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If I Had A Hammer_Trini Lopez
Will China Save
There's a lot of copy these days in the financial press that's devoted to the idea that China is going to keep bailing the United States out of its financial doldrums. Why? Because the Chinese economy is expanding like a fat person on the See-Food diet (see food and eat it).
Furthermore, it's about the only economy that is growing, and we count on it to keep buying up our treasury debt, especially now that our treasury has gone crazy and created cash and credit from nothing out of nowhere. The fact that China's economy is growing is good news, right?
Well, it would be if China keeps on buying our treasury debt.
Let's take a look at some writers who address the subject of China's boom.
Dr. Gary North, an economic historian, concludes on his members-only website that China's stock market is a bubble. In a piece called, "Why Jim Rogers Is Right But Too Early," on July 1, 2009, Dr. North writes:
I don't think it's wise to invest in a bubble market. China's stock market today is the #1 bubble on earth.
The People's Bank of China is inflating to the tune of 27% per annum (M2). It is in expansion mode. It is trying to keep the boom alive. This is why the Chinese stock market is up: a monetary stimulus.
This stimulus is distorting production, according to Ludwig von Mises' 1912 theory of the business cycle. If the central bank does not stop inflation, China will have mass price inflation. If the bank does stop, China will have a major recession. But already 20 million workers are said to have lost their jobs.
I have warned against this repeatedly. Now Fitch's has concluded something similar. This was reported by Ambrose Evans-Pritchard.
Fitch's says that the central bank is behind the expansion of loans by the commercial banks. This analysis is correct.
One sign that the boom is turning into a bubble is the warning from the People's Bank to commercial bankers to be more selective in making loans.
China's Banking Regulatory Commission fired a warning shot last week. "The top priority at the moment is to stop explosive lending. Banks should carefully monitor the process of credit approval and allocation, and make sure that loans flow into the real economy," it said.
This is a traditional warning given by central bankers after their policy has created a bubble.
The central bank makes no distinction among commercial banks when it inflates the currency to lower short-term interest rates. Why should central bankers imagine that commercial bankers will be any more selective? The key issue is the interest rate. It's fake. Why should the projects funded by commercial banks not be equally fake?
The only thing keeping Western bubbles from appearing is the fear of commercial bankers, who keep excess reserves at central banks. They are looking at commercial projects and concluding "fake." There is no recovery in the West But in China, bubbles are forming.
Fitch traces the 2009 bubble to the central bank's decision to cut interest on reserves to 0.72pc. Bankers responded to this "margin squeeze" by ramping up the volume of lending instead. Over half the new debt is short-term. Roll-over risk is rocketing. China is a bubble economy today. My concern is that commodities are a mini-bubble. When China's bubble pops, commodities will fall again.
Dr. North tells us that China's stock market and economy is a bubble. Since China has a history of civil disorder when it suffers an economic slowdown, it is to the government's advantage to keep the boom going as long as possible. Plus, China probably thinks its prestige is enhanced if it keeps on growing while other countries' growth screeches to a miserable halt.
Now let's take a look at The Daily Reckoning of July 12, 2009, where Bill Bonner of Agora Financial examines the Chinese Miracle:
Yes, it's the 'miracle economy.' China, that is. Many analysts think it has 'decoupled' from the rest of the world economy. While the rest of the world sinks into the 'worst recession since the '30s,' it is said to be growing at 8% per year.
Well...when we go figure we figure there's something fishy about it. In fact, we figure it's a fraud.
In America, the bear market bounce took a little jig downwards yesterday. Stocks - measured by the Dow - fell 96 points. Oil fell below $70. The dollar and gold remained almost unchanged.
But China's revved up so hot she seems likely to throw a rod. We've been telling our Dear Readers to stand clear.
At least, that's the case with the Chinese stock market. It's a bubble. And it's getting ready to pop.
As for the economy...we figure it's a fraud...
Chinese officials have a funny way of counting. When products are shipped from the factory, for example, they are counted as 'sales' even though no one may actually buy them.
There are some other ways of keeping score that tend to tilt the game in China's favor - at least, on paper. When you add up all the scores - it shows China a big winner. But by the end of the day, it isn't at all clear that China's economy is growing at such a breakneck speed. In fact, it isn't clear that China is really growing at all - not in a genuine and helpful way.
And here...perhaps we should pause. We are about to tell you that China is a scam. It's not really becoming more prosperous.
