Can Governments Stop an Economic Slowdown?
How strong is China’s economy? CNN Money says Jim Chanos believes it is about to go into meltdown. Chanos has warned in the past that China was pumping billions into a property bubble that would ultimately burst, but now he may now be proven right. “China’s top auditor said that loose lending standards and a sharp rise in local government borrowing (for building projects, of course) may have created a mountain of debt that cannot be repaid … All it will take is a fall in housing, or some sort of economic slowdown, to reveal an untold number of bad loans.”
The New York Times says “Liu Jiayi, the top auditor in China, said on Monday that at the end of last year local government debt had reached $1.7 trillion, or about 27 percent of the nation’s gross domestic product. He said better regulation was needed to manage the debt risks.” The prosperity was built on a mountain of government debt, acquired by the Chinese government itself.
The auditor’s report on Monday was similar to a warning earlier this month by the Chinese central bank. The bank said that at the end of last year, local government liabilities were as high as 30 percent of gross domestic product, or about $2.2 trillion — far higher than previous estimates.
That survey said local governments had created 10,000 investment companies to borrow money from banks, mostly to finance ambitious infrastructure projects. (China does not allow local governments to issue bonds to finance projects.) …
Mr. Shih and other analysts say local governments create their own investment companies to borrow from state banks to finance infrastructure projects. And because much of that borrowing is done off official balance sheets, often using government land or assets as collateral, the debt can be hard to track and assess.
And often the projects, which include roads, bridges, tunnels and subway systems, do not generate enough earnings to repay the loans.
In its report Monday, the national audit office said it had found many irregular activities. For instance, many local governments were using “unreal” or illegal collateral to secure the loans, the report said, and some of the money they borrowed was funneled into the stock and property markets. At other times, the auditor said, the local governments were “overestimating the value of the collateral” — which was often tied to land values.
Now that Chinese property prices are beginning to decline, leading analysts to worry that the meltdown has started. Experts who were once bullish on China are now very much afraid. The Wall Street Journal asks, “what changed? A growing realization that much of China’s massive stimulus spending and lending of 2009 and 2010 ended up in land purchases, driving up prices in an unsustainable fashion.” Because the Chinese people used savings, rather than debt to invest in some of these schemes analysts expect the effects will not be as bad as the subprime mortgage meltdown in the West. All the same, a bursting bubble would wipe out an enormous amount of wealth.
The government keeps bank deposit rates well below the rate of inflation to benefit state-owned banks and other firms, which have the political power to defend the status quo. With few financial alternatives to beat inflation, Chinese savers buy real estate, even if supply soars ahead of demand.
Chinese savings wound up in these black holes, which recycled rising consumer incomes and may now have wasted them.
It’s no secret that China and its people have done an amazing job stimulating its economy by investing and attempting to drive the wealth machine, encouraging its citizens to save, save, save! From 1982 to 2007, China and its citizens jumped aboard the savings bandwagon as national savings as a percentage of gross domestic product jumped from approximately 34% to 54%. This period also witnessed one of the most precipitous drops in personal consumption ever witnessed. In 1982, personal consumption as a percentage of GDP stood at 52%; by 2007 this figure would drop to just 35%.
Under normal circumstances, in a healthy economy, we would expect the personal consumption to rise along with GDP, but we simply aren’t seeing that with China. One reason could be that the wealth effect seen in China is simply artificial. Investment rather than consumption is what’s driving growth, and this usually proves to be unsustainable in the long term. Real wealth appears to be tied up in the banking system and not with the general public. Personal consumption’s disconnect with GDP is a major red flag that Chinese consumers may not be able to sustain this economy any longer.
If the population’s savings are wiped out in a crash, there will be a great deal of anger in the population to go with sudden bankruptcy. If the China bubble is real and actually bursts, it could wipe out the Recovery Summer that the President hoped his stimulus would provide. All over the world the efficacy of public-sector led stimuli is being tested. The global results so far don’t look all that good.
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Hey, maybe we can lend them back their money at a higher interest rate and solve both our problems.
Won’t be long before the comparisons between India and China start to become real, real stark. India has a representative government, which is messy, imperfect, what have you. China is a command economy with decisions relegated to a mere handful of elites. The future of China, however bad, will be the result of what a few people did, just as what a very few people (more elites) did in this country to bail out their friends in the wall street sector, after what they had done had already failed so miserably.
Not to mention the impact on the price of ME crude.
It isn’t just a debt problem. The Chinese Government has just swallowed a box of stupid pills washed down with a bucket of hubris. See this very relevant article on June 24 about nationalizing China. In part the article says:
‘In the past, the Chinese government had denied that it had a policy of squeezing out the private sector. This unofficial policy, which entrepreneurs dubbed “Guo jin min tui” -literally “the state advances as the private sector recedes” -has since become a household term that serves the government well: To assert its authority, the government now unabashedly declares that its absolute control of all power centres in Chinese society includes the private sector. China is heading for a degree of government ownership and central planning unseen since Mao’s passing.
The extent to which the Chinese government believes that a few people at the top of the government hierarchy can micromanage an economy for 1.4 billion people became clear with the recent release of the government’s latest five-year plan. Many governments think they can pick a few winners in their economy. China’s central government thinks it can pick 750 of them, and plans to provide them with the support needed to make theirs a self-fulfilling prophesy. More, China thinks it can pick losers -it found 426 of them -and will ensure their demise.’
The article continues with a fuller account of how the Chinese government intends on taking over the means of production. First comes cocky old Harry Hubris. Next comes mean old Nancy Nemesis who kneecaps Harry before you can say FLOCCINAUCINIHILIPILIFICATION. It looks like China is making mistakes.
“Hey, maybe we can lend them back their money at a higher interest rate and solve both our problems.”
Worked for the Japs. I can remember all those chicken little articles about Japan buying America. 70′s or 80′s IIRC. Anyway, When Japan, Inc. collapsed, we bought the property back at pennies on the dollar.
Mean while, back on topic, a kleptocracy always collapses once they have stolen all the money. The trouble with buying “friends” is that when you run out of money, you run out of friends. At the same time, which is always at a bad time.
Using OPM doesn’t change that basic fact.
Cronism is part and parcel of a kleptocracy. The label on the kleptocracy doesn’t matter. (R)/(D), Democrat/Republican, Liberal/Conservative, Left/Right, it doesn’t matter.
19 years (a Generation) of kleptocracy has pretty much emptied the piggy bank.
Now we are all going down together. No innocents here.
America has a representative government. Every one of the crooks stealing from the body politic was either elected or appointed by someone who was elected. So we deserve the collective screwing we are getting.
I can’t find the article, but I read a few months ago the following analysis:
1. China has been growing at an astounding rate along all its ports cities
2. These are becoming super congested & growing at much much too fast a pace
3. Inland china, is not growing at such a rate.
4. As the port cities are now too clogged up (with ability to move goods) … the [unsuccessful] attempt has been to move new growth to the inland cities
5. However, its more expensive to produce things inland (transporting all the goods in & out)
6. All of #1-#5 serve a dual problem: Inability to keep growing. the massive growth in the port cities has come to an end
I’ll add to the above:
7. I believe, the bubble is real (mostly in the port cities) & its popping is going to be devastating
8. We have to also see the overall picture:
A. Yes china has grown too fast & has a very nasty bubble along the port cities
B. Still, overall, its good it grew so fast out of its terrible missery
C. Once it get over the nasty bubble (5 years?) it again will continue to grow, which is for the good of its people
I think the bigger real concern is:
9. If the bubble is real & does pop — what effect will that have on the global economy. We are truly at our limit, there is no more built in slack in the global economy …. between debt limit in US due to entitlements, oil prices, possible euro collapse starting in Greece, Iran and nukes, QE1 & QE2, and now a possible popping of the Chinese bubble …
Its won’t be pretty [during the transition] as the post WW II era comes to an end & a new era starts …
Overall though, I’m still very optimistic in the post WW II era – I think it will be a vast improvement over the post WW II era (superpowers, mutual assured destruction, socialist net, nanny state, etc).
