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China Crash 2011 - Part I: The repetition compulsion of central bankers - Eric Janszen

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  • China Crash 2011 - Part I: The repetition compulsion of central bankers - Eric Janszen

    China Crash 2011 - Part I: The repetition compulsion of central bankers


    It’s China’s turn to pop a world-class asset bubble and smash the global economy

    • China tried to pop its property bubble once before but the global economic catastrophe caused the US financial crisis aborted the effort in 2008
    • This week China re-launched the crash phase of its Greenspan Credit Bubble with Chinese Characteristics

    • Watch out for flying bricks

    Why don’t central banks, and the governments they front for, ever learn? The only way to prevent macro-economic damage from a collapsed asset bubble is to not allow a bubble to develop in the first place. Once a government takes the path of winning popular favor with the temporary prosperity that’s produced by asset price inflation, there is no easy way out, as Japan re-discovered in the 1990s, the US found out again in the 2000s, and China will experience soon enough. As part of our project to map out the coming decade, this week we investigate the prospect of the collapse of the Greenspan Credit Bubble with Chinese Characteristics.

    Monday China embarked anew on a treacherous program of rate hikes to end a property bubble that took root there in 2005.

    Here is a game readers can play at home to simulate the genius of a central bank managing an asset bubble down via interest rate hikes.

    Find a cinder block and a bungee chord. Place the cinder block on the far end of your kitchen table. Attach one end of the bungee chord to the cinder block and put the other end between your teeth. Kneel down so that your face is level with the tabletop and pull the chord until it is taught.

    Now it’s time to begin “tightening” the way central banks try to, bit by bit, to bring an asset bubble to a benign end, or so they believe.

    Pull ¼ of an inch. If nothing happens then pull another ¼ inch. If nothing happens then do it again, and again.

    Silly game, you’re thinking. A child can see how this will turn out. Sooner or later that concrete brick will sing across the table and smash your face.

    As obvious as the outcome might be to a 10-year-old, the brick-in-the-face lesson remains lost on central banks. They must be slow learners because repeat it over and over. Or perhaps there is a common institutional neurosis shared among central banker’s that compels them to repeat the same mistake, to recreate the experience of concrete on teeth.

    For years I’ve referred to China’s asset bubble economy as a Greenspan Credit Bubble with Chinese characteristics. This week we find that not only the policies that created China’s bubbles but even the policy responses to attempt to tame them mirror Greenspan’s.

    Democracy or dictatorship, credit bubbles buy political favor... while they last

    The beauty of a credit bubble is that while they expand both the creditor and the debtor believes they are getting rich. But unless the asset purchased with debt is appreciating, as might a piece of farmland, in fact only one of the two of them is getting richer, the one who holds the loan has an asset on his or her balance sheet. The debtor may increase his or her purchasing power temporarily, but once the cash is spent -- on a car or tuition at a culinary school or a home in the US since 2006 -- all they have left is a depreciating asset and a liability.

    After a bubble gets big and fearsome enough, and all of the political benefits have accrued – capital gains tax revenues, high paying appointments to influential political posts such as running Fannie Mae or Freddie Mac, large scale wealth redistribution from debtors to creditors, and so on – and a catastrophic crash looms, first governments attempt to slow a bubble gingerly, such as restricting bank credit and raising taxes on particular classes of capital gains.

    But speculators are not discouraged by such half-measures. The specter of marginally higher costs pale beside the dreams of quick riches created by the central bank during years of bubble growth. The speculator believes that the wealth and success they have achieved during the bubble resulted from their own genius, and this misguided view undoes all but the most self-aware of investors in such periods. The idea that excess liquidity and cheap credit were the main sources of their good fortune only occurs only to a small number of those who understand how asset bubbles operate, both economically and politically, as iTulip.com readers have since 1998 when we played the technology bubble until April 2000.

    Asset versus wage and commodity price inflation: the central banker’s game


    If commodity and wage inflation containment policy is all about managing consumer inflation expectations downwards, then the central bank’s policies that produce asset price inflation, to bribe the middle class into accepting insane levels of income and wealth inequality, is aimed at managing speculators' asset price inflation expectations upwards. Later, affecting an asset bubble policy about-face from encouragement to discouragement is like trying to convince Paris Hilton fans to stop reading her tweets.

