What's Really Happening in China
China's economy will someday be larger than the U.S. When you consider that China's population is about 4.3 times larger than the U.S., this shouldn't shock you. But just because they're so big and their economy has grown so quickly lately doesn't mean they're not going to hit a few speed bumps. In fact, I wouldn't be at all surprised if they crashed into a brick wall sometime soon.
To understand why they may be headed for more than a speed bump, consider what the Chinese government has been doing for years. They've been printing money - lots of it. Why?
They've been printing money in order to hold down the value of their currency so that it wouldn't appreciate relative to the U.S. dollar. Why?
They don't want their currency to appreciate relative to the U.S. dollar because if it did, the stuff they make there would cost more. The U.S. is a big customer for the stuff they manufacture. If their stuff costs more, they're thinking is that they would sell less of it to the U.S. If they sell less of it to the U.S., then they would have to stop making so much stuff. But they don't want to stop making so much. Why?
If they stop making so much, they won't need as many workers to make the stuff. Chinese companies will have to lay people off. Lots of those people moved into Chinese cities from the countryside to get these plumb manufacturing jobs. If they're laid off, where will they go? What will they do? This is a recipe for social unrest on a large scale.
But, unfortunately for the Chinese leaders, their money printing, which held down the value of the currency for years, also goosed their economy. It lit a fire under certain types of manufacturing companies who were able to borrow cheap money to expand operations. That seems like a good thing, right? Well, it was, but in the end, it really isn't.
What happens when governments print money and thereby make it cheaper to borrow is that companies borrow the money just because its cheap - whether they really need it or not. They figure they'll get the money while its cheap and they'll expand while the getting is good. So they borrow and expand and they make more stuff with their expanded facilities and for a time, it seems like they're making more money because they're selling more stuff.
This goes on until they hit the wall. The wall is the lack of increased demand for all that new stuff.
Now, the Chinese leaders see the wall looming out there and they're trying to do something about it. They're printing less money. But I think they may have either forgotten about or underestimated the other effect of all that money printing. That effect is what we call price inflation.
Prices in China have been going up for a few years. The prices went up faster than the wages of the workers. And some basics have gone up so much that the regular folks are having trouble paying for them - food being the most important of them.
Food is just as important to the Chinese as it is to us, as you might have guessed. So there have been riots in China, little reported, but some as big as the sorts of riots reported in the Middle East. (There are so many people in Chinese cities, that even a smallish riot is pretty big.) Not all the riots were about food. Some had political overtones. But that's true in the Middle East too. The riots started as food riots, then escalated to political issues.
Anyway, now that the Chinese government has decided to stop printing so much money, they're starting to see what happens when you do that. "That" being when you print money for a long time, then you slow down or stop printing so much money, the economy slows down. And sometimes it slows down a lot, maybe even so much that you get a Depression. These things sometimes get out of control no matter how smart your politicians or central bankers think they are.
I don't know if China will slip into Depression, or whether this will be just a temporary slow-down, followed by a swift recovery.
What we do know is that when the government printed money, the effect was what's called "misallocation of capital." That's what happened when companies expanded by borrowing money just because it was cheap, rather than in response to an increase in demand. The thing is we don't know just how much misallocation or capital took place. But we're going to find out soon. If the misallocation of capital was grossly out of whack, then you may indeed find China plunge into something worse than an economic slow down.
Of course the Chinese government, as they see all this happening, may respond by printing money in large quantities to prevent the economy from slowing down too much. If they do that, they'll be doing exactly what they've criticized the U.S. government for doing. They'll be joining the money-printing party that's led our economy to the brink and they'll bring the Chinese economy to the brink too.
It looks like "the brink" is becoming a more and more crowded place.
To understand why they may be headed for more than a speed bump, consider what the Chinese government has been doing for years. They've been printing money - lots of it. Why?
They've been printing money in order to hold down the value of their currency so that it wouldn't appreciate relative to the U.S. dollar. Why?
They don't want their currency to appreciate relative to the U.S. dollar because if it did, the stuff they make there would cost more. The U.S. is a big customer for the stuff they manufacture. If their stuff costs more, they're thinking is that they would sell less of it to the U.S. If they sell less of it to the U.S., then they would have to stop making so much stuff. But they don't want to stop making so much. Why?
If they stop making so much, they won't need as many workers to make the stuff. Chinese companies will have to lay people off. Lots of those people moved into Chinese cities from the countryside to get these plumb manufacturing jobs. If they're laid off, where will they go? What will they do? This is a recipe for social unrest on a large scale.
But, unfortunately for the Chinese leaders, their money printing, which held down the value of the currency for years, also goosed their economy. It lit a fire under certain types of manufacturing companies who were able to borrow cheap money to expand operations. That seems like a good thing, right? Well, it was, but in the end, it really isn't.
What happens when governments print money and thereby make it cheaper to borrow is that companies borrow the money just because its cheap - whether they really need it or not. They figure they'll get the money while its cheap and they'll expand while the getting is good. So they borrow and expand and they make more stuff with their expanded facilities and for a time, it seems like they're making more money because they're selling more stuff.
This goes on until they hit the wall. The wall is the lack of increased demand for all that new stuff.
Now, the Chinese leaders see the wall looming out there and they're trying to do something about it. They're printing less money. But I think they may have either forgotten about or underestimated the other effect of all that money printing. That effect is what we call price inflation.
Prices in China have been going up for a few years. The prices went up faster than the wages of the workers. And some basics have gone up so much that the regular folks are having trouble paying for them - food being the most important of them.
Food is just as important to the Chinese as it is to us, as you might have guessed. So there have been riots in China, little reported, but some as big as the sorts of riots reported in the Middle East. (There are so many people in Chinese cities, that even a smallish riot is pretty big.) Not all the riots were about food. Some had political overtones. But that's true in the Middle East too. The riots started as food riots, then escalated to political issues.
Anyway, now that the Chinese government has decided to stop printing so much money, they're starting to see what happens when you do that. "That" being when you print money for a long time, then you slow down or stop printing so much money, the economy slows down. And sometimes it slows down a lot, maybe even so much that you get a Depression. These things sometimes get out of control no matter how smart your politicians or central bankers think they are.
I don't know if China will slip into Depression, or whether this will be just a temporary slow-down, followed by a swift recovery.
What we do know is that when the government printed money, the effect was what's called "misallocation of capital." That's what happened when companies expanded by borrowing money just because it was cheap, rather than in response to an increase in demand. The thing is we don't know just how much misallocation or capital took place. But we're going to find out soon. If the misallocation of capital was grossly out of whack, then you may indeed find China plunge into something worse than an economic slow down.
Of course the Chinese government, as they see all this happening, may respond by printing money in large quantities to prevent the economy from slowing down too much. If they do that, they'll be doing exactly what they've criticized the U.S. government for doing. They'll be joining the money-printing party that's led our economy to the brink and they'll bring the Chinese economy to the brink too.
It looks like "the brink" is becoming a more and more crowded place.
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