The comparison to Soviet Union is problematic but definitely more relevant than US investment scenarios that you highlighted.
The US scenario you highlighted would be more comparable to Chinese investment in the last 25 years, no?
The clear difference between Soviet Union and China is that China has a growing and robust economy, with a firm grip on the situation whereas the Soviet Union was aching away on so many lies.
Chinese fabricated financials can be papered over with any kind of magic the state wants to apply to it - so long as the economy continues to move forward the numbers will say anything they want them to say.
The articles comparison may be overblown but it's not without reason.
I believe that the China boom has mostly been had, and we're going to see lower growth from here on in; that said, it'll be consistent and positive and they aren't going to disappear as a superpower.
> Chinese fabricated financials can be papered over with any kind of magic the state wants to apply to it - so long as the economy continues to move forward the numbers will say anything they want them to say.
My feeling is business people and economists are upset that China utterly refuses to follow neoliberal economic polices. Preferring instead to follow old school Keynesian policies. Policy makers thus view China as economically in a state of sin.
Typically countries that try to follow Keynesian economic policies get hammered by western central banks and monetary institutions. However China is way both too large to be 'punished' like that and has iron fisted control of it's own currency. That leaves western and in particular US monetary authorities powerless to do anything.
Hence the constant butthurt blather for the last 30 years that that Chinese expansion only has 5 more years left before it collapses.
Notable: In 2008 the US and Europe followed neoliberal austerity policies to make sure that the banks and paper wealth were made whole. Resulting in a very slow recovery and increasing poverty and political blow back. China responded by building the worlds largest high speed rail network.
Economists just want 'real' numbers from China, numbers that reflect some kind of reality. That's before any ideology sits in.
If there were at least transparency there, we'd all be better off, that said if there were, the 'fudges' necessary to make things worse would be more obviously lies.
As far as 2008 - this was a failure of integrity from the bottom to the top: those taking home loans, mortgage lending staff, executives, those bundling up crap, the ratings agencies, and the laziness of those buying the bundles. It was a systematic failure of reason as well.
Were actual, material numbers to have been objectively published, we wouldn't have had a crisis in 2008, because nobody would have bought bundles of crap, and the market would have needed no correction because it wouldn't have gotten out of hand.
China's central policies surely irk some, of course they can do it if they please, but they cant reasonably contend to be 'free trade' or what not so long as there is such government intervention; they should not be in the WTO.
Everyone in the world would benefit from more objective clarity on all of this.
> Were actual, material numbers to have been objectively published, we wouldn't have had a crisis in 2008, because nobody would have bought bundles of crap, and the market would have needed no correction because it wouldn't have gotten out of hand.
This is circular reasoning. The market works on the information that is available at a given time, which includes all the fudging of numbers that salespeople and marketers do as part of their quest for maximising their individual interest - being handsomely rewarded by the market for this.
No, it's not circular logic. Lying to the public, to the government, false reporting is illegal, and against a lot of other controls and regulations that are in place to support a healthy free market.
There is a lot of information that does not have to be made public and people can do as they please with it - but this was not the cause of 2008, for the most part.
Yes, it's illegal, but it's part of every real market that has ever existed, and will ever exist. The circular logic IMHO is in thinking that the market can prevent this by itself, without having to go through corrections like we had in 2008.
" The circular logic IMHO is in thinking that the market can prevent this by itself"
It's not circular logic because nobody really thinks that the market will stop corruption by itself.
And FYI if regulations and laws were not in place, forget about 'market correction', there would be no market to begin with. See: dysfunctional, corrupt states. They barely have 'markets'.
"but do you feel if regulatory bodies were given more power to execute on already existing laws"
I don't know. It might not be a matter of law or even policy, but failure of those in the office. Maybe they were understaffed, or had the wrong incentives.
Banks have tons of oversight committees and auditors, and they call kind of failed as well.
Major funds buying huge bundled up mortgages were maybe a little lazy in not doing diligence, but that's a 'market' thing not a regulatory thing.
It was a lot of big and small failures - market and regulatory, that caused 2008.
Maybe a bit tangential, but do you feel if regulatory bodies were given more power to execute on already existing laws and to investigate this kind of fraud, we could prevent 2008-style crises in general?
China’s external debt to GDP is one of the lowest in the world, as is their debt per capita.
They aren’t going to be ‘punished’ by creditors because they don’t have significant debt. In fact, it’s more likely that China will be the one doing the punishing down the road.
> Designed to handle 320 trains a day, the Lanzhou-Xinjiang HSR currently has only eight daily services. “Because of this large amount of idle capacity, [the line’s] annual revenues are not enough to pay for its electricity costs,” said Prof Zhao.
