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China can make all the bad investments they want. Unlike any other western country, the government prints their own money debt free and can thus just bail out

China can make all the bad investments they want. Unlike any other western country, the government prints their own money debt free and can thus just bail out all the bad loans forever. The boom bust cycle is just an aspect of fractional reserve / debt as money banking. In China the banks operate like partially privatized central planning and are closely directed by the government. There is such extreme cognitive dissonance about this in the western financial press. They just don't get why China doesn't bust. Check out the history of Chinese bail outs and bad loans. It's really quite interesting. Loans and funds and banks and all that fail all the time in China and the government just prints up some money and bails them out if they're politically important. Goof ball investment schemes which are the Chinese equivalent of LTCM fail all the time and everybody loses their money and nobody bats an eye in China, but it doesn't bring the system down.

DavidSJ 12y ago
So, is that system a time bomb for China (and the rest of the world), when one day a financially critical entity doesn't have the right political influence and goes belly up, bringing the house of cards down? Or, is there some reason to think this can go on forever and the political system will keep bailing everyone out?
- joe_the_user 12y ago
  I think the parent would argue that if the state chose not to support a given entity, it would simply support all the others and so financial collapse could still be averted. Edit: and the state can do that because it's a dictatorship quite willing to print its own money (though the US sadly little different today). The point here isn't that collapse is inevitable but that if you postpone collapse forever, you'll pay a worse price in price distortion than you'd pay if you let the system collapse. Perhaps the people in the slums will riot because they're tired of watching the empty ghost cities rot. But given the imbalance here, that possibility might be present universally.
  - vorg 12y ago
    > Perhaps the people in the slums will riot because they're tired of watching the empty ghost cities rot Despite the recent price inflation of luxury goods, the cost of rice and noodles has remained constant. Workers can still eat for 12rmb (us$2) a day, or 20 if they want vegetables and some pork. The water and power supplies are still reliable, and the governments in China are investing in infrastructure to keep them so. Construction and its flow on industries is what's keeping a large chunk of Chinese workers employed. Whereas there's problems with the luxury property market and other high end industries, the Chinese are carefully watching their social bottom line, such as ensuring cheap food and water for workers. There's still a long way to go in health care, education, and clean air though.
lingben 12y ago
"China can make all the bad investments they want. Unlike any other western country, the government prints their own money debt free and can thus just bail out all the bad loans forever." wow, it has been a very long time since I read anything remotely as economically ignorant and facile as this statement. for one, the implication that the Chinese hold US debt and that they in turn are not borrowers is categorically false. second, the Chinese hold less than 7% of the US debt but if you listen to the general media and commentators it sounds like it is more like 70%. The fact is that the vast majority of the US debt is held by the Federal Reserve. Credit bubbles, like every other economic bubble is disastrous because it is a gross mis-allocation of resources. The piper shall not be denied. He is a hellish collector that will break every bone in your body if you don't pay. But the thing is, he's a bit unpredictable because you never know exactly when he'll knock on your door to collect. But knock he will. May I respectfully suggest that before you attempt to comment on something as complex as macroeconomics you take at least a single course in the discipline?
- joe_the_user 12y ago
  Hmm, I reread the parent and I still couldn't find a single reference to US debt, which is all you discuss in your post. I have a degree in economics, the parent's argument seems fine - it might contradict your dogma but it's a fine rendition of current reality. Also, I'm sure no influential economist would say "In the long run, we're all dead," right?
  - hueving 12y ago
    >I have a degree in economics, the parent's argument seems fine - it might contradict your dogma but it's a fine rendition of current reality. Except it ignores the fact that if the Chinese government has to print too much money in the face of a major issue, they will cause inflation or hyperinflation which will kill their economy anyway.
  - lingben 12y ago
    here's the implied reference: "Unlike any other western country..."
- 12y ago
joe_the_user 12y ago