    The “solution” that the Greenspan Fed devised to quell the technology stock bubble was a program of 25 basis point rate hikes. The theory was that these clearly communicate the central bank’s determination to end the bubble, and cause the speculators to exit the market in an orderly fashion.

    The central bankers’ dream is that these tender rate hikes will first slow the bubble, then allow it to deflate gradually to give the macro-economy a soft landing. But that never happens. They believe this despite the evidence that these measures cause the asset bubble to collapse. Every. Single. Time. It’s as predictable as the laws of physics that propel a brick airborne.

    The NASDAQ Cinder Block

    After six interest rate hike tugs the NASDAQ cinder block flew off the table and smashed the Fed in the face in 2000.


    The first five hikes (percent, right hand axis) were quarter point each, just like the Bank of China’s on Monday. The final sixth hike that finally produced the NASDAQ crash starting in Q2 2000 (price, left hand axis) was a full half point just for good measure, nine months after the tightening program began.

    Six months later the Fed began unprecedented panic rate cuts from 6% in Feb. 2001 to 1.5% by the end of the year. Many analysts at the time thought it was U.S. 1929 all over again, or maybe 1990 Japan, and a deflation spiral was sure to follow. Within a year, as the FIRE Economy crisis indeed began to spill over into the Productive Economy, median duration of unemployment (weeks, right hand axis) doubled from under six weeks to over 10.

    The Housing Bubble Cinder Block

    But as it turned out the year 2000 wasn’t 1929. The tech bubble was Greenspan’s warm-up for an even bigger and more macro-economically devastating bubble, the housing bubble. Incredibly, after allowing the housing bubble to grow by ten trillion dollars in fictitious value via asset price inflation, the Fed followed the exact same procedure as before except this time to pull a ten trillion ton brick off the table.


    The Fed tugged on interest rates for two years before the housing bubble finally burst and the cinder block went flying. But as we explained in 2004 (See Housing Bubbles Are Not Like Stock Market Bubbles, January 2004), when housing bubbles collapse they don’t pop like stock market bubbles. The process is slow and corrosive, like rust, rather than an sudden like a stock market crash. Bank analyst Chris Whalen can be heard repeating our forecast after the fact six years later.






    A stock market crash informs the unfortunate investor of their condition in quarterly stock portfolio statements, but homeowners don't experience their asset price deflation pain until they try to either refinance or sell their home, and that happens over years not quarters. As the realization of losses is gradual, so is the political, legal, and economic fallout. If a stock market crash is a ball of sodium burning up in a bucket of water, and housing bubble crash is pickup truck rusting on the bottom of a lake.

    The main reason that the macro-economic damage of a property bubble is far more severe and long lasting than an equity bubble is that property bubbles are debt not equity financed, and a debt is an asset on the balance sheets of the politically protected commercial banking class whereas stocks are owned by a politically diverse group. The losses of banks are pawned off on the taxpayer, and if the taxpayer can't cover it then the nation's balance sheet takes the bad debts on.

    This is why, ultimately, private credit risk (See Credit Risk Pollution, April 2006) expresses itself as currency risk, and why we bought gold in 2001.
    Fourth Currency (Gold) Price Rise Eight Step Thread of Causation:
    1. Asset bubbles end in
    2. Financial crises that cause
    3. Debt deflation that forces
    4. Governments to deficit-spend to reduce unemployment that results in
    5. Fiscal crisis that leads to
    6. Sovereign debt crisis that ends in
    7. Currency crisis that causes
    8. Decline in the exchange rate value of the asset bubble host country's currency

    In the US case, the reduced equation is:

    US asset bubbles + n years = rising gold prices

    If we were in Argentina in 2001 instead of in the US we’d have bought US dollars instead of gold, but as the world’s reserve currency is the source of currency risk in the current case, the only place to go to hedge dollar currency risk was into gold. But that still leaves open the question, how will the global currency imbalances work out?


    China Crash 2011 – Part II: Do the currency wars end with a bang or a whimper?