China’s economy is structured to run a big trade surplus. Turns out a lot of that surplus has been transferred into funny money: 1)Bad loans inside China, 2)Purchasing US T-bills.
US government should be cultivating this for maximum effect, ensuring the complete down fall of Chinese Communism should be a top priority and the splitting up the unnatural large kingdom into the different section each their own fully autonomous nations!
Ain’t it strange
How plus ca change
And China’s now in trouble
No Fannie Mae
That’s what they say
So how come there’s a bubble
Is Barney Frank
The guy to thank
For selling them on housing
Drive up the price
No land for rice
And now they need de-lousing
And so it goes
The problem grows
Both China and in Stateside
But no one cares
Just say your prayers
O says we’ll catch the late tide
It’s our old friend Free Money again. But it is only apparently free. Ultimately deficit spending or borrowed money is a claim against future taxes (tax the future) or a dispersal of leveraged risk on a global financial system. In the last analysis, every viable debt needs an operating cash flow to make the payments good. Bubbles neglect the operational income and rely on debt to make up a quasi flow.
So now there is this big uncollectible liability. Nothing to do but write it down. Take the hit. Now comes the fun part. The elites are going to try to get other stakeholders to take cents on the dollar, while they protect their claims.
But my guess is that it’s not going to happen. The most equitable outcome is for those who took the bad risks to take the biggest write-downs. And while I don’t expect a purely equitable outcome from all of this, I don’t think the elites can get away with fobbing off the bill in toto this time.
In the process, the power relationships are going to be changed, and changed for along time to come.
If China’s growth is real, and its statistics about an expanding economy are real, it would be the first time in history for a totalitarian regime.
WRETCHARD
But my guess is that it’s not going to happen. The most equitable outcome is for those who took the bad risks to take the biggest write-downs. And while I don’t expect a purely equitable outcome from all of this, I don’t think the elites can get away with fobbing off the bill in toto this time.
Sometime in the last month I read that 90 % of the wealth in China was in the hands of Party members or their families. Time for a writedown.
W, that is a trick question. right?
Seriously, while I have no doubt that there are problems in China, in the short term they are overblown. This is unfortunate because it will obscure the longer term issues.
Two things stand out from what is here:
1) No mention is really made of the quasi government enterprises that have received, along with local governments, a great many of these governmental and “pseud-governmental” loans. Essentially, senior party officials, their kin or their cronies have been given these enterprises as fiefdom to milk, and they are rabidly out there getting while the getting is good.. Reminiscent of “privitization” in the 1990′s in Russia where the “Oligarchs” came to power (really just former Soviets and their cronies), but in China it as just been more veiled and obscured. When this article talks abut “the government takng back the means of production” it may really be the case that in sone sense they never let it go in the first place. My guess is that there is even more assess trouble and more wealth destroyed than even the new Chns bears know or will at least admit.
2) It would be interesting to see the break out here of firms and sectors. Much of the “private actors is composed of either Multinationals with regional plants or Chinese private firms who do subcontracting work for the Multinationals (Iphones, etc.). Of curse, we can assume that there are Partying officials all up and down the line on the take here too. Certainly there may be other private sector firs, but they do not appear to be the main players. One wonders just what they are talking about. Taking back the “private sectors” is not such a simple matter in a nation that has relied so much on foreign investment, particularly when the nteral markets of Chna were dangled before the eyes of these investors. I do not doubt that there is movement here, but I wonder about the scope of it.
China, again, will not collapse, there may well be contracts and pain–and very real dangers to us–but they will nit go under or cease to be a force to reckoned with. China bears are in for some disappointment.
But we should take a longer view and have a vantage above mere economics.. What is really called for is a honest and fuller discussion of the matter.
Nice sextilla from Walt!
It’s not just China, but China was the last mysterious stash that was going to make all the bailouts work, seeing as Japan, Europe and the USA were broke. Well if China’s broke too, then everybody’s broke and the write-down can no longer be long deferred.
What it affects are the claims on the physical output of goods and services in the world. The world’s still there. The buildings are still up, the factories for the most part, still standing. People are mostly alive. And the basic skills still exit. The universe outside the window is much the same as it was in 2007.
But with regard to who owns what in that landscape, ah, there’s the rub. And its a big rub. How is it all going to get settled? Beats me. But my guess is that in the next few years, the world is going to have to work out a way to divvy up what’s out there.
China represents a model tyranny. The Left constantly marvels over the efficiency of China’s system of government (read no Republicans). It is funny how China loosened up markets in the 80’s just as the US was tinkering around with their new command economy and pay for play system of corruption. Still Thomas Friedman laments…
…but that what if we could just be China for a day? I mean, just, just, just one day. You know, I mean, where we could actually, you know, authorize the right solutions, and I do think there is a sense of that, on, on everything from the economy to environment. I don’t want to be China for a second, OK, I want my democracy to work with the same authority, focus and stick-to-itiveness. But right now we have a system that can only produce suboptimal solutions.
I can only hope that America keeps producing ‘suboptimal’ solutions because I can’t imagine what kind of medicine the likes of Friedman would prescribe. It won’t be simply a matter of Schadenfreude that I hope that China augers its economy deep into the ground. It is so that maybe the Democrats will keep looking to China as an objective end goal of their political imperatives.
Chinese with money have been “buying” citizenship in other countries, with the preference for democracies. In the US it has been everything from the anchor baby scheme, $1500 bucks for a pregnant Chinese woman to get to the US and have her baby in California. To the make a heavy investment to get the green card and inline for citizen ship. This has been going on for several years with an uptick in the really wealthy doing it. I think it may be the get while the getting is good motivation.
http://www.youtube.com/watch?v=MlfcF1I5e_g
“the state advances as the private sector recedes”
The US has its own system of advancing the state. Government backed loans for the education needed for the right to work for a company and government backed loans, businesses licenses, taxes, levies, etc to suck all of the profit out of the company. Command economy? We like to call it the new green economy. You know, the one that does not exist and would not turn a profit because the supply and the demand cannot be balanced. You are born in debt and your future are belong to us, but no worry, will make you a great home loan. This week’s special, anyone from Tanzania can get a zero interest loan for anything they want.
Amerika wuvs you!
#6 Amit Green
You bring up an aspect that deserves wider attention.
1) the bulk of the prosperity is in the coastal cities and in the Special Economic Zones.
2) the bulk of the people are not. Ergo, the bulk of the people are not receiving the prosperity and a class system is re-evolving [a natural thing, but something not quite kosher in the official ideology, other than the gap between the proletariat and the Nomenklatura].
3) economic migrants from the interior to the coastal areas are treated even worse by the powers that be, than they are at home; and that is saying something.
4) inflation, especially in food prices, is a fact of life; to the point that the central government issued an emergency increase in the minimum wage nationwide a few months ago. In the coastal areas, higher base incomes moderate the effects of inflation more than in the hinterlands. It does not make the locals happy.
5) at least one generation has grown up without experiencing hunger or famine. Food IS going to be in shorter supply. Drought has thumped the Chinese winter wheat crop bad. Floods have severely damaged the vegetable crop. The world grain crop is not sufficient to make up the difference, there or in the Middle East as we have seen. And yes, it is largely our fault.
When things get hungry, especially with the current spoiled generation of “little emperors”; there will be unpleasant reactions.
6) add in the effects of financial and real estate bubbles bursting taking away what wealth the people believe they have, and it may involve “interesting times”.
Another factor. There is the beginning of a movement to revive the old revolutionary fervor.
http://www.washingtonpost.com/world/southwestern-chinese-city-leading-red-revival/2011/06/25/AGkh8JnH_story.html?hpid=z3
It sounds to me like the way the Great Proletarian Cultural Revolution started. This is government approved, but other sources I have seen indicate that there is worry that this could turn into a “purification” movement. That would not bode well for the inhabitants of Zhongnanhai.
