China Falls into the Same Trap

For a while there was an impression that China had avoided the financial problems that are hitting western countries right now. Not so, says the Telegraph. It seems they were just a couple of years behind, and now they’re catching up.

Consider some of these quotes from the article:

“Officially, inflation was 4.4pc in October, and may reach 5pc in November, but it is to hard find anybody in China who believes it is that low. Vegetables have risen 20pc in a month.”

“Diana Choyleva from Lombard Street Research said the money supply rose at a 40pc rate in 2009 and the first half of 2010 as Beijing stoked an epic credit boom to keep uber-growth alive…”

“The froth is going into property. Experts argue heatedly over whether or not China has managed to outdo America’s subprime bubble, or even match the Tokyo frenzy of late 1980s. The IMF straddles the two.”

“[H]ome prices in Shenzen, Shanghai, Beijing, and Nanjing seem “increasingly disconnected from fundamentals. [House] prices are 22 times disposable income in Beijing, and 18 times in Shenzen, compared to eight in Tokyo. The US bubble peaked at 6.4 and has since dropped 4.7. The price-to-rent ratio in China’s eastern cities has risen by over 200pc since 2004″

This won’t be a surprise for anyone familiar with the mechanisms of fractional reserve banking. As soon as we allow commercial banks to take control of the creation of money, all we have to look forward to is unaffordable housing, significant inflation, excessive debt, and shortly after, a wave of bank collapses, which are in turn followed by taxpayer-funded bailouts, austerity measures, and potentially an IMF bailout of the government. It seems that China is falling into the same trap that has caught the US, UK, Ireland, Spain and many other Western countries.

Let’s be very clear: we must never allow privately-owned, profit-seeking banks to issue the national currency*. The incentives that encourage banks to effectively ‘print’ money are as strong as the incentives that lead Mugabe to cause million-percent inflation.

Of course, some will say that central banks (such as the Bank of England) can restrain how much money high-street banks can create by increasing or reducing the amount of ‘base money’ (the special type of money that banks use to make payments between themselves). That true, but only to the same extent that you can slow down a car on the motorway by tying yourself to it with a tow rope and running along behind it. And as quantitative easing showed, if the central banks want to encourage high-street banks to start lending again, they really are pushing on a piece of string

The Future for China?

At the height of the UK’s debt-fueled boom, say early 2007, it appeared that one could become wealthy simply by taking out one of the five pre-approved credit cards that you had received in the mail that morning. But wealth that’s canceled out by debt isn’t really wealth at all. You do not own a house if you have a mortgage – you owe a house-load of money to the bank which owns your house!

China has been lured into a similar trap, thinking that allowing banks to lend trillions of newly-created money into the economy will cause a real economic boom. What it really does is inflate house prices and massively distort the economy. It also lays the foundations for the painful crash that may hit China very shortly. Watch this space…

*For supporters of a denationalisation of currency, I’m assuming that such a proposal is politically impossible from this starting point, so we need to find the best mechanism and structure for the creation of a national currency.