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Letters by a modern St. Ferdinand III about cults

Gab@StFerdinandIII -

Plenty of cults exist - every cult has its 'religious dogma', its idols, its 'prophets', its 'science', its 'proof' and its intolerant liturgy of demands.  Cults everywhere:  Corona, 'The Science' or Scientism, Islam, the State, the cult of Gender Fascism, Marxism, Darwin and Evolution, Globaloneywarming, Changing Climate, Abortion...

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Thursday, December 2, 2010

The China Mirage

Like the Euro, at some point it comes crashing down.

by StFerdIII

I have never bought into the China-is-the-next-great-superpower theory. It is a myth. I don't believe Chinese 'GDP' numbers, with GDP being as everyone knows a spending algorithm controlled by government and its economic soothsayers and prophets. Yes China might be economically stronger than it was 30 years ago, but it is still a largely poor, agrarian and regionally disparate empire. A signal fact about Chinese history is that circa every 150 years it devolves into civil war and violence. There is no good reason why this pattern won't repeat itself.

The obvious issue with China is that statism always fails, and a centralized, repressive Communism, which denies any of the factors which can create an open, free and thriving society, must at some point fail. This failure is acclerated in my opinion, by selectively opening up markets, capital and trade flows, whilst simulateneously and illogically imposing capital controls, currency devaluation, and negative interest rates.

Bloomberg long a proponent that China will take over the world, is moderating its position. In an expose of why China will collapse the obvious bubble-nature of the Chinese economy was highlighted. First is the misallocation of wealth by the state – something to be expected in a Communist system. The second objection to China is the improbability of maintaining recent economic growth especially as obvious bubble markets in real estate collapse.

China is in the midst of "the greatest bubble in history," said James Rickards, former general counsel of hedge fund Long-Term Capital Management LP.
The Chinese central bank's balance sheet resembles that of a hedge fund buying dollars and short-selling the yuan, said Rickards, now the senior managing director for market intelligence at McLean, Virginia-based consulting firm Omnis Inc.
As I see it, it is the greatest bubble in history with the most massive misallocation of wealth," Rickards said at the Asset Allocation Summit Asia 2010 organized by Terrapinn Pte in Hong Kong yesterday. China "is a bubble waiting to burst."
Rickards joins hedge fund manager Jim Chanos, Gloom, Boom & Doom publisher Marc Faber and Harvard University professor Kenneth Rogoff in warning of a potential crash in China's economy. The government has raised banks' reserve requirements twice this year after economic growth accelerated and property prices rallied.
China has pegged the yuan to the dollar since July 2008 to help exporters weather the global recession.
The central bank buys dollars and sells its own currency to prevent the yuan strengthening, driving foreign-exchange reserves to a world- record $2.4 trillion as of December.
....Rickards said leveraged speculation in the stock market, wasteful allocation of resources by state-owned enterprises, off-balance-sheet debt through regional governments and the country's human rights record are concerns.

"Take Russia and China together, neither of them is really deserving any investment" except for short-term speculation, Rickards said. India and Brazil are two of the "real economies" among the developing countries, he said.

Many disagree with the above of course. Anti-Western bias usually finds an outlet in the 'Great Society' theory of the new and invincible China with some Sinophiles like Thomas Friedman at the New York Times advocating bengin dictatorship as the best model of political-economic progress [I guess he missed most of the 20th century]. These stalwarts view China's reasonably massive economic growth in the past 15 years as 'normal' and whose bubble effects can be 'managed'. This is highly unlikely. Wisdom usually arrives post mortem when events seem obvious in hindsight. China is composed of two economies and 5 or more regional societies. The political-economic tensions generated by the growth of the periphery must cause dislocations in the core. Not only is China facing a future crisis as economic growth either slows or implodes in a bubble due to state mismanagement and massive debt and destruction of capital, it will also face a far worse crisis socially and civilly.

Writing this 3 years ago, little seems to have changed in the near to longer term diagnosis of China's mirage:

Asset inflation is clearly a government phenomenon. China is holding down interest rates and its currency, in the hope of stimulating jobs, and capital-income liquidity. At some point however, the capital control regime, and the gross manipulation of stock markets and state owned firms by the Chinese state, will result in such a market dislocation, that the entire stock market in China will simply fall apart. It is inevitable.

The repercussions will be large. China is regarded by most multi-nationals as a key part of their current and future earnings strategy. When and if the Shanghai market blows up, the Chinese economy will contract, liquidity will dry up, and the currency will have to revalue. In order to stabilise the currency the government will raise interest rates and liberate some capital controls. Inflation will pick up strength and economic growth will start to cool off.

As China's assset bubble blows up, other international exchanges will contract. US and European exchange appreciation has been largely based on the 'global growth' story, and in particular the China syndrome. When China's asset bubble pops, and deflation follows, then the global growth story becomes less compelling, and stock prices and indices in the US and Europe will drop.

When will the asset inflation manifest itself and when will the illogic of capital controls and state directed financing finally present itself in economic and social discord ? No one knows. But like all things which are too good to be true, the Chinese economic miracle at some point must come to a clattering halt. One fact in history is apparent. Statism always fails. Just ask the Europeans and their beloved Euro. Ten years ago at Lisbon 2000 the Europeans were chattering about dominating the world economy. Now they are fretfully wringing their hands about the ability of their concocted and irrational currency area to even survive. China will experience the same.


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