Home Finance Reserve Bank “Geniuses”, and Why is China’s “Credit” So Important?

Reserve Bank “Geniuses”, and Why is China’s “Credit” So Important?

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Money printed out of thin Chinese air is buying Australian farmland

By Greg Buck

Well, credit is a pseudonym for debt, which is a pseudonym for “money printing”.

In 2017, we are not allowed to say that the Central Banks are engaged in “money printing”, because this conjures up notions such as “irresponsible”, “easy way out”, “kicking the can down the road”, “money grows on trees” etc.  The words we use are “quantitative easing” or “asset purchases”, but what we mean is plain ole money printing!

Now, our chief economists in the Central Banks, IMF, World Bank etc cling to the 1950s “bath tub” model of the economy.  This model presumes that each economy is its own “bathtub”, and whatever one does to stimulate and/or manipulate the economy in the bathtub, remains in the bathtub. Print $100B, toss it into the tub, and it remains in the tub, generating employment and economic activity as if nothing spilled out of the tub! Great theory! Only it is garbage. In 2017, what actually happens is that the tub leaks all over the place, because we live in a globalized world.

So, turning to money, or credit, or debt, and China for example.  China prints $100B.  With a B.  Hands it to its banks, in order to “stimulate” the economy.  Where does this $100B go? According to the geniuses at the Central Bank, it goes into the Chinese economy, creating jobs and prosperity all round. Wrong. Large quantities end up in the hands of assorted cronies, businessmen and otherwise connected folk, and they promptly spirit the stuff to “safety”, out of China… laundering the newly printed cash into places like Canada and Australia.

Money is “fungible”. It shifts around. It does not stay in the bloody bathtub!

This merry dance goes on as long as the Chinese government tolerates all of its newly printed moolah bolting overseas, and as long as the Canadians and Australians tolerate exchanging their farms, houses and businesses for “credit” emanating from China.  Or until people wake up and realise the con afoot, and they elect somebody like Trump or vote for something like Brexit.

And then .. the “bubble” that was the credit emanating from the printing presses across the sea bursts, and all of that “credit” turns out to be worthless.

That’s why China’s debt to GDP matters.  Because one day, it’s gonna pop.

Forecasts

This chart below summarizes the “forecasts” made by our erstwhile geniuses at the Reserve Bank regarding wages growth, over the past decade.

The black line is “reality”.  The coloured lines represent the “forecasts” made in each of the marked years.

Now, one might have thought that after all this time, the smart-alecs earning $500K-$1M per annum to forecast might have figured out that, er, maybe the model’s wrong?

See… the assumption that driving interest rates down by printing money is going to boost wages presumes a bathtub model, and assumes that the money stays in the bathtub, and generates activity in Australia, trickle-down effect and all that. What happens in practice though is that the newly minted money handed to the banks ends up elsewhere — speculating on US futures, or Japanese Yen, or share buybacks…

And as for wages?

Well, why would you risk your newly minted windfalls doing the hard stuff, building businesses and taking risks, when you can go off and front-run the central banks by gambling with it risk-free in the financial markets all over the world, say by buying Venezuelan or Greek bonds?

But our central bank geniuses wallow in 1950, lying in the bathtub, wondering why the hell wages aren’t growing, while asset prices are going through the roof.

Tick, tick … POP.

 

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12 COMMENTS

  4. This was also sent — via email — to me from Greg. As a further addition:

    “Now, the trick here is that this asset price inflation is a one-time thing.

    Those in the privileged classes, near to the free-money spigot, don’t care what something “costs”, because they can pay any price. They don’t need to earn their money. For them, it “grows on trees”.

    Those who bought assets yonks ago, before the “free money” era, when things were affordable for people who worked for a living, well, they simply see their existing assets balloon in value thanks to the central bank money printers.

    But the rest of us, and most importantly, the next generation who still cling to the idea that one should “work” for a living .. well, there’s big trouble here, because there’s no way that the average yokel can actually work to buy the average house, pay for the average school, buy the average groceries etc, unless he or she takes on a monstrous debt.

    And it’s getting worse, because wages – “work” – is going down, while asset prices – costs – go up.

    Meanwhile, the geniuses at the central banks wallow in their bathtubs, fiddle, print, jawbone and scratch their heads, instead of getting the hell out of way and letting Capitalism do its work.”

    From GREG BUCK

  7. Greg, the Chinese actually imposed tight exchange controls earlier this year, precisely to stop the laundering exercise you refer to. There have also been literally thousands of arrests as part of Xi’s crackdown on corruption. On my recent trip to China one of the things that impressed me was the frankness with which they are discussing the problem, and un like our do-nothing bunch of parasitic time servers in Canberra, actually doing something about it. The same is true of a whole range of other issues.

  9. Globalism is communism , governed by central bankers . By changing the blood , they are eradicating the history of nations as we knew them . In Sydney alone , 1000 new settlers (punters for the banking cartel) arriving daily for the past five years . The CCP manifesto is the blueprint for world domination . Oz and Chinese bankers are in the same club , and “we the people ain’t in it”.

      • Mary ,
        nothing can be done . But , as long as we continue to have open talks , the awareness may spread about the massive fraud of printing our money for the price of the paper , loaning it to us and then demanding repayment with compounding interest .

        Marcus Tullius Cicero
        ” A nation cannot survive treason from within . An enemy at the gates is less formidable …But the traitor moves amongst those within the gate freely , his sly whispers rustling through … all the alleys , heard in the very halls of government itself .”

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