Subotai Bahadur
The second whammy that will implode the value of these infrastructure projects follows from China’s endemic corruption. As can be expected in a centrally planned hierarchical authoritarian society, cheating is rampant. My expectation is that soon highways will crumble, trains will derail, power plants will go offline (or worse) and much of the new housing will prove uninhabitable.
The good news could be that a retrenchment of the Chinese economy could reduce the Mercantalist pressures that have been pushing them towards confrontational raw materiel grabs and foreign adventures. The bad news is that demographic and domestic political instability will probably overwhelm that effect. China may become exceedingly dangerous at the moment when the Democracies are least prepared to face Her.
For the past several months I believe the US has been buoyed by foreigners, Chinese European and Latin American, coming to spend while their money is still worth something and goods are much cheaper here. Soon I fear that effect will recede.
The Financial Times says that China’s troubles are not immediately critical, so long as things stop right there.
But the problem with Free Money is that it’s addictive. How are they going to keep the music playing unless they pop more coins into the jukebox? And then at some point, some kind of clearance event is going to force a payment and then there’s no payment to be made.
So I don’t agree with the Financial Times that there’s no immediate problem. Rather, we don’t now if the problem will come immediately. And those are two different statements.
W, well…these things have generally been settled by wars.
The elites are certainty not going to “write down” their positions on their own; they will have to be forced out and forced into accountability. Thus the real question is a how much real power and control do they have over their own populations, and is do they have the time to increase it.
Certainly, the American Nomenklatura would move toward the final betrayal in a heartbeat if threatened with ruin.
You suggest that power relationships may change. Fair enough, but they may well change for the worse. Perhaps we should hope that events overtake their schemes, and the sooner the better.
“So I don’t agree with the Financial Times that there’s no immediate problem.”
Remember the Financial Times and their ilk is a big part of the problem. Their rice bowl consists of soothing the sheeple while they are sheared. Every word they utter is designed to manipulate.
The Financial Times article above adds:
What that suggests is that the bounds of the problem are only now being delineated. China could well be in a deeper hole then the US. In fact, it may be in so deep it could take your breath away. But right now, nobody knows for sure how thin the ice is.
What I’m wondering if how the market will price this is if it looks really bad. For Australia, its probably going to mean that stocks based on sales to China are going to take a hit. The discounted future cash flow which the maret represents is going to have to be revised downwards.
What it will do elsewhere, I don’t know.
BACK OT. No, governments cannot. If government is all powerful, all knowing why are they overthrown at regular intervals?
We are just fortunate to live in societies that allow remove and replace to be mostly non-violent. I’m afraid China has no such society….YET…
Charles;
“splitting up the unnatural large kingdom into the different section each their own fully autonomous nations!”
Are you speaking of China or the USA? My favorite Youro calls America a continent that thinks it’s a country. A good argument can be made for splitting a few chunks off the USA.
One wonders…
Can you really have Capitalism when the government keeps tipping the scales to make sure the “right people” win the economic contests? Or is that just socialism wearing a mask?
And can you really have Capitalism when the basis of commerce (again, decreed by the government) is purely fiat money that the government or their favored banking interests can diminish at will with the stroke of a pen or with a printing press?
Capitalism is predicated upon the notion that the game is not rigged, and that people by luck and effort can win. Once it becomes apparent that the deck is stacked they quit playing the game. It seems more and more though that stacking the deck seems to be the main principle that guides most modern governments and a lot of the suckers are beginning to catch on.
The bright shining progressive future was supposed to revolve around the principle of “from each according to their abilities, to each according to their needs.” Instead we have “from each according to their political connections, to each according to their political connections.”
How far we have fallen. I fear the ground is approaching quickly.
Just to throw a frog in the punch bowl, remember these are all paper debts. Bookkeeping devices, nothing real about them. If ALL the debtors decided to stop pay, then the banks would fold. The next day new banks would open. The old bankers would find out the hard way how long bought friends last once the money is gone.
I agree w da mongoose.
China has a real, productive economy. No doubt prices have gotten overblown. What killed the US and institutions was not a normal bubble popping, but (a) market failure unlikely to happen in China’s controlled economy, especially given they have trillions in surplus US dollars to play with. (b) the US has been living only on bubbles for twenty years or more, if you believe certain parties, it is this structural problem that is now killing us, that the bubbles simply hid. Some in the US hope and pray for a new bubble to come and hid our true condition again. China is simply not in that situation.
Debeers has been real happy because the Mainland Chinese have been making a lot of diamond purchases. When the inhabitants of a country start making increased purchases of diamonds, emeralds, in the carat and 1.5 carat size, I get nervous. Even large sales in the .5 carat range worry me.
In his book “Eat the Rich” P.J. O’Rourke describes visiting Shanghai. THere was a bustling economy and they were building like crazy but across the river was Pudong, the “New Area” of huge new buildings, and the place was empty. The Party had decreed that Shanghai would be expanded and so they did it. Only nobody wanted to do any business there or live there. So the Chinese were telling foreign firms thet they better buy or rent some of that overpriced and unneeded real estate is they want to do business in the country.
As P.J. puts it, “This is not a Darwinian economy where enterprises prosper according to their ability to to survieve and grow. This is a creationist economy where prosperity is bestowed by a greater power.”
And besides, the senior leadership in the Party and the PLA no doubt have a lot of personal interest in those new useless new buildings. And Pudong was being repeated all over the country.
P.J. says that the Chicoms are trying to build capitalism from the top down, as if the Egyptians had built a pyramid by assigning one guy to hold the pointy stone at the top up while all the other slaves went and got a few million stone blocks to put under it.
As the Asian WSJ put it, China decided that it would have great cities by ordering that they be great.
Fascism is what is left after Socialism fails.
It happend in Italy and Germany after WWI.
It happend when the USSR collapsed.
It is happening in China and the US now.
Here’s the answer brought to you in living color:
http://www.dailymail.co.uk/news/article-1339536/Ghost-towns-China-Satellite-images-cities-lying-completely-deserted.html
As the Asian WSJ put it, China decided that it would have great cities by ordering that they be great.
That is precisely the model for the central planners of the US, when they pull the political levers for the public/private partnerships, or 3-pees, that erect uneconomic public stadiums and light rail lines and densified living quarters and of course, the awesome high-speed-rail lines. The punch line of all their promotions is the World-Class City. But they, still assuming that the US economy may be taken for granted, haven’t yet witnessed the World-Class Collapse, and are still running on their knowitall hubris – and borrowing our grandchildren into servitude.
It would have been nice to see a country or a continent that hadn’t been netted in the bubble. But a survey of Europe, Japan, China, the Middle East and the US showed that none of the elites could keep their hands out of the cookie jar. At some point the financial system did a roaring trade in supply financial crack cocaine to governments and none of them could resist a snort.
That suggests that the solution lies with making sure that government is never itself itself the consumer of financial crack. Because if it is, then no regulatory regime can save the system because the regulators represent the addicts themselves. I think the lesson is that when government is allowed to finance its growth from borrowing it will sooner or later corrupt the markets and spreading collapse is inevitable.
The only way out of a repeat of the debacle is ensure the government is put on a fixed percentage allowance of GDP, so that it is has no real incentive to game the system for its own benefit. If it is out of the game to begin with then it can be the referee. Otherwise not.
If the international system comes crashing down and is painful enough the next big control system to emerge from the post-crash world is a government limiting system. Whereas the UN was designed to stop national war, the successor institution might be aimed at ensuring that no government gets too big.
Governments will be treated like incipient cancers, watched for any sign of metastasis. Once they get past a certain threshold and look to grow uncontrollably, then a Security Council resolution (in this future universe) will be invoked to slim it down. Maybe it’s a batty idea, but I’m not so sure. I think the world of the near future will realize that humanity’s survival depends on never letting anything get Too Big to Fail.
