The Market is Focused On Europe. What About China?

China is on the brink. Eventually, the math catches up to you. I think that Jimmy Chanos is about to make a lot of money.

The Chinese banks are in serious trouble. They have papered over losses. The bank books in China aren’t giving an accurate picture of their true financial position. In the US this is fraud. In China, it’s supported by the government.

The Chinese government has a lot of competing interests to control. It is virtually impossible to have a long term successful centrally planned economy in a country as large and diverse as China.

I have heard stories of how the Chinese simply take huge tracts of land and develop it . The concept of property rights and individual rights are non-existent. It’s impressive to see how they have built amazingly gargantuan cities practically overnight. Underneath all of that, the foundation is unsteady.

Another accounting scandal was reported today in Japan. Olympus hid losses for years. In the US, MF Global’s scandal was a gigantic failure of ethics that crafty accounting hid for a short period of time. Poor accounting practices are not confined to cultures or simply private industry. Governments have shoddy accounting all the time.

Today, everyone will wonder about Italy, and perhaps France. Both nations have a gigantic social safety net that they have not paid for. Instead of focusing on growing their economies, and cutting spending the remedy for both seems to be some austerity on the spending and an increase in taxes.

There is only one guarantee in that last statement-taxes will go up. I doubt seriously if spending will fall that much because bureaucrats and politicians cannot cut spending. Bureaucrats because more budget money means more power. Politicians because they can’t afford to tick off a disenfranchised constituent. Politicians in this day and age only exist to get re-elected.

Increasing taxes will cause their economies to slow. That is an economic fact. Liberals will point to the Clinton years in the US when we increased taxes by a little and had economic growth. It’s the wrong conclusion. The productivity gains of the internet were just inserting themselves into business. That more than made up for the small tax increase. The internet productivity also lead to the “jobless recovery” we had during the Bush administration and is still with us today as we automate and streamline processes that were once done by humans.

Human nature from continent to continent is practically the same. The Chinese government has managed to keep a lid on it for years, but the injection of some capitalism brings different emotions to the front that haven’t existed for a long time there. Combine that with the Asian cultural norm of “face”, and a very proud Chinese government cannot risk a public failure.

However, accounting has a way of bubbling up from the depths to strike you at inopportune times. If Europe goes into a severe economic downturn, the US and the Chinese are going to feel it. Government accounting tends to go awry when economies sputter.

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  • “It is virtually impossible to have a long term successful centrally planned economy in a country as large and diverse as China.”
     
    Yes. I figure the total maximum population at which central planning might have some hope of long-term success is exactly 1. With 2 or more people there will be conflicts of interest, differing priorities, perceived imposed inequities and compounding errors. After that the situation just accelerates geometrically downhill to the dump as ever more and more time, energy and resources become dedicated to nothing but temporary disaster control. And so we come to China and its massive, futile efforts to prop up a state model that was a failure the instant it began.

    • It can work until it can’t.  In the beginning, the growth was so spectacular it didn’t matter.  Now it’s starting to matter and as the world economy slows, there will be big shocks to the Chinese economy and its banking infrastructure.

  • Anonymous

    If people think Wall Street hides loses and gives themselves big bonuses- they will be shocked to learn (if they ever are able to) the immense corruption of the Chinese elite.

  • James

    “the “jobless recovery” we had during the Bush administration….”
    Er, I’m not sure Bush needs to take the fall for that.  The market crashed in the fall of 2008.  These were the final months of Bush’s second term.  

    • Anonymous

      the “jobless recovery” we had during the Bush administration.

      So why did the report it hit one of the lowest levels in all time?  4%

      • sometimes you need to use language that is familiar with the masses to get a point across.  If I had a dime for every time I read or heard the words jobless recovery, I’d be Warren Buffett.  

        I agree, I don’t think that you can equate unemployment levels from 2000-2008 directly to or away from Bush policy.  Sometimes it is what it is no matter what the government does.  Frictional unemployment is 5%.  The numbers vary by what, who is entering the job market at any one time. 

        President’s set policy that provide for either a fertile, or infertile ground for job creation.  But govt never creates jobs.  Obama has set really poor policy as captain of the ship. 

        • Anon

          There are over 4 million federal employees including the military.  How can you say that the government can’t create jobs?

          • Rc

            Because gov’t takes $150,000 from the private sector (the ultimate source of all revenue) to pay for a $100,000 / year job. It’s like “creating” 2 gallons of a liquid starting with 3 gallons of a liquid or “creating” 1 Gigawatt of energy beginning with 1.5 Gigawatts of energy. Understand?

          • Anon

            Apparently I understand more clearly than you do because I understand that taxes do not fund spending.

          • In the classical equations, G is around 10% of the input to GDP.  Govt doesn’t create jobs.

  • China fails, Friedman and the NY Times hardest hit.

  • “The internet productivity also lead to the “jobless recovery” we had during the Bush administration and is still with us today as we automate and streamline processes that were once done by humans.” 

    For example, writing financial blogs with either a Hayek or Keynes point of view can be *completely* done by an algorithm, with better SEO. 😉

  • TB

    Graphing the “jobless recovery” under Bush.

    http://data.bls.gov/pdq/SurveyOutputServlet?request_action=wh&graph_name=CE_cesbref1

    Bet a lot of people wish some of those “non-jobs” were still around.

  • Anonymous

    “Liberals will point to the Clinton years in the US when we increased
    taxes by a little and had economic growth. It’s the wrong conclusion.”

    There is little evidence that tinkering with the rates and other decorations of the tax code affects the amount that the government collects. This was certainly true in the 90s:

    http://politicalcalculations.blogspot.com/2011/09/why-hiking-top-income-tax-rate-wont-fix.html

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  • Larry

    As much as I hate the thought of higher taxes, are we not on the verge of higher growth driven by lower natural gas and oil prices?

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