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| Rumours surfaced last week that the Chinese authorities would impose a "lending curfew." Yesterday, rumours become fact. "Banks have suspended new lending since 19 January across the country," reports Yuen Tuck Siew, an analyst with Credit Suisse. "The suspension in lending was imposed by the authorities after an emergency meeting by the central bank's monetary policy bureau. "This sudden suspension in lending has caught importers by surprise," Siew continues. "Letters of credit (LoC) suddenly became unavailable, despite previous agreements. We believe that this will inevitably lead to delays or cancellations in China's imports. Import orders for commodities and machineries could be affected most." If this curfew continues, many sectors of the global economy could feel the effects. This realization seems to be troubling global equity markets. All of the world's major equity markets have slipped into the red for 2010. Your California editor has no idea if Chinese lenders should be withdrawing credit or extending it. But he has observed that Chinese lending volumes have inflated well beyond what underlying economic conditions would justify. And when credit inflates, bubbles form...then burst. The renowned short-seller, Jim Chanos, has been highlighting the credit excesses in China for months...and worrying publicly that these excesses will end badly. Chanos calls the credit-fuelled real estate bubble in China "unprecedented." And in a recent CNBC interview, he remarked, "One fun fact I'd like to mention: Right now, for commercial real estate, there's 30 billion square feet under construction. Not all of that will probably get finished...but to put 30 billion square feet in context, that would be a 5 foot-by-5 foot office cubicle for every man, woman and child in China." Excesses of this magnitude rarely correct themselves painlessly...which causes us to wonder: If China sneezes, what disease will the global economy contract? Just a head cold? Or tuberculosis? |
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And now over to Bill Bonner, who has today's reckoning from Paris, France... Good news and bad news. But which is which? The situation is so confused, we can't tell. The good news is that housing prices are going down. That's what The Wall Street Journal says. "Home prices declined in November." Good. People will be able to find more affordable housing. Wait. That's not good news, is it? Doesn't that mean we're still in a depression? Besides, another report says housing is going up. What to believe? Let's try something else... Consumer confidence rose in the latest reporting period. No argument there... Now, that's definitely good news, right? Nope. The better things get the more likely the feds are to clamp down on the recovery by "exiting" their stimulus efforts and reducing the deficit. That's part of the reason stocks often decline when the news is "good" and go up when it is "bad." Investors are afraid the feds will take away the juice. That would risk a return of the "error of '37,"...say economists such as Paul Krugman and Richard Koo. Ignoring the calendar a bit...it would turn our president into "Herbert Hoover" Obama, as one commentator suggested. What happened in the '30s? Well, in the approved storyline, the feds had their stimulus foot to the floorboards...and they were happily driving right out of the depression. But fearing inflation...deficits...and a backlash against excessive spending (and believing that they were clear of the bad neighborhood) - they slowed down...they eased off their stimulus efforts in the mid-'30s. This sent the economy into another downturn and stretched the depression out for another 3 years. It's nonsense. What really caused the relapse of '37 was the feds' own meddling. But that's not the way mainstream economists and analysts look at it. In their cockamamie view, an economy grows thanks to the good stewardship of publicly elected officials. In their view, government spending is actually BETTER than private spending. Why? Because it produces nothing of value. Really; we're not making this up. And so what if the government doesn't have any money? To them, money that doesn't exist - created 'out of thin air,' as Keynes put it - is BETTER than real money. Because it creates consumer price inflation. Up is down. Good is bad. Better is worse. In their view, what makes a strong economy is government action. Specifically, government spending. So, anything that might incline the feds to spend less is BAD news. According to the papers, there's some bad news coming. 