> Unlike any other western country, the government prints their own money debt free ... Don't you mean " Like Europe and the US, the government prints their own money debt free ..." I mean, some players fell in 2008 but most of the debt in the US from the housing crisis was covered by Federal loans to banks that were judged "too big to fail". And the government is now considerably more insulated from popular pressure than in 2008 so the printing can be done with fuller impunity. The (apparently) infinitely expanding economy keep catastrophic crisis at bay but distorts the economy and constantly increases the concentration of wealth. Capitalism's periodic financial crises have been a way to solve perhaps fundamental imbalances. The end of these crises may result, longer term, in more problematic results than otherwise.
- crdoconnor 12y ago
  >Capitalism's periodic financial crises have been a way to solve perhaps fundamental imbalances. In theory (if you just leave the crisis to play out) that's what should happen, but in practice it rarely does. Not without the correct political response. The too-big-to-fails in the US could have been allowed to go bankrupt, but it would have caused a catastrophic economic bottleneck because they have so many counterparties. Following regular insolvency procedures for a small enterprise is complicated enough and can take years as the creditors fight it out among themselves over how to divvy up the remainders of liquidation. Imagine how much of a clusterfuck it would be if half the country was either a creditor or a debtor in some respect. Worse, you wouldn't know if half of the rest of the country was bankrupt or not until you resolved the clusterfuck. What could have happened was for a temporary nationalization so that the banks could have continued operating in a limited form so as to avoid the bottleneck and give time to tie up the loose ends. This is what Sweden did in the 90s. Their fundamental balance was resolved and they returned swiftly to growth. When the too-big-to-fails are too politically powerful, however, they just tell the government to make them solvent again and the government promptly does it. Spectacularly bad lending decisions then resume and the power of the heads of those banks increases even more as the cancerous organization grows even larger. The fundamental imbalance has worsened.
  - waps 12y ago
crdoconnor 12y ago
While mostly true, I'd add some qualifiers: * A disturbing amount of that debt is unofficial (as well as uncounted), so won't be getting bailed out. * This does mean that they've overstated their GDP, possibly by quite a wide margin (by however much unrecognized losses there are on that debt). Yes, the Chinese government can (maybe) stabilize in the after effects of any property bubble not built on foreign debt, but it's still wasted investment.
- narrator 12y ago
  Let's take a look at a single bank in China which had a 22.49% bad loan rate in 2002. The government just bought the loans with some electronically printed money and everything just kept chugging along. http://www.bloomberg.com/apps/news?pid=newsarchive&sid=apBROzexbOpQ http://www.bloomberg.com/apps/news?pid=newsarchive&sid=apBRO... "Bank of China said it had loans and overdrafts of 1.74 trillion yuan ($210.3 billion) at the end of 2002. The bank's bad loan ratio stood at 22.49 percent or 409 billion yuan at the end of last year. The Beijing-based lender in 1999 transferred 352 billion yuan of bad loans to China Orient Asset Management, one of four companies set up by the government to dispose of banks' bad assets, and has disposed of 63.7 billion yuan of those." Now in the U.S for that bailout to take place the government would have to borrow that money from the Fed and the taxpayer would have to pay it back eventually. In China, nobody borrows it and nobody pays it back.
  - crdoconnor 12y ago
    >Let's take a look at a single bank in China which had a 22.49% bad loan rate in 2002. The government just bought the loans with some electronically printed money and everything just kept chugging along. THAT part of the economy will keep chugging along, but shadow lending (which is growing at a fantastic rate and now comprises about ~60% of GDP) will not. The government isn't about to buy THEIR loan books. China's shadow banking system could well go nuclear. >Now in the U.S for that bailout to take place the government would have to borrow that money from the Fed and the taxpayer would have to pay it back eventually. In China, nobody borrows it and nobody pays it back. In principle the US kind of did the same thing actually: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=axKqzNUV06Dw&pos=3 http://www.bloomberg.com/apps/news?pid=newsarchive&sid=axKqz... Bad assets -> liabilities on the public balance sheet -> turned into cash (via QE) It wasn't quite to the same extreme as China, obviously. That QE cash created also didn't get spent on goods and services, it was just piled into higher yielding investments. The cost of clothes didn't go up, but the NASDAQ and luxury apartments in Manhattan bloody well did. In China the state banks just kickstart lending again (usually to SOEs) no matter what the losses. This cycle of never ending debt-driven keynesian investment stimulus with no market discipline leads to some of their more spectactular white elephants - like entire mini-cities full of housing where nobody lives, malls where nobody shops and weird theme parks that nobody visits. Since the people employed to build all these things are still getting paid and spending their paychecks, inflation on goods and services in China is pretty high.
jhonovich 12y ago
Do you think China has invented a financial perpetual money machine? "Prints their own money debt free and can thus just bail out all the bad loans forever."

