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China's Massive Monetary Expansion and Crackup Boom

Economics / China Economy Oct 29, 2010 - 03:52 AM GMT

By: Mike_Shedlock


Best Financial Markets Analysis ArticleChina is pointing the finger at the US, complaining about "Out of Control" US dollar Printing by the Fed.

Dollar issuance by the United States is "out of control", leading to an inflation assault on China, the Chinese commerce minister said in comments reported on Tuesday.

"Because the United States' issuance of dollars is out of control and international commodity prices are continuing to rise, China is being attacked by imported inflation. The uncertainties of this are causing firms big problems," Chen was quoted as saying by the official Xinhua news agency.

Chinese officials have criticised U.S. monetary policy as being too loose before, but rarely in such explicit language.

Decoupling Theories Renewed

I will get to loose monetary policy in just a bit, but first consider More than decoupled, China is in league of its own

Two years on from the global financial crisis, the contrast with the rich world is striking. In the United States and Europe, growth is sluggish, a slump into outright deflation is a real risk and central banks look set to loosen policy further.

So the evidence is in: China is decoupled, influenced by, but ultimately independent from other major economies.

"The crisis was a test and China passed the test. Decoupling has become a much more solid thesis now than three years ago when we only talked about it hypothetically," said Qing Wang, Morgan Stanley's chief economist for greater China.

Chinese Money Supply Numbers from People's Bank of China

Money and Quasi Money Jan 2009 - 496135.31
Money and Quasi Money Sep 2010 - 696384.86

"Out Of Control" Monetary Expansion Irony

I am certainly not about to defend the Fed's misguided policies, but the complaint from Chinese commerce minister that US monetary printing is "out of control" is the ultimate in "pot calling the kettle black" irony.

Over the past few weeks I have exchanged quite a few Emails regarding China with my friend "BC" who writes ...
Total Chinese money supply is up over 4 times since '03, a 17%/yr. rate at a doubling time of just 4 years; up 66% since Jan. '08, a 19%/yr. rate at a doubling time of 43 months; and up 40% since Jan. '09, a 20%/yr. rate at a doubling time of 40 months.

Knowingly or otherwise, China has experienced a textbook faster-than-exponential money and debt/asset blow off or crack-up bubble that mathematically cannot continue. All faster-than-exponential bubbles burst and collapse, with prices falling back to the levels at which the differential rate of GDP and money began to diverge at an order of exponential magnitude, which was around early '02.

Ironically, Bubble Ben bashers claim the Fed is going off the rails with debt-money reserve growth?! Imagine what would happen to the Renminbi were the currency to be floated/convertible with money growing at arguably near hyper-inflationary rates in China!

Do Schiff, Faber, or Rogers ever talk about China's reckless, hyper-inflationary money supply growth? This kind of money supply growth is banana republic-like, making our feeble efforts appear benign by comparison.

This situation is INSANE, and the crash coming in China-Asia will be unprecedented in world history.
Credit Expansion in US vs. China

One might think that a country whose money supply is doubling every 40 months and growing exponentially since 2003 would not be pointing the finger elsewhere, complaining that others are "out of control".

One might also think those screaming about hyperinflation would scream about happenings in China, not just the US.

One would be wrong on both counts.

Moreover, unlike US monetary expansion that sits as excess reserves, China's money supply growth has spawned massive lending sprees, property bubbles, and asset bubbles in general.

I spoke briefly of this in Massive Inflation in China, US Inflation Nonexistent

In a fiat credit-based society, credit-expansion not reserve-expansion is the key to understanding inflation. Credit is contracting in the US but running rampant in China. It should be no wonder China shows signs of an inflationary crackup boom and the US is mired in deflation.

Peak Oil and the Demand for Resources

In my recent interview with Chris Martensen (see "Straight Talk" with Economic Bloggers) a pertinent question came up regarding energy.