Insufficiently #33:
My thoughts exactly. And those various cases we hear of where the local municipality condemns private property and takes it over so it can be sold to a another private entity for the purpoce of increasing the tax base come to mind as well.
And if all the best laid central plans turn to rancid owl poop and you end up nothing but a weed-chocked lot littered with the remains of what used to be nice private residences, then what the hey – it’s all due to the creative destruction of capitalism isn’t it? And nobody goes to jail.
What we are seeing is sort of a Cargo Cult mentality. Make it look like a rich bustling modern city and it will become one.
Too failed to 2b big.
@#32, well, those barren, empty, developed cities with nobody there yet will likely make some great backdrops for a bunch of interminable hollywood post apocalypse films, and besides who wants to make a hollywood movie here anymore? It’s just too danged expensive. You gotta pay so many people to try to do it that it becomes cost prohibitive. Go there and people will do it for peanuts, literally.
#20 Blast from the Past:
“The second whammy that will implode the value of these infrastructure projects follows from China’s endemic corruption.”
Recipe for catastrophe: Combine
1) Rapid growth and development
2) Corruption in government and business
3) A geography with multiple natural hazards
Think of Chernobyl; or the 1999 earthquake in Izmit Turkey which leveled thousands of poorly designed and shoddily built structures; or the levee breaks, caused by poor construction, that flooded New Orleans after Hurricane Katrina. I’d argue that the Katrina disaster was caused as much by Louisiana’s dysfunctional political system as by anything else. China’s corruption is orders of magnitude greater than Turkey’s or Louisiana’s. Which comes first- a bubble burst and resulting large scale social unrest; or earthquake, famine or flood?
China today is what Japan was in 1990. Conventional wisdom said they owned the future. It hasn’t worked out that way.
R2P the too failed 2b big
When it does become time to figure out the write downs, many people will blame “speculators, financial firms, banks, foreigners, secret corporate interests, the vast right wing conspiracy, TV reality shows and uncle Tom Cobbley and all.”
In other words, Governments will have a lot of cover to hide behind. Great hordes of people will clamour for Government to “do something”. For these reasons I can’t see the size of government being controlled by external pressures.
What I can see is government losing it’s funding because the taxpayers are broke. If there’s no rent to be had then rent seeking functionaries will slink away into the shadows. In that way government may well shrink. Then we would find out that we don’t need very much government after all.
As I often say to my vegetable patch – “shrink government, live free”.
Wretchard,
You wrote something very significant, and something I probably need more time to think about in your last post. One thing that worries me in it is the line “If the international system comes crashing down and is painful enough the next big control system to emerge from the post-crash world is a government limiting system.”
The problem is the crash. Anarchic chaos is a good limiter of government size and power- so is a new feudalism. Before that is the old order refusing to change, and doing everything in its power to hold on. The Bourbons have learned nothing and forgotten nothing. I’m rehashing old news, of course, but it’s hard for me to take my mind off it.
There’s a whole lot of nothing currently going on in the Spratleys, and between Turkey and Iran, and in Greece and Venezeula, but I recall a whole lot of nothing that happened in the Balkans not so long ago, too. In the Spratleys it is in no-one’s interest for things to go further, except that it is in all the players interests for their goals to be achieved. Someone is supposed to blink- what happens if they don’t?
My big fear lies between today and whatever day that post-crash world stabilizes. As you mentioned before, the idea of the “world airplane” being totally out of control is terrifying. It reminds me of AF449- which if the initial analyses are correct was destroyed by bad data being fed to the flight control computer.
w@34: The only way out of a repeat of the debacle is ensure the government is put on a fixed percentage allowance of GDP
That number is 20%.
Once they get past a certain threshold and look to grow uncontrollably, then a Security Council resolution (in this future universe) will be invoked to slim it down.
That violates the “widely recognized” right of sovereign states to determine their own political status and exercise permanent sovereignty within the limits of their territorial jurisdictions… [wiki] I’d vote for Palin before I’d go there.
Such a suggestion also bends beyond recognition the problem of ‘who’s policing the police.’
The solution is not that drastic, but neither is it short-term, which creates an even more problematic environment for implementation. The concept has already been raised (Jon Huntsman IIRC) – the Long War of nation-building needs to be engaged within our own borders. The good news is that the trend-bending need not take that long – this country got badly (and stupidly) suckered into goat herder wars. That can be fixed without too much hand wringing. The bad news is that we let it get so far out of control.
In a previous thread, I posted a brief defense of the progressive reforms immediately following the Industrial Revolution led by the so-called Robber Barons. I did so because the complaints and the speeches from that time resonate in near perfect pitch with the public rhetoric of today – or to extend wretchard’s analogy, like the uneven reflection of light from a distant past bouncing off the stress-fractured control surface of modern times.
The answer is not to erect a new structure – or set of institutions – with modern mandates. The answer is to do better at what we know has to be done, which the evidence suggests are human improvements and investments, more than structural. Not to be quaint, but there’s a finite number of structural solutions for the human condition – and I think it’s safe to say that all of them are less than optimal – except for one.
In this sense, Francis Fukuyama had it right – the best way for humans is liberal democracy, which means that the best solution is to strengthen and perfect the people and the institutions that support liberal democracy, not to build something new. Fukuyama was overly optimistic about the velocity of the global progress over this century, 1.3 billion Muslims not to be denied their due. Unfortunately for all, USA leadership was ground-level stupid at a critical point in time. My guess is we’re catching up in the quiet spaces occupied by the military and the intelligence agencies but the rest of us are stuck dealing with the financial fall-out from 2008, so under the radar goes much of the progress.
“There is a lot of ruin in a nation” – Adam Smith
China has pulled itself pretty far out on a limb. But I think China can go much further before an actual collapse. More’s the pity – the collapse will be all the worse when it comes.
The Party has maintained and extended its control by systematically infiltrating and co-opting every enterprise that grows to become significant to the economy. Now, the Party controls the government, the banks, the large state-owned enterprises and unknown numbers of supposed-private companies.
The Party forced the stimulus spending, which is now coming due, on banks over the protests of bank executives. Now that the lending is failing to perform, the Party has every reason to cause the faults to be papered over. The Party must continue (double entendre intended).
But this doesn’t change the fact that massive mal-investment of capital is occurring. Eventually, the mal-investment will show.
The Party has maintained a tight grip on all sources of social and political power and authority. I suspect that the current regime will remain solidly in power, until… one day it won’t. The change will be swift and ‘unexpected’.
The
I have no love for the Chinese Communist Party, but a big blow up and collapse isn’t going to do anybody any good. They are trying to keep the lid on things now and are increasing repression. Stories are coming out about riots, bombings, and other actions against government officials and agencies. They’ve have increased their spending on anti-riot gear and measures. If the Chinese currency goes down will they be able to buy sufficient raw materials from Australia to keep industries going and people fed and employed? What would happen to the Australian economy and others who sell to China? The sad thing is that many Chinese officials know what has to be done but can’t get it done. An Air Force political officer stated that if the Party want’s to survive it would be better to lose an election and become a minority power and come back later rather than desperately hang on and lose everything. IMHO they are going to lose it.
China’s problem is that they have been denying themselves the benefits of free trade by practicing a form of mercantilism. They have a lack of domestic consumption brought on in part by the fact that there really is not much to buy. By keeping the yuan high they encourage export but price products that have a competitive advantage out of the domestic market, and since most domestic production is geared to the export market there ain’t much for the average Chinese to actually spend their money on. If you do not believe that is true follow a group of Chinese tourists around New York or Washington some time. They will buy anything that isn’t nailed down like the money is burning a hole in their pockets. The same is true in Europe or anywhere else they travel.
There most certainly is a real estate bubble in the country and the ghost cities, gleaming blocks of unoccupied offices and apartments are real. Whole new towns on the outskirts of existing cities built to house citizens that cannot afford them and probably would not buy them if they could. That real estate bubble will burst if it hasn’t begun already. It is hard to tell how severe the impact will be though.
