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> the government prints it's own money. Thus, when there is a credit crisis the government just recapitalizes the banks with freshly printed Yuan and sells off

> the government prints it's own money. Thus, when there is a credit crisis the government just recapitalizes the banks with freshly printed Yuan and sells off the bad loans at a discount. This has been tried by many governments and has a well-established track record as a disasterous solution. I believe the following is a well-established consensus in economics (though I may misremember some details): Printing money on this scale doesn't add wealth to the economy, it just vastly increases the number of yuan available to buy each unit of actual value, increasing prices. For example, if you were in a universe of 10 people with $50 each in currency, and one day that increased to $500 each, you wouldn't be any wealthier: You couldn't buy any more; the numbers on the price tags would merely increase by a factor of 10 - inflation. It creates high inflation, even hyperinflation, which has further consequences for savings (whose value is greatly reduced as prices shoot up - your $10,000 no longer can buy anything), receivables (which lose their value just like savings), people on fixed incomes (your pension's value drops just like savings), investment (what good is an investment that loses value quickly just from inflation?), interest rates, exchange rates, and international trade (when your currency is worthless, and is expected to lose more value tomorrow, few will take it as payment for anything).

tim333 11y ago
You don't generally get much inflation in a credit crisis so your points tend not to be the main issue.
narrator 11y ago
I see you have a theory. So do the guys who write all these China crisis articles, but the empirical evidence proves them wrong and they don't care. They just write another article every six months. I'm sure I'll be back here in another six months arguing the flaws in the antiquated quantity theory of money. Briefly, the problem is that you are only looking at the supply of money and not the demand. If China increases the money supply 2x and goods and services output increases 4x there will not be inflation and this has been roughly the case during China's economic expansion. A country like Venezuela or Zimbabwe that has falling output will have hyperinflation if they tried the same thing.
- foxhedgehog 11y ago
  Uh, based on what evidence? Empirically speaking, the Chinese stock market has, observably, lost enormous value in the past year, with probably further to fall.
ww520 11y ago
Inflation doesn't happen here. Bad debts actually take money out of the system. Recapitalizing the banks just add back the destroyed money. Modern monetary policies don't "print" money anymore. Debt creation and destruction are used as the primary mean to create and destroy money. Below is a very simplified version of money creation, skipping many other aspects. The banks lend their deposit out to the public and money is created out of the thin air and starts to circulate in the system. The banks are regulated by the central bank to maintain a certain reserve ratio on the deposit so there is a maximum level that can be lent out and that becomes the limit on the money supply. When loans are paid back, the money is destroyed but the returned money can be lent out again thus the money supply is not changed. Central banks can influence the money supply by setting the interest rate. Lowering rate causes more loans to be made thus expanding the money supply, conversely for raising rate. Now when a loan has gone bad, there is no money paid back to the bank. The bank is short of that amount of money. It still has to maintain the reserve ratio and can't lend that much out again. The money is gone; essentially it has been destroyed from the system. So a bad loan actually shrinks the money in circulation, lowering the money supply. Too many bad loans would cause a credit crunch - the banks simply can't get the loan money back to re-lend them out and thus there's not enough money to go around. Here's where the central banks step in. They recapitalize the banks (fancy word to create money out of the thin air), by either giving created money to the banks to write off the bad loans, or in the U.S. case in 2008 the Fed buying the bad debts from the banks with new money it created out of the thin air. In either case the banks get money for getting rid off the bad debts and can lend again, re-balancing the money taken out of the system due to bad debts. Thus the money supply is back to normal and life goes on. The bad debts held by the central banks are simply some numbers on some papers, whose value are questionable. Someday it might be decided that they are worthless and, puff, they are gone. The Chinese central bank is basically using the same mechanisms to deal with bad debts.
- narrator 11y ago
  Bravo, someone who gets it. The subtle difference with China is when the bailout happens, the government doesn't go into debt to do it and stick the taxpayer with the eventual interest bearing burden of the bailout. Instead, they print the money. This creates moral hazard. I think China's political system is better at dealing with banker moral hazard than ours is unfortunately.
forgetsusername 11y ago
>Printing money on this scale doesn't add wealth to the economy Ceteris Peribus... But when vast amounts of wealth vanish in a broad deleveraging you are merely replacing money. Case-in-point, the US pumped over $1TT into the economy since 2008, and yet the value of the dollar has gone through the roof, despite the cries that hyperinflation was around the corner.
- dharma1 11y ago
  Probably something to do with the safe haven status of the dollar. Whenever there is a sign of trouble in the global economy, investors dump soft/emerging economy currencies and buy dollars, yen and Swiss franc

