Posted on 02/16/2009 8:54:44 PM PST by TigerLikesRooster
So just to stay at 0% growth, the "domestic" Chinese economy (sub 60%) would need to make up for massive shortfall in the export economy (40%+) And with imports to China also showing massive contraction (40%+! in January) - you simply cannot make any suitable business case. It is just lazy to say "baltic dry index" this or "Chinese stimulus plan" that - but that's what the pundits do, and we can create a nonsense "thesis" to drive stocks up.
Again let me reiterate; I do think China has the best balance sheet and will be the nexus for the EVENTUAL global economy. But we're nowhere near that point. So let's be a bit more rigorous than the folks who show up on TV with their 10 second sound bites to explain things and see what is really going on.
First, a quick refresher of an Economics 101 lesson we laid out two months ago.
I'll spare you the economic formulas, but if you are interested, click here. Right now we have a problem of money flow - both the amount of "money" in the system, and the velocity of said money. In the simplest terms, just think of velocity as the amount of times money changes over. The higher the better. About 4-5 months ago, both these areas (amount and velocity) were lacking. Capital was being destroyed in an over levered system; much of it unregulated in a "shadow banking system". For every 1 "actual dollar" in the system, 10-20-30x was "lent". Much of it was based on the housing bubble. So as the 1 actual dollar is destroyed, the capacity to lend 10-20-30x of that dollar is also destroyed - and your velocity of money crumbles. As we've outlined the past few months, our money supply is now going off the charts - the Federal Reserve has made it clear they will create money at any cost. They are going to do everything and anything in their power to liquidate the system, assuming I suppose that a currency crisis is a better outcome (or predicting no currency crisis will happen) than a financial crisis. It is very sad how we lurch from emergency to emergency in this country - but it is what it is.
The Federal Reserve balance sheet which used to consist of staid Treasury Bills was at $800Billionish last year, it is now approaching $2.3 Trillion,and much of that is now the junk, I'm sorry - "the undervalued assets that once the market returns to normalcy will return to their rightful value- which will be much higher" - banks want to get rid of. It is now to the point the Federal Reserve will take the said "undervalued assets" off the books of hedge funds so our shadow banking system can re-emerge (the one that got us here in the first place). They are desperate and they will do anything.
So that's half the picture; the other is the even more tricky question of velocity. We are handing the banks (and other parts of the financial system) dollars by the wheelbarrow, but if they do not get circulated within the economy they are useless to everyone but banks. So we have one half the equation being force-fed by the Fed/Treasury - the money supply will be ballooning - no matter the potential cost to the currency, and the other half of the equation is based on the belief that at some point so much money will be provided to said financial institutions that even the most risk-averse will lend a portion. And we can begin anew. I won't even touch the long term questions this brings since we only deal with one crisis at a time.
Before I write the rest of this article, don't take it as bashing the Chinese. In fact they are learning from the masters of manipulation - the United States. They are following the Greenspan playbook - to forestall a normal economic cycle, flood the system with dollars which creates new bubbles. Keep kicking the can down the road, until one day it all implodes (which is what we are enjoying now after 20 years of kicking).
Did we learn from this? No... in fact the implicit policy of the Bernanke Fed is to do the same exact thing as I outlined above. The problem is that the mechanisms to create "velocity" of money have been in many cases nearly destroyed (securitization) or impaired (think our banks). So Bernanke is no different than Uncle Al G. He just is hampered by lack of conduits that saved Uncle G's grits. And this is why the gold bugs are awaiting the "Great Inflation." But first we have to work through the capital-destroying deflation we are enjoying before the master government plan happens (again).
At its basis, this plan relies on a financially illiterate populace (check!) - because the massive infusion of money pumps up the "price" of all assets, including stock returns (and houses). So if you devalue your currency by 30% (which is not as easily 'measured' by the financiall illiterate), but pump up the value of homes and stock markets by 30% (which on the other hand IS very easily 'measured' by the financially illiterate), the powers-that-be can say "mission accomplished." Because the peon class is satisfied as the government has succeeded in pumping up asset values (easily measured) while destroying their purchasing power by an equal amount (hey, why does bread cost 30% more than a year ago?) So you can tell your neighbors and work mates this is what has been happening to them the past few decades, and this is what the government plan is now and in the future.
But now we see China is embarking on the same game plan, which in the long run will lead to bad outcomes, but in the short(er) run can goose values. (see United States of Leverage example above). Let's take a closer look at what is going on. (special thanks to reader Adam [Prudent Capitalism, Chinese style] for sending me an email to goose my brain into seeing the light)
AP: China's Bank Loans Double in January to $237 Billion
Ping!
I also wonder where they are going to get the Dollars to buy the debt Obama is about to throw on the Markets. In fact, it is more likely they are sellers of US Treasuries needing funds to shore up their own Economy.
this is the part that I don’t understand.
Where will the buyers of US debt come from if no one is generating surplus US dollars. Rather, big current account surplus countries like Russia and China are spending down their current accounts on domestic problems.
Is the US just financing the new trillion dollar debt with fiat money?
(Is it presumed that the US can draw on fiat dollars because the economy is deflating. While US banks are lending less the chinese banks are lending more.)
The US current account deficit has been cut in half during the last four months. If the the US current account deficit turns into a current account surplus then the whole business will make sense.
I think.
I would be interested in hearing from those who thought that current account deficits were not important last year when the US was running monthly deficits of 60-70 billion. Now the current account monthly deficit is down to 30 billion.
That is, if the current account deficit became a surplus, then the US dollar won’t be pressured down.
Now, like Maddof, this Ponzi Scheme is in danger of unraveling. Not only are the Surpluses dwindling but those who could be expected to recycle these Surpluses in normal times have their own needs for them to shore up their own economies. In fact, it is quite possible that holders of our debt might even become net sellers with the obvious effect of increasing rates on these securities.
The Oil Producers, China and Japan are seeing severe reductions in their own trade balances and the are initiating their own Stimulus Plans. They simply do not have the appetite for our Debt that they historically have had and this at a time when we are issuing monumental amounts into the Markets.
That's where the Fed comes in. They sop up the surplus, putting it on their balance sheet by, in effect, expanding the Money Supply. However,this can only go so far so I expect that, after a slight dip in interest rates, the rates will start to rise - This despite the seeming reduction in commodity inflation.
Stocks Drop Around Globe, Led by Banks, as Euro Declines, Treasuries Rise
http://www.bloomberg.com/?b=0&Intro=intro3
I mentioned the Fed intervening. When they do (If they do - I'm pretty confident they will though) that is the time.
FWIW
You’re probably right. If China’s still growing despite the loss in exports, they’d have to be financing it with negative savings or deficits or both.
That’s a pretty big ‘if’ though. I’d guess their actual GDP growth was deliberately underreported over the last decade. They might be using the recent downturn to ‘uncook’ the books?
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.