One of the other underlying problems in China is the disparities between the coastal cities and the rest of the country. Some pressure is relieved because a raising tide floats all boats and while things such on the collective farm they are much better than they were. If that upward trend were to suddenly end there is no telling what the political consequences would be.
Stars are remarkably stable things. They have inherent self-limiting elements at work as a function of physics that keep them in balance with their available fuel supplies and (stellar) environment.
Still, they’re burning fuel and eventually even the moderating physics involved (and which we still poorly understand in some areas) is overwhelmed. What happens next is that the star goes into overdrive, expanding greatly as it bloats up on overconsumed fuel. It may burn much brighter than normal, and/or increase in size enormously. If you were in the business of harvesting solar radiation from these central engines of planetary systems, you’d be quite happy with the evolution.
But then, the stars lose enough fuel and can no longer sustain the expanded state. They collapse inward to cooler, quiescent and mostly useless entities with a gravity well but not much else to compel interest. That is, unless said star was sufficiently massive, in which case before collapsing they explode off a shell of material at such energies as to make anyone in a wide neighborhood very, very dead. And, the resulting core tends to be something you’d not want to get close to either.
Now, from this oversimplified version of stellar physics (or what we think it is), to the topic of governments/nation-states.
Governments are like these stars. If they are small enough to begin with, and lack or cannot obtain enough fuel to reach a kind of critical mass, then their collapse after overconsumption and bloat will be bad for the immediate constellation that orbits them, but otherwise life will continue. Greece is an example of this, as is Portugal, both of which present a problem, but one containable even if stupidly painful.
Take a state an order of magnitude larger, such as Mexico, Egypt, or at the high end, China, and national collapse will almost inevitably involve a spasm of human expansion in all directions. We see this in Mexicans fleeing (or being pushed in some cases) to the US, and in China’s most energetic particles.. er, people, acquiring residency and property elsewhere.
When China goes nova, it will create an enormous wave of human debris accelerating outward and destabilizing everyone else within reach. As Wretchard points out, the rest of the world is not in much better shape, so the risk is that when China goes, or some other sufficiently large entity, it will cause a chain of explosions rendering our subsequent constellation of governments unrecognizable.
I rather like sovereignty. What people are willing to settle for afterwards may not include that.
–JC
W -”That suggests that the solution lies with making sure that government is never itself itself the consumer of financial crack.”
Our Constitutional form of government works very well except for those twentieth century “Progressive” tack on anomalies like the Federal Reserve which has no checks and balances and is really only answerable to the member Big Banks. Ditto the EPA and some of the other new Obama “innovations”, like Obamacare. Where we went wrong is where we jumped the rails of the constitutional principles outlined by the Founding Fathers.
The member banks of our financial system became addicted to crack like the CRA, subprime derivatives, Fannie and Freddie and the money/ lifestyle blew away anything you local crack dealer mobster could imagine. Way too much money and way too little oversight by law. Net result: fraudulent derivative and overleveraged easy money junkies who have grabbed enormous power through their thuggery.
The 20% spending limit is a nice idea, maybe combined with a a balanced budget amendment that would limit taxation.
Wretchard writes:
Governments will be treated like incipient cancers, watched for any sign of metastasis. Once they get past a certain threshold and look to grow uncontrollably, then a Security Council resolution (in this future universe) will be invoked to slim it down. Maybe it’s a batty idea, but I’m not so sure. I think the world of the near future will realize that humanity’s survival depends on never letting anything get Too Big to Fail.
Perhaps. But maybe the better and more elegant solution is to adopt the mindset that absolutely nothing is Too Big to Fail, and that the consequences of failure shall rest solely and eternally upon the folks who were responsible for the failure. Let it fail. And let the people in charge of the institutions that failed be sent to prison for life without hope or possibility of parole or pardon. Replacing golden parachutes with a corridor leading straight to Hell might do the trick.
That is the essence of the problem. For the political class (and those connected with them are indeed part of the political class as well) the consequences of their behavior never fall back upon them. Ever. And that is the path to ruin. Stupidity must be punished. When you remove that from the equation the result is … what we have now.
Systems which do not punish or ignore stupidity are doomed to die.
Jim in Virginia 38,
Concur except that I think you are a little to hard on the Japanese. Yes they lost over 10 years due to crony corruption and yes there were real problems in the design and construction of the nuclear plants. Still the perfect only exists in a better world and the fact is that they did build the plants and then when struck by a once in a 1,000 year disaster they responded as well as anyone on Earth, including Americans, could have. Other countries would have dissolved. The Japanese seem to be OK and I want them on my side.
Disasters, Natural or Man-Made, will strike China. Let us see how they handle them.
JC in KZ 46,
Your last sentence raises a possibility. Some of us have been looking at these problems as if they were being manipulated by agents of the Chinese government, through the SCO or Maurice Strong etc., doing what that entity thought, according to theories we disagree with but comprehend, was in the best interest of China. That is we were arguing that if we were seeking to increase the power and wealth of China and the long term prosperity of the Chinese people and we did not have any of the internal restraints of Western morality then how might we act? What if the leadership in China really are like the disloyal tranzi elites of the West and do not give a damn about the Chinese people? Whay if they were willing to see China and the West consumed in a disaster that would leave them in charge of the remnants? What if they are seeking to increase their relative power, even if the pie shrinks and significant numbers of humanity perish? Would their conduct be any different?
If that model is true then they are worse than the fascists and nazis, who at least claimed they sought the growth and prosperity of their nations, and more dangerous than Sunni extremists, who seek to dominate an impoverished world but also seek to multiply their flock in the apparently magical belief that there will always be sources of infidel wealth to extract. The nihilist tranzi elites are closer maybe to the Iranian Twelvers who seek to be part of a small elite that will rule after an apocalypse.
Imagine a scenario: Chinese economy goes tango-uniform, someone somewhere finally gets fed up with the U.S. fiat currency’s plummet. (That appears to be inevitable, given the reckless printing; we’ll have to start using really crummy paper, because we won’t be able to afford the good stuff any more…)
Even the Chinese Lao Gai prison labor scheme will be unable to produce functioning factory goods for export at prices lower than U.S. when our currency is devalued to one thousandth of its present exchange rate. It won’t be fun, but it looks to me there will be a time when we will not be able to afford to import things that used to be relatively cheap. We’ll have to start making things in the U.S. again.
It occurred to me decades back that all the pavement we lay so promiscuously – mall parking lots, 12-lane superhighways, schoolyard playgrounds, et cetera – have created an unintended and unmarked “reserve” of arable topsoil for later generations. Just break the asphalt layer into chunks and clear’em away, and suddenly there’s soil for a garden. The asphalt can probably be put to other uses.
After the general collapse of civilization, the North American continent will still have a staggering wealth of natural resources… If we don’t have “Red Dawn” play out.
Imagine the miraculous super-carriers rusting at their docks, crumbling aircraft sold for scrap except for a few kept in the hangars with the goats and chickens and cooking fires; crews hiring themselves out for odd jobs to supplement the government paychecks that no merchant or bank will honor at face value.
After the Great War the U.S. demobilized, allowing approximately 4 MILLION troops to muster out and return to the civilian world. By 1920 legislation was passed by congress limiting the Regular Army officer corps to 17,726 and the enlist ranks to 280,000. After participating in the unsuccessful attempt to limit the Bolsheviks taking over all of Russia – along with the British, Japanese and paltry few troops from several other nations – the U.S. withdrew Army troops from deployments around the world except for a thousand assigned to Tsientin, China, and small Marine contingents for embassies and missions… (link to http://www.history.army.mil)
At least the government then didn’t melt down all the munitions manufactured for the war, keeping a large store in reserve against future emergencies.
Not like some surpassing idiots of the present we could name.
One crucial difference between the collapse of the world economy in 1929 and what seems to be hurtling toward us now — a great majority of folks in those days had some knowledge of raising gardens, chickens, rabbits and other domestic critters. People were accustomed to living with their windows open, and accommodating their activities to the weather. Vehicles were simple enough that kids learned how to repair them by buying junk cars, taking’em apart and re-assembling them.