> China’s huge leveraged bet on HSR has also generated many other benefits as it dramatically shrinks distances, transforms lives and boosts regional economies. The now three-hour, 1,100km train ride between Guangzhou and Wuhan used to take 11 hours, and tickets are now priced at just Rmb464.
Annual travel on China’s HSR lines — 1.7bn trips — exceeds travel on conventional rail services. And about half of all HSR trips are, like Mr Liu’s, business-related.
“When you think about that, a staggering 850m people are travelling [on HSR] to meet customers, get to their job, visit research centres and so on,” said Mr Ollivier.
If China Railway’s HSR network is ultimately able to pay for itself, it will be a testament to the miracles that can happen when the Chinese Communist party marshals the vast financial resources at its disposal to serve a common good. But if it cannot, there is little doubt who will have to make up the difference.
“China Railway’s debt is government-backed,” said Prof Li. “It won’t default.”
This is what really irks the West. China did not allow themselves to be controlled by external debt like the Soviet Union. The Chinese have not only avoided debt slavery they have actually begun to weaponize their own debt power and such that they are now the world's largest sovereign lender.
The US doesn't borrow money from China. The US swaps treasuries for reserves with the Federal Reserve, which then sells those treasuries to primary dealers, who in turn sell them on the open market where anyone including foreign sovereigns like China, can buy them. In the unlikely event that the Federal Reserve failed to sell those instruments, they'd be left on their balance sheet and the interest would be remitted back to the US treasury. So long as there is any demand for US dollars though, there will always be a demand for interest bearing instruments that have near cash-like liquidity.
Of course if you're referring to China's African colonies and their use of debt to control the local governments, then yes that's accurate.
The US owes China gazillion dollars. Not a gazillion dollars in services and stuff. That's a huge difference because at any point the US can create a gazillion dollars for virtually no effort.
The US owes China both a gazillion dollars, and additionally a gazillion dollars in stuff that dollars can buy - because they have not just US debt, but they also have currency.
Inflation is caused by too much currency chasing too few goods and services. Creating money alone won't cause inflation, that money has to actually be spent in a market where demand is already greater than or equal to supply.
One great example of inflation is the housing market. Private sector banks create money from nothing, by balance sheet expansion, every time they originate a mortgage. Because the stock of housing is less than the demand, every time the banks create more money it drives prices up. Because money in the housing market mostly stays in the housing market, that is people usually take the proceeds from a sale and put them into a new house, there isn't too much spillover to non-housing markets. The same is true for student loans.
So as you can see, two of the largest examples of inflation in the US are caused by the private sector, not Treasury spending. Please note though that the Federal Government does set banking policy as well, along with various direct and indirect guaranty programs, so in that sense ultimately they are responsible.
It will have an impact, no doubt, but probably more like a few points higher inflation than a total crash. Either way, the point is that owing money in a currency you control is vastly different than owing money in a currency you don't.
This is hard to wrap one's head around, so let me try again with some more detail. The US doesn't sell TBills. It creates those interest bearing IOUs ex nihilo, and then swaps them for reserves (also created ex nihilo) with the Federal Reserve. Primary Dealers buy treasuries from the Fed, not from the treasury.[1] The process is absolutely nothing like going to a bank or anyone else to borrow money.
Yes, I get it - but the mechanism does not matter: TBills and TBonds US government debt.
US dollars are a form of debt to the US economy.
So If you hold TBills/TBonds, the US government owes you money.
If you hold USD, then the US economy owes you 'stuff' that you can exchange those dollars for.
Anyone who holds TBills/TBonds is lending to the US Government.
China holds a lot of both, ergo the US is indebted to them ... essentially, the US does borrow money from China. Though the sale may not be directly to China, ultimately, that's who's sitting on those bonds/cash.
"the mechanism does not matter" only if you have no interest in understanding how the system actually works.
China isn't the US's lender and they do not make any loans. They can't foreclose, because no loan exists. All they can do is take their coupons or sell the security to someone else who will do the same.
China can't starve the Treasury of money because the Treasury exclusively borrows reserves from the Federal Reserve.
Also worth noting is that with the stroke of a pen Congress and the President acting in concert could restore the Treasury's power to spend money into existence directly. The US creates securities as a matter of public policy, not because it actually needs them to finance itself.