tim333 11y ago

You don't generally get much inflation in a credit crisis so your points tend not to be the main issue.

narrator 11y ago

I see you have a theory. So do the guys who write all these China crisis articles, but the empirical evidence proves them wrong and they don't care. They just write another article every six months. I'm sure I'll be back here in another six months arguing the flaws in the antiquated quantity theory of money. Briefly, the problem is that you are only looking at the supply of money and not the demand. If China increases the money supply 2x and goods and services output increases 4x there will not be inflation and this has been roughly the case during China's economic expansion. A country like Venezuela or Zimbabwe that has falling output will have hyperinflation if they tried the same thing.

foxhedgehog 11y ago
Uh, based on what evidence? Empirically speaking, the Chinese stock market has, observably, lost enormous value in the past year, with probably further to fall.

ww520 11y ago

Inflation doesn't happen here. Bad debts actually take money out of the system. Recapitalizing the banks just add back the destroyed money. Modern monetary policies don't "print" money anymore. Debt creation and destruction are used as the primary mean to create and destroy money. Below is a very simplified version of money creation, skipping many other aspects. The banks lend their deposit out to the public and money is created out of the thin air and starts to circulate in the system. The banks are regulated by the central bank to maintain a certain reserve ratio on the deposit so there is a maximum level that can be lent out and that becomes the limit on the money supply. When loans are paid back, the money is destroyed but the returned money can be lent out again thus the money supply is not changed. Central banks can influence the money supply by setting the interest rate. Lowering rate causes more loans to be made thus expanding the money supply, conversely for raising rate. Now when a loan has gone bad, there is no money paid back to the bank. The bank is short of that amount of money. It still has to maintain the reserve ratio and can't lend that much out again. The money is gone; essentially it has been destroyed from the system. So a bad loan actually shrinks the money in circulation, lowering the money supply. Too many bad loans would cause a credit crunch - the banks simply can't get the loan money back to re-lend them out and thus there's not enough money to go around. Here's where the central banks step in. They recapitalize the banks (fancy word to create money out of the thin air), by either giving created money to the banks to write off the bad loans, or in the U.S. case in 2008 the Fed buying the bad debts from the banks with new money it created out of the thin air. In either case the banks get money for getting rid off the bad debts and can lend again, re-balancing the money taken out of the system due to bad debts. Thus the money supply is back to normal and life goes on. The bad debts held by the central banks are simply some numbers on some papers, whose value are questionable. Someday it might be decided that they are worthless and, puff, they are gone. The Chinese central bank is basically using the same mechanisms to deal with bad debts.

narrator 11y ago
Bravo, someone who gets it. The subtle difference with China is when the bailout happens, the government doesn't go into debt to do it and stick the taxpayer with the eventual interest bearing burden of the bailout. Instead, they print the money. This creates moral hazard. I think China's political system is better at dealing with banker moral hazard than ours is unfortunately.

forgetsusername 11y ago

>Printing money on this scale doesn't add wealth to the economy Ceteris Peribus... But when vast amounts of wealth vanish in a broad deleveraging you are merely replacing money. Case-in-point, the US pumped over $1TT into the economy since 2008, and yet the value of the dollar has gone through the roof, despite the cries that hyperinflation was around the corner.

dharma1 11y ago
Probably something to do with the safe haven status of the dollar. Whenever there is a sign of trouble in the global economy, investors dump soft/emerging economy currencies and buy dollars, yen and Swiss franc