    For the perspective of an expert who consults to governments worldwide on trade, monetary, and currency policy, I caught up with Michael Hudson in Germany for an interview on Wednesday. His Financial Times editorial on the currency wars appeared the day before. Here’s his take. more... $ubscription

    Tulip Select: The Investment Thesis for the Next Cycle™

    __________________________________________________

    For a concise, readable summary of iTulip concepts read Eric Janszen's 2010 book The Postcatastrophe Economy: Rebuilding America and Avoiding the Next Bubble.

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    All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Nothing appearing on this website should be considered a recommendation to buy or to sell any security or related financial instrument. iTulip, Inc. is not liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. Full Disclaimer
    Last edited by FRED; 10-25-10, 12:19 AM.

  • #2
    Re: China Crash 2011 - Part I: The repetition compulsion of central bankers – Part I: Let us raise up then crash the economy, again - Eric Janszen

    Pierced Fans, Stiff Cadres and Hip Rock



    By ANDREW JACOBS

    ZHENJIANG, China — A curious thing happened this month at the Midi Music Festival, China’s oldest and boldest agglomeration of rock, funk, punk and electronica.

    Performers took musical potshots at the country’s leaders, tattooed college students sold antigovernment T-shirts and an unruly crowd of heavy metal fans giddily torched a Japanese flag that had been emblazoned with expletives.

    Curious, because the event, a four-day free-for-all of Budweiser, crowd-surfing and camping, was sponsored by the local Communist Party, which spent $2.1 million to turn cornfields into festival grounds, pay the growling punk bands and clean up the detritus left by 80,000 attendees.

    The city cadres also provided an army of white-gloved police officers, earplugs in place, who courteously endured bands with names like Miserable Faith and AK47 while fans slung mud at one another.

    The incongruity of security agents facilitating the sale of cannabis-themed merchandise was not lost on the festival’s organizer, Zhang Fan.

    “The government used to see rock fans as something akin to a devastating flood or an invasion of savage beasts,” said Mr. Zhang, a handful of whose events have been canceled by skittish bureaucrats since he pioneered the Chinese music festival in 2000. “Now we’re all part of the nation’s quest for a harmonious society.”

    http://www.nytimes.com/2010/10/24/wo...html?ref=world

    All part of China's bubble-popping program? Social engineering in action .....

    Comment


    • #3
      Re: China Crash 2011 - Part I: The repetition compulsion of central bankers – Part I: Let us raise up then crash the economy, again - Eric Janszen

      They leaned from us that yup redirect anger at nonsense like punk rock festivals,wrestlmania, pro sports, real housewives and probably soon enough wedge issues like gay sex.

      Originally posted by don View Post
      Pierced Fans, Stiff Cadres and Hip Rock



      By ANDREW JACOBS

      ZHENJIANG, China — A curious thing happened this month at the Midi Music Festival, China’s oldest and boldest agglomeration of rock, funk, punk and electronica.

      Performers took musical potshots at the country’s leaders, tattooed college students sold antigovernment T-shirts and an unruly crowd of heavy metal fans giddily torched a Japanese flag that had been emblazoned with expletives.

      Curious, because the event, a four-day free-for-all of Budweiser, crowd-surfing and camping, was sponsored by the local Communist Party, which spent $2.1 million to turn cornfields into festival grounds, pay the growling punk bands and clean up the detritus left by 80,000 attendees.

      The city cadres also provided an army of white-gloved police officers, earplugs in place, who courteously endured bands with names like Miserable Faith and AK47 while fans slung mud at one another.

      The incongruity of security agents facilitating the sale of cannabis-themed merchandise was not lost on the festival’s organizer, Zhang Fan.

      “The government used to see rock fans as something akin to a devastating flood or an invasion of savage beasts,” said Mr. Zhang, a handful of whose events have been canceled by skittish bureaucrats since he pioneered the Chinese music festival in 2000. “Now we’re all part of the nation’s quest for a harmonious society.”

      http://www.nytimes.com/2010/10/24/wo...html?ref=world

      All part of China's bubble-popping program? Social engineering in action .....

      Comment


      • #4
        Re: China Crash 2011 - Part I: The repetition compulsion of central bankers – Part I: Let us raise up then crash the economy, again - Eric Janszen

        "...torched a Japanese flag...." not their own chinese flag. a japanese flag.

