Bubble Deniers, Part II

If you ask a serious economist, “What was the lesson of the Soviet economic experience?” he would have a ready answer:

“It was that distributed information is more reliable than the centralized variety.” In the non-communist world, if a man had money and no bread, he exchanged the former for the latter…and sat down to dinner. As if guided by an ‘invisible hand,’ millions of people did the same thing. Everyone tried to get a bit more grease on his plate, by making his own decisions based on the facts before him. The result: standards of living rose for practically everyone.

In the centrally planned economies, on the other hand, neither the householder nor the baker had a choice. Their tasks were set by apparatchiks who presumed to know exactly how much of society’s resources should be devoted to making bread…and exactly how much each person should eat. But by the ‘80s, it was obvious that central planning had failed. And by 1990, both the Soviets and their neighbors, the Chinese, had abandoned the experiment. Mankind breathed a sigh of relief. It seemed to have made a genuine great leap forward. Finally, it was generally accepted that people should be able to offer up their money as they did their prayers – to whatever god they chose.

The planners had made millions of people miserable over the course of seven decades; remarkably, none were hung from lampposts. Instead, they retreated to the universities, central banks and finance ministries. From these defensive redoubts, they continued their meddling. Soon, they were in the drivers’ seats…and headed for another wall. The crash of ’08 cut world asset values by as much as $50 trillion. But did the planners learn anything?

“This is where I have the greatest problem with US economic policy makers,” writes Marc Faber. “I don’t think they have ever recognized that the excessive, credit-driven expansion of the US economy was unsustainable in the long run and that, sooner or later, the current crisis was inevitable.”

The bubble deniers deny there was a bubble and deny that their own stimulus caused it. They see nothing wrong with what they were doing and no reason to stop doing it. Instead, they add more stimuli…and create new bubbles.

In the gallery of Hell bent deniers, China is a special case. “To get rich is glorious,” announced Deng Xiaoping after coming to power in 1978. The state pulled back its long arm. People were free to run businesses, to pay wages, to keep bank accounts. Today, in many ways, the average Chinese entrepreneur is freer than, say, his counterpart in France or America. He faces fewer obstacles. Factories go up overnight…and he is in business.

So dynamic was the Chinese economy that it responded to America’s centralized monetary policies in record time. Spooked by the recession of 2001-2002, the Americans cut rates and boosted public spending. This brought a bubble in the housing sector…which gave English speaking consumers an appetite. Soon they were gobbling up boatloads of goods made by people who spoke Chinese.

Now, it is indigestion to which the central planners respond. An IMF report gives us a measure of the response. Add up all the loan guarantees, toxic asset purchases and other forms of bicarbonate administered by the G20 nations and they come to about a third of their combined GDPs. Those are just the monetary stimulus programs. The fiscal programs add another 5.5% of GDP.

America’s central bank adds reserves so fast it must be running out of storage space. As for its fiscal policy, this week it has passed the $1 trillion deficit milestone – with almost half the year still ahead.

For their part, the Chinese planners enjoy the liberty of the damned. With no creditor looking over their shoulder, they are free to fight the downturn even more recklessly. “China is back in bubble land,” says the Financial Times. In the first six months of this year, Chinese banks lent more than $1 trillion – or about four times the rate of 2007. They have more money to lend because reserves of foreign currencies are still increasing…and recently passed the $2 trillion mark. The money is coming in from speculators, who have taken stock market trading volumes to three times last year’s levels.

Chinese planners thought they were pretty smart. During the boom years, they fixed the yuan to the dollar and refused to let it rise. This spurred rapid growth in China’s export sector. But like all central economic planning, it backfired. China’s entrepreneurs were misled. They didn’t know their biggest customers were going broke. Now, they have too many factories producing too much stuff for too many people who cannot afford it.

But that is the beauty of being a central planner; you never have to say you’re sorry.

Instead, you double up. The Chinese economy is expanding at nearly 8% this year, according to official estimates. It is expected to generate 74% of the worldwide GDP growth in the 2007-2010 period. As for commodities, were it not for Chinese buying, prices would collapse. Of course, that could be said for a lot of things. Were it not for the Chinese stimulus, the whole world economy would probably be backing up. We’ll find out for sure…when this next bubble blows up.

Enjoy your weekend,

Bill Bonner
The Daily Reckoning

The Daily Reckoning