China, Credit and the IMF

Is China's rise merely a symptom of the global credit bubble? And is the IMF right to discourage saving?...

YOU MIGHT not think of 9.1% GDP growth as slow. But by Chinese standards, that's the slowest annual pace since 2009, writes Dan Denning, editor of the Daily Reckoning Australia.

And remember, the official inflation for September was an annualized 6.1%. What you're looking at then, is a maximum of 3% GDP growth in China – assuming GDP isn't over-estimated and inflation under calculated.

China consumes 40% of the world's copper. It wasn't a surprise, then, that copper traded as low as $3.25/lb in New York after the news of China's slower growth came out. If the universe can't expand forever, then China can't either. That truth is immutable. The question is this: is China's expansion slowing down? Or is its economy due for a contraction?

There's a lot at stake for Australia in the answer to that question. For example, if you took the view that China's emergence as an economic superpower since the mid-1970s is a direct result of the decline of the US Dollar as a store of value (among other things), then China's amazing growth would be a kind of derivative of Dollar devaluation.

Suggesting that China is merely the largest, most spectacular evidence of a global credit bubble is probably deeply insulting to the Chinese. It also reflects a tendency by Americans (of which your editor cannot help being one) to make everything about America. It's not always about you, America.

China (like India) has a 5,000-year-old culture and is emerging from nearly a century of forced stagnation. It's got its own story and its own future independent of the US Dollar. But a Dollar-free future may be a few years down the track for China.

In the meantime, China will have to reckon with a credit bubble of immense proportions. Its bubble is a product of linking its currency, the Yuan, with the Dollar. When America inflates, China must follow. And as the world deflates, how can China not follow?

The International Monetary Fund, for its part, is pushing for a return to the status quo. Specifically, it wants people to spend money they don't have in order to boost demand for the sake of making GDP grow. When you realize the IMF is really the long arm of central banks and governments, then it's easier to understand why it wants more spending, even if it means greater government debt.

It's disgraceful really. The IMF provided a briefing to G-20 finance ministers over the weekend and trotted out the corpse of John Maynard Keynes. The report warned of "severe risks" to the global economy if the entire world decides to get thrifty at the same time. This is Keynes's famous Paradox of Thrift, which suggests that if everyone saves, demand will collapse and the economy will enter a Depression.

Newsflash IMF: we're already in a Depression. Nonetheless, the organization intoned, "The overarching risk is of a global paradox of thrift as households, firms and governments around the world reduce demand...Downside risks have increased and are severe."

Blah blah blah. This is nonsense. The core problem is that debt-financed growth is no longer real growth. The world's huge debt loads need to be extinguished. And then savings can become the basis of new credit, dealt out prudently by banks to enterprises that create real value and real returns for investors.

That's after the revolution, though. First, the revolution...or the Depression...or the crash. Or all three.

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