Why The Wheels Are Falling Off China’s Boom
by Charles Hugh Smith
The rot in China’s economy is deeper than inflation and malinvestment.
Despite their many differences, the economies of China and the U.S. share a number of key traits: both are corrupt, rigged, crony-Capitalist, rely on phony statistics and propaganda and operate with two sets of rules: one for the Elites, and another for the masses.
Given these similarities, it’s no wonder that the wheels are falling off both economies.
There are some key differences, of course, which will make the crashing of China’s boom all the harder. China’s leadership likes to do things in a big way, and so its campaign of “extend and pretend” over the past three years has been unprecedented.
This isn’t just the consequence of a Command Economy overseen by a Central State; the “extend and pretend” boom was fueled by stupendous borrowing by local governments and private enterprise as well.
This flood of money has severely distorted China’s economy, yet the imbalances are now normalized. The system and players have now become dependent on this level of stimulus, so withdrawing the distortions would have negative consequences. Yet allowing the flood of investment to continue will unleash higher inflation, which is already triggering social unrest: Chinese Street Vendor Dispute Expands into Violent Melee.
Thus China’s leadership faces the same impossible conundrum as Bernanke has in the U.S.: Your Pick, Ben, But One Goes Off the Cliff (April 22, 2011).
When a system become this precarious and imbalanced, it can best be modeled by stick/slip destabilization: blaming the last grain of sand that destabilizes the entire pile for the collapse is to ignore the real cause: the entire system is unstable.
Here are a few factors which are widely misunderstood or discounted by the mainstream financial media.