Fundamental Problem in China
“The fundamental problem — that Chinese people paid excessive prices for real estate because they thought the price would always go up — remains. And that means that someone will eventually have to take the losses.”@Noahpinionhttps://t.co/I7m7fd3eWc
— Michael Pettis (@michaelxpettis) June 3, 2023
“The fundamental problem — that Chinese people paid excessive prices for real estate because they thought the price would always go up — remains. And that means that someone will eventually have to take the losses.”
Someone Will Have to Take the Losses
Noah accurately comments that “someone will eventually have to take the losses.”
In China, the government refuses to support consumption. Instead, it repeatedly turns to real estate and exports for growth, pilling on losses upon losses in State Owned Enterprises (SOEs).
In the US we have commercial real estate problems, overprices houses, and overpriced equities.
Someone will have to take the losses, notably pension plans that are massively underfunded despite three consecutive stock market bubbles.
But is That the Fundamental Problem?
Hardly. The fundamental problem everywhere is an unsound currency system that promotes bubbles as a means of growth.
The fundamental problem propagates differently in different place.
China has massive property bubbles. The US has untenable deficit spending issues and many bubbles, yet, still tries to be the world’s policeman, while weaponizing the US dollar on top of it all.
In the EU, Germany and Northern Europe largely dictate what happens in a core vs periphery issue.
The EU has an additional problem: The Maastricht treaty, the EMU, and EU rules make it nearly impossible to fix anything without unanimous consent of all the nations involved.
Central banks everywhere are guilty of promoting bubbles and busts of increasing amplitude.
The Fundamental Problem
The fundamental problem is best viewed as a combination of unsound currencies, unsound central bank policies, and unsound fiscal policies that manifest in different ways in different countries.
But every country has the same thing in common: “someone will eventually have to take the losses.”
That we are in such a quagmire over that unavoidable truth is not the problem. It’s a symptom of the primary underlying problem, unsound currencies, everywhere.
Global Japanification and a Currency Crisis on Deck
A fundamental strength of capitalism is ability to succeed and fail.
We do not have capitalism when central banks and governments act to prevent losses. Nonetheless, the losses and distortions continue to mount or are papered over at taxpayer expense.
Japanification of the global economy has largely been the result, more so in Japan and the EU, than the US. Japanification of China is happening now.
A currency crisis of some sort awaits, as every country, but in different ways, is hell bent on preventing someone from taking the losses.
I think that the crisis starts outside the US. Likely places include Japan, China, or the EU, but it could start anywhere.
Dollar Weaponization Will Speed Up the Crisis
One thing I am certain about is dollar weaponization by the Fed will speed up the timeline.
For discussion, please see Dollar Weaponization Expands – FDIC Message to Foreign Depositors Is Don’t Trust the US
Also see Central Banks Are Buying Gold at Record Pace, What Does That Mean for Inflation?
Just don’t expect immediate results. We have been on an unsustainable path for decades.
Don’t underestimate the willingness or ability of central banks to kick the can down the road. No one knows when, or what the trigger will be.
Do expect more global Japanification.
This post originated on MishTalk.Com.
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Unless savings are activated, put back to work, a dampening
economic impact, a deceleration in money velocity, is engendered and
metastases, resulting in secular strangulation (not because of robotics, not
because of demographics, not because of globalization, not because of monopolization).
As the economic syllogism posits:
circuit flow of funds is to be maintained and deflationary effects avoided”…
aggregate demand and therefore produces adverse effects on gDp”…
time-deposit banking, would tend to have a longer-term debilitating effect on
demands, particularly the demands for capital goods.” Circa 1961
Lawrence K. Roos, former President, Federal Reserve Bank of
St. Louis and part-time member of the FOMC (the Fed’s policy arm), was cited in
the Wall Street Journal’s “Notable and Quotable” column, April 10,
1985, as follows:
“…I do not believe that the control of money growth
ever became the primary priority of the Fed. I think that there was always and
still is a preoccupation with stabilization of interest rates”.
“In a letter of March 15, 1981, Willis Alexander of the American Bankers
Association claims that: ‘Depository Institutions have lost an estimated $100b
in potential consumer deposits alone to the unregulated money market mutual
funds.’
funds goes right back into the banks, in the form of CDs or bankers acceptances
or other money market instruments; there is no net loss of deposits to the
banking system. Complete deregulation of interest rates would simply allow a
further escalation of rates by the banks, all of which compete against each
other for the same total of deposits.”
– Vice President Shearson/American Express
General Theory, it is necessary to substitute the term financial intermediary
in order to make the statement correct. This is the source of the pervasive error that characterizes the
Keynesian economics, the Gurley-Shaw thesis, the elimination of Reg Q ceilings,
the DIDMCA of March 31st, 1980, the Garn-St. Germain Depository Institutions
Act of 1982, the Financial Services Regulatory Relief Act of 2006, the Emergency
Economic Stabilization Act of 2008, sec. 128. “acceleration of the effective
date for payment of interest on reserves”, etc.
UNIVERSITY OF KANSAS Prepared by:
Department of Economics Leland J.
Pritchard
Professor Emeritus of
Economics
CONSOLIDATED CONDITION STATEMENT FOR COMMERCIAL BANKS AND
THE MONETARY SYSTEM
Item 1939….. 1979
Loans and Investments 40.7…… 1229.8
Cash & Due from banks 22.5….. 169.5
Total Assets—Total
Liabilities & Net Worth 65.2….. 1480.3
Demand Deposits 32.5…… 400.5
Time Deposits 15.3….. 675.8
Borrowings –….. 180.5
Currency outside the banks 6.4….. 106.1
Reserve Bank credit 2.6….. 128.3
MONETARY AND BANKING CHANGES
End of 1939 to end of 1979
(figures in billions of dollars)
Net effect on the volume of time
and demand deposits and borrowing of all factors, except commercial bank credit
(principally capital accounts) …..13.5
Net expansion of commercial bank
credit….. 1189.1
Net increase in time and demand deposits
and borrowings….. 1202.6
SOURCE: Computed from data
reported in All-Bank Statistics, U.S. 1896-1955; Federal Reserve; and the Federal
Reserve Bulletin