Leithner Letter Nos. 151-154
26 July 2012 - 26 October 2012

At the same time that China’s economy no longer benefits from these three favourable conditions, it must recover from the dislocations – asset bubbles and inflation – caused by Beijing’s excessive pump priming in 2008 and 2009, the biggest economic stimulus program in world history (including $1 trillion-plus in 2009 alone). Since late September, economic indicators – electricity consumption, industrial orders, export growth, car sales, property prices, you name it -- are pointing toward either a flatlining or contracting economy. Money started to leave the country in October, and Beijing’s foreign reserves have been shrinking since September.

As a result, we will witness either a crash or, more probably, a Japanese-style multi-decade decline. Either way, economic troubles are occurring just as Chinese society is becoming extremely restless. It is not only that protests have spiked upwards – there were 280,000 “mass incidents” last year according to one count – but that they are also increasingly violent as the recent wave of uprisings, insurrections, rampages and bombings suggest. The Communist Party, unable to mediate social discontent, has chosen to step-up repression to levels not seen in two decades.

The regime has clearly lost the battle of ideas.

Gordon Chang, The Coming Collapse of China: 2012 Edition
Foreign Policy (29 December 2011)

The conclusion I draw is that the Chinese economy has indeed slowed over the past year or so. It was intended that a slowing occur. But the recent data suggest that, so far, this is a normal cyclical slowing, not a sudden slump of the kind that occurred in late 2008. The data are quite consistent with Chinese growth in industrial output of something like 10 per cent, and GDP growth in the 7 to 8 per cent range.

… So far, then, the “China story” seems to be roughly on course. It is certainly true that we will feel the effects of the Chinese business cycle more in the future than we have been accustomed to in the past. That presents some challenges of economic analysis and management. But even so, it may be better to be exposed to a Chinese economy with a high average, even if variable, growth rate, than, say, to a Europe with a very low average growth rate that is apparently also still rather variable.

Glenn Stevens, The Lucky Country
(Address to The Anika Foundation, 24 July 2012)

Of the State’s Manipulation and
Market Participants’ Overoptimism

Charles Maurice de Talleyrand-Périgord, 1st Prince de Bénévent (1754–1838), was a senior French diplomat who survived the sudden and sometimes drastic gyrations of political life in his country during the late 18th and early 19th centuries. He served – not always faithfully – Louis XVI, the Committee of Public Safety and other régimes of the Revolution, Napoleon I and the restored Bourbon monarchs Louis XVIII, Charles X and Louis-Philippe. Of the Bourbons, Talleyrand reputedly remarked: “they have learned nothing and forgotten nothing.”

The same failing applies to the Western economic and financial mainstream – that is, to senior politicians and bureaucrats, journalists and corporate executives (particularly bankers) and market participants. Virtually all of them blindly worship the state. Long before mid-2007, powerful insiders enthusiastically (and preposterously) believed that the state (with them, of course, at the rudder) could and should steer the economy. “Macroeconomics was born as a distinct field in the 1940s as a part of the intellectual response to the Great Depression,” declared Robert Lucas, winner of the 1995 Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel (which is commonly but quite erroneously called the “Nobel Prize in Economics”), in his Presidential Address to the American Economic Association (2003). He continued:

The term [macroeconomics] then referred to the body of knowledge and expertise that we hoped would prevent the recurrence of that economic disaster. My thesis in this lecture is that macroeconomics in this original sense has succeeded: its central problem of depression-prevention has been solved, for all practical purposes, and has in fact been solved for many decades …

Like The Great Helmsman, Mao Tse-Tung, the anointed duly crashed into the rocks. What have they learnt from this experience? Since mid-2007, Western élites have been chastened – but still champion the intervention of the state (particularly its central bank) and its alleged ability to ignore, amend, suspend or even repeal the laws of economics. For decades the establishment’s policies have privileged some (i.e., debtors and spendthrifts, particularly governments), and punished others (namely savers and the provident and prudent). In order to combat a malady whose cause escapes them and whose major symptom is massive and growing debt and an inability to live within one’s means, our masters have prescribed – without a hint of shame – massive doses of additional debt and profligacy.

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Chris Leithner


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