Central Planning is Failing in China ... and the US

I argued for the past year that the hand-wringers were dead wrong about China threatening to overtake the US economy and currency. I claimed, on the contrary, China would likely go the way of Japan. Today, an article by an economist has just come out saying China is “going the way of Japan.” (You heard it here first more than a year ago when everyone else was claiming the opposite.) The article tries to offset that risk by saying China has more possible exit ramps off that path of decline because it has seen Japan go this route, so it can learn from Japan’s missteps.

That, however, certainly does not mean China will be any smarter than Japan about taking those exits; and the article’s solution is the usual flickering dim-bulb idea of modern economists — more debt! However, the article does, first, admit China will not be able to take the usual easy path deployed by so many governments of trying to get its citizens to stop saving and stop paying down debt by enticing them into more debt with lower interest rates so they will buy things and juice the economy, which was Japan’s primary path.

The economist in the article below says China has already gone far enough over the hill of the diminishing curve of that particular path to where cheaper credit won’t do anything to stimulate China’s economy. That is because its citizens are so concerned about suffocating under the mountains of debt they have heaped over themselves — now that they face a badly failing economy — that they will just use the cheap credit to refinance and pay down their debt, not to buy more stuff they can live without. Therefore, China must, according to the economist, use government debt to create stimulus via new projects that can stimulate the economy, not mere financial rigging by its central bank, which has run its course.

This coincides with another news story in a long string of stories in The Daily Doom lately, about China exercising major stimulus strides to prop up its economy — especially its crashed real-estate economy — in order to avoid economic collapse. That, however, is no different than the path the US has started down under Bidenomics. The results always look promising at first — rebounding economies under extreme fiscal stimulus.

With financial stimulus (low interest), economies always develop dependence on the low rates, and we have seen that in the US. The risk of fiscal stimulus through government deficit spending is higher inflation, especially when resources are already scarce. Fiscal stimulus also can create higher interest rates for everyone as we are now seeing in the US, increasingly undermining its own success, the harder you push down that path.

That is especially true if you become pressed to fight the inflation you create; however, even if you don’t have to fight inflation, government borrowing pushes up bond rates that other interest is pegged off of. It is also partly what got China into its current real-estate mess. China pushed the development of a lot of real-estate that didn’t sell. The risk with central planners is always misallocation: “If you build it, they will come,” and then they don’t come.

I do not mean by any of the above that China is not strenuously trying to overtake the US currency. The headlines below also carry plenty about that. It is just that, so far, it is failing badly and having to constantly rescue its own currency and its economy and its debt-bloated, dying real-estate developers. Such is the path of centrally planned economies.

The US and the rest of the West are in equally dire straits

While financial stimulus created all kinds of financial wealth in the US, it created little wealth that can endure without the constant administration of financial stimulus. So, as the Fed now tries to remove its stimulus measures, bonds crash and stocks crash. (Don’t forget last year; last year actually happened! It is not a fading fantasy.) It is simple logic that applies: what goes up must come down when you remove the thing that pushed it up. (Modern economists like to avoid logic with their sophistry.)

So, the US economy and its financial institutions are crashing, too, as I wrote about yesterday, and that will take stocks down again just as bond prices are now crashing again. That leaves us in a spot where we can hardly scoff at China’s communist central planning. We aren’t doing much better with our own central bank-planned economy. Neither are Europe or many other Western nations that have taken this path.

The point is none of these major economies — China, Japan, Europe or the US — are going to be left standing in strong shape because of their reliance on the assumed wisdom of financial planners. Yes, they thrived for awhile, but now every one of them faces some massive scale of debt collapse, and the ability of stimulus and new debt (even government debt) to push things further is constantly becoming more complicated by such intrusions on their grand schemes as inflation.

As China tries over and over to save the yuan from this year’s perpetual decline and to prop up its busted real-estate developers by desperately extending the terms of their loans so they can avoid default, it turns out there is no free lunch. In yet another story today (see below), China’s banks are paying for this gimmickry.

US banks, in different ways, are also clearly paying for years of gimmickry in bond markets that sought to drive the economy forward with practically free money … now that inflation has imposed its own ruling: “No more free money!”

Intervention (manipulation) has a cost, if none other than high inflation. If you battle the inflation you created, then you get economic collapse. In fact, you get the economic collapse either way because, if you don’t battle the inflation, it rages hotter and hotter until it eats your economy alive.

The only sane path would be for central banks to stop creating inflation as a target and stop trying to financially engineer their economies. They need to be required to focus solely on maintaining a stable value for the currencies they create and administer. If you don’t create the unsustainable bubbles, then you do not need to endlessly save your citizens from the messes you create.

We need to centrally disempower banks. They have already apparently been lobotomized, but they need to have their stomachs tied. They are too gluttonous for power.