Now we have massive “closed box” apartment & condominium and office buildings, with windows that CAN NOT be opened to allow in some fresh air.
This time, the collapse is going to teach a lot of folks they should have learned something to do with their fingers besides texting.
Or excavating their nostrils through a long afternoon.
Sorry. the correct link for #50 is http://www.history.army.mil/books/AMH/amh-19.htm…
#48 Tcobb – Sure, stupidity will always be punished. But the trouble is that in the case of the parasitic classes in Western society (bankers, particularly investment bankers, government apparatchiks, politicians, lawyers, tax accountants, lobbyists…) it isn’t stupidity at all. All these people know very well what the effect of their machinations will be – and they don’t care, for they will have provided for themselves from what they’ve stolen. It’s not stupidity – it’s evil.
Sooner or later, people like this will be punished. And it won’t be pretty, and won’t be according to law, and will create a public hygeine problem in the form of rotting corpses hanging from lamp posts, and a lot of people who don’t deserve to get hurt will be.
Also, nobody’s immune from the temptation to steal. Over here, Esther Rantzen (who has spent most of her adult life campaigning on TV and elsewhere for consumers’ rights and against the petty stupidity of government officials) has sold out to a firm of ambulance-chasing compensation lawyers.
42. YBR
“the best solution is to strengthen and perfect the people”
Oh, bugger!
Not again!
Whenever I hear ‘to big to fail’ I think of dinosaurs.
“At least the government then didn’t melt down all the munitions manufactured for the war, keeping a large store in reserve against future emergencies.”
That same government also didn’t carry the legacy burden of the number and costs of retirees in the War/Navy Departments budgets from maintaining a large standing force for over 60 years. DoD and Congress has just about run out of cooking the books on managing their retiree medical costs first with shifting the burden to Medicare for those over 65 and then creating Tricare to charge back for services that once were promoted as compensation for the substandard pay prior the 80s-90s. If the active military was completely demobilized tomorrow, the obligation accumulated over generations to those that served would still dwarf other agencies of the government. Everyone has been kicking that can down the road for a long time.
34. wretchard
“It would have been nice to see a country or a continent that hadn’t been netted in the bubble.”
Best bets for investors and entrepreneurs are Canada and Israel, 7.4% and 5.8% unemployment respectively, both with competent and stable governments, educated populations, and investing to tap massive energy resources for export.
Figuring out what’s going on in China — from the outside at least — is like visiting a hall of mirrors. It is, after all, quite strange to hear about unemployment riots in a country that has been growing close to 10% per year for more than a decade. So often we see business stories using Chinese statistics that come from government sources and can be presumed to have dubious content. Further, we know that the Chinese government has pressured Goldman Sachs and other investment firms to suppress research they’ve done which conflicts with what the government wants to be understood. So unofficial statistics released to the public aren’t especially reliable either.
Some things, however, are not in doubt. There are newly built cities without inhabitants. There is a nationwide glut of residential and commercial real estate. There is a wildly expensive high-speed rail system that is too costly for normal people and so poorly built that sections can’t tolerate the high speeds. There’s the Three Gorges Dam. These are tangible signs of misallocated capital, and they drag down the economy.
We also know that the Chinese government is actively pursing mercantilist policies, such as those that have failed consistently all over the world since their original failure in 17th and 18th century Europe. Chinese citizens are required to convert foreign currencies into yuan upon receipt, and must ask government permission to obtain foreign currency for purchases. This has led to the accumulation of huge foreign currency reserves and drives up the value of the yuan, which the government counteracts with its currency peg. Perhaps more important to the government is the restrictions currency controls place on Chinese businessmen who cannot efficiently transfer wealth out of China and out of the reach of the Chinese government. Either way, these restrictions also misallocate capital. Surely the Chinese have something better they could do with the money than letting it sit in Treasury notes.
At any rate, it stands to reason that this can’t go on forever. Timing the collapse, however, is difficult. With the Chinese habit of summarily executing everyone deemed responsible for speculation and corruption, we can be sure problems will be papered over until the last possible moment. On the other hand, Chanos has a lot of money riding on a collapse and is therefore peddling his own story. And of course there are a lot of people, like most of us, who’ve come to the conclusion that there’s less to China’s economic miracle than meets the eye, and as a result favor the possibility of collapse.
It does seem that a collapse will come in times like these. China has been the recipient of a flood of foreign investment. This continuous influx of new foreign capital has masked the misallocations of the local governments and the central government for a long time. With weak consumer spending in much of the West and the Chinese government demanding more and more in terms of technology transfer and ownership restrictions from foreign investors, that flow of capital could slow. If so, watch out.
BM@54: Oh, bugger! … Not again!
[smile]
Slightly over the la la line, I admit. Maybe five people in the world understood securitized derivatives trading – one was Hank Greenberg, the other was someone at Goldman Sachs, and I assume the remaining three worked for AIG’s FP group in London. I simply can’t engage in the ideological debate until the level of corruption gets tamped down. At present, both parties are cartoon caricatures of so-called progressive and conservative thought. One prefers hard cash, the other, stock options.
Rodo: Just so.
As far as “securitized derivatives” are concerned… I don’t know much about them but it sure sounds a lot like printing your own money.
Glass-Steagall, now, more than ever!
“Provisions that prohibit a bank holding company from owning other financial companies were repealed on November 12, 1999, by the Gramm–Leach–Bliley Act.
The repeal of provisions of the Glass–Steagall Act of 1933 by the Gramm-Leach-Bliley Act effectively removed the separation that previously existed between Wall Street investment banks and depository banks.
Some experts believe that this repeal directly contributed to the severity of the Financial crisis of 2007–2010 by allowing banks to gamble with their depositor’s money.”
We are experiencing the first pangs of resource constraints. The powers-that-be have focused upon conservation of resources rather than resource development. Of course, we don’t like what that entails: population control, agricultural restraints, energy allocation, etc. Preserving minnows and snails alone is wreaking untold damage to our economy. The next step is severe population management; who can reproduce, what they can reproduce and when they can reproduce.
As long as we’re convinced that we can manage Earth’s resources indefinitely, the above constraints can only become ever more oppressive. There simply is no ethical alternative.
But of course, we do know that someday there is likely be another ice age, extreme warming, ocean rise/fall, asteroid hit and the final unavoidable step is when the Sun flames out. If we have focused our efforts on sustainable resource management, our species is going to be destroyed at some unknown future date.
On the other hand, if we were to focus our resource management upon space exploration and development, we could gain much needed resources, spread our species and possibly survive the extinction of our solar system.
Does It Make Sense to Resurrect the Glass-Steagall Act?
Our analysis holds that the key reason for financial instability is not the repeal of the Glass-Steagall Act as such but the existence of the central bank. It is the central bank that enables banks to practice fractional-reserve banking and thereby pollute the economy with money created out of thin air.
As long as we have a central bank, it makes sense to impose tighter controls on banks in order to minimize the damage the central bank’s policies inflict. A better alternative is, of course, to have genuine free banking without the central bank.
So many people are calling for the abolition of the Federal Reserve System.
But what scheme is being proposed to replace it? What are the defects that need remedy and how does one remedy them?
I would remind everyone that when Andrew Jackson destroyed the Second Bank of the United States, our country was plunged into a decade long economic slowdown due to chaotic finances. How many today revere the name of Martin Van Buren, Jackson’s henchman and successor?
I have long suspected that the US would force itself into an inflationary period just to eliminate the real power of China’s dollar holdings and cripple the regime. Maybe it wasn’t premeditated but just the natural course of events, but it looks like it’s working.
I supported the repeal of Glass-Steagall at the time but I may have been wrong. The argument that US banks needed the additional powers to compete with large foreign banks was the basis of my support.
