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Mandarin Monday Meltdown – Ancient Chinese Secret is DEFICITS!

 

In a gadda da vida, honey
Don’t you know that I’m lovin’ you
In a gadda da vida, baby
Don’t you know that I’ll always be true

Oh, won’t you come with me
And take my hand
Oh, won’t you come with me
And walk this land
Please take my hand

That’s all the lyrics there are in the 17 minute and 10 second song "In-A-Gadda-Da-Vida" by Iron Butterfly yet it sold 4M copies (the most ever for Atlantic Records at the time) and was on the charts, with a hit run for 140 weeks.  43 years later, it’s "Iron Who?" and I challenge anyone reading this to name another song of theirs.  Market rallies are kind of like that – once they get going, you often forget how they started and, after they end, you can only wonder what kind of drugs people were on when they were buying…  

We have talked for years about the myth of China’s "infinite expansion" that has been driving the global economy, particularly the commodity bubble.  We’ve talked about the empty cities and shopping malls, the unused rail lines and airports, the bridges to nowhere, etc. that dot the Chinese landscape because it’s easy to grow a $5Tn economy 10% a year if the Government spends $500Bn a year building things that no one needs.  China’s "boom" began with their preparations with the 2008 Olympics, for which they spent over $400Bn on infrastructure projects in preparation.  China was "booming" and China became as addicted to infrastructure spending as the US ever was to oil.  And who was pushing behind the scenes to encourage this madness – why GE, of course – China’s pump-masters on CNBC!  

Recently, local government debt has become a concern in China and, as recently as June,Standard Chartered had warned that debt would hit $2Tn Yuan ($308Bn) by 2012, which was likely to trigger a debt crisis in China.  The report, authored by Fraser Howie, also the co-writer of a book entitled ‘Red Capitalism,’ which portrays a gloomy picture of China’s ‘fragile‘ financial system, said that banks could resort to fraud and false reporting on their balance sheets to cover up any losses arising out of lending to local governments.  As a last resort, they might even be forced to seek capital injections, it…
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