2. Many of our readers have subscribed to Chris' position that the economy must be increasingly interpreted through two other lenses; energy and other environmental resources. Can you comment on the Three E's?

Mish: I am a firm believer in peak oil. I don't know how anyone can deny it. Given peak oil, and given the demand from China for oil and other commodities, the world is on a crash course of demand that cannot be filled.

China is growing at 8-10% a year (assuming you believe the stats). Can China keep growing at that rate forever? For even 10 more years? What about India? Brazil?

Either we get some serious energy breakthroughs, China slows, or the standard of living drops in the US, UK, and Europe. Well China does not want to slow, and the US and Europe are fighting hard to maintain a standard of living that is not sustainable.

Historically these situations end up with war. That is an observation, not a prediction.

Something has to give, perhaps many things, but all of the people who think China will soon be the number one economy in the world and that China's growth is sustainable, better start thinking about the implications of what I just typed above.

Preparation For War?

My friend "BC" writes ...

China's behavior since 9/11 and the invasion and occupation of Afghanistan and Iraq by the US is reminiscent of nations' war preparations of the past.

Then again, given Peak Oil, China's increasing dependency on imports of oil and other mineral resources, and the extent to which the US imperial military is arming the Middle East, encircling Iran and Pakistan, and encroaching deeper into Central Asia and towards China's western frontier, why would the Chinese not be preparing for war (or at least war-like conflict in regards to trade and resources)?

Runaway Printing Fuels Crackup Boom

It is important to understand the drivers behind China's growth.

1. Rampant monetary expansion
2. Property bubbles including completely vacant cities
3. US and European outsourcing
4. Malinvestment in infrastructure

Those who claim China's growth is internal fail to factor in points 2 and 4.

"BC" writes ...

China's runaway growth is derivative of US firms' massive investment in China-Asia, which has occurred recently coincident with Peak Oil, peak US Boomer and EU demographics, and now China reaching terminal velocity of investment, production, and credit growth.

That the US and EU economies (60-65% of world GDP) can no longer grow because of demographics and Peak Oil, and China is heavily dependent upon global markets for continuing US firms' investment and derivative growth of Chinese domestic investment, production, and exports, Peak Oil and China's terminal velocity occurring for the largest credit bubble per GDP in history implies that China faces an unprecedented contraction, with the risk that GDP per capita will fall at least 50% in the coming decade.
China bank profits defy loan problems

Much the same way the US housing bubble did not matter until it did, China bank profits defy loan problems

Bank of China and Agricultural Bank of China both reported rises in net profit of nearly 30 per cent in the third quarter in spite of government attempts to slow new lending and rein in asset prices.

The banks are the first of China’s state-controlled lenders to report profits for what is expected to have been a bumper quarter for most of their competitors as well.

However, the banks face problems involving bad loans resulting from a government-directed lending binge launched to combat the financial crisis.

Analysts, regulators and even the banks warn that the big expansion in lending, with the volume of new loans doubling from a year earlier to Rmb9,600bn in 2009, will almost certainly lead to a large rise in non-performing loans as many borrowers eventually default.

With credit still relatively easy to obtain and with economic growth still above 9 per cent, many of those asset problems are yet to materialise.

Love Affair Will End Badly

Parabolic expansion of housing prices, credit, or asset prices never ends well. Yet because the US bubble has burst while the various Chinese bubbles have not, various economic pundits are chanting nonsense once again about decoupling scenarios, even in the midst of currency wars and competitive currency debasement.

This love affair with China will not end well for the US, for China, and especially for the commodity producers like Australia and Canada, each in huge denial about their own property bubbles.

By Mike "Mish" Shedlock

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at .

© 2010 Mike Shedlock, All Rights Reserved.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


29 Oct 10, 08:10
Shedlock Wrong Again!

Mike writes as though he understands the subject matter but his forecasts are virtully always proven to be wrong!

For instance earlier in the year he was writing that the chinese economy would crash, now he has switched to a crack-up boom ???