While everything you've said is accurate, I think you're intentionally skirting around the meat of the issue and that is the value of currency. That we can we can 'print' (colloquially speaking) as much money as we like is not in dispute. However, the consequences of choosing to do so are the heart of the matter. In the past our money was implicitly backed by oil thanks to our petro dollar arrangements, but those times are coming to an end. In the relatively near future our economic decisions will be left to stand, or fall, on their own merit - and substantial outstanding debt owned by foreign not-creditor-creditors will play a role in this.
The US dollar is backed by the taxing power of the United States and the productivity of the US economy. Our economic decisions have always stood and fallen on their own merits. Those merits include the world's largest consumer market and the world's putative strongest military. Foreign desire to export to the US and thereby acquire dollar denominated assets is a function of those merits. So long as that situation holds, foreigners will always desire to swap their non-interest bearing reserves for interest bearing treasuries, at any nominal positive interest rate.
So long as enough oil is denominated in dollars to satisfy US demand for imports, it doesn't really matter what currency other countries pay. A eurodollar crunch doesn't have any appreciable effect on US domestic prices and neither will a eurodollar glut. Petrodollars are eurodollars. [1]
To cut right into the meat of the issue, US issued currency will remain valuable until economic and political collapse destroy US consumer markets and productivity. Foreign asset holders cannot cause that by refusing to show up at treasury auctions. It would take a serious civil war, a world war where the mainland USA wasn't left untouched, or a similar multi-megadeath level catastrophe. And even then it wouldn't be impossible for the US to pull through as a going concern, as it were.
"China isn't the US's lender and they do not make any loans."
Yes, China is a lender to the US, in fact the largest lender [1]. Treasures are loans/bonds. Whoever owns them is a lender to the United States. It's economically the same thing as any other nation selling bonds.
"They can't foreclose, because no loan exists. All they can do is take their coupons or sell the security to someone else who will do the same."
It's the same thing as government debt in all other nations. If you loan money to Greece, you can sell that Greek debt to someone else. The economics of government debt are the same in the US, Canada, and US even if 'how it gets sold' is different.
"China can't starve the Treasury of money "
China can 'starve' any nation to the extent they are a lender to that nation. China's demand for Treasuries makes up part of the demand curve for Treasuries, along with all the the demand. In just the same way as there is demand for Greek, UK and Canadian bonds. Or stocks. Or corn, or whatever.
If China was the only buyer of US Treasuries you can dam well be sure they can 'starve the Treasury' - because if nobody is buying Treasuries, then the government is printing money.
"Also worth noting is that with the stroke of a pen Congress and the President acting in concert could restore the Treasury's power to spend money into existence directly."
Every nation on Earth can do this. It's called 'printing money'. It's not a new idea, and it has dramatic consequences including hyperinflation.
Summary:
China is the #1 lender to the US both in Treasuries (and by holding US dollars.)
US government debt operates differently, but economically is the same thing as government debt to basically any other nation.
The US does have the advantage of 'seignorage' which is to say that because so many people need US dollars to do so many things, that there is a nice bit of 'cushion' in demand for USD, but that's only worth so much.
Otherwise it's just like anywhere else: governments loan at a certain rate, or they can tax, or they can print money and see confidence lost in their currency.
For the benefit of anyone else reading this, I'd like to point out the misconceptions and misinformation above.
> China can 'starve' any nation to the extent they are a lender to that nation. China's demand for Treasuries makes up part of the demand curve for Treasuries, along with all the the demand.
The Federal Reserve controls short term yields completely through its open market operations desk. It controls long term yields as well, because they are a function of expectations of short term yields. If China, or Russia, or anyone else stops buying treasuries, the Primary Dealers will pick up the slack, and they will always take that deal because no matter what the yields are they make money off it.
> If China was the only buyer of US Treasuries you can dam well be sure they can 'starve the Treasury' - because if nobody is buying Treasuries, then the government is printing money.
The Federal Reserve, not China, creates reserves every time the Treasury or a member bank asks it to, which is all the time. It's called an elastic money supply. Relatively few reserve notes are actually printed, because there isn't a lot of demand for Federal Reserve Notes compared to demand accounts.
>Every nation on Earth can do this. It's called 'printing money'. It's not a new idea, and it has dramatic consequences including hyperinflation.
Hyperinflation is a consequence of a collapse in productivity, not of money printing. Some governments turn to printing more money as their money becomes worthless, and there is a feedback loop, but that is a consequence not a cause. Hyperinflation can also occur when the money issuing sovereign effectively loses their sovereignty, fully or partially.
> China is the #1 lender to the US both in Treasuries (and by holding US dollars.)
The Federal Reserve is the USA's bank, not China. China is just another depositor at the Fed and whether they choose to store their capital account surplus with the USA in a interest free account (reserves) or an interest bearing account (treasuries) is irrelevant to the solvency of the US Treasury.
