Bill Bonner

Man’s hope!

Yes, it’s the ‘miracle economy.’ China, that is. Many analysts think it has ‘decoupled’ from the rest of the world economy. While the rest of the world sinks into the ‘worst recession since the ’30s,’ it is said to be growing at 8% per year.

Go figure.

Well…when we go figure we figure there’s something fishy about it. In fact, we figure it’s a fraud.

In America, the bear market bounce took a little jig downwards yesterday. Stocks – measured by the Dow – fell 96 points. Oil fell below $70. The dollar and gold remained almost unchanged.

But China’s revved up so hot she seems likely to throw a rod. We’ve been telling our Dear Readers to stand clear.

At least, that’s the case with the Chinese stock market. It’s a bubble. And it’s getting ready to pop.

As for the economy…we figure it’s a fraud…

Chinese officials have a funny way of counting. When products are shipped from the factory, for example, they are counted as ‘sales’ even though no one may actually buy them.

There are some other ways of keeping score that tend to tilt the game in China’s favor – at least, on paper. When you add up all the scores – it shows China a big winner. But by the end of the day, it isn’t at all clear that China’s economy is growing at such a breakneck speed. In fact, it isn’t clear that China is really growing at all – not in a genuine and helpful way.

And here…perhaps we should pause. We are about to tell you that China is a scam. It’s not really becoming more prosperous. But before we do, we have to explain what prosperity really is.

Do you remember the Bubble Years? Of course you do. They just ended scarcely 24 months ago. Well, during those years we were told that we were getting richer. Two forms of evidence were presented – one statistical…the other observational. The numbers told us that GDP was growing. Since economists figure GDP growth is the same as prosperity…they thought Americans were getting richer.

There was also the evidence available to anyone with eyes. You could look at any driveway; there you would find two or three cars – new cars…big cars. And behind them was a brand new McMansion…Bubble Era vintage…

Yet, both forms of evidence were misleading. Americans were spending. The spending showed up as GDP growth. The faster they spent, the more new cars and new houses they had too.

But they were not creating wealth…they were consuming it. They were spending money they hadn’t even earned yet. In other words, they were not only consuming their current wealth, they were consuming wealth that didn’t even exist yet – it was tomorrow’s wealth. You couldn’t see this happening by looking at the GDP numbers; instead you had to look at balance sheets. And even then, you needed to look at them with a suspicious eye. On the one side, debt was clearly swelling up; it doubled during the 2001-2007 period. On the other, assets were swelling up too. But the assets were of the overpriced, Bubble Era variety…houses and stocks that were subject to easy correction. And when the correction came, assets declined…and debt grew heavier and heavier. Now, Americans have twice as much debt…and their assets are back to where they were 10 years before. Net result: impoverishment, not wealth.

Consuming wealth is not the way to get rich. It’s the way to get poor. But it would take someone without a PhD in economics to see such a simple and obvious truth. Given a fellow a computer and an advanced degree in economics and he’s ready to believe anything…

Yes, dear reader, in His majestic wisdom, God – or whatever wiseacre created this system – set up something so subtle and complex that it is beyond the reach of human tinkering. That’s why the meddlers always make things worse. That’s how they put the ‘great’ into the depression of the ’30s – by interfering with the markets’ natural corrective mechanisms. And now these simpletons think they can stop the correction underway since ’07 – with stimulus, bailouts, and boondoggles. Yes, they admit, it was excess credit that put American consumers into such a jamb. But, heck, now we’ll let the government do the borrowing. The government will make up for the demand that has been removed from the private sector. The private sector is paying down debt at roughly $1 trillion per year. And now the public sector is adding debt at roughly $1 trillion per year. That ought to do it, right?

Ha…ha…yes…why not? And while we’re at it, let’s round off pi to a whole number so it will be easier for school kids to remember.

But wait a minute…we’re talking about China, not the United States. And we’re talking about Chinese meddlers, not the American variety. And we’re talking about the Chinese depression…not the depression in the advanced economies.

But wait…you’re probably wondering… ‘What Chinese depression? China is booming…isn’t it?’

Well, here’s a question for you: if China were really growing at 8% per year, how come its electricity consumption is going down?

Answer: Because the Chinese bureaucrats can jiggle and jive the numbers for employment, GDP, and inflation. But the number of kilowatt-hours consumed in China is just a number. It is not computed. It is not seasonally adjusted. It is not tortured by statisticians nor tormented by economists. It is just a number. And that number is a smaller number than it used to be.

Oh, and here’s another number. China’s exports for July were down 22% from the year before. Here’s another question: how can an export led economy grow when its exports are collapsing?

Again, we have an answer: when it is not really growing.

According to the meddlers, China is growing because meddling works. China is spending $586 billion (proportionally nearly 3 times as much as the US) to keep its economy booming. The program must be working, say the economists, because China’s economy is still growing.

But is it? Most of the money is spent on infrastructure. The Chinese are doing what the Japanese did before them. Japan bailed out its banks and spent trillions on infrastructure. There were years when little Japan was pouring much more cement than the entire USA. – channeling rivers, building bridges to nowhere, and creating highways for no one. What did they get for their money? Well, you could say they got a lot of infrastructure…and the most cemented–up country on the planet. Is that a good thing? We don’t know. But one thing they didn’t get was durable economic growth.

Why not? The easy answer is because an economic system is too sophisticated to yield to these ham fisted interveners. Another way to look at it is because the economy had already spent too much…creating too much capacity. Adding infrastructure that could handle more capacity was not a solution.

“Keep in mind,” says The Richebächer Letter’s Rob Parenteau, “China needs at least 9% growth to soak up the 24 million new Chinese workers who come of age each year – something even the Chinese Premier doesn’t like to mention.”

