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Same Difference: US and China on Identical, Empire-Destroying Fiat Debt Path

Mises Institute  ( Original )
JUN 12, 2018

One of the great tyrannies of the stock market is the quarterly reporting cycle. Public companies routinely cut off their corporate noses to spite their corporate faces, prioritizing extreme short-term results at the expense of longer-term company health and sane, sustainable planning.

Why? Because today’s CEO knows that if he angers today’s shareholders, it’s highly likely he’ll be yesterday’s CEO and replaced by someone else. And CEOs, more than anything else, can be counted on to act in their own self-interest. Collecting giant compensation for as long as possible is the name of their game.

It is identical to the dynamic that drives politicians. Their foremost concern is getting elected, and then re-elected. So they will say and do whatever they have to, inconvenient truths easily discarded for out-and-out lies that increasingly fool an ever-lazier, less-engaged voting public. They will employ drastic short-term measures (and fiat currency manipulation, by definition, is a doomed-from-the-start short-term measure) that are incalculably damaging to countries and societies over even the medium term, and absolutely, unquestionably will ruin them over the long term.  

But what if you’re in office for life? Such is the reality of Chinese president/strongman/emporer/call-him-what-you-will Xi Jinping. He has a huge political upper hand against an adversary who needs to worry about getting votes in a couple years. He can afford to play 3D chess against other heads of state playing checkers. So why isn’t he doing so?

The prime directive for any ruling Chinese leader is to avoid a Tiananmen Square redux at all costs. So while he needn’t worry about getting votes, the ghosts of relatively recent, violent societal upheaval drive similar behaviors to Western leaders. Namely, an incredible reliance on fiat debt to sustain the mirage of a healthy economy.

Ironically, Trump and Xi, while engaging in plenty of public sniping and chest-puffery, are pursuing the same empire-destroying policies as they attempt to promote and sustain their own personal agendas and power. As with the average corporate CEO, whether or not that will ultimately destroy the very entity they govern is of far less concern than how it benefits them today.

Unlike his Western competitors, China’s new strongman, Xi, can implement his long-term strategy in a targeted and gradual fashion. Xi explicitly underlined his goal of asserting China’s interests in the world by referring to military, economic, political, and diplomatic means in his speech at the National Congress in October 2017.

He left no doubt that China was not willing to compromise in any shape or form with regard to its territorial integrity (N.B. Taiwan, Hong Kong, Tibet), and he issued point-blank threats against separatist tendencies.

However, the transformation of the economy could (intentionally or otherwise) cause economic distortions not only in China but globally. Recent years have been dominated by a massive expansion of credit. In fact, it is often said that China has blown the biggest credit bubble in history.

It seems, there are greater similarities between China and the US than may be visible at first glance. China builds real estate for a shrinking population, invests for an overindebted client (the US, which even insists on a drastic reduction of the bilateral trade deficit) and finances all this with money it does not have.

ORIGINAL SOURCE: China is in Trouble by Ronald-Peter Stöferle and Mark J. Valek at Mises Institute on 6/9/18