Monetary Disorder by Doug Noland – SafeHaven
Global Credit, Bubble and market analysis is turning more interesting.
China August Credit data were out Friday. Total (aggregate) Social Financing jumped to 1.48 TN yuan ($225bn), up from July’s 1.22 TN and above the 1.28 TN estimate. New Loans were reported at a much stronger-than-expected 1.09 TN (estimates 750bn yuan), up from July’s 825bn. New loans expanded 13.2% y-o-y. Through August, Total Social Financing is running 18% above 2016’s record pace. Total system Credit growth (“social financing” plus govt. borrowings) appears on track to surpass $4.0 TN. While “shadow banking” has of late been restrained by tighter regulation, household (largely real estate) borrowings have remained exceptionally strong.
It was the weaker Chinese economic data that made the headlines this week. Retail sales (up 10.1% y-o-y), industrial production (up 6.0%) and fixed investment (up 7.8%) were all somewhat below estimates. At the same time – and I would argue more importantly – Chinese inflation is running hotter than forecast. Considering the scope of the ongoing Credit expansion, inflationary pressures should come as no surprise.
September 10 – Bloomberg: “Inflationary pressure emanating from the factory to the world is proving more resilient than economists have anticipated. China’s producer-price inflation accelerated to 6.3% in August from a year earlier, exceeding all but one of 38 estimates… That data… followed 5.5% readings in the prior three months… The surprise strength gives support for global inflation spanning from metals to fuel and shows the effects of resilient domestic demand and reduced supplies of some commodities.”
Up 1.8% y-o-y, Chinese August CPI was the strongest since January. This follows last week’s stronger-than-expected import data. China is demonstrating classic signs of a Credit-induced Bubble economy – one where domestic Credit excesses are seeping into the global inflationary backdrop through commodities and some modest upward pressure on goods and services prices.
It’s now only about a month until the (10/18) start of the National Congress of the Communist Party of China. Financial stability will be a primary focus, though I question whether the party appreciates how unstable things have become. Chinese officials have dabbled with myriad (“macro prudential”) tightening measures. For the most part, stop and go policies have attempted to balance mounting financial risks against a determination to meet growth targets. Fatefully, policymakers have been willing to accommodate ever-expanding Credit expansion. And for how much longer?
At this late stage of the cycle, Beijing’s bid to direct finance into productive economic investment will surely achieve about the same results as similar desires during the late-twenties U.S. Bubble period. Officials at some point will need to bite the bullet and rein in system Credit.
It’s the nature of Credit Bubbles that risk rises exponentially during “Terminal Phase” excess. In simple terms, the quantity of new Credit expands greatly while quality deteriorates rapidly. A hypothetical chart of systemic risk – that had been rising left to right steadily for years – takes a moon shot. A surge in risky mortgage Credit fuels unsustainable real estate inflation, while business borrowings expand rapidly from entities that will struggle with solvency issues as soon as the Bubble falters. The real economy suffers deep maladjustment that remains largely masked so long as rampant Credit growth (and self-reinforcing asset inflation) runs unabated.
Global policymakers have delusions of controlling Bubble Dynamics. Or should I say that the appearance of being able to manage Bubbles creates the complacency necessary for immense, out-of-control Bubble inflations. A dangerous notion took hold that, rather than permitting Bubbles to burst, they will simply be inflated away. Surely part of the underlying angst affecting central bankers (from Washington to Frankfurt to Tokyo to Beijing) these days is the realization that they indeed do not control inflation dynamics. Instead of inflating consumer prices so as to catch up with inflated asset prices, their reflationary measures are exacerbating price instabilities and inflationary divergences.