#50 mad fiddler
Hate to be the bearer of bad news but that “reserve” of topsoil under the asphalt was scraped up and sold prior to the paving, in my area anyway. And they planted big box stores and warehouses on all the scarce productive valleys, as the farmers sold out to real estate interests. No topsoil under those either.
Succinct summary from wiki:
………………
The argument for preserving Glass–Steagall (as written in 1987):
Conflicts of interest characterize the granting of credit (that is to say, lending) and the use of credit (that is to say, investing) by the same entity, which led to abuses that originally produced the Act.
Depository institutions possess enormous financial power, by virtue of their control of other people’s money; its extent must be limited to ensure soundness and competition in the market for funds, whether loans or investments.
Securities activities can be risky, leading to enormous losses. Such losses could threaten the integrity of deposits. In turn, the Government insures deposits and could be required to pay large sums if depository institutions were to collapse as the result of securities losses.
Depository institutions are supposed to be managed to limit risk. Their managers thus may not be conditioned to operate prudently in more speculative securities businesses. An example is the crash of real estate investment trusts sponsored by bank holding companies (in the 1970s and 1980s).
The argument against preserving the Act (as written in 1987):
Depository institutions will now operate in “deregulated” financial markets in which distinctions between loans, securities, and deposits are not well drawn. They are losing market shares to securities firms that are not so strictly regulated, and to foreign financial institutions operating without much restriction from the Act.
Conflicts of interest can be prevented by enforcing legislation against them, and by separating the lending and credit functions through forming distinctly separate subsidiaries of financial firms.
The securities activities that depository institutions are seeking are both low-risk by their very nature, and would reduce the total risk of organizations offering them – by diversification.
In much of the rest of the world, depository institutions operate simultaneously and successfully in both banking and securities markets. Lessons learned from their experience can be applied to our national financial structure and regulation.[18]
……………….
The legislation was passed along party lines by a Republican Congress and signed by Clinton.
‘Competitive disadvantage’ is the oldest con in town, imo. But I’m biased against Phil “Stop yer whining” Gramm.
In fact, every one of the “con” arguments came true. None of the “pro” arguments saw light of day. (I especially like the last one.)
Following #64 – YBR’s quote, the article concludes:
“As long as we have a central bank, it makes sense to impose tighter controls on banks in order to minimize the damage the central bank’s policies inflict.
A better alternative is, of course, to have genuine free banking without the central bank ”
—
ie, in the Real World as it now exists, we need the wall of separation that previously existed between Wall Street investment banks and depository banks.
Thanks to Wretchard and all the posters for sounding the alarm on China. I checked with Jim Rogers, a super bull on China, my China sage and all around shrewd dude, and he conceded in an interview on 15 June that China could be in for a train wreck. I just took my wife’s ira out of her heavy holdings in China with her capital intact.
A friend in need . . . .
Best,
Richard
USA just backed off of 100% for the second time in our history:
The United States federal government began with a substantial debt, the cost of the Revolutionary War. Under Alexander Hamilton’s funding system the debt was paid off by 1840. Government debt has typically peaked after wars. It breached 30 percent of GDP after the Revolutionary War, the Civil War, and World War I. It breached 100 percent of GDP in World War II. Government debt also breached 100 percent of GDP in the aftermath of the financial crisis of 2008.
China’s GDP ($5T) being just over a third of USA GDP ($14T).
There’s train wrecks … and then there’s Train Wrecks.
In the DC Drift thread I mentioned that the Democrats were setting the political stage in THE NEW REPUBLIC to openly defy Congress on the debt ceiling. It has started.
In an article at the HUFFINGTON POST [linked by PJM's INSTAPUNDIT http://pajamasmedia.com/instapundit/123366/ ]
Democrat Senators Murray of Washington and Coons of Maryland are supporting the claim that the Executive has unilateral power to issue debt without consent of Congress due to the 14th Amendment’s text that the Debt of the United States shall not be questioned. Implied there, that the Executive has the right to spend the funds so raised, without reference to Congress, so long as they make the claim that it is related to guaranteeing the debt.
They are saying that the 14th Amendment functionally transfers the Article I Section 8 enumerated power of the Congress to borrow money on the credit of the United States to the Executive. Up until now, while it has been the Executive that actually did the mechanics of borrowing; it was always as per the authorization of Congress, first individually before 1917, and now under the provisions originally set up in the Second Liberty Bond Act. [ see Congressional Research Service Report to Congress "The Debt Limit; history and recent increases" of April 29, 2008. http://fpc.state.gov/documents/organization/105193.pdf ]
That is a constitutional crisis and something that the markets [and the country] should be up in arms about.
Thomas Friedman has opined long and loud about how it would be good if we could get rid of those pesky Constitutional and political limits on the conduct of the government; and just let the government run things “efficiently” like China. He is getting his wish.
Subotai Bahadur
Goldman Sachs is planning a major hiring spree in Singapore, even as it prepares to slash its headcount in the US to cut costs. The financial giant is so worried about criticism over the job shift that it has taken the unusual step of notifying lawmakers about its hiring plans, insiders tell Fox News. The 1,000 jobs the company is adding in Singapore will mostly be the same kind of high-paying investment banking positions that Goldman plans to cut in the US, a source says.
Goldman’s shifting of jobs overseas is likely to spell bad news for more than just Wall Street bankers, according to Daniel Indiviglio at the Atlantic. It looks like the firm is both aiming to escape new financial regulation and betting against the US economy, he writes—and Goldman has a history of being ahead of economic trends. “If Goldman is right, then the US is going to be in for a rough time over the next decade or so. And other Wall Street firms moving more workers overseas will make matters worse,” he concludes.
Yep. Reinstating Glass-Steagall ought to be just the trick.
As I said, holding hostage.
Rodo #58:
“It is, after all, quite strange to hear about unemployment riots in a country that has been growing close to 10% per year for more than a decade.”
Go back and read the Belmont Club post on the “ant army” of young Chinese college graduates who would love to be working at the U.S. “Do you want fries with that?” level.
Absent the rest of the world, the U.S. still has a huge economy with lots of opportunities if the government and other rent-seekers would gethell out of the way. That is not necessarily true with Red China.
“Reinstating Glass-Steagall ought to be just the trick.”
I can go you one better. Aug 1st is a Monday. We should organise a bank run for that day. Destroy the whole rotten scam in one day. Show the elites that the sheeple have teeth.
Before the income tax and attendent banking reforms, $1000US would buy a lot. More then 20,000 will buy today. If they are too big to fail a bullet behind the ear will call that bluff.
Goldman-Sach’s is running a bluff too. Singapore IS NOT a Free whatever it is. If Goldman-Sachs will quickly find out about having men with automatic weapons attending board meetings.
https://www.cia.gov/library/publications/the-world-factbook/geos/sn.html
pinched
“Sellapan Rama (S R) NATHAN was appointed president in August 2005 after Presidential Elections Committee disqualified three other would-be candidates; scheduled election not held”
Why is everybody running bluffs? I blame TV poker.
The administration tried to bluff the Duck of Death. We see how that worked. The Duck didn’t die of laughter, although it was close..
Berry tried to bluff Bibi. Bibi told him to pound sand. To his face in front of millions. Now the won is trying to bluff Congress on the Debt ceiling. Time to take the issue out of the hands of those fools. If everybody goes to the Bank August 1, 2011 it will end all the bluffing. It will end the deceit and trickery. Goldman-Sachs won’t have enough money to make it worth the time of Rama to finish his robbery.
NO, time to flash mob the banks. Get money out while it is still worth something.
#74 RWE
Perhaps I was unclear, but I made the point to question the truth of Chinese economic statistics rather than the reality of riots. If the US economy grew by 10% a year for a decade, we’d have to annex Mexico to get enough workers.
A wide variety of economists have demonstrated that official Chinese government statistics don’t add up. And they don’t correspond to China’s apparent natural resource consumption. Most guess that China has actually been growing by 4-6% per year rather than 10%.