DavidSJ 12y ago

So, is that system a time bomb for China (and the rest of the world), when one day a financially critical entity doesn't have the right political influence and goes belly up, bringing the house of cards down? Or, is there some reason to think this can go on forever and the political system will keep bailing everyone out?

joe_the_user 12y ago
I think the parent would argue that if the state chose not to support a given entity, it would simply support all the others and so financial collapse could still be averted. Edit: and the state can do that because it's a dictatorship quite willing to print its own money (though the US sadly little different today). The point here isn't that collapse is inevitable but that if you postpone collapse forever, you'll pay a worse price in price distortion than you'd pay if you let the system collapse. Perhaps the people in the slums will riot because they're tired of watching the empty ghost cities rot. But given the imbalance here, that possibility might be present universally.
- vorg 12y ago
  > Perhaps the people in the slums will riot because they're tired of watching the empty ghost cities rot Despite the recent price inflation of luxury goods, the cost of rice and noodles has remained constant. Workers can still eat for 12rmb (us$2) a day, or 20 if they want vegetables and some pork. The water and power supplies are still reliable, and the governments in China are investing in infrastructure to keep them so. Construction and its flow on industries is what's keeping a large chunk of Chinese workers employed. Whereas there's problems with the luxury property market and other high end industries, the Chinese are carefully watching their social bottom line, such as ensuring cheap food and water for workers. There's still a long way to go in health care, education, and clean air though.

lingben 12y ago

"China can make all the bad investments they want. Unlike any other western country, the government prints their own money debt free and can thus just bail out all the bad loans forever." wow, it has been a very long time since I read anything remotely as economically ignorant and facile as this statement. for one, the implication that the Chinese hold US debt and that they in turn are not borrowers is categorically false. second, the Chinese hold less than 7% of the US debt but if you listen to the general media and commentators it sounds like it is more like 70%. The fact is that the vast majority of the US debt is held by the Federal Reserve. Credit bubbles, like every other economic bubble is disastrous because it is a gross mis-allocation of resources. The piper shall not be denied. He is a hellish collector that will break every bone in your body if you don't pay. But the thing is, he's a bit unpredictable because you never know exactly when he'll knock on your door to collect. But knock he will. May I respectfully suggest that before you attempt to comment on something as complex as macroeconomics you take at least a single course in the discipline?

joe_the_user 12y ago
Hmm, I reread the parent and I still couldn't find a single reference to US debt, which is all you discuss in your post. I have a degree in economics, the parent's argument seems fine - it might contradict your dogma but it's a fine rendition of current reality. Also, I'm sure no influential economist would say "In the long run, we're all dead," right?
- hueving 12y ago
  >I have a degree in economics, the parent's argument seems fine - it might contradict your dogma but it's a fine rendition of current reality. Except it ignores the fact that if the Chinese government has to print too much money in the face of a major issue, they will cause inflation or hyperinflation which will kill their economy anyway.
- lingben 12y ago
  here's the implied reference: "Unlike any other western country..."
12y ago

joe_the_user 12y ago

> Unlike any other western country, the government prints their own money debt free ... Don't you mean " Like Europe and the US, the government prints their own money debt free ..." I mean, some players fell in 2008 but most of the debt in the US from the housing crisis was covered by Federal loans to banks that were judged "too big to fail". And the government is now considerably more insulated from popular pressure than in 2008 so the printing can be done with fuller impunity. The (apparently) infinitely expanding economy keep catastrophic crisis at bay but distorts the economy and constantly increases the concentration of wealth. Capitalism's periodic financial crises have been a way to solve perhaps fundamental imbalances. The end of these crises may result, longer term, in more problematic results than otherwise.

