China Has a $1.2 Trillion Ponzi Finance Problem
bloomberg.com
bloomberg.com
As James Carville once quipped : "I used to think that if there was reincarnation, I wanted to come back as the President or the Pope or as a .400 basball hitter," he said. "But now I would like to come back as the bond market. You can intimidate everybody. [1]
http://www.nytimes.com/1994/06/12/weekinreview/ideas-trends-...
Isn't the US Federal Reserve an organisation made up of and governed by the private sector (banks).
Also: When you read the word 'Ponzi' in the context of macro-economics, as opposed to criminal prosecution, you should stop reading right then an there because the author is spouting drivel.
Is that supposed to be worse? Is it better if it were under the thumb of a handful of powerful private banking corporations whose primary goal is the pursuit of profit?
At least within the communist party you might find an idealist or two who cares about the role of the banking system in raising the standard of living of the poor.
My gut feeling is you can compare the United States 1929-1935 with China 2009 to 2015 and here we are. Notable China has managed to totally avoid a depression via the very policies bloomberg article rails against. They'll be sorry!!! Real soon now the chickens will come home to roost. And it'll be curtains for China!!!
After six years of this, spare me please.
You know ... metaphor is a fairly powerful and useful tool ... I feel like maybe, it might be possible for someone, somewhere, to usefully and accurately draw a comparison between a macro-econ concept and a ponzi scheme ...
Call me crazy...
China lacks transparency, and that's why they can get into a bad loan situation that US companies and banks can't. But it isn't a Ponzi scheme.
Also, $1.2 trillion Yuan is about $200billion. N.B. the headline uses a dollar sign but the article denominates that number in Yuan.
So non-performing loans are $188b/9240b = 0.0203 or 2% of GDP. This isn't anything the Central Banks can't deal with.
The article is drivel.
Ponzi borrowing is actually a concept in macro-economics, first explained by the economist Hyman Minsky. From Wikipedia: The "Ponzi borrower" (named for Charles Ponzi, see also Ponzi scheme) borrows based on the belief that the appreciation of the value of the asset will be sufficient to refinance the debt but could not make sufficient payments on interest or principal with the cash flow from investments;
Ponzi borrowing could be restated in terms of borrowing when your model does not take into account the possibility of asset stagnation/depreciation. This phenomenon became a popular topic in 2008, because the housing market had began behaving as though returns on real estate never dropped below 0.
In short, no: http://www.federalreserve.gov/faqs/about_14986.htm
http://www.factcheck.org/2008/03/federal-reserve-bank-owners...
The stockholders of the US Fed Reserve are private banks. The majority of the board of governors are appointed by the president of the United States. He of course appoints the leading experts in the field... the bosses of those very same private banks.
The Fed exists because Congress created it, but it doesn’t enact policy measures with any Congressional or Presidential approval.
http://www.scmp.com/article/625045/23-arrested-probe-93b-yua...
>"The audit office found that the banks had lent money to fictitious individuals and companies with insufficient capital."
>"They also lent more money to certain developers than they were entitled to, it said."
Can you ever imagine arrests and hundreds of employees of a bank disciplined for something like that in a western country?
Inflation is not caused by money printing. Inflation is caused by poor capital investment or capital destruction. Central planning can cause this if the planners are not careful to make bad investments fail on a regular basis and free up goods of higher orders for alternative investment.
Japan has a western financial model where the government is on the hook for bank bailouts and has to borrow money from a central bank to fund spending so it obeys the western "economic realities" which are an artifact of that system.
That is...completely an utterly false. You just disqualified yourself from discussing this topic and be taken seriously imo. Inflation is a monetary phenomena. There is more to it than just money printing, but an excess amount of cash/liquidity in markets is what causes inflation. The velocity of money is also important. Seriously, there's even an equation for this and none of it involves whatever you just said.
This is something that every major school of economics, both left and right agree upon since the 1960s (and it has roots way before then.) I honestly have no idea where you got this idea from. Even Keynesians, who once denied it, now acknowledge it but with their own methods.
Similarly, if you destroy a country's infrastructure in a war and keep the amount of money the same, you'll have rising prices for what production is available.