        Comment


        • #5
          Re: China Crash 2011 - Part I: The repetition compulsion of central bankers – Part I: Let us raise up then crash the economy, again - Eric Janszen

          Originally posted by jk View Post
          "...torched a Japanese flag...." not their own chinese flag. a japanese flag.
          MY gosh! Freedom of expression..... change we will have to believe is occurring right in front of our eyes....

          Comment


          • #6
            Re: China Crash 2011 - Part I: The repetition compulsion of central bankers – Part I: Let us raise up then crash the economy, again - Eric Janszen

            Originally posted by jk
            "...torched a Japanese flag...." not their own chinese flag. a japanese flag.
            ej is predicting a chinese crash. if the u.s. consumer is tapped out and can no longer import chinese goods, and europe is going into the dumper, how will the chinese, with its millions of excess 20-30 year old males, react to growing unemployment and social unrest? have more rock concerts? or a military push and increased nationalism?

            Comment


            • #7
              Re: China Crash 2011 - Part I: The repetition compulsion of central bankers – Part I: Let us raise up then crash the economy, again - Eric Janszen

              Originally posted by jk View Post
              ej is predicting a chinese crash. if the u.s. consumer is tapped out and can no longer import chinese goods, and europe is going into the dumper, how will the chinese, with its millions of excess 20-30 year old males, react to growing unemployment and social unrest? have more rock concerts? or a military push and increased nationalism?
              We have long believed that the Chinese government, even more than most governments, will crank up the nationalism in the event of an economic crisis, just as they did when the US accidentally bombed the Chinese embassy in Belgrade. Ten years later, here is China's official position:

              "During interviews, some Chinese experts believe that objectively, the bombing of the Chinese embassy offered China an opportunity to reflect and transform. On the one hand, the general public has realized that economic construction is the basis on which the enhancement of the overall national strength rests. On the other hand, a strong belief has formed among the general public that only strong military power and an advanced national defense system can fundamentally protect and safeguard the results of economic construction."

              10th anniversary of the bombing of the Chinese Embassy in Belgrade
              Ed.

              Comment


              • #8
                Re: China Crash 2011 - Part I: The repetition compulsion of central bankers – Part I: Let us raise up then crash the economy, again - Eric Janszen

                Originally posted by FRED View Post
                We have long believed that the Chinese government, even more than most governments, will crank up the nationalism in the event of an economic crisis, just as they did when the US accidentally bombed the Chinese embassy in Belgrade. Ten years later, here is China's official position:

                "During interviews, some Chinese experts believe that objectively, the bombing of the Chinese embassy offered China an opportunity to reflect and transform. On the one hand, the general public has realized that economic construction is the basis on which the enhancement of the overall national strength rests. On the other hand, a strong belief has formed among the general public that only strong military power and an advanced national defense system can fundamentally protect and safeguard the results of economic construction."

                10th anniversary of the bombing of the Chinese Embassy in Belgrade
                putting aside how grim this all is, what do you think about "defense" stocks? if the only thing we can sell [besides commercial aircraft] is military equipment, and if we can predict a chinese nationalist/militarist build up, shouldn't we be investing in lockheed, et al?

                and if what got the u.s out of the great depression, finally, was wwii, what about the benefits of a new [hopefully cold] war? if we live in a world of inadequate demand, what's better than military spending, which builds enormously expensive things which we hope never to use?

                Comment


                • #9
                  Re: China Crash 2011 - Part I: The repetition compulsion of central bankers – Part I: Let us raise up then crash the economy, again - Eric Janszen

                  Originally posted by jk View Post
                  putting aside how grim this all is, what do you think about "defense" stocks? if the only thing we can sell [besides commercial aircraft] is military equipment, and if we can predict a chinese nationalist/militarist build up, shouldn't we be investing in lockheed, et al?

                  and if what got the u.s out of the great depression, finally, was wwii, what about the benefits of a new [hopefully cold] war? if we live in a world of inadequate demand, what's better than military spending, which builds enormously expensive things which we hope never to use?
                  Ironically, just as the US and China joined forces (unofficially) against the USSR, the US and Russia could (again unofficially) join forces against China.