The other piece of the impending ChiCom problem is fallout from a generation of their one child policy: an overabundance of young men somewhere in the range of 20-30 million. When you have that many young men without the ability to marry, the testosterone is available for other enterprises. Perhaps an away game in Taiwan or Siberia. Cheers -
45. Joe Hill
The Red Chinese have tried to jump past the whole ‘need to make a profit’ schtick so common here abouts.
Which means that to a shocking degree her exports are not profitable. Her national gross margins are too low.
This is the consequence of chasing volume to satisfy Beijing.
It also means that Red China has evolved from manic communisim into mercantilist fascism — a strange transform, no?
BTW, there is some confusion here on this blog WRT the yuan. It’s being held DOWN in value vs the USD –not up.
CAPITAL CONTROLS are blocking the Chinese citizenry from purchasing overseas assets. The result is squirrelly arb possibilities between Hong Kong gold and Vancouver gold. The Chinese can access Hong Kong at lot easier than Vancouver — and are desperate to get out of yuan and into gold.
What’s happening is a tragic game of musical hot-potatoes. The monied class is trying to find assets that can survive the ‘adjustment’ that is certain to come.
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WRT Chinese building techniques and designs… Generally they have imported the finest talent in the world for their major structures. Their new work is state of the art.
The problem is that even state of the art residential structures need to be occupied. Empty buildings decay all by themselves. They need occupancy — and the tender care of a housewife.
The other ticking time bomb for China – I’m surprised I haven’t seen it mentioned – is their demographics. The one child policy is soon going to prove to be the most stupid, short sighted, suicidal policy in the history of bad policies. China will be aging very rapidly without the wealth to support it. They also have an alarming imbalance of males to females. Your demographics is your future…it doesn’t look so bright for China. We live in interesting times.
Actually, the worst news for China is that it remains one of the most corrupt places on earth to do business.
A wide variety of economists have demonstrated that official Chinese government statistics don’t add up. And they don’t correspond to China’s apparent natural resource consumption. Most guess that China has actually been growing by 4-6% per year rather than 10%.
Reminds me of when the World Bank had to revise China’s actual GDP downward from $9 trillion to $6 trillion a couple of years ago. I wonder how many of the stories that tout China’s current and projected GDP vs. America are even aware of that correction from, I believe, 2007?
#77, Agimarc and I must have posted similar thought about the same time. Demography is such a huge factor that is almost always overlooked because it’s always out in the future until one day it’s not, like our current surpluss of large single family homes for a shortage of customers forming family requiring that type of house…Gen Y meet Gen X…not enough Gen Xers to buy Gen Y’s big house at a tidy profit X 10′s of thousands = crisis.
#76, don’t disagree that Chinese GDP growth is overstated, however, if they were legitimately growing at 10% the have the equivalent of several Mexico’s to pull labor from their poor rural areas.
I just don’t think they can grow fast enough, long enough to overcome the looming demographic crisis of their own making.
s@75: Singapore IS NOT a Free whatever it is. If Goldman-Sachs will quickly find out about having men with automatic weapons attending board meetings.
I was quietly hoping for a subtle reminder to the GS board of the many benefits of doing business in a free country, but the Singapore message is mixed.
But Singapore is unlikely to be tainted as expatriates surveyed by the Hong Kong-based group once again rank it the least corrupt economy in the region. (2008)
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But the purpose of this post is not just to tell you that. It is to tell you that Singapore is one of the most corrupted countries in Asia. (2009)
A shrinking population base makes many, many troubles go away — starting with open warfare.
Polities without second sons are extremely reluctant to go to war.
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Japan, Korea, China and most of Europe are over populated by American metrics. The tell is how close to starvation they are — if they had to depend upon themselves.
If Red China stays the course she might attain attain American per capita numbers — in a couple of generations.
Such a reduced population would not need mind boggling resource inputs — and would be vastly more sustainable in every sense of the word.
America has to stop predicating every manner of economic expansion as being a holy grail. The recent housing debacle should make that apparent.
America does NOT lack demand for McMansions — she lacks Americans with the economic output to afford their mortgages.
The Obamanation is making this all the worse.
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Current numbers in the money markets indicate pervasive fear — the belief that Europe is cracking up — that the Euro is on the ropes. No international money wants to be tripped up.
Write-offs, if borne by the French, figure to wipe out their top three banks. Berlin is only a half-step behind Paris.
The fact is that all over the world the elites have blown up the ‘system.’
As with the stimulus and the QE’s, perhaps MORE regulation by Dodd-Frank is the answer!
Blert said…
“Such a reduced population would not need mind boggling resource inputs — and would be vastly more sustainable in every sense of the word.”
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Indeed:
Extrapolate current trends a bit, and China needs the entire World’s resources.
…and then there’s India and the rest of the high population First-World Wanna Bees.
b@85: The fact is that all over the world the elites have blown up the ‘system.’
That they have – and they did it from the context of business as well as government. Ideology was a distant echo from a dimly relevant past.
Who might attempt to use instability in the US and around the world to their benefit?
Soros Open Society Institute and the billionaire club, Democracy Alliance, in the US and around the world in most developed nations. Hidden and radical and ignored by all media except FOX. Looks like Soros fronts may be buying farm land and grain storage and shipping in the US and probably elsewhere. Soros helped loot the USSR and can use the same mechanisms.
soros/clinton Center for American Progress employee van jones is starting a commie/progressive tea party (Democrats are gone for now). Frequent visitor Trumpka has pledged 10 million union members to join. Probably SEIU and ACORN will have Obama fulfill his pledge to paint the USA SEIU purple.
Add in the radical EPA and meanie greenies that want to flood the Missouri and revert land back to primitative, with the cooperation of congress and the corp of engineers. Hell they have already turned east of Fresno into a dust bowl losing tens of thousands of jobs. Wonder who gets to build on that abandoned land? Pelosi’s husband?
I didn’t even know about the fascist Agenda 21 until a couple of months ago. It has been around since 1992 and is quietly and stealthily being implemented throughout the United States, trevorloudon
Time magazine shreds the Constitution many of us have served to protect, and we are not done. And no media outrage. CNBC is shifting left, except for Rick and Joe, they need to move to FBN with larry. Can you imagine Time publishing that in our lifetime?? Rupert’s far left son is running FOX in Europe and Asia and will get the US eventually. Need a new channel.
They must think the have the numbers, they are opening the kimono, but there is usually a price for that peak.
Far leftist Australian Greens leader Bob Brown calls for an “inevitable global parliamentary governance” Brown’s party, which consists mainly of communists in disguise, is about to assume the “balance of power” in Australia’s upper house, the Senate. not
And we depend on the second Wednesday in November, 2012 to stop the insanity. With or without a damaged China the US will be at tremendous risk from nov 2012 to jan 20, 2013 if they lose. If they do not lose it is over. They have been hiding out in the schools, controlling the NEA and running the foundations and building leftist unions preparing for this day. Will not leave easily. Hope Obama knows the officers pledge to the Constitution not the CIC.
China is just one of the world’s problems.
Dodd Frank and Liz Warren are a nightmare. Will take over or kill the community bank. The want the govt to make all loans, like student loans, the only fair way. Replace evil profit with govt fraud, waste and abuse.
Blert #85
Agree that a shrinking population and lack of multiple kids, particularly sons, does reduce risk of country being a biligerent. However the rest of your hypothesis on benefits of shrunken population is fine in theory but in reality China and Europe will have to go through a painful phase of a relatively very old population which means way too many pensioners to producers. China’s problem is they don’t have critical mass of wealth to manage this stage gracefully. This looming dramatic demographic change will likely have much impact socially, economically and politically on the China we currently know.
91. phil g
Having a lot of old people is no problem. At worst, they die. They’ve lived their life.
It’s going to happen to all of us one day.
The painful phase is purely political pain. Pained politicians — ( Clinton: I feel your pain ) — is rich.
As the Volksturm showed… old men make lousy warriors. No one can convince them that they’re destined to live forever.