Well, here's a question for you: if China were really growing at 8% per year, how come its electricity consumption is going down?
Because the Chinese bureaucrats can jiggle and jive the numbers for employment, GDP, and inflation. But the number of kilowatt-hours consumed in China is just a number. It is not computed. It is not seasonally adjusted. It is not tortured by statisticians nor tormented by economists. It is just a number. And that number is a smaller number than it used to be.
Oh, and here's another number. China's exports for July were down 22% from the year before. Here's another question: how can an export led economy grow when its exports are collapsing?
Again, we have an answer: when it is not really growing.
According to the meddlers, China is growing because meddling works. China is spending $586 billion (proportionally nearly 3 times as much as the US) to keep its economy booming. The program must be working, say the economists, because China's economy is still growing.
But is it? Most of the money is spent on infrastructure. The Chinese are doing what the Japanese did before them. Japan bailed out its banks and spent trillions on infrastructure. There were years when little Japan was pouring much more cement than the entire USA. - channeling rivers, building bridges to nowhere, and creating highways for no one. What did they get for their money? Well, you could say they got a lot of infrastructure...and the most cemented-up country on the planet. Is that a good thing? We don't know. But one thing they didn't get was durable economic growth.
Why not? The easy answer is because an economic system is too sophisticated to yield to these ham fisted interveners. Another way to look at it is because the economy had already spent too much...creating too much capacity. Adding infrastructure that could handle more capacity was not a solution.
"Keep in mind," says The Richebächer Letter's Rob Parenteau, "China needs at least 9% growth to soak up the 24 million new Chinese workers who come of age each year - something even the Chinese Premier doesn't like to mention."
But heck...it's summer. And in the sum...sum...summertime, we're not going to criticize our fellow man. Instead, we're just going to laugh at him.
In China, for example, the government's stimulatory programs are having the same flaccid results they got in Japan. Prices are going down. The Chinese feds are trying to get people to spend more money - just as they did in Japan. But people do not spend more when prices are falling. They wait for a better deal. And as they wait, consumer demand falls...forcing prices down further. Japan has gone through almost two decades of on-again, off-again consumer price deflation. Now it's China's turn. Consumer prices in China have been going down for the last six months...and are now reported falling at a 1.8% annual rate.
How could prices be going down in a booming economy? Well, because the economy isn't booming. Instead, it's burdened with overcapacity - just like Japan's. And like Japan's it is probably doomed to go through a long period of re-adjustment...before a durable recovery can begin.
Dan Amoss of Strategic Short Report agrees that China is a big bubble, and that it could pose a lot of trouble for the American economy, maybe even stalling our recovery. In an essay entitled, "Green Shoots Do Not See The Mowers," published in the August 12, 2009 Daily Reckoning, he points out the following:
I'll add a seventh lawn mower: the growing risks posed by debt bubbles in China and other emerging markets...
The Chinese government realizes that its stimulus spending and pressure on banks to expand lending is inflating a massive bubble in the Chinese stock and property markets. The problem with unsustainable economy activity is, of course, that it must eventually end. Michael Cembalest, the Chief Investment Officer of J.P. Morgan Global Wealth Management, describes the Chinese lending bubble in his Aug. 6 "Eye on the Market":
"And in China, while there are positive recovery signals, I've never seen a country expand its loan base by 34% in one year without massive inefficiencies and asset speculation in its wake. Only 5% of this year's loans went to private enterprises (which employ 75% of the urban workforce), as 95% went to state-owned enterprises or provincial entities. While there have been substantial productive improvements in rail and other infrastructure, our contacts in Asia also indicate that funds designated for stimulus are ending up pushing up land price auctions to 4 times the original bids."
This is mal-investment on a monumental scale. But for now, the Chinese have much more room to borrow and inflate than the US (which has spent the last few decades doing so). Eventually, the market will cut them off. The end will not be pretty, and at some point in the future, shorting Chinese stocks may be one of the best short selling opportunities in history.
But in the meantime, it makes no sense to bet against China. The Communist government has proven very efficient at stealing the resources of its people (via inflation and taxation) and channeling them into whatever infrastructure project they deem necessary.
This process could end next week, or next year. That's the annoying part about bubbles: they tend to expand until the last patsy has bought in, and there's no telling how many patsies there are. There are already signs emerging that the furious pace of loan growth is slowing down. Today, Bloomberg reports:
"China Construction Bank Corp. will reduce new lending by about 70 percent in the second half after a surge in loans in the first six months increased credit risk, President Zhang Jianguo said in an interview.
