Contact us
CALL US NOW 1-888-GOLD-160
(1-888-465-3160)

China’s Keynesian Experiment

  by    0   0

While President Trump nags the Federal Reserve to reinstitute Obama-era monetary stimulus, China has already taken off down that path. And it actually has some people in the mainstream concerned.

According to a Reuters report, the Organisation for Economic Cooperation and Development (OECD) is warning that while Chinese government stimulus may boost the country’s economy in the short-run, it “may undermine the country’s drive to control debt and worsen structural distortions over the medium term.”

Sound familiar?

The Chinese economy has been slowing in recent months due to weaker domestic demand and the ongoing trade war with the US. In an attempt to boost the economy, the Chinese government has launched a massive stimulus program. According to Reuters, local government will be allowed to issue $320.6 billion in bonds for infrastructure projects this year. The would represent a 59% increase over last year.

Overall, China’s fiscal stimulus could climb as high as 4.25% of GDP this year, up from 2.94% in 2018, according to the OECD.

This is the typical Keynesian response to an economic slowdown. We’ve seen it before. The Obama administration launched a massive stimulus program during the Great Recession – much of it targeted at infrastructure spending. But the money from these projects doesn’t rain down from heaven. It has to be borrowed. That means it must be paid back. According to S&P Global Ratings, local governments in China are already sitting on as much as $49 trillion yuan ($560 billion) in debt.

The US faces a similar problem after nearly a decade of both government and central bank stimulus. While mainstream pundits and talking heads cluck about great jobs number and amazing economic growth, by and large, they completely ignore the fact that the entire economy is built on giant piles of debt.

The OECD also raised concerns about “misallocations” caused by all of this economic stimulus.

Infrastructure stimulus could lift growth over the projection horizon, but it could lead to a further build-up of imbalances and capital misallocation, and thereby weaker growth in the medium term.”

You will always end up with misallocations of resources when governments spend money. Lacking market guidance, stimulus money gets allocated through the political process. That means it often gets spent on useless projects for the benefit of the politically connected. You end up with things like “bridges to nowhere.”

Flooding the economy with money printed out of thin air also more generally leads to malinvestments. In fact, skyscraper construction driven by artificially low interest rates and stimulus money can predict economic crashes, as economist Mark Thornton has shown. This is a fundamental aspect of the business cycle.

In addition to running up government debt, government stimulus can indirectly lead to a rise in corporate debt. Chinese corporate debt already stands at 160% of the country’s GDP.

In March, the Chinese government announced tax and fee cuts of 2 trillion yuan for companies this 2019.

In another move that will sound familiar to Americans, the Chinese government is pushing banks to loosen lending standards. From Reuters:

But there are concerns that looser lending standards may fuel a further rise in bad loans as well as inefficient investment and speculation, particularly in the property market. Underscoring the OECD’s warning about debt risks, data on Tuesday showed growth in new home prices accelerated in March after cooling since November 2018. Average new home prices in China’s 70 major cities rose 0.6 percent, quickening from a 0.5 percent gain in February, according to Reuters calculation of data released by the National Bureau of Statistics (NBS). Home prices in China are expected to rise more this year than predicted just a few months ago, a recent Reuters poll showed, as the government urges banks to increase lending and lower interest rates to support the economy.”

But really, what could go wrong?

It’s interesting that a mainstream international economic body is expressing concern about this Keynesian stimulus program in China and that Reuters reported on it. But it is also telling the government officials have not learned any lessons from the past. We see the same thing here in America with President Trump’s call for the Fed to launch more QE. Keynesian “cures” aren’t going anywhere.

As Peter Schiff said in a recent podcast, “Every time [politicians] make the problems bigger by kicking the can down the road, there’s more political motivation to kick it again. Because the worse the problems are, the more painful is the resolution and of course, nobody wants to be blamed. Nobody wants to be the messenger that gets shot full of holes because they deliver the bad news.”

Bitcoin buy gold from SchiffGold

Get Peter Schiff’s most important Gold headlines once per week – click here – for a free subscription to his exclusive weekly email updates.
Interested in learning how to buy gold and buy silver?
Call 1-888-GOLD-160 and speak with a Precious Metals Specialist today!


Related Posts

10% Gold in Your Investment Portfolio; Get Ahead of the Crowd

Last week, Independent Strategy head David Roche said gold could hit $2,000 by the end of the year. And Rosche isn’t the only big name in the investment world who sees a shiny future for the yellow metal. Mark Mobius recently said he thinks gold could push above $1,500 as central banks move interest rates […]

READ MORE →

World Gold Council: Gold Could Shine as Heightened Risk Meets Easy Money

Gold Flows into ETFs for Second Straight MonthGold will likely shine over the next six to 12 months as heightened risk meets easy money — this according to the World Gold Council’s mid-year outlook. Gold ranked as one of the best-performing assets through the first half of 2019, beaten only by stock markets – which have also been supported by the turn […]

READ MORE →

Gold-Backed ETF Gold Holdings Chart Biggest Increase in Seven Years

Holdings in global gold-backed ETFs surged in June, charting their largest increase in seven years driven by increased geopolitical uncertainty, fear of an economic slowdown and widespread anticipation of looser central bank monetary policy. Globally, gold holdings in ETFs rose sharply by 127 tons last month, according to the latest data from the World Gold […]

READ MORE →

Poland Gobbles Up Gold, Plans to Bring It Home

Poland has added 100 tons of gold to its reserves through the first half of this year and plans to move at least half of its hoard from England to National Bank of Poland vaults in Warsaw. We’ve reported extensively on gold purchases by central banks, particularly China and Russia as those countries seek to […]

READ MORE →

China Adds to Gold Hoard for the Seventh Straight Month

For the seventh straight month, China added a significant amount of gold to its official reserves. The People’s Bank of China’s gold hoard grew another 10.3 tons in June, according to information released by the bank. Over the last seven months, the Chinese have increased their gold reserves by just over 84 tons.

READ MORE →

Comments are closed.

Call Now