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China, The World's Banker

Dec. 10, 2020 5:27 PM ET14 Comments
John M. Mason profile picture
John M. Mason


  • if the United States does not get its act in order, it is in danger of allowing China to become the world's banker, something Chinese leaders would be happy with.
  • Investors are seeing that the banking and investment banking activities taking place in China are outperforming many other areas in the world and China's leaders want more.
  • Unfortunately, economic policies over the years have weakened the country and then the Covid-19 pandemic jolted American institutions and markets leaving a disrupted economy behind.
  • The future is still in the hands of the U. S. government, but unless it re-focuses and takes a longer-run focus on things, a very patient China may continue to erode it's position.

Funny how taking on more and more debt eventually catches up with you?

You start out with only small amounts of debt and it really helps you get what you want. Then, upon seeing this, you think that adding a little more debt will not hurt… in fact, it may actually make you better off.

And, then you add more debt…and more debt…and more debt…and, things get tough but you feel you can manage the tighter times. But, then, you add more debt… and even more debt.

When does this end?

Well, there is no exact timing as to when the ‘house of cards” might come crumbling down.

It might be a loss of a job. It might be an illness. It might be some bad luck. It might be a pandemic.

The United States has piled up debt for sixty years. Most of the years have been very good years, as the U. S. government adopted a policy of “credit inflation” in an effort to maintain high rates of employment, not just through cyclical swings, but also over time.

Debt piled up, privately as well as publically. And, although some complained about the rising debt load, the general policy of “credit inflation” continued and the debt continued to pile up.

The big change in the economy was that more and more of the money created during this time was directed into the financial circuit and less and less money was directed into physical capital investment.

During the economic recovery following the Great Recession, the U. S. economy grew at an annual compound rate of 2.2 percent, the lowest for a period of economic expansion since World War II. Yet, during this time housing prices rose dramatically and the U. S. stock market hit new historical highs, year after year after year. Asset price bubbles occurred frequently.

This article was written by

John M. Mason profile picture
John M. Mason writes on current monetary and financial events. He is the founder and CEO of New Finance, LLC. Dr. Mason has been President and CEO of two publicly traded financial institutions and the executive vice president and CFO of a third. He has also served as a special assistant to the secretary of the Department of Housing and Urban Development in Washington, D. C. and as a senior economist within the Federal Reserve System. He formerly was on the faculty of the Finance Department, Wharton School, the University of Pennsylvania and was a professor at Penn State University and taught in both the Management Division and the Engineering Division. Dr. Mason has served on the boards of venture capital funds and other private equity funds. He has worked with young entrepreneurs, especially within the urban environment, starting or running companies primarily connected with Information Technology.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (14)

@John M. Mason

I read the rest of the Ruchir Sharma article the author linked above. It says foreign ownership of US debt went from 50% of outstanding debt to 67% this year. He says an IMF study identified 50% as the point at which crises start.

This can only result in either higher Treasury rates as foreigners exit Treasuries, or several more trillions of dollars of money-printing by the Fed to hold down Treasury yields.

Have to agree with the author that the denouement will come from the currency markets as the Fed prints several more trillion and the dollar keeps going down. The Fed's "deputy director for financial stability" has called for another $3 trillion of QE.

Meanwhile the yuan is strongest in 27 years as China's economy booms, exports and trade surpluses keep reaching new records every month.
@John M. Mason

China doesn't deceive its own people unlike Western central bankers/politicians:


The unrelenting pace of inflows heading for China’s bonds and stocks has one yuan bull predicting the currency could strengthen to a level not seen in nearly three decades.

The yuan has been on a tear since late May,.... Overseas funds have increased their holdings of onshore bonds and stocks by more than 30% this year to records,
David/David profile picture
In 1930, the Fed and the Bank of England undertook a collaboration to return the UK to the gold standard. The thinking was that absent doing so would condemn the UK to second class citizenship in the world economy. The elite of both countries were convinced of it (much as the leaders of the US were convinced that the solution to the crash and economic decline of 1929-30 was tariffs and tight money, turning a moderate recession into the Great Depression and leading to WW2 and all that went with it). In the process, they managed to consume sufficient wealth from the UK that its second class citizenship was guaranteed. It has never recovered.

Conventional wisdom suggests that Germany should never have recovered from the war with the speed that it did. Maybe conventional teachings aren't always correct?
Jim Rogers in last week's Barrons interview on what happened to the UK:


"A year ago at this time, America was the largest debtor nation in the history of the world. That debt is now up by trillions of dollars—that’s trillions with a T...

That’s what happened to the U.K. The U.K. was the richest, most powerful nation in the world in the 1920s, and then took the path of “it doesn’t matter, we’ll spend all we want.” Fifty years later, the IMF had to fly into Heathrow and bail them out. They were bankrupt. So, I am afraid of what I see."
Algorithmic profile picture
@John M. Mason IMHO when you look around the world, you have to ask yourself, maybe the world will be better off with China. In case you havn't noticed, the world is looking pretty grim.

The only looser in that scenario, may be....
@John M. Mason

It occurred to me the three types of institutions whose wealth the Fed transferred towards the Federal Government's borrowing power, have no interest in announcing their misfortune:

1. Banks: a bank run can become self-fulfilling if you reveal that the record low net interest margin and record forbearances will bankrupt you.

2. Insurance companies: if you announce the yield you are earning on your float won't be enough for future liabilities, you will lose customers and counterparties right away.

3. Pension funds: since the managers of state pension funds are chosen by politicians, they have no interest in announcing that the state is in trouble (until after the next election).

The Federal Reserve cannot create wealth, all it can do is transfer it across institutions and across time.

The Federal Government has been able to pay interest on $27 trillion of debt, precisely because the wealth of bank depositors, insurance companies and pension funds (and their taxpayers) are being raided by the Federal Reserve silently but steadily for 12 years.
cgougeon profile picture
Wow, interesting summary, @greedyfellow. Well put.
Our status in the world will continue to erode as long as we continue running current account deficits. The Chinese understand, all they have to do is stay on coarse while our friendly bankers sell out the future prosperity of Americans.
The trust has been lost. We promised the world to unwind the QE we implemented during the financial crisis, which the Fed started doing so and actually unwound about $400B. Then came a new president, and all of a sudden the Fed balance sheet ballooned. Now the financial crisis looks like nothing.

We badly need to rebuild the trust. Unfortunately, it's so much easier to destroy things than building things.
Same thing people said when Obama sent the debt through the roof. Don't forget, congress played its role in both cases. There is a lot of blame to go around, but there are good counter-arguments that both presidents had to do what they did. If you condemn one, you must condemn the other.
cgougeon profile picture
Yep, seems to be the one thing both parties agree on. More QE, don't worry about the balance sheet. There will be no consequences.
The budget deficit for the first two months of fiscal 2021: $429.3 billion ($886.5 minus $457.2). "Defense" spending at $128 billion ($2.1 billion per day) consumed twenty-eight cents of each dollar in tax revenues. Ponder that. The military junta remains firmly in control, everything else is just pretense. China wins without even trying.
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