Similarly he has been proven to be wrong on a bullish US Dollar, wrong on the stocks bear market, and WRONG on DEFLATION!

Shelby Moore
29 Oct 10, 17:17
China's roaring 20s

China is going through its version of what the USA did in 1920s, before the Great Depression. At that time, USA was displacing the rest of the world in commerce, and Europe was in a fiscal mess. The capital was running from Europe to USA, causing the Roaring 1920s. We all know the misery that followed for the USA, even though the USA would go on to be the strongest economy in the 20th century.

Mish is correct about deflation, but only if we use gold as the unit-of-account. Gold is the only thing that can retire the global debt. Since mankind refuses to go to gold willingly, then it will come in the form in an capitulation to debt slavery, aka the one world (NWO) currency (SDRs):

I have many posts about China's misallocation of capital:

29 Oct 10, 18:03
Deflation mantra

Gold price rising is ONE manifestation of inflation.

No one recieves their salary in gold or buys groceries or any other consumer goods in gold.

If there were deflation then the gold price would FALL!

All that gold has done for the past decade is to try and catch up with inflation, infact it still is well below where it would have to be to have kept pace with inflation.

Mish and others complicate some that that is really simple. When the price of something / anything in the domestic currency is rising then it is INFLATING, when the price of something is falling then that is DEFLATING. Mish shows that he does not have a clue what he is talking about because he does not not understand the obvious.

Deflation is a delusion... I feel another article coming on.... :)

Shelby Moore
29 Oct 10, 18:38

Any one can receive their earnings in gold, simply buy gold when you receive the fiat.

And thus we see that if someone's earnings are not increasing about 20% per year since 2001, then their earnings are deflating, i.e. DEFLATION.

Nadeem, it is a meaningless statement to say that the gold price would fall in deflation, because for example during hyper-inflation some governments have removed some zeros from their currency, to pretend the hyper-inflation does not exist, and thus the price of everything falls instantly to say 0.0000001 of the former price, but that is not deflation.

Rather the meaningful metric is to ask what is the purchasing power of gold. During deflation, the purchasing power of gold increases, and during inflation, the purchasing power of gold decreases. From 1980 to 2001, we had inflation, because the purchasing power of gold was declining. But in 2001, the debt bubble peaked and now the purchasing power of gold is increasing, because only gold can retire debt (no fiat can retire debt, because fiat is debt).

The problem that the world has is that the masses don't keep their mental unit-of-account in gold. This is why they can be manipulated and fooled as to the true of what is going on.

In reality, the 309 year public inflation wave (growth of socialism since birth of USA) ended in 1998 and the private wave deflation (growth of free market and gold back to money) has begun:

29 Oct 10, 19:01
gold deflation

your making the same mistake as Mish.

Your picking what has risen in price X4, over 10 years (INFLATED).

Afterall price IS in the domestic currency !

Price of goods and services ARE in the domestic currency!

Wages are PAID IN the domestic currency! and you can't switch in and out of gold EVERY other day to meet your living expenses! your wages would disappear in commissions regardless of how high gold went!


If gold crashed to $600 tomorrow then what ? - Oh... No wait... Gold price falling to $600 is DEFLATION !!!!!

Gold price rising to $1300 is DEFLATION !!!!


I really am going to have to do another article and bust this .....

Shelby Moore
29 Oct 10, 19:55
unit-of-account matters


You know that I agree there is price inflation in fiat. I have also busted those who argue otherwise as evident in numerous of my comments on your site.

However, you are confused about what deflation and inflation are. It is impossible to define anything in life, if you use an arbitrary measuring stick such as fiat. Fiat is nothing more than plastic chips in a casino-- the house determines their value at will. They can create more at will. They remove zeros at will.

The only stable metric is purchasing power. That is what matters to people. They want to know how much they can purchase with their money.

From 1980 to roughly 1998, people could purchase less with gold. Since then, they could purchase more with gold.

