Dominant Social Theme: China takes over.
Free-Market Analysis: We've written about China's incredible economic progress recently, but this article, excerpted above, provides us an example of how high finance works in a fiat-money economy. There is no doubt that China's 10 and 15 percent growth rates have been generated not by internal entrepreneurship but by money printing of the most stupendous sort. China's economy is still far smaller than, say, America's, but we cannot even fathom how much monetary stimulation it would take to jerk America into a similar economic frenzy.
We also pointed out that every part of the Chinese economy was probably infected by the intense monetary stimulation that has taken place. And since modern China never had any semblance of a free-market economy during the past century, the structure that has grown up around its out-of-control central banking environment is inevitably distorted. Western countries have a long tradition of banking and entrepreneurship and the culture tends to revert to free-market dialogues during periods of intense crisis. But there is no free-market argument to return to in China.
Yes, China has had free-markets in the past, within the context of larger Imperial regimes, But the cultural conversation is not similar to the West's, and the context is not the same either. That leaves only despotism, first, and then central banking. For the past 30 years, Chinese infrastructure and industry has been "juiced" by fiat money. There are probably bubbles throughout the Chinese economy at this point. These may include banking bubbles, housing bubbles, stock bubbles, currency bubbles and others. These bubbles are prolonged and probably will inflate for years to come before the entire economy takes a hit.
But in the meantime, with nowhere else to go, Western hot money will pour into China, aggravating every bubble and pushing the Chinese growth rate even higher. This is the inevitable result that fiat-money has on a country the size of China, especially when it begins with so little and ends with so much. If the pattern holds, as Western money begins to join the paper-printing of the yuan, there will inevitably be an avalanche of articles about the Chinese miracle and how China has changed drastically in the past 50 years. These media stories will be predictable but largely false. Or at least they will miss the point. China has changed, and it's unregulated free-marketplace for entrepreneurs is wonderful to behold. But most of the growth is bubble growth.
China has merely swapped its communist ideology for a central banking-centric one. To get rich is indeed beautiful, but wait until the Chinese economy begins to unwind. There will be executions at levels of society - as that is the modern Chinese way. Corruption will suddenly be discovered under each root and leaf. Greed will be blamed. Getting rich will be anything but glorious. Communism may make a comeback, or at least a highly regulated state (one that will more and more resemble the EU - if the EU still stands). Western systems will come under sustained attack.
China is going down the road that America and Europe chose in the 20th century. As we have pointed out before in this slim volume, a central banking economy is not only distortive, it also brings citizens over time into a most subservient position vis-à-vis the state. That's because central banks create industrial bubbles that tempt citizens to give up self-reliant environments, including farming and trade, to participate in service and financial economies that are first pumped up by central banking and then diminished. The sea sweeps out, leaving the rubble of a millions of lives behind. Government thrives and becomes increasingly authoritarian even as its citizens grow more dependent and hopeless.
Are the hedge funds rushing into current-day China merely being foolish, or are they in some sense cynical. Here at the Bell, we see clearly what's going on in China (as do many of our Zurich-based banker pals), and it's a little difficult to believe that managers charged with oversight of billions do not understand the mechanism of China's success. But perhaps, as with all things, it is a little bit of both. Successful managers certainly do understand business cycles, at least some of them. But even those who see what is occurring are probably motivated more by the need to provide investor returns than the need to be cautious in the face of far-off disaster.
Conclusion: The Chinese industrial miracle could indeed last another decade, but at some point there will be a reckoning. It is just as likely that those placing bets on China today are hoping that they will be able to migrate their investments back to the West before China really unravels. That's certainly a possibility, though one fraught with risk. By the time China goes down it will likely be entirely intertwined with America. But then, there is always Africa.