Is China’s Day of Reckoning Coming?
Is China’s Day of Reckoning Coming? by Tom Luongo – Gold, Goats and Guns
Lost in all of the geopolitical noise are some basic concepts of economics. It’s no secret that China’s economy has been built by their openly mercantilist economic policies.
Mercantilism is, oddly enough, President Trump’s dominant economic philosophy. It involves protection of domestic producers through high barriers to foreign investment and a cheap currency created through counterfeiting (we call this ‘inflation’) to boost exports of domestic products.
The problem with mercantilism is that it ultimately, like all artificial controls on the market, destroys more capital than it accumulates. Protected domestic producers already priced out of the global market and now protected from competition, have no reason to innovate and drive down costs. The government transfers wealth by stealing it through inflation from the taxpayer and subsidizing these producers through inflation.
Chinese mercantilism was allowed to go on for years because the U.S. was more than willing to subsidize their policies through equally, if not, cheaper money. We used the demand for the U.S. dollar to liquefy global trade to continually print and spend, driving up domestic prices for domestic products while sending trillions overseas to bring back rapidly depreciating consumer goods from overseas.
We are now left with a mountain of sovereign and personal debt and an equally large pile of unusable, valueless crap. In the process China ‘got rich’ off of this scheme by keeping its economy mostly closed to internal investment and deploying its insane foreign exchange reserves to encourage an equally-toxic debt mountain.
The Great Wall
They used a significant part of those funds to build out an infrastructure it sorely needed to run a modern economy serving more than a billion and a half people.
They also used a lot of that ‘wealth’ to fund a bunch of wholly uneconomic projects whose reality is being uncovered now that we’ve reached the limit of this entire Ponzi Scheme.
Today’s article at Zerohedge has a typically-apocalyptic tone concerning the new wave of Chinese corporate defaults starting and the potential for this trickle of defaults leaking through the mercantilist dam to blow the whole thing apart.
The shadow banking system is simply the system of financial transactions that happen outside of the banking system’s oversight facilities. And whenever China makes a substantive change to its monetary policy to burst another part of the shadow banking bubble these bouts of deleveraging (see chart above) occur.