No I am not picking what has risen over a short period of time. Since 1913, the purchasing power of gold is roughly constant in terms of raw materials (adjusted by any technological productivity improvements). Whereas, the fiats have lost 95+% of their purchasing power.

It is meaningless to talk about inflation versus deflation if you unit-of-account is fiat, because fiats NEVER deflate. They inflate (lose purchasing power) until they return to their intrinsic value of 0.

So we might as well just stop the entire discussion if we are going to use fiat as our measuring stick (i.e. unit-of-account), because there is never deflation in that case.

The only meaningful discussion is to use gold as the unit-of-account. This has been true for over 2000 years.

You are arguing about a non-argument. I don't disagree with you that there is always inflation for those who are stupid enough to use fiat as their unit-of-account.

For those of us (like Rothschild) who use gold as our unit-of-account, we are interested in inflation and deflation with respect to gold, because it enables us to be richer and smarter than the masses.

Michael B.
29 Oct 10, 21:45
unit-of-account matters

Shelby and Nadeem,

Quick question. How does one know when to switch from gold to fiat currencies? When real interest rates are positive? When the credit destruction/default process is complete, i.e. the marginal utility of debt is positive? The past 10 years have been great for those who grasp gold’s role in the regulation of the fiscal and monetary mismanagement of the world’s fiat currencies, yet I am wondering when it is time to return to the land of fiat currencies.



Shelby Moore
30 Oct 10, 14:38
re: gold vs. fiat

Michael B. that is an excellent question. Nadeem may have a different opinion than me.

The backward-looking metric is when the interest rate paid on fiat sovereign bonds (an entity backstopped by the central bank printing press that can not default), is greater than the appreciation in the fiat price of gold.

So roughly 20%, although that has been 40% during past 2 years. This is why I wrote that at the "End Game, the Gold Investors Destroyed", the level of interest rates required to arrest the gold bull would be catastrophic to society and the compounded relative losses for gold investor who do not pay the taxes so they can't re-enter sovereign bonds at that time, would be extreme. And my thesis is that the level of taxes at this end game, will probably result in a loss of purchasing power greater than the appreciation of purchasing power during the bull run of gold:

However, that backward-looking relative metric (interest rates vs. appreciation of gold fiat price) may not help tell you when to sell gold, because by the time the metric gives a sell signal, any parabolic increase in the gold price may have reversed into a crash in the gold price.

Normally I would say we will be near the top when I will hear common people talking about buying investment gold at places where they are now oblivious (e.g. at the mall). However, in order to raise interest rates (whether it be via domestic currencies or a new international one, e.g. SDRs), it will be necessary for the global economy to implode (all the misallocation of capital will be erased).

Thus what I see likely is that SDRs will be (at least partially) backed with gold (recent BIS gold swap may be for this purpose), and that the domestic currencies will become like banana republics. The way the NWO currency will start is as an alternative to the broken (perpetual QE and halving of the interest rates) domestic currencies. Thus I can see interest rates rising for SDRs, while interest rates continue to fall for domestic currencies. In order to invest in SDR bonds (or national bonds indexed to SDRs), you will have to pay your taxes (prove where your cash came from). Initially SDRs will not be available to the average person.

Over time as more capital moves into SDRs, and as national govts are forced to borrow in SDRs (i.e. inflation or maybe even hyper-inflation relative to SDRs and gold), the SDRs will gradually become the world's reserve currency. At that point the world's central bank will have complete control over the world, as every person will be preferring to buy and sell using SDRs instead of the nearly worthless local currencies:

Then as the interest rates paid on SDRs come down, and the appreciation of gold relative to SDRs stagnate, it will be time to trade gold for SDRs, but you will still have that huge tax loss problem. The SDRs will also be debased over time, stealing from the world in inflation. This will be the death march for humanity (as predicted in Revelation).

