China: Heading for a Great Depression?
“Capitalism was driven by investment, savings, capital accumulation, reinvestment and capital accumulation… But history got in the way…”
In yesterday’s reckoning, economist and author Richard Duncan explained “creditism.” And how it came to replace good old-fashioned capitalism, now dead beyond recall.
World War I forced warring nations off the classical gold standard. The Great Depression and World War II put the final stakes through capitalism. Government spending, based on the expansion of credit-backed money, was the new order of the day.
Thus, creditism was born.
Creditism scotched the Nazis. It buried the Soviet Union. It also sparked one of the great economic booms in history as it ushered in a new era of globalization. Thus, an economic backwater like China could develop into the world’s second-largest economy.
But the laws of economics will not be forever conned. Trees don’t grow to the sky. Imbalances must be righted. Debts must be paid….
Creditism has produced booms and busts and the devil and all the other disorders to which a credit-based monetary system is prone.
“Once the Bretton Woods system broke down, the old rules went out the window,” notes Richard. “The world sent America goods, but the world didn’t get American goods in return. It got paper dollars. Under the dollar standard, central banks accumulated hundreds of billions, ultimately trillions, of U.S. dollars in this way. The huge inflow of dollars also created investment booms in those countries.”
But as sure as night follows day…
For many of these countries, the rapid accumulation of dollar reserves proved to be a curse, rather than a blessing. That sharp growth in reserves created a domestic investment boom, accompanied by rampant asset price inflation that eventually ended in financial disaster. The bubble economy that developed in Japan during the ’80s is a perfect illustration, as is the Asian Miracle bubble that followed in the ’90s.
Or China today. Global recession looms once again, and the world’s central banks are running out of tools. The Chinese export-based economic model that creditism birthed is crumbling. And it could drag the rest of the world down with it.
P.S. The Federal Reserve might reduce rates again or launch another round of QE to stimulate the failing economy. And gold should soar on the weaker dollar. That’s why we’ve produced a FREE special report called The 5 Best Ways to Own Gold. We’ll send it to you when you sign up for the free daily email edition of The Daily Reckoning. We break down the complex worlds of finance, politics and culture to bring you cutting-edge analysis of the day’s most important events. Click here now to sign up for FREE and claim your special report.