Chinese Economy Just Waiting for Excuse to Blow Up

“China’s lending curb sparks a rush for safety.”

That’s how The Financial Times describes what happened yesterday. Investors were more moved by fear than by greed. Dow sold off 112 points. Gold dropped $27. The dollar and bonds were up.

The first thing we note is that investors are idiots. They’re looking for safety in the wrong places. Sell gold? Buy the dollar? And bonds?

It may be a good move in the short run…but this kind of safety is too dangerous for us.

The second thing that comes to mind is a question: is this the beginning of the end? Today, stocks in Asia are still falling…presumably for the same reason. China is reporting such hot growth that the authorities will be forced to throw a bucket of water on it. At least, that’s what a lot of investors are thinking.

What we’re thinking is that the Chinese economy is just waiting for an excuse to blow up. You can’t grow at a double-digit rate – with such massive investments in new plant, equipment, and infrastructure – without making a lot of mistakes. In America, developers put up condos that are left empty. They begin sub-developments that are never completed. They abandon a new building from time to time.

But in China, they build entire cities…which become ghost towns before they ever lived.

The Chinese are human. And humans err. Corrections, recessions, crashes, bear markets and depressions are nature’s way of fixing the mistakes and punishing the mistakers. And the longer the feds try to hold off these necessary corrections, the bigger mess of things they make.

Here’s another headline for you:

“World Bank: growth may wilt as stimulus fades.”

Why is that? Because government spending ain’t really very stimulating. In fact, it’s depressing. We’ve explained why in past editions of Markets and Money. We’ll add today that the same is true, in a slightly different way, for monetary stimulus. They lower interest rates to try to revive a dying economy. The lower rates buy time – and more debt. Debtors are able to hold off the day of reckoning by refinancing at lower rates. But then what? Then, even lower rates are needed so they can refinance again.

Imagine a fellow who’s built a group of condos. He spent all his money…and borrowed millions more to do the project. Now, he’s waiting for buyers…and paying interest. The buyers don’t show up and he runs out of money. So, he refinances his old debt…adds more new debt…and he’s able to keep going…waiting for a ‘recovery’ that brings the buyers back.

But there are no real buyers. He made a mistake. In the heady days of the Bubble Era it looked like people had much more money than they really had. Now, where did their money go? He doesn’t know. But no one is stepping up to buy his condos – except for a few bargain hunters, who buy at such low prices, he still can’t pay his debt. So, he needs to refinance again. And so, the feds need to lower rates again so that he can get a better deal…otherwise, what’s the point?

But sooner or later, as the depression drags on, the feds eventually lower rates down to zero…the banks realize that his collateral is permanently impaired, not temporarily under-priced…and he realizes that the jig is up.

The real problem is not a lack of affordable credit. It’s a lack of able buyers. People are not really as rich as they seemed. It was a mistake, in other words; it had to be corrected.

But don’t expect mainstream economists, financial commentators, or the feds to understand what is going on. They are lost in their own claptrap theories and corrupt politics. What Wall Street bank will tell clients that the economy is in a depression? What Fed official…or elected politician…will admit that there is nothing they can do – except make the situation worse? What financial advisor will tell his customers that they should get out of US Treasury bonds…and the dollar…and stocks…?

Not many.

And so…dear reader…the depression continues. Few people have any idea of what is going on. None knows what to expect.

Of course, that is true for us too. We don’t know when the tools for being able to foretell the future were handed out, but we must have been out sick that day.


Obama…lucky bast***!

The president’s candidate lost in Massachusetts.

There are many different explanations for why the voters went with the Republican candidate. He seemed the more likeable of the two, is the one we’re seeing this morning.

Maybe so. Or maybe there are a lot of voters who would like to smack down Obama himself…but had Coakley at hand. Who knows? If we could look into the minds of Yankee voters it would probably make us ill. Year after year they sent Kennedy back to Washington. And now they’ve sent an exhibitionist to the Capitol. Clearly there is something wrong with them.

Scott Brown posed naked for Cosmopolitan magazine. His daughter was a finalist on American Idol. Maybe his wife would like to make a public spectacle of herself, too.

But the papers are concerned with Obama’s health plan. Now, he’ll have a harder time getting it passed, they say. Lucky fellow. This puts him in a much better position. The last thing he should want is for that health care plan to go through. As near as we can tell – we haven’t read it…but who has? – it is an abomination of boondoggles, corruption and poppycock.

Obama promised the nation a health care overhaul. Now, he doesn’t have to deliver one.


Bill Bonner
for Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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There’s an old but very successful trick used frequently in the health sector by governments: For example, say the waiting time in an emergency department in NSW is 5 hours, and the waiting time for a nursing home bed is 5 months – protesters in the street come before the health minister’s offices with placards, etc. The health minister knows his budget is broken from the outset, but nonetheless he “creates” 100 new nursing positions (better make it a bit more random, like 93 .. otherwise people might get suspicious), and 30 or 40 more doctor positions, etc. Thing is,… Read more »
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