But heck…it’s summer. And in the sum…sum…summertime, we’re not going to criticize our fellow man. Instead, we’re just going to laugh at him.

In China, for example, the government’s stimulatory programs are having the same flaccid results they got in Japan. Prices are going down. The Chinese feds are trying to get people to spend more money – just as they did in Japan. But people do not spend more when prices are falling. They wait for a better deal. And as they wait, consumer demand falls…forcing prices down further. Japan has gone through almost two decades of on-again, off-again consumer price deflation. Now it’s China’s turn. Consumer prices in China have been going down for the last six months…and are now reported falling at a 1.8% annual rate.

How could prices be going down in a booming economy? Well, because the economy isn’t booming. Instead, it’s burdened with overcapacity – just like Japan’s. And like Japan’s it is probably doomed to go through a long period of re-adjustment…before a durable recovery can begin.

Until tomorrow,

Bill Bonner
The Daily Reckoning

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success in numerous industries. His unique writing style, philanthropic undertakings and preservationist activities have been recognized by some of America's most respected authorities. With his friend and colleague Addison Wiggin, he co-founded The Daily Reckoning in 1999, and together they co-wrote the New York Times best-selling books Financial Reckoning Day and Empire of Debt. His other works include Mobs, Messiahs and Markets (with Lila Rajiva), Dice Have No Memory, and most recently, Hormegeddon: How Too Much of a Good Thing Leads to Disaster. His most recent project is The Bill Bonner Letter.

  • Peter Rogers

    China makes some very dubious products for the UK market, almost all of them are so poorly made they break within hours of light use, I for one stopped buying this crap around 2 years ago, nothing to do with the credit crunch just a sickening feeling every time I buy a substandard product that has been shipped half way across the world to end up in my local landfill waste site within a few days, rather than participate in this shameful waste I now buy second hand quality products on ebay, it’s actually cheaper than a new china made product and lasts.

  • Amorim

    Hello,

    In a previous post you said:

    “When you borrow money you take something away from the future and bring it into the present. That is not a bad thing…if you are doing it to increase your future output. In that case, you’ll be able to pay back the loan with your extra earnings. But if you borrow from the future only to consume, the future waits for you…”

    OK. I agree. But if you borrow money to increase future output someone has to increase its future consume, otherwise we have an excess of production crisis. Right? How do we find a perfect balance?

  • Kurt

    We are heading towards the greatest depression. NY Times says American Graduates Finding Jobs in China.
    But wait, China is not doing well either.
    This must be feel good time.
    They are spending a lot in stimulating their economy, even though they are spending our dollars before they turn into Weimar currency. Their steel mills and manufacturing plants still humming, bu heck we don’t buy their goods anymore. We are broke. Too bad for China.
    Soon we will bring manufacturing back home, because our wages will compete with Chinese wages. Isn’t that nice.

  • Harry

    So let me get this straight, all economic indicators are pointing undeniably at a recovery in most of the world economies. Yet you still seem to think that China (absurd) and USA (even more absurd) are in a depression. That’s foolish. Hopefully your readers are intelligent enough to realize that they should be investing in a market that is reflecting the realities of recovery and not sitting in a bunker waiting for the world to end.

  • Dean

    Hey, perhaps this is the great depression. After all there was nothing great about the 1930s depression. From what I’ve heard it was pretty damn horrible.

  • Mike 28

    Another interesting piece of data…
    home foreclosures are up 7% from June to July, and… up 32% from the same month last year! Heck, with a “recovery” like that, we don’t need a depression.

    Mike 28

  • Bloomer

    China’s comparable advantage is cheap labour. The American comparable advantage is global military supremacy, innovation and entrepreneurialship. These are all risky attributes, and as we have gambled and spent away our future, China has become the bookie holding our IOU’s.

    With a captived workforce, and the help of American innovation and entrepreneurs, China has become the manufacturing capital of the world. But by not sharing their wealth with their workers, and confronted with falling demand in the western world, the Chinese are losing customers for their manufactored goods. Thus, the world is not flat, it is hollow.

  • Ben

    How do you explain rising industrial commodity prices?

  • JMR bayou bobby

    Ah, you people I swear. According to some, all you need is faith in the official POV.

    Well, BB, you keep pointing your finger at the facts and let those bozos go to the personal hell they are creating.

    One day, and that day may never come….

  • Vishal

    I couldn’t understand the import of a photograph of Varanasi (India) in a note that talks only about China. regards.

  • The Swissy

    I just had the visit from a China Hedge Fund. They compare China to the US in the early 20ies. People full of savings and with a consumer led domestic boom ahead of them and not behind them. It looks like a bubble, is maybe a bubble but risks to pop later than other bubbles.

  • Bors

    Just another topic in the same old rat race.

  • VangelV

    While I am concerned that the bureaucrats are playing games with the numbers that overestimate growth it is important to note that China could use more infrastructure spending to accommodate the rural population that is abandoning farm life in favour of better prospects in towns and cities. While there is too much building activity going on in some areas others are desperate for much greater activity in order to meet growing demand for housing, schools, roads, etc.

    It is also important to note that as older state run companies are shut down there should be a significant improvement in efficiency that should lead to lower demand for some inputs so those that are projecting an acceleration of demand might be disappointed.

    Do I think that there is a Chinese bubble? In some areas like the stock market there is no doubt that there probably is. But while those bubbles should pop it may be that a devaluation of the US currency might make some of those overpriced stocks look quite reasonable compared to alternatives.

  • ngchuanling

    WHAT ABOUT the US mighty fiat ‘worthless’ dollar ponzi back by the military-might and The Arab, “petroldollar”?
    THE US dollar ‘coming home to roost’ or rather ” be roasted”

  • blah

    china elec production rose… check ur facts

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