crdoconnor 12y ago
>Capitalism's periodic financial crises have been a way to solve perhaps fundamental imbalances. In theory (if you just leave the crisis to play out) that's what should happen, but in practice it rarely does. Not without the correct political response. The too-big-to-fails in the US could have been allowed to go bankrupt, but it would have caused a catastrophic economic bottleneck because they have so many counterparties. Following regular insolvency procedures for a small enterprise is complicated enough and can take years as the creditors fight it out among themselves over how to divvy up the remainders of liquidation. Imagine how much of a clusterfuck it would be if half the country was either a creditor or a debtor in some respect. Worse, you wouldn't know if half of the rest of the country was bankrupt or not until you resolved the clusterfuck. What could have happened was for a temporary nationalization so that the banks could have continued operating in a limited form so as to avoid the bottleneck and give time to tie up the loose ends. This is what Sweden did in the 90s. Their fundamental balance was resolved and they returned swiftly to growth. When the too-big-to-fails are too politically powerful, however, they just tell the government to make them solvent again and the government promptly does it. Spectacularly bad lending decisions then resume and the power of the heads of those banks increases even more as the cancerous organization grows even larger. The fundamental imbalance has worsened.
- waps 12y ago

crdoconnor 12y ago

While mostly true, I'd add some qualifiers: * A disturbing amount of that debt is unofficial (as well as uncounted), so won't be getting bailed out. * This does mean that they've overstated their GDP, possibly by quite a wide margin (by however much unrecognized losses there are on that debt). Yes, the Chinese government can (maybe) stabilize in the after effects of any property bubble not built on foreign debt, but it's still wasted investment.

narrator 12y ago
Let's take a look at a single bank in China which had a 22.49% bad loan rate in 2002. The government just bought the loans with some electronically printed money and everything just kept chugging along. http://www.bloomberg.com/apps/news?pid=newsarchive&sid=apBROzexbOpQ http://www.bloomberg.com/apps/news?pid=newsarchive&sid=apBRO... "Bank of China said it had loans and overdrafts of 1.74 trillion yuan ($210.3 billion) at the end of 2002. The bank's bad loan ratio stood at 22.49 percent or 409 billion yuan at the end of last year. The Beijing-based lender in 1999 transferred 352 billion yuan of bad loans to China Orient Asset Management, one of four companies set up by the government to dispose of banks' bad assets, and has disposed of 63.7 billion yuan of those." Now in the U.S for that bailout to take place the government would have to borrow that money from the Fed and the taxpayer would have to pay it back eventually. In China, nobody borrows it and nobody pays it back.
- crdoconnor 12y ago
  >Let's take a look at a single bank in China which had a 22.49% bad loan rate in 2002. The government just bought the loans with some electronically printed money and everything just kept chugging along. THAT part of the economy will keep chugging along, but shadow lending (which is growing at a fantastic rate and now comprises about ~60% of GDP) will not. The government isn't about to buy THEIR loan books. China's shadow banking system could well go nuclear. >Now in the U.S for that bailout to take place the government would have to borrow that money from the Fed and the taxpayer would have to pay it back eventually. In China, nobody borrows it and nobody pays it back. In principle the US kind of did the same thing actually: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=axKqzNUV06Dw&pos=3 http://www.bloomberg.com/apps/news?pid=newsarchive&sid=axKqz... Bad assets -> liabilities on the public balance sheet -> turned into cash (via QE) It wasn't quite to the same extreme as China, obviously. That QE cash created also didn't get spent on goods and services, it was just piled into higher yielding investments. The cost of clothes didn't go up, but the NASDAQ and luxury apartments in Manhattan bloody well did. In China the state banks just kickstart lending again (usually to SOEs) no matter what the losses. This cycle of never ending debt-driven keynesian investment stimulus with no market discipline leads to some of their more spectactular white elephants - like entire mini-cities full of housing where nobody lives, malls where nobody shops and weird theme parks that nobody visits. Since the people employed to build all these things are still getting paid and spending their paychecks, inflation on goods and services in China is pretty high.

jhonovich 12y ago

Do you think China has invented a financial perpetual money machine? "Prints their own money debt free and can thus just bail out all the bad loans forever."