My philosophy on this is different. Gold is money and nothing more. My ideal period of time to hold gold is never. As the Bible says, wealth grows wings and flys away. Never do I want to feel secure in wealth. The point of having wealth is as per the Parable of the Talents, that more wealth is given to those who know how to put it to productive use and enrich the lives of the most people. The Bible is clear about this, don't plant a single fruit tree, it implores us to plant a whole acre and trade.

Thus ideally we want to constantly be recycling our wealth as investments in productive businesses. In that case, you really don't care what is going on with the currencies (especially if you are in software development like I am where the incremental changes in currencies are irrelevant to the bottom line).

For any insurance savings, then I never want to sell it. My holding period for that gold and silver is forever.

So the answer to your question is you should sell gold as soon as you can find a productive use for your wealth. This is why Buffett said he thought digging gold out of the ground to bury it again in a vault, was stupid.

However, I will never again invest my money in interest bearing fiat instruments (and insurance) as Buffett has done, because it is very clear from the math, that such actions by society lead to slavery and socialism:

The man who becomes so wealthy that he can no longer invest his wealth in productive business, but rather has to rely on the slavery system of usury compounding (insurance and futures contracts are similar), has sold himself and society to slavery.

Rather if I am getting wealthier than my ability to reinvest in productive business (and I am already so), then I will structure my businesses to share more of the profit with my employees and customers. In that way, making the world more prosperous, as they can invest the money more rapidly and wisely than I can. A centralized decision maker is the antithesis of success, prosperity, freedom, and free markets. Are you reading this Warren Buffett?

It is really just the Henry Ford principle:

Hope that helps.

Shelby Moore
30 Oct 10, 16:32
re: "humble pie" (huh?)

Wags, apologies for the double post, but wags comment was approved by Nadeem after I had read and was composing my reply to Michael B's excellent question.

I do not remember ever being refuted on this site. And I have not changed my position, rather I have remained consistent in my understanding of the macro-economics. I think perhaps you didn't understand my points?

You seem to think that some near-term skyrocketing inflation in China is sign of a crack-up hyperinflation? Did you forget what happened in Q1 2008? It was the same thing, then a crash of the global economy. You don't understand, just as Gordon Lira and other hyperinflationalists don't understand. I suggest you read the prior reply I made to Michael B and also the following link (and the sub-links) about how long the end game will drag out:

You will find refutation of Gordon Lira at sub-link of the above link. It is also posted on this site some where if you search all my comments.

Shelby Moore
30 Oct 10, 18:23
Only Gold is Money

I think it is important I make it clear that gold is different than any other substance on earth in a very specific way. One must understand this in order to understand macro-economics.

Gold has the lowest new stocks relative to existing above ground readily recoverable stocks of any tangible thing on earth (aka stocks-to-flows ratio[1]). Silver is the second lowest.

Above ground gold is about 160,000 tonnes (nearly all of which is held in forms that are readily salable) and annual supply is about 2,500 tonnes, or roughly a 66.6 years of supply thus 1.5% rate of monetary inflation (debasement). Above ground silver in tradable forms is roughly 20 billion oz, and annual supply is about 0.8 billion oz, or roughly a 25 years of supply thus 4% rate of monetary inflation (debasement). Btw, this is why the central banks say they target a low inflation rate (but it is lie).

All the other commodities (including other metals and foods) are consumed such that readily recoverable stocks are not more than about 6 months of supply. This is also why there can't be a global hyperinflation relative to general commodities, because the people would starve themselves within 6 months.

Only gold and silver can not be debased. All other substances on earth (especially paper or digital money) can be overproduced to create artificial inflation and theft by the central bank.

Lately I had an epiphany, and my thesis is that knowledge has a very huge existing stock relative to new supply. As we know (even the Bible says), most knowledge is recycled and not new. Thus I think if knowledge could be made fungible with programmatic referential transparency, then we could replace gold and silver with a form of money that we carry in our mind:

That is what I am working on now.


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