'Cause Mr. President is going to tell the nation in his State of the Union address that it's time to put on the brakes. If we don't, people will get the impression that government spending is out of control. We can't have that. Because lenders might refuse to lend. Investors might refuse to invest. Voters might refuse to vote for the scalawags now in office. On the other hand, if the Prez really does cut spending, none of the aforementioned are likely to be very happy about it. Federal spending doesn't really make people richer; it makes them poorer. Still, appearances are what really matter. Dim economists want a president who puts into action their loopy theories. And dim voters want a president who takes action to save them from their own mistakes...especially when it means getting their hands on someone else's money. The stimulus offered by government spending is phony. But it appears real to the masses. Take it away and the economic consequences will appear very real too. The 'creative destruction' of the market will finally get to express itself. Businesses that should fail will fail. Speculators who ought to lose money will lose money. There will be blood, in other words. Like most people, we don't mind a little blood...as long as it's not our own. So you can imagine how the parasites will howl when they see the knife draw near to their own arteries! They can relax. The feds are not likely to reduce spending significantly. The deficits are structural...they're built-in to the system...they won't go away. And as the depression lingers, the debt piles up... What will happen? We don't know. We can't look into the future. But we can look at Japan...a country that is at least 10 years ahead of us. Why is Japan ten years ahead? Because its stock market turned down in 1989...a decade ahead of Wall Street. And because its population is about 10 years older. And because it's been fighting the de-leveraging process for 20 years. What can we learn? Here's the latest from the WSJ, warning of an explosion: "S&P lowers Japan's outlook to negative." Uh oh. Not too encouraging. The rating agency told Japan that if it didn't cut its deficits its debts would be downgraded. Ah yes... Thanks to the Japanese, we get to see someone cross the minefield ahead of us. After 20 years, Japan hasn't been able to get clear. But it hasn't blown up completely, either. But watch closely. It's putting its feet down on some dangerous ground. Deficits have grown and grown and grown. Now, it risks an explosion with every step. This year, it will borrow $480 billion. It will receive only $405 billion in tax revenue. As far as we know, no major economy has ever run so far into the red without a blow-up. And what can it do? They are getting the same sort of advice as Obama. They're told they must cut the deficit to protect the currency...the economy...and the credit rating. But they're also told that good is bad, or bad is good...that if they do the right thing - cutting the deficit - the economy will suffer. Tax revenues will fall further...widening the deficit! The Japanese economy has become so dependent on debt-fueled government spending that, take it away and things fall apart. In the long run, that is exactly what should happen. The economy needs a shake-up...so it can rebuild on more solid foundations. But what politician wants to risk his own blood? And more thoughts... Poor Tim Geithner. He's got to appear before Congress and explain how come the US bailed out AIG by paying off its counterparties at par. You'd think everyone involved should have taken a haircut on that deal. But the only ones to get scalped were those who had nothing to do with it - the taxpayers. Why, Tim? Of course, the Secretary of the Treasury will have answers. He's been rehearsing them for weeks. He'll explain that the integrity of the system was at stake...etc...etc... Blah...blah. The real reason was that the authorities have a different agenda. They have no idea how an economy really works. So, they merely react to the incentives laid before them. On the one hand, the taxpayers may be annoyed...but the common man will never really understand what went on. On the other hand, Goldman Sachs pays its top operatives very well...and Tim Geithner is still a young man. He's going to need another job, after his term at the Treasury is up. And the way it's going, his boss may only have three years left...not 7. Goldman had a lot of money at stake in AIG. And why not bail it out? Wouldn't that be good for the economy? Wouldn't it help protect investors' confidence? Wouldn't everyone be better off as a result? Of course they would, Tim. Of course they would... The British economy finally pulled out of the worst recession in 50 years. At least, that's what the government claims and the papers report. GDP growth was positive in the last quarter of 2009. By exactly 0.1%. This was such a poor showing that the pound fell on the news. And given the way governments track GDP it is hardly proof of anything. A number that close to zero is meaningless. It could end up being revised in either direction. The real story in Britain is the same as in the US...only worse. Britain's economy boomed when London's financial industry boomed. If we're right...the financial industry is now in a downturn that will last for decades. Not since the '40s has there been such a decline in consumer and business credit. And when this de-leveraging cycle finally bottoms out, it could be many years in the future. Then, the new center of world finance will probably be in a different city - perhaps in Singapore. |
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