Submitted by David Stockman via Contra Corner blog [14],
If you ever needed proof that the financial press has been completely indoctrinated in the cult of Keynesian central banking consider the attached Bloomberg note on the recent tiny decline in Chinese industrial company profits. Without breaking for anything more than a comma, its hapless Hong Kong stringer, one Malcolm Scott, conjoined the fact of less profits with the imperative for moar……money.
Industrial profits in China [15] fell the most in two years, underscoring the need for looser monetary conditions as the world’s second-largest economy slows.
Perhaps Bloomberg is no longer using carbon units to post its news stories and has gone straight to algo-writers designed to directly feed algo-readers without the bother or cost of human intercession. But regardless of whether “Malcolm Scott” is carbon or silicon based, the attached is clearly presented as a news story and the above excerpt as a declarative sentence. Accordingly, by the lights of Bloomberg and the rest of the mainstream financial press which it echoes, it is now the job of central banks to print money to ensure that at no point in time do profits—-and therefore their stock market capitalizations—-fall by even so much as 2.1% over prior year.
That’s right. In the land of red capitalism, where corporate accounting and reporting are so advanced that profit results are published on a monthly basis, the doctored number for all of China’s industrial companies in October came in at 2.1 percent less than last year’s fictional number.
Once upon a time, even journalists recognized that accounting profits are the swing residual after all fixed and variable costs have been accounted for and that in every capitalist economy known to history profits have been violently cyclical. But now, apparently, a 2% change in the bottom line results of China’s cooked corporate books is straight-away proof of the need for “looser monetary conditions”.
Well, here is the balance sheet trend for the People’s Printing Press of China. It has expanded by a stunning 9X since the year 2000, thereby fueling the greatest sustained explosion of new credit in recorded history. In fact, total credit owed by China’s household, business, financial and government sectors has risen from $1 trillion to $25 trillion over the same period. Exactly how can you get any “looser” than that?
Needless to say, this immense explosion of credit did not disappear quietly in the night. Instead, it funded the greatest construction and investment boom ever recorded. That’s why China produced 2.2 billion tons of cement in 2013, for example, or 29X more than the 77 million tons produced in the US last year. Or, even more dramatically, why it produced more cement on an average day that year than did the UK during the entire year!
Likewise, that’s why China has 1.1 billion tons of steel production capacity, but hardly 600 million tons of sustainable “sell-through” requirements for consumer durables and capital replacement. The difference represents the monumentally bloated one-time production of plate steel for ships, rails for transit lines and structural steel and rebar for a vast building binge. The latter, in turn, has bequeathed China with 70 million empty apartments, scores of ghost cities and dramatically under-utilized office towers, shopping malls and other commercial real estate facilities throughout the length and breadth of the land——but most especially in the second and third tier cities where Beijing’s approach to GDP manufacturing reached its most absurd parody.
Stated simply, China allocates GDP targets from the center and cascades them down through the party and governmental apparatus (essentially the same thing) to regional, county and city units. The latter, in turn, dutifully achieve their GDP targets by building things. Anything. Everything.
Needless to say, of the many dubious gifts that the West has supplied to the Middle Kingdom, surely Keynesian GDP accounting is among the most unfortunate. How does building pyramids increase a society’s wealth, exactly?
The least that Simon Kuznets and his merry band of Keynesian pioneers might have done 80 years ago is to measure annual economic output based on the market value of buildings, machinery and tools actually consumed during the current year—not mere spending for fixed assets that might never be used.
In any event, China and much of its EM supplier base is inundated in excess capacity for everything—cement, steel, aluminum, silicon based solar panels, refrigerators, automobiles and every manner of industrial fabrications and machinery, such as backhoe loaders and construction cranes; and also, vast excess capacity to export goodies and trinkets to the rest of the world including toasters, sneakers and socks.
This means that unless the construction and fixed asset boom is fueled with ever greater amounts of freshly minted credit, the house of cards known as red capitalism will eventually collapse. And it doesn’t matter whether the latter occurs all at once with a thud, or more gradually in the manner of a tire going flat. The result will be the greatest deflationary swoon the world has ever known.
It will manifest itself first in falling industrial prices such as currently underway for iron ore, coal and crude oil.
The deflation from this crack-up boom will inexorably move upstream, of course, to the pricing of everything made from these commodities owing to both lower materials costs; and also due to the fact that artificially cheap credit resulted in vast excess capacity in these fabrication and manufacturing sectors, as well. And, yes, the bloated wage bill of this overbuilt supply chain will also shrink.
Stated differently, “fiat credit” fuels the generation of “fiat wages” and especially “fiat profits” during the boom phase of over-investment and runaway construction. Consequently, when the credit tsunami finally crests—as even the leaders in Beijing are now resigned to—- fiat wages and fiat profits are also liquidated.
Indeed, what gets hit first during the bust phase is the accounting residual. That is, net profits and apparently so, even under Chinese accounting.
In short, the global economy is cooling rapidly and profits are already falling sharply in the primary sectors of mining and energy extraction. And that is only a foretaste of things to come down the industrial food chain.
Yet contrary to the Bloomberg algo-writer, this nascent profits collapse is not a result of too little money now; it is a consequence of way too much money over the past decade or two - and not only in China but in the entire central bank dominated world wide economy.
So Mises was right. “Moar” fiat credit always leads to a crack-up boom. Someone needs to reprogram the algos.
By Malcolm Scott Bloomberg News [17]
Industrial profits in China [15] fell the most in two years, underscoring the need for looser monetary conditions as the world’s second-largest economy slows.
Total profits [18] of China’s industrial enterprises fell 2.1 percent from a year earlier in October, the National Bureau of Statistics said today in Beijing. That compares with September’s 0.4 percent increase and is the biggest drop since August 2012, based on previously reported data.
The People’s Bank of China, which last week cut benchmark interest rates [19], refrained from selling repurchase agreements [20] in open-market operations today for the first time since July, loosening monetary policy further. Mired by a property slump, overcapacity and factory-gate deflation, China is headed for its slowest full-year economic expansion since 1990.
Data released Nov. 13 showed the economy’s slowdown deepened in October. Factory production rose 7.7 percent from a year earlier, the second weakest pace since 2009, while investment in fixed assets such as machinery expanded the least since 2001 from January through October. Retail sales gains also missed economists’ forecasts last month.
