. Party conversation today is not about global, and regional important events.....it's about the great deal that was had on some piece of crap that was probably not needed or wanted that will end up in the land fill within weeks. Where have our values gone???????