Last one out, please turn out the lights

The release of  China’s latest batch of inconsistent and methodologically opaque official statistics were—cue Captain Louis Renault for effect—just about perfect for the job of demonstrating the exquisite degree of control which the country’s enlightened despots are able to exert over the actions of the 1.3 billion people under their sway.

The annual change in CPI ostensibly dropped to a reassuring (if still above-target) 5.5%; industrial production growth edged down to 13.2%; urban fixed investment was still at the 25% p.a. pace which has characterized the past 15 months or so: what was not to like?

The ‘Soft Landing’ was seemingly assured.

Except—forgive our scepticism—but the whole idea of a ‘soft landing’ from a credit-fuelled boom is a risible one.

Once an economy becomes sufficiently distorted by an effusion of newly-created money and too-easily extended credit; once the resulting process of malinvestment becomes not just engrained but actively self-aggravating and its increasingly cashless continuation assumes the role of driver of ’growth’ and wellspring of notional earnings, there remain only two alternatives: to keep adding more and more fuel to it to the point it achieves a hyperinflationary escape velocity or bunker down in some reinforced concrete bolt hole, deep under ground and await the multi-megaton impact of its collapse.

This is not hard to recognise in practice, whether you dress it up by calling it a ‘Minsky moment’, or cite Charles Kindleberger’s catalogue of errors past, or do the decent thing and look at what the Austrians have been saying for nigh on a hundred years, based on a formalization of their close study of the events which took place in the preceding century (something which forms the subject of a slender little volume book called ’Santayana’s Curse’ – ahem!).

The point is that it is of no import how different the details of the regulatory arbitrage, the sources of extra leverage, the nature of the search for yield, or the callousness of the enhanced disintermediation which take place in the credit system might be. Nor does it matter overmuch how disparate the vehicles which come to express the manias these episodes unleash.  Whatever the superficial distinctions, we invariably end with an increasing sterility of what passes for ’investment’, coupled with an increasingly hard to fill demand for what have now become domestically underproduced consumer goods to satisfy the whetted appetites of those who may be paper millionaires, but who are also flesh-and-blood paupers.

Not only are returns on capital appalling in their paucity by this stage, but such ‘profits’ as are booked are either unjustifiable capitalizations of dubious future contingencies or a Gordian tangle of interdependent, below-the-line expenditures. As Prof. George Riesman long ago pointed out, in aggregate, the winners—i.e., those who make more than the natural interest rate—so far outstrip the losers—those who fall short of it—because a bloated schedule of investment is only partially being charged to earnings in each accounting period. Adding to the cheap gilding of false prosperity, all that newly inflated finance is allowing money illusion and Cantillon (first-user) effects to flatter apparent net income, both inordinately and across the board.

Judge for yourself whether this diagnosis applies to China when one of its own dignitaries, Wu Jinglian, member of the State Council’s Development and Research Center, can tell an international audience that:-

Chinese enterprises have entered a bottleneck stage where they face tremendous difficulties in making any further progress despite rapid advances up global rankings in recent years… excess liquidity has inflated asset prices and that investments made with short-term, high-interest loans threaten the stability of the overall economy…

The general atmosphere is one that encourages speculation, and entrepreneurs have become less patient with real businesses that take time to pay off.’

So, if you still subscribe to the suggestion that the dreadful misdirection of real resources and human aspirations into the various Ponzi schemes, White Elephants, and me-too bandwagons which a credit boom inevitably occasions can be gently guided back to some sort of sustainable, income-generating, self-amortizing pathway by the omniscient hand of the very same idiots who unleashed this outbreak of mass folly—well, I have some AIG stock, some Greek government debt, and some Chinese railway bonds to sell you!

In reality, the only stay of execution the central meddlers can effect is to quit too early in the job of damping down whichever speculative blaze it is that they are belatedly trying to extinguish—a course which only reinforces the associated moral hazard and so encourages even more edge-of-the-waterfall foolhardiness when next it flares up again.

