Red Ponzi Ticking

Submitted by Dr. Paul Craig Roberts – Institute for Public Economy

There is something rotten in the state of Denmark. And we are not talking just about the hapless socialist utopia on the Jutland Peninsula——even if it does strip assets from homeless refugees, charge savers 75 basis points for the deposit privilege and allocate nearly 60% of its GDP to the Welfare State and its untoward ministrations.

In fact, the rot is planetary. There is unaccountable, implausible, whacko-world stuff going on everywhere, but the frightful part is that most of it goes unremarked or is viewed as par for the course by the mainstream narrative.

The topic at hand is the looming implosion of China’s Red Ponzi; and, more specifically, the preposterous Wall Street/Washington assumption that it’s just another really big economy that overdid the “growth” thing and is now looking to Beijing’s firm hand to effect a smooth transition. That is, an orderly migration from a manufacturing, export and fixed investment boom-land to a pleasant new regime of shopping, motoring, and mass consumption.

Would that it could. But China is not a $10 trillion growth miracle with transition challenges; it is a quasi-totalitarian nation gone mad digging, building, borrowing, spending and speculating in a magnitude that has no historical parallel.

So doing, It has fashioned itself into an incendiary volcano of unpayable debt and wasteful, crazy-ass overinvestment in everything.  It cannot be slowed, stabilized or transitioned by edicts and new plans from the comrades in Beijing. It is the greatest economic trainwreck in human history barreling toward a bridgeless chasm.

And that proposition makes all the difference in the world. If China goes down hard the global economy cannot avoid a thundering financial and macroeconomic dislocation. And not just because China accounts for 17% of the world’s $80 trillion of GDP or that it has been the planet’s growth engine most of this century.

In fact, China is the rotten epicenter of the world’s two decade long plunge into an immense central bank fostered monetary fraud and credit explosion that has deformed and destabilized the very warp and woof of the global economy. But in China the financial madness has gone to a unfathomable extreme because in the early 1990s a desperate oligarchy of despots with machine guns discovered a better means to rule—— the printing press in the basement of the PBOC—-and just in the nick of time (for them).

Print they did. Buying in dollars, euros and other currencies hand-over-fist in order to peg their own money and lubricate Mr. Deng’s export factories, the PBOC expanded its balance sheet from $40 billion to $4 trillion during the course of a mere two decades. There is nothing like that in the history of central banking—–nor even in economists’ most febrile imagings about its possibilities.

China Foreign Exchange Reserves

The PBOC’s red hot printing press, in turn, emitted high-powered credit fuel. In the mid-1990s China had about $500 billion of public and private credit outstanding—hardly 1.0X its rickety GDP. Today that number is $30 trillion or even more.

Yet nothing in this economic world, or the next, can grow at 60X in only 20 years and live to tell about it. Most especially, not in a system built on a tissue of top-down edicts, illusions, lies and impossibilities, and which sports not even a semblance of financial discipline, political accountability or free public speech.

To wit, China is a witches brew of Keynes and Lenin. It’s the financial tempest which will slam the world’s great bloated edifice of central bank fostered faux prosperity.

So the right approach to the horrible danger at hand is not to dissect the pronouncements of Beijing in the manner of the old Kremlinologists. The occupants of the latter were destined to fail in the long run, but they at least knew what they were doing tactically in the here and now.

By contrast, and not to mix a metaphor, the Red Suzerains of Beijing have built a Potemkin Village. But they actually believe its real because they do not have even a passing acquaintanceship with the requisites and routines of a real capitalist economy.

Ever since the aging oligarch(s) who run China were delivered from Mao’s hideous dystopia by Mr. Deng’s chance discovery of printing press prosperity, they have lived in an ever expanding bubble that is so economically unreal that it would make the Truman Show envious. Any rulers with even a modicum of economic literacy would have recognized long ago that the Chinese economy is booby-trapped everywhere with waste, excess and unsustainability.

Here is but one example. Somewhere near Shanghai some credit-crazed developers built a replica of the Pentagon on 100 acres of land. This was not intended as a build-to-lease deal with the  PLA (People’s Liberation Army); its a shopping mall that apparently has no tenants and no customers!

One of the more accurate things I have ever said is that the USA’s Pentagon was built on a swampland of waste. That is, I do take my anti-statist viewpoint seriously and therefore firmly believe that the Warfare State is every bit as prone to mission creep and the prodigious waste of societal resources as is the Welfare State and the bailout breeding backrooms of Washington.

But our Pentagon at least has a public purpose and would return some benefit to society were its mission shrunk to honestly defending the homeland. By contrast, China’s Pentagon gives waste an altogether new definition.

Projects like the above—–and China is crawling with them—–are a screaming marker of an economic doomsday machine. They bespoke an inherently unsustainable and unstable simulacrum of capitalism where the purpose of credit is to fund state mandated GDP quota’s, not finance efficient investments with calculable returns.

Accordingly, the forms of capitalism are belied by the substance of statist control and central planning. That means there is no legitimate banking system in China—just giant state bureaus which are effectively run by party operatives.

Their modus operandi amounts to parceling out quotas for national GDP and credit growth from the top, and then water-falling them down a vast chain of command to the counties, townships and villages below. There have never been any legitimate financial prices in China—all interest rates and FX rates have been pegged and regulated to the decimal point; nor has there ever been any honest financial accounting either—-loans have been perpetual options to extend and pretend.

And, needless to say, there is no system of financial discipline based on contract law, either. China’s GDP has grown by $10 trillion dollars during this century alone—that is, there has been a boom across the land that makes the California gold rush appear pastoral by comparison.  Yet in all that frenzied prospecting there have been almost no mistakes, busted camps, empty pans or even personal bankruptcies.  When something has occasionally gone wrong with an “investment” the prospectors have gathered in noisy crowds on the streets and pounded their pans for relief—-a courtesy that the regime has invariably granted.

Indeed, the Red Ponzi makes Wall Street look like an ethical improvement society. Developers there built an entire $50 billion replica of Manhattan Island near the port city of Tianjin—– complete with its own Rockefeller Center and Twin Towers—– but have neglected to tell investors that no one lives there. Not even bankers!

 

Stated differently, even at the peak of recent financial bubbles in London, NYC, Miami or Houston  they did not build such monuments to sheer economic waste and capital destruction. But just consider the case of China’s mammoth steel industry.

It grew from about 70 million tons of capacity in the early 1990s to just shy of 1.2 billion tons or 60% of the world’s entire capacity at present. Needless to say, it’s a sheer impossibility to expand efficiently the heaviest of heavy industries by 17X in a quarter century.

The fact is, China will be lucky to have 500 million tons of true flow-through demand or just 40% of its massive investment. That’s why on Sunday the Beijing State Council made a rather remarkable announcement. To wit, it will close 100 million to 150 million tons of steel-making capacity. That would mean cutting capacity by an amount similar to the total annual steel output of Japan, the world’s No. 2 steel maker, and nearly double that of the US.