Mike Krieger On When Central Banking Dies: China and Oil

Thursday, March 29, 2012
By Paul Martin

Mike Krieger of KAM LP


China is a topic on which I have differed greatly from many analysts and macro commentators with whom I generally share a similar economic philosophy. What I have heard from many in this camp is this story about how China was the next great power and that they are going to revalue the yuan higher. In that process, they would be able to shift their economy away from a dangerous overemphasis on fixed asset investment and toward consumption. There was this notion that China had its house in order and was about to totally shift the balance of economic power in the world as the West melted away. In the middle part of the last decade I heard this argument yet it always seemed a little preposterous. In 2007/2008 as the Western housing markets and banking systems came apart this view was expressed in the now much maligned (and rightfully so) “decoupling thesis” which turned out to be nothing but a fantasy. Nevertheless, in the aftermath of the implosion in the West there was still this notion that China was ok. That they had figured it out and were about to take over the world. This concept was furthered by the very robust bounce back that they had compared to the weak recoveries in the Western world. Nevertheless, I was extremely disturbed from day one by the manner in which they were going about achieving this recovery. First of all, almost none of it was related to a sudden preeminence of currency strength based consumption that would have potentially allowed the economy to actually restructure. In fact, the yuan stopped appreciating relative to the dollar in July 2008 and didn’t begin strengthening again until June, 2010. the interim, the Chinese did absolutely nothing to restructure and instead went on a Keynesian orgy of stimulus packages and fixed asset investment. Million person cities with no one living in them were built seemingly overnight. The biggest mall in the world was built and there was no one shopping in it. I saw all of these things and immediately called them out on it. I was writing about how China’s recovery was a total sham by the first half of 2009, yet there were all these China bulls talking about how they are “the best capitalists in the world.” What a ridiculous statement. That economy is total command and control at the top, just like EVERY single major economy on earth today. To say China isn’t is total delusion and their response to the crisis proved it to me 100%. They didn’t allow market forces to take over, the flooded the system with liquidity and tried to direct it as well.
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