The somewhat less palatable—if neatly exculpatory—alternative is to allow the implosion of the current frenzy to proceed to its awful denouement relatively unhindered, while identifying likely candidates for a new bubble to be pumped up amid the ruins of the old (ideally laying the foundations for this replacement Babel while the masonry is still tumbling from its predecessor).

Keynesians might just recognise that this describes the remedy they usually prescribe when they talk of the social imperative to maintain ‘aggregate demand’ by inveigling whichever groups still possess the simulacrum of a decent balance sheet to ruin it in their turn by spending more than they earn on things which will never help to repay the greatly increased indebtedness which must inevitably accompany such a policy.

A classic case in point here was the openly avowed intent of Messrs Greenspan and George to have householders and governments put their futures in hock as an offset to the collapse in corporate exuberance entailed by the TMT crash, a decade ago. We all know how well THAT worked out!

China, however, has chosen not to heed the evidence before it of the inadvisability of such a programme—or else it has come to rely far too heavily on the overblown opinion we credulous gweilos hold of the Party’s omnipotence. China—and several of its Eastern neighbours—have turned a blind eye to the Japanese experience of the late 1980’s; have ignored the lessons of the disastrous Tiger hunt of the late 1990s: and have paid no attention to Korea’s succession of failed experiments in issuing every citizen with a multiplicity of credit cards and/or encouraging them to dabble in the property market every time the local chaebol find their export revenues threatened.

Indeed, an Asia (strictly, a broader EM grouping) to  which everyone—not just President Sarkozy—implicitly looks as the saviour of their business plan, as well as of their debt crisis, may have lined itself up for a powerful double whammy. For now, the intervention-delayed and intervention-magnified impact of Europe’s post-bubble reversion is blowing a chill wind through an arguably overbuilt export sector at the same time that the scope for another, mighty,  internal boost has been greatly lessened for fear that even greater destabilization takes place and that further, socially-invidious side effects are inflicted upon a long-suffering populace at home.

Among these latter are not just price inflation of a whole host of necessaries—with all the implications that has for the quality of life—but also the rampant cronyism and outright corruption which are the inescapable concomitants of a system where fallible men step in to ration scarce resources when dispassionate economic forces are not allowed to do so, according to the most urgently expressed uses of those trying to acquire one thing honestly by offering some other freely in the marketplace.

And if you do not yet recognise the shining Middle Kingdom of Sinophile myth in the foregoing description, ask yourself why it is that comments emanating from a recent conference of CEOs involved in China and convened by Chief Executive magazine threw up the following, acerbic observations.

Referring to the ongoing war for talent, one said:

“People are, frankly, totally underqualified for the roles they’re getting. If you can speak English and Chinese and have any Western training, you’re just constantly moving on because a lot of companies are squabbling over a very small supply of people.”

Worse yet, the tainted nature of the system has not gone unregistered. Thus, the fortunate few seem to have realised where there bread will be most  thickly buttered—and that this will not be as part of a genuinely entrepreneurial outfit of wealth creators, but in the ranks of one of the privileged creatures of the Party:

“The nature of loyalty in China is associated more with working for a state-owned enterprise than with staying with the brand where you began. In the old days a foreign company was the place to be because you were going to learn, but today they would rather work for a state-owned enterprise… As far as they’re concerned that’s where the action is and where the power will be—and that’s an issue for all of us. At the end of the day you need Chinese people working in your company and it’s going to be harder and harder to acquire those people.”

No wonder that a joint report by China Merchants Bank and Bain & Co, largely corroborated by a similar, if broader, survey conducted by the Hurun Research Institute and the Bank of China, revealed that almost half of the wealthy Chinese asked (a group defined as disposing of more than Y100 million in the first sample and of Y10 million-plus in the second) were planning to emigrate while a quarter of the upper echelon and a sixth of the lower already had. This finding was of sufficient concern that the usual Party organs were quick to respond with editorials piously proclaiming the leadership’s intent to address the many shortcomings which these select wielders of a great deal of capital stock felt were driving them away from their homeland.

China bulls, clamouring to get in, should take note that much of the smart money seems to be rather anxious to shake off the dust of the place, instead!

