11/22/10 Baltimore, Marlyand – The news last week followed the sun. It began with doubts about Ireland’s solvency…then moved to fears that California would default…and ended on Friday with doubts about China. Word on the street was that the Middle Kingdom wanted to dampen down inflation. They were going to raise rates and tighten credit.
The Chinese blame Ben Bernanke for increasing the supply of dollars and causing inflation in emerging markets and commodities. Bernanke points his finger at the Chinese. Replying to charges of reckless endangerment, “they made me do it,” he says. The Chinese wouldn’t raise the yuan…so he has to lower the dollar.
That’s what’s nice about paper currencies – you can manipulate them. Which is exactly what the US is doing…trying to manipulate its dollar downward…while simultaneously charging China with being a “currency manipulator.”
Which just goes to show how little honor there is among central bankers.
Maybe it was the China story. Maybe not. But for one reason or another there was no bullish follow-through on Friday. The Dow barely ended the day in positive territory. Gold stood stock still.
So, what is going on in China? We decided to get to the bottom of it.
Friday, we had a Chinese businessman in our office. He had come to see us about starting up a venture together in China.
“Nobody…nobody…knows for sure what it going on,” said he. “On the one hand, there are plenty of excesses and bad investments in China. There must be. We’ve been growing so fast. And there must be a lot of bad debt hidden in the banking system, for example.
“But on the other hand, China is booming. There have never, ever been so many people working so hard to make money. It’s a bit like the US probably was a hundred years ago. Only bigger. Faster. And with more government involvement.
“There might be plenty of problems…business failures…bankruptcies…and financial blow-ups. But I doubt that the China story will end any time soon.”
We don’t think the story will end. We think it will become more and more fascinating…and more exciting. You can’t grow at such a breakneck speed without breaking someone’s neck. And any time the government is heavily involved in planning an economy, you can be sure the plans will be bad ones. They will control too much…and then they will lose control.
Our friend Dylan Grice, analyst at Société Générale, has more on this story:
Is it possible they’ve…(sharp intake of breath) already lost control? And if so, who’s to say what will happen if the asset inflation goes into reverse? Maybe when the authorities engineer the slowdown they desire and tell investors it’s safe to buy again, those investors won’t want to buy. In which case a hard landing shouldn’t be beyond the realms of imagination.
Forget US de-leveraging, this represents the largest deflationary risk to the world economy
So long as China’s credit growth continues at its current pace, aided by the liquidity the Fed is flooding world markets with, and encouraged by artificially low interest rates, the primary risk Ems (Emerging Markets) face today remains that of a bubble.
This might sound a very bullish note on which to end. It isn’t. And let me be crystal clear about why: a bubble is not a bullish scenario. It’s not bullish for the EM economies themselves, their citizens or for the world as a whole. The fact is all bubbles end in tears.
Tears. Did you hear that, dear reader? Tears. Let’s be sure they’re not our own.
Bill Bonner
for The Daily Reckoning
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 The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
The Daily Reckoning is your premier source for making sense of the news Washington and Wall Street generate. Each business day, The Daily Reckoning calls on its stable of world-class writers and thinkers to show you how to get ahead.
Start your 100% FREE subscription to The Daily Reckoning today and you’ll get a free research report, “How to Survive the Fall of Social Security.” Simply enter your email address below to get your free report and join over 495,000 worldwide Daily Reckoning subscribers!
We Respect Your Privacy and We will
Never Share or Sell Your Email Address
Didnt the US boom 100 years ago end in a GREAT DEPRESSION? China is bigger, faster you say? Uhuh, this dosen’t sound good.
Post-bubble may always end in tears for some, but for others its the opportunity of a life-time. Ask anyone who bought commercial real estate at 10% on the dollar from the RTC. Or anyone who bought prized art work after that market crashed in 1991. But alas once something is out of the mania phase and has cratered, there isn’t nearly as much satisfaction bragging at cocktail parties about the latest aquistion. The satisfaction comes from within, and at a fraction of the price the maniacs were once paying.