"CCB, the world's second-largest bank by market value, plans to extend about 200 billion yuan ($29 billion) of loans, down from 708.5 billion yuan in the first half, said Zhang, 54. The company's new lending through June 30 was 42 percent more than for all of 2008."
Lots of debt loans are being made, but as long as loan growth is running hit, they will be hidden. Once loan growth stalls, bad loans will come to light, and the Chinese government may implement its own version of TARP to recapitalize its banks.
These authors prognosticated correctly--the Chinese stock market took a big fall on Monday, August 17, 2009, and another good-sized fall on Wednesday, August 19, when it went so low, it "dipped into bear-market territory." The reason? Investors feared the Chinese stock market was unsustainable.
Then on Thursday, August 20, the Chinese stock market rose again, as reported by msn.com on the Money Central page:
China's Shanghai Index rebounds
China's Shanghai Composite Index closed 4.5% higher overnight after dipping into bear-market territory on Wednesday, causing worries about a global recovery.
Well, folks, there you have it. China's economy is a bubble economy, with no real growth and no capacity to bail out America's economy, much less the world's. If there's no "Chinese miracle," and the mainstream financial press continues to tout America's "green shoots," the global recovery, and the red-hot Chinese economy, what does that say about the possibility that the much-ballyhooed "American recovery" is real?
What American recovery? All Kong's friends have lost their jobs, and now he doesn't have anyone he can borrow bananas from anymore!
This Just In !
This just in, folks. We just learned, from Dr. Gary North, who has been watching for this, that China has now begun selling U.S. treasuries. What does this mean? According to Dr. North, we won't know for sure for 2 or 3 months, but he believes China may be starting to disengage from the dollar. On his members-only website, in an August 21, 2009, article called, "The Nightmare for the Treasury Has Begun," he writes the following:
The Treasury has depended on Asian central banks — mainly China's and Japan's — to fund a big chunk of its deficit. I have waited all year for any sign that China was reversing course. It came this week.
The key report is issued by the Treasury. It is known as the TIC report: Treasury International Capital.
All year, China has been buying Treasury debt. It was up by $61 billion in May. I kept waiting for the shoe to drop. It dropped in June. The Chinese sold off $25 billion.
If this continues for three consecutive months, we are seeing a policy reversal. China is unloading dollars.
It is not clear from the TIC report what maturity dates China's central bank is selling. The bank may merely be failing to roll over existing loans. I suspect this is the case. It then gets delivery of dollars as the loans mature. What will it do with these dollars? Buy U.S. goods, such as food? Possible. Buy other currencies? Possible. The People's Bank of China probably will not say. What we do know is that it is not buying Treasurys. It is selling them.
This appears to mark a change in policy. The yuan is a controlled currency. There is no mythology about the independence of the People's Bank of China from the government. The bank is a tool of government policy-makers.
This indicates that Premier Wen is willing to enforce his warning about the need to find another way to handle international transactions besides the dollar. The only currencies that are likely replacements are the yen and the euro. These are major trading currencies in world commerce.
Selling dollars is a risky thing for China to do. It has relied on a huge trade surplus with the United States to subsidize its export industry -- a bad economic policy. This shift may indicate that the government has run out of patience with Washington's domestic deficit. We won't know for two or three months. But this is a major sell-off. China seems to be disengaging from the dollar in a tentative way.
We aren't sure what is going on yet, but we do know that if China quits buying U.S. treasury debt, the United States is in big-time trouble. And if China outright sells off all its dollar holdings, that will be a major indicator that China has lost confidence in the value of the dollar .
Once that happens, look out below, because nobody will want dollars anymore. When this happens, that is called a "hyperinflation."
Bear in mind that when France underwent this same event back in 1789, its king and queen lost their heads and the French Revolution ensued. When Germany underwent this in 1923, Adolf Hitler siezed the opportunity and assumed power.
What will happen in America if the dollar becomes worthless? Kong doesn't know, but he sure doesn't like the possibilities!
The will have that "hang dog" look and our enemies will be .
If you recall, from the numerous ChemBioUpdate Flash Alerts, Mr. "B" warned that when this happens, they will have no reason to stay friends with us. They are on the way to war with us! We will be attacked on the East Coast while Russia attacks our cities. It's still coming folks!
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