Back in the Grand Guignol which is the European Union, it is hard to know where to start—and even harder to keep up, as life not only imitates art, but frequently surpasses it with every screen refresh of the modern 24/7 news cycle.

One feature among this whirl of comment and counter-comment which does exercise your author is the irritating penchant for talking heads and gurus manqué to adopt the soundbite of the moment and then to repeat it mindlessly as if it were some profound coinage of their own.

‘Kicking the can down the road’ is a particular disfavourite of the moment, but at least its overuse is an easily forgivable lapse for those speaking impromptu, if not quite so pardonable for those writing and having the benefit of a second look at what they are saying.

But the one that really gets one’s goat is the mindless mantra of ’no monetary union without fiscal union’ since this is not only larded with an ersatz gravitas, but actually propounds a false economics. Worse, it insinuates a Bernaysian programming into the user’s mind in favour of the gross imperialism espoused by the worst One World Government vipers in our nest.

In truth, this infernal mantra is a complete canard which perhaps deserves a moment’s further examination.

When you and I, as neighbours, do business with one another, we are effectively co-members of a monetary union, too, yet we seem instinctively to manage without ever having to agree to pool our household finances—that is, to engage in an interpersonal fiscal union—as a way of ensuring that we can both continue to accept the same medium of exchange.

So, if it works for individuals, why is it any different if one clan trades with another, or one village, one canton—or one whole nation?

Can we not be honest enough to stop parroting this latest Newspeak which the bien pensants have cooked up in order to serve their masters’ hidden agenda and to say, candidly, that:

‘It is highly likely that the European leadership will chose one of the two, following alternatives, since they believe these to exhaust all possible ways of trying to address their self-inflicted problems.’

‘One, they will engage in the OVERT fiscal union of a federal budgetary control exercised far from the scrutiny of the concerned citizen—even though this may be in contravention of the rule of law and will undoubtedly take place absent any democratic mandate; or, two, they will indulge in the COVERT fiscal union of massive, central bank inflation injected via the indiscriminate purchase of government bonds, weighted to those IOUs issued by the most abject profligates, the one responsible for getting us into this mess in the first place’

The first, the irresistibly acronymic FU, is presumably the elite’s first preference since it suits the collectivist dream which informs the whole project of erecting an Unholy Roman Empire (or an EUSSR if you are even more cynical) – and it also reduces the scope for the sort of tiresome, bottom-up, locally-chosen, social arrangements to flourish within each of the national polities, different visions which might therefore compete within the Union—a central planner’s nightmare, if ever one existed!

For the second, that also speaks to the mainstream fetish with top-down ‘fixes’ and also with the (non-Teutonic) boys’ room envy of the unfettered Fed which undoubtedly prevails in the dark corridors of the ECB. So, at some point, this could well become a complement to the former approach, if only over the metaphorically dead bodies of a few more Bundesbankers.

Note, however, that if Snr Draghi emulates his ineffable predecessor in office and adds meaningfully to the size of the ECB’s balance sheet expansion and to its credit exposure, it may quickly require a near-consummate degree of FU to backstop it in any case.

If asked to opt for a choice, we think this latter is still a second choice—if an achingly tempting one— since it raises a host of opposing issues far too emotive and far too easily sound-bitten to be palatable to a German electorate which must be lulled or scared into acquiescence with the power transfer and with their implicit underwriting of most of the associated costs (witness the recent furore over a putative IMF smash’n’grab to replace Buba gold with JMK’s SDR dross).

Just this last week, there has appeared—almost out of nowhere—the kernel of an idea of following a third, previously unthinkable route: viz, that of pushing the recalcitrants and the feckless out of the single currency, if not out of the Union itself.

Transitional difficulties aside, this is almost something we would be inclined to endorse as a lesser of many evils were it not for the sneaking suspicion that it is nothing more than a gambit aimed at scaring the ne’er-do-well, Latinate nephews with the prospect that their stern, Northern European, maiden aunts might not continue with their allowance if they do not promise to do better in future. Time will tell.