I hope this helped everyone else with an interest in understanding some of the widespread ideologically motivated ("money printing" is a shibboleth) misconceptions in this area.
"I hope this helped everyone else with an interest in understanding some of the widespread ideologically motivated ("money printing" is a shibboleth) misconceptions in this area"
I think the opposite is true, I think you're not grasping some basic economic issues and may need to re-look at the situation.
None of your responses are in fact responses to my points.
This is not correct. The government sells treasury securities at auction.[1] Primary dealers are required to participate in all Treasury auctions.
When the Federal Reserve conducts open market operations, it does create reserves out of nothing, but most Treasury securities are not bought by the Fed. The Federal Reserve can buy treasuries directly from the government via non-competitive bids, but generally buys and sells treasuries on the secondary market via primary dealers.
> The government sells treasury securities at auction
This is true, in the sense that the Treasury and the Fed work together extremely closely, and both are acting as or on behalf of the government. But strictly speaking, it's the Fed that conducts the auction because it is the Treasury's fiscal agent.[1][2]
The link you supplied provides useful information for a retail investor who wants to buy securities, but it's not and it isn't meant to be a description of the fine mechanics of government funding. In the event that the TT&L accounts[3] and Treasury's account at the Fed are together insufficient for Treasury's spending needs, then it creates securities and transfers them to the Fed for auction, in exchange the Fed debits Treasury's deposit account. This all follows from the statutory limitations on both entities. Treasury isn't legally permitted to carry a negative balance at the Fed, but the Fed legally can carry a negative balance on its own account. A primary benefit of and reason for this arrangement is it makes the funding predictable. Personally I find the system elegant in its (legally mandated) complexity.
Saying "the Treasury sells securities at auction" isn't really wrong, seeing as it's just a simplification that is acceptable in virtually every case with the sole exception being discussions like this one. It's a lot like saying "I sold some AAPL stock." You didn't really, your broker did. In everyday conversation there's nothing wrong with these simplifications.
>>My feeling is business people and economists are upset that China utterly refuses to follow neoliberal economic polices.
>>Typically countries that try to follow Keynesian economic policies get hammered by western central banks and monetary institutions.
This is a common trope/conspiracy-theory that's not substantiated by the numbers. Western countries don't follow neo-liberal economic policy, unless you consider an increasingly powerful and unaccountable regulatory state, growing social welfare spending provided at the taxpayer's expense, and interventionist central bank policy, to the tune of the Federal Reserve holding $4.5 trillion in assets now, "neoliberal".
By any broad-based metric of economic freedom, the West has been growing less economically liberal over the last 50 years.
Besides Keynes and obviously Marx, China's nationalist economics policies have been strongly influenced by Friedrich List (who also inspired economic development in Japan).
There are more booms to be found in China, for sure. But corrections/recessions/crashes are needed to wash out the bad elements so the better ones can thrive.
The party has stated they can do this on their own, but given that their families' control of large parts of the economy has become a huge part of the problem they are unwilling to manage (which would have been hard anyways).
Crashes are happening all the time. For example right now P2P lending is crashing hard. The question is if it is worth it to have a systematic crash in order to clear the markets, as in Andrew Mellon's "liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate." China is not the only one in the modern world unwilling to crash systematically.
Perhaps a better comparison is a slightly older one - the economic consequences of the Russian investment in the Trans-Siberian Railway. The significant [struggling to find a citation with numbers] investment as a percentage of GDP between 1891 and 1916 starved other capital investments that would have yielded greater return in the more populated west. In addition, the infrastructure investment brought the Russian Empire into stronger contact with previously distant empires (China and Japan). By 1914 and the start of World War 1, the railway was valuable in bringing resources from Siberia to the west. But, if that capital had been invested in the western provinces, even improved railway network in Ukraine, Poland and Belorussia, would war outcomes have been different. And, would capital investments more directly visible and related to population centers created a dynamic that would have been less sympathetic to Bolshevik ideology?
The US scenario you highlighted would be more comparable to Chinese investment in the last 25 years, no?
The clear difference between Soviet Union and China is that China has a growing and robust economy, with a firm grip on the situation whereas the Soviet Union was aching away on so many lies.
Chinese fabricated financials can be papered over with any kind of magic the state wants to apply to it - so long as the economy continues to move forward the numbers will say anything they want them to say.
The articles comparison may be overblown but it's not without reason.
I believe that the China boom has mostly been had, and we're going to see lower growth from here on in; that said, it'll be consistent and positive and they aren't going to disappear as a superpower.