'Chinese Credit dynamics do these days bring to mind the great Hyman Minky’s “Ponzi Finance” stage of financial development.'<blockquote>'Rampant Credit expansion is inevitably damaging to the underlying currency. Early in the boom, Credit growth generally supports strong capital investment, favorable economic dynamics, rising asset prices and financial inflows. Trouble mounts as the Credit Cycle ages. At some point, Credit excesses shift from predominantly financing productive investment to various non-productive endeavors. Late-cycle non-productive purposes would certainly include funding speculation, along with lending in support of troubled borrowers struggling to service mounting debt loads. Chinese Credit dynamics do these days bring to mind the great Hyman Minky’s “Ponzi Finance” stage of financial development.
Especially in the emerging markets, the non-productive “terminal phase” will more conspicuously expose Credit inflation’s myriad consequences. These would likely include traditional consumer price inflation, along with problematic Bubbles, inequitable wealth distribution, corruption, and attendant social stress. An increasingly maladjusted economic structure will require ever-increasing amounts of (non-productive) Credit, at great cost to financial and economic stability. Growth will slow even in the face of ongoing Credit excess. Traditionally – and we’ve witnessed this dynamic over the past year in the likes of Brazil, India, Turkey, Russia, Argentina, etc. – the deteriorating macro backdrop will see a problematic reversal of “hot money” flows. A weakening currency will tend to exacerbate inflationary pressures, while fostering ongoing destabilizing excesses within the domestic Credit system.
Let’s return to the Chinese enigma. With ongoing trade surpluses and an incredible $3.8 Trillion international reserves position, the Chinese currency would on the surface appear a juggernaut in comparison to its weak rivals. A strong consensus view holds that the Chinese currency is sound. As I see it, the unprecedented inflation of non-productive Chinese Credit would seem to ensure an eventual currency crisis.
Pegged currency regimes played prominently in ‘97/98 global crises (Thailand to SE Asia to Russia to hedge funds to Wall Street). Currency values tied closely to the dollar were fundamental to huge boom-time speculative “hot money” inflows and leverage that were instrumental in fueling the “Asian Tiger” “miracle” economies. Yet booms never last forever – so be ever suspicious of economic miracles. The reversal of EM “hot money” found the pegged currency regimes unsound and acutely fragile. And the rapid-fire disintegration of currency pegs unleashed contagious deleveraging, financial meltdown and economic collapse.
I’ve for some time viewed China’s currency regime as a virulent “peg on steroids”. Chinese officials have essentially tied the yuan value to the dollar while employing gradual yuan appreciation versus the U.S. currency. If currency pegs invite speculative inflows, then there’s a strong case that China’s newfangled currency controls have over recent years provided the strongest “hot money” magnetic pull in financial history. A powerful “money” magnet in a world awash in cheap “money” provided a most portentous elixir.'
- Doug Noland,
Curriencies, Carry Trades, Fat Pigs and Pythons, February 21, 2014</blockquote>
Context '..Austrian theory is absolutely essential to successfully navigate the treacherous macro investment landscape..'<blockquote>
Myths and Lessons of the Argentine “Currency Crisis”, February 13, 2014
Why Some Emerging Markets Are Heading for a Bust, Frank Shostak
Bernanke’s Legacy: A Weak and Mediocre Economy, February 04, 2014
Krugman Claims Mises Couldn’t Explain the Great Depression, January 30, 2014
'It's a collapse in asset prices (not consumer prices) that will restrict bank lending and cause consumers to hold off on consumer purchases.'Law of Bad Ideas, February 20, 2014</blockquote>