The Bubble Deniers Deny that Their Own Stimulus Caused it

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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.

Regards,

Bill Bonner
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Bill Bonner

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Comments

  1. What self serving rot!
    Firstly, the premise of the article is a strawman. Free marketeers have had the upper hand in central banks, finance ministries and universities for at least 20 years now (30 or more in most western nations.)
    Secondly, the root cause of the GFC – CDO’s, and the debt they enabled – were not engineered in the “defensive redoubts” of socialist planners, but in the bastions of free market capitalism – investment banks and insurance companies!

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  2. Well Mr. Bill may be an apologist for Adam Smith and the Oil Imperialists, but at least he’s got Von Miser’s CRACK UP BOOM explanation correct. And he is correct about that. And there isn’t going to be any recovery until the debris and excesses of the Finance Capitalist’s decades long orgy of easy money delusions has been painfully swept away. Recovery in 2010 ? What a crock.

    As too the inscrutable Chinese, who knows ? At least they have running factories and not a lot of bankrupt bankers thinking their entitled to mega million dollar bonuses. The Freakin’ Red Commies are now the #1 Industrial Society, ever, on this planet. And the “Best and Freest” country is now the BIGGEST DEADBEATS.

    As to the near future, the hell with stocks, especially if it’s just another speculative bubble with more easy money. It smells so damn rotten. The biggest mistake anybody can make is believing: “things will return to normal”.

    I don’t know, I’m old; I don’t give a rat’s ass, plus I like rice. And I’m enjoying my permanent staycation getting things done and starting work on projects I only dreamed of.

    thethrillisgone
    July 21, 2009
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  3. CDO’s weren’t the root cause of the GFC. The cause of the GFC was rapid debt expansion via bubbling asset prices (homes). And the root cause of the debt expansion/asset bubble was low interest rates and loose lending policy. The problem was created by throwing fuel on a fire and we are still doing it to keep it burning. But we nearly out of fuel.

    Also I don’t blame free market capitalism, the way I see things it is the interference in the market that creates the issue rather than letting free markets sort themselves out. Agressive easing fiscal policy artificially affects the market, the fallout from the tech stock collapse should have been allowed to play out rather than making another bubble on its back to stop the fallout from the bursting of the first bubble. Debt is not our friend or our saviour, it is our enemy. If the debt binge was like a drinking binge, it appears we are trying to drink our way out of a hangover.

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  4. I travel with Derek and thethrillisgone. Bill’s comment on the Yuan ignores the fact that the suppression of the Yuan was achieved using an effective defensive measure to restrain Chinese domestic inflation. Without that measure China’s very real concern with internal stability would have been realised. From 1977 to now is an impressive run of primarily domestic reforms from the Chinese that translates directly into productivity gains and so far (so good for Australia) they don’t look like turning their backs on Westphalian values.
    That doesn’t mean I disagree with Bill’s take on the challenges that they face dealing with bubble collapse versions one and two and likely three.

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  5. dear mutt, er matt. your woeful understanding of ‘free markets’ that seemed to have ruled the roost underscores the brainwashing the dumb media and tv economists have achieved.if you think g’span was a free marketer or bernanke is the godsend of laissez faire types, shame on you.you might as well believe bush genuinely belived in them wmds

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  6. Derek: “CDO’s weren’t the root cause of the GFC”

    Surely that is a circular argument? Easy credit was certainly the spark that lit the fire but easy credit in itself would have been basically self regulating in a relatively short period.

    All credit – easy or otherwise – depends upon the actual availability of money to lend as credit. Any period of easy credit will lead to booms, bubbles, busts and tears before bedtime but we have had these in the past and they are well within the natural order of things financial.

    No, what set this time apart is those wonderful inventions- CDO’s, SIV’s, and all the alphabet soup of financial instruments which the money institutions invented, corruptly supported by the rating agencies, in order to create apparently limitless leveraging to the balance sheets and a bottomless pit of money to supply the credit.

    This was counterfeiting “money” on an enormous scale – enough to threaten the integrity of society – and I am only surprised that those who did it have never been charged with treason as enemies of the state.

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  7. One thing we aren’t hearing much of yet, which probably has to be expected eventually, is legislative changes aimed at preventing the future formation of credit driven bubbles. Allowing the creative destruction side of capitalism to fix problems has been declared an unacceptable alternative. And it just mightn’t be realistic to expect that tax payers can be stiffed for multiple trillions of dollars every few years to stabilise the world’s financial systems.

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  8. Ned S – yes taxpayers will be footing the bill for this mess via a tax you have without calling it a tax: the Emissions Trading Scheme ;)

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  9. I have a feeling that the clawing back of dollars from the public will be slightly more incidious. Along with the Emissions Trading Scheme, you will likely see a big cut back on the PBS, increases on “fees”, new charges cloaked in subtefuge (like the proposed $30 charge on televisions to help with the recycling of them). The Tax review will be very interesting.

    On a state level I saw a curious inclusion on my rego. A $23 fee for traffic improvement. I rang up transport and they said it was for traffic lights!!!!!! you gotta laugh

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