Which particular road to perdition is followed is still very much moot at the moment, but while we wait to be informed of the choice, we might while away the time in contemplation of the fact that the deliberately constricted menu which the world’s leaders have set before themselves does not actually list all the available options.

Just as a completely whimsical Gedanken experiment—with no practical relevance in the world as it is today, alas—let’s just suppose that we write down/off the Greeks’ (and all the others’) insupportable sovereign debts; that we shut those among the 7000 (sic!) extant EZone banks which can’t cope with the reality check; that we recap those who can, but who are now impaired—by appeal to private means for strong preference. Then, the Augean stables cleansed, we then insist on a proper degree of sanitation, henceforth, meaning that we balance budgets by reducing government spending to a bare minimum while kick-starting growth through offering (generalized and simple, not falsely-ingenious and dirigiste) tax incentives to promote entrepreneurship and to foster capital formation.

This latter may never, ever fly among today’s global Jacobins, but that’s not to say that we cannot wonder whether such radical thinking might point to a way out of the false dichotomy posited by the powers-that- be. Nor, even if we wearily admit defeat as a matter of pragmatic politics, do we have to deny ourselves the chance to offer up a critical analysis of the half-truths and quack thinking they are offering up as a rationale for their blind Flucht nach Vorn.

The dismissal of the platform encapsulated in the shibboleth of ‘no common money without a common treasury’ is a classic case in point. What do those who solemnly rehearse this formula think happened during the long millennia when real, tangible, specie money flowed freely across borders and between sovereignties everywhere?

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7 replies on “Last one out, please turn out the lights”
  1. says: Paul Danon

    The content could be marvellous, but the grotesque writing-style gets in the way. This is this otherwise excellent site’s main fault – writers using byzantine expressions and too-long sentences. Sorry, but maybe the editors could ask for more straightforward writing.

  2. says: Tracy

    To answer Paul; Yes, well, that’s our Sean! Seriously, the gigantic intellect that has somehow managed to squeeze itself inside his head can be overwhelming at times. Yes, he’s famous for his rampant use of obscure nomenclature but God love him! I’m damn glad to know him and read everything he writes however difficult and painfully slow it so often is for me to finish. I will say that aside from the benefit of an expanded view of macro economics, my vocabulary is the better for it ;=)

  3. says: Steven Cox

    When I was a boy I found it helpful, as well as enormously entertaining, to read comic books as a stepping stone to Treasure Island and Swiss Family Robinson. I formally call upon Mr.Corrigan to supply such stepping stone essays as a supplement for that juvenile segment of his audience who mistake depth and complexity of language for froth and bubble. They will find that a steady diet of these simplified supplements will gradually nourish their intellects and lengthen their attention spans. You really owe it to them, Sean.

  4. says: Tom Mueller

    Sean, both Eurotechnocrat solutions of overt union and covert union are ultra vires: not that illegality has stopped Strasbourgeois technocrats on previous occasion.

    My reading of the German press concurs with your take – the Bundesbankers have their limits – a fiscal bridge too far as it were. I always had the impression the Germans only participated in this Euroexperiment merely as a purgative of all-too recent history.

    And I share your bemusement at recent speculative hubris to exclude the Club Med partyers from a more restrictive, dignified and exclusive Euroclub. Unfortunately, to follow this line of logic would also necessarily exclude France rendering such an option as a risible resurrection of the Hansa Teutonica – another non-starter.

    Regarding your self-identified impractical and irrelevant Gedankenexperiment: that governments balance budgets by reducing government spending to a bare minimum while providing bona fide tax incentives to kick start the economy…

    To thoughts jump to mind: necessary but not sufficient & too little – too late!

    Germany did not clear its war reparation debt of WW I until October 3 2010 – and even that was not paid in full.

    Will it take us at least 92 years to clear the detritus of today’s Augean stables?

    Should we be investing in ammo and canned goods in the interim?

  5. says: John Spiers

    Mr. Corrigan,

    If this American can “get you” on the first read-through then you do not need to change a thing. I like it, and I know I am reading Corrigan. One eats meat loaf faster then foie gras, and there is a reason.

    John Spiers

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