                  Siberia is very empty and a resource treasure box. And there *is* enough of a historical basis for China claiming those lands.

                  Comment


                  • #10
                    Re: China Crash 2011 - Part I: The repetition compulsion of central bankers – Part I: Let us raise up then crash the economy, again - Eric Janszen

                    Just for laughs

                    http://www.bloomberg.com/news/2010-1...rod-china.html

                    G-20 Vows to Avoid Weakening Currencies as Leaders Prepare to Prod China




                    Strategists said the decisions taken in Gyeongju were unlikely to mark an end to the dollar’s recent slide or trigger a quicker rise in the yuan. Photographer: Andrew Harrer/Bloomberg



                    Group of 20 finance ministers and central bankers vowed to avoid weakening currencies to lift exports, leaving leaders to flesh out new ways of prodding fellow member China to allow faster gains in the yuan.
                    Officials ended talks in South Korea on Oct. 23 pledging to refrain from “competitive devaluation” and to let markets set foreign-exchange values more as they sought to calm fears that they risk a trade war by using cheaper currencies to spur growth. They called for more sustainable current-account gaps without embracing a U.S. proposal for targets, an initiative aimed at making a yuan advance more palatable to China.

                    Comment


                    • #11
                      Re: China Crash 2011 - Part I: The repetition compulsion of central bankers – Part I: Let us raise up then crash the economy, again - Eric Janszen

                      Originally posted by FRED View Post
                      We have long believed that the Chinese government, even more than most governments, will crank up the nationalism in the event of an economic crisis, just as they did when the US accidentally bombed the Chinese embassy in Belgrade. Ten years later, here is China's official position:

                      "During interviews, some Chinese experts believe that objectively, the bombing of the Chinese embassy offered China an opportunity to reflect and transform. On the one hand, the general public has realized that economic construction is the basis on which the enhancement of the overall national strength rests. On the other hand, a strong belief has formed among the general public that only strong military power and an advanced national defense system can fundamentally protect and safeguard the results of economic construction."

                      10th anniversary of the bombing of the Chinese Embassy in Belgrade
                      Don't forget about the easily forgotten Hainan incident...

                      Comment


                      • #12
                        Re: China Crash 2011 - Part I: The repetition compulsion of central bankers – Part I: Let us raise up then crash the economy, again - Eric Janszen

                        I was doubtful of your basic premise EJ until I tried it. Indeed the breeze block does practically fly across the table as you said. I'm short two teeth, have a nasty black eye and fat lip. But the insight: priceless.

                        If anyone on the board has a good way to explain this to my wife I'm all ears.
                        Last edited by oddlots; 10-24-10, 09:48 PM.

                        Comment


                        • #13
                          Re: China Crash 2011 - Part I: The repetition compulsion of central bankers – Part I: Let us raise up then crash the economy, again - Eric Janszen

                          Originally posted by jk View Post
                          "...torched a Japanese flag...." not their own chinese flag. a japanese flag.
                          Exciting the crowd, getting people ginned up on nationalism is an old trope. It doesn't mean you are preparing them for war. You just need to keep the crowd in a war mindset.

                          What keeps people in line here. Permanent war and fake tribal conflicts in our entertainment and political media.

                          Comment


                          • #14
                            Re: China Crash 2011 - Part I: The repetition compulsion of central bankers – Part I: Let us raise up then crash the economy, again - Eric Janszen

                            But what does a crash look like in the Chinese system?

                            Comment


                            • #15
                              Re: China Crash 2011 - Part I: The repetition compulsion of central bankers – Part I: Let us raise up then crash the economy, again - Eric Janszen

                              Originally posted by LargoWinch View Post
                              Don't forget about the easily forgotten Hainan incident...
                              Lt. Shane Osborn is a hero of the very best calibre; piloting an aircraft that was, by all accounts, right on the very edge of flyable, right aileron fully vertical, one propeller severely damaged and impossible to feather, nose radome completely smashed off the aircraft, landing with full right aileron, no trim, no airspeed indicator, nor altitude indicator and at 200mph. Magic, pure magic!!!

                              Comment

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