The problem with most monetary systems is that the increased money is not well invested enough causing the supply of goods relative to the supply of money to become imbalanced thus raising prices. This is the difficult problem that the Chinese have to solve in their monetary expansion: channeling the money into productive uses instead of hoarding or capital consumption (e.g burning the furniture to keep warm).
And Yes, printing more money does increase inflation. https://en.wikipedia.org/wiki/Seigniorage
The government mints banknotes, it cannot create money without reducing it's value. Banknotes are backed by government's own debt to the central bank. So, even if you print 10x the number of notes already in circulation, it's backed by the same government debt, and so, the value of yuan will fall to a tenth.
Your biggest problem in understanding money's effect on prices is that you think that one dollar of newly created money is spread throughout the population evenly and thus raises prices evenly. This is not the case. If it is created by the banking system it goes into new bank loans, and since banks prefer to lend against collateral, it raises the prices of the assets that those banks lend against thus resulting in asset bubbles and inflated real estate, and stock prices.
If the government spends it on transfer payments, then it's going to go in to less productive uses and thus have a greater impact on prices of consumer goods. If however, the Chinese government is channeling it into loans for highly effective infrastructure projects such as railways, aqueducts, etc. then it is going to have less impact on prices and may even lower them in directly affected areas such as the cost of transporting goods because the new capital will lower the cost of production and increase supplies of raw materials and other factors of production.
NO! NO! They represent the debt of the Government. Just this misunderstanding invalidates the rest of your argument.
>If however, the Chinese government is channeling it into loans for highly effective infrastructure projects such as railways, aqueducts, etc.
You're asking the government to run a more-deficit budget. 10 times more, from your previous comments. What will this money be used for? Labour and raw materials. Since there is only finite amount of these in their country, The government will essentially be paying more salaries to get the same job done, more money for the same resources. If you haven't figured it out yet, THIS IS INFLATION.
Why do people build a road or a factory? When Elon Musk builds a factory for batteries in Nevada he is doing it to lower the per unit cost of battery production due to increased efficiency. When someone paves a road to their house they are doing so to lower the cost in vehicle maintenance and time to traverse that road. Capital is created to lower costs.
You fall for the Keynesian fallacy that capital investment is just "spending"; that creating capital is economically equivalent to paying people to take a whole bunch of raw materials and burn them in a bonfire. Thus, you cannot distinguish between productive capital investment ,which lowers prices, and unproductive uses of resources, which raises prices. You probably think that war is good for the economy because it increases "spending".
Seriously? Read your comment again to understand it's absurdity.
I don't wish to sound belligerent, but You simply don't understand money at all.
You're suggesting increased government spending on infrastructure. But you somehow think the government can do that without borrowing money either from the Central Bank or the people. If this were possible, wouldn't all governments be doing this already?
If the Central Bank asks the Treasury to print more money than the amount of assets it holds, (assets = Treasury bonds), it will either be (a) no longer capable of fulfilling it's obligations or (b) effectively devaluating the currency and thereby increasing the inflation.
Also, Bank notes are not "debt". They're transferable IOUs.
I don't fall in any economic-theory-based fallacies as you're suggesting. You think government can make money out of thin air and I am telling you that it cannot.
>You probably think that war is good for the economy because it increases "spending".
Unlike you, I do not ideologically believe in some economic theory.
Not that I'm the most financially savvy person, but I've never heard the phrase Ponzi borrowing before. Until I read the comments, I glossed it as 'Ponzi scheme'. It completely makes sense, once I read the comments.
http://www.bloomberg.com/news/articles/2015-05-01/chinese-co...
Read that days[1][2] New York Times in its entirety. No problem. WSJ was there too. South China Seas news, etc.
[1] Well, the day before, technically ...
[2] Yes, the real NYT, not the herald tribune or whatever...
Like Sweden.
On a side note aren't all software engineering startup-jobs basically in Ponzi Finance problem? We should be worried by this. I always got the feeling engineering jobs are primarily driven by a bunch of startups running on credit, thus very very very volatile and unstable.
Comparative numbers are irrelevant.