Global (Economic) Warming

by Alasdair Macleod, GoldMoney:

If the economy was on its uppers, Trumpenomics could be reasonably compared with Reaganomics. But that is not the case. The economy is operating close to capacity, ….any further fiscal and monetary expansion will begin to create …. economic overheating.

A failure to understand the credit cycle

Few, if any macroeconomic commentators, seem to be aware of how the global economy is performing. Their selective reliance on duff and out-of-date statistics forces them to anticipate what lies ahead by looking backwards. This approach to economic forecasting and planning gives as little hint of what lies ahead as it does for driving along a winding country road, and has only encouraged closer scrutiny of the past. Ignorance itself is increasingly ignored as the causative factor behind the manifest failure of modern macroeconomics.

Even perfect knowledge of the past and present is no substitute for understanding that it is unpredictable change, the dominant characteristic of progress and regress, that makes the past barely relevant. The modern reliance on statistics, most of which are produced by government agencies with vested interests, is nonsensical. Instead of understanding this, we rely on the opinions of the great and the supposedly expert. Nearly every pundit’s introduction nowadays starts with a list of his or her academic achievements, as if they mattered. Indeed, to be believed in macroeconomics requires PhDs, professorships and the all the rest, as cover for the lack of a true understanding of economics.i

That the cream of the economics profession is clueless was admitted this week by a rate-setting member of the Bank of England’s Monetary Policy Committee, in evidence before the Treasury Select Committee of the UK’s Parliament. The BoE’s forecasters have not only got the performance of the economy over Brexit horribly wrong, but it is now admitted that “….there are large forecast errors, and we are probably not going to forecast the next financial crisis, nor are we going to forecast the next financial recession.”ii

Opinion, which is what these macroeconomists possess, is inappropriate for economics, being built on the quick-sands of Keynesian wishful-thinking, as opposed to the firm ground of sound reasoning. The combined intellects of all the panjandrums in all the central banks, in all the top universities, and in all the smart investment banks have consistently failed to foresee any financial crisis. And they now underestimate the degree to which the global economy today has progressed, aided by human nature and buoyed up on a sea of financial credit. They also underestimate the consequences of today’s events for price inflation, which is approaching a confluence of events on the demand side, against a backdrop of a marginally unresponsive physical supply. When the purchasing-power of fiat currencies declines, measured initially in rising commodity prices, the purchasing power of sound money, which is gold, rises, undermining confidence in fiat money even further. That is the background, in place for a year now, to a rapidly approaching train-wreck. Only a handful of prescient analysts, those who understand the considerable risks posed by unsound money, are gradually becoming aware of the consequences for prices measured in fiat currencies.

China is the world’s locomotive

For these reasons, nearly all that we read in Western commentary about China emphasises the risks from her overblown credit bubble, such as in property speculation, misallocation of resources, and capital flight. China’s government is cast as an economic villain, while we in the West are the good, responsible guys. This is blatantly biased. In discussing China, it is as if we are proto-Austrian. In analysing our own welfare-committed economies, we remain stubbornly Keynesian.

To understand China, you must first accept that it is a tightly controlled, command economy. The state owns the banks, so controls both money and credit, unlike in the West where credit expansion is devolved to the private sector. The banking crises we face in our welfare states do not happen in China. Instead, the Chinese government, through its banks, selects the indebted enterprises that survive and those that fail. Some very respected investors in Western capital markets have lost fortunes through not grasping this fundamental point.

Control over all forms of monetary creation and the prosperity, or otherwise, of indebted businesses is the foundation of China’s five-year plans. It allows China to be the ultimate mercantilist, directing money, businesses, and people in the interests of the state. A purely communist economy fails, as has been demonstrated under Mao, and in the USSR. But a communist economy deploying directed capitalism is a powerful force. It has taken China from being a sleeping, backward subsistence economy to the world’s largest trading nation in less than forty years, while the communist apparatus has broadly survived.iii

For this reason, China is less of an immediate threat to global economic stability than the welfare states in Europe and America, whose finances are deteriorating rapidly. China has become the locomotive engine driving the global economy, but because macroeconomists in the West don’t trust China and its statistics, while swallowing those of their own governments without question, China does not feature as much as it should in their analysis. The fact of the matter is China’s five-year plans are unleashing enormously positive economic forces, encompassing the world’s largest land mass and its populations. It is a gross mistake to ignore them, and their consequences for prices in all currencies.

There are two main thrusts in the current five-year plan, which will also be the basis for the ones that follow. Firstly, domestic demand is being redirected towards services and high technology, away from manufacturing cheap consumer goods, which has been China’s export staple so far. It involves the urbanisation of some 200 million more people, moving them into newly-built accommodation in expanded cities, while raising their living standards. Furthermore, the plan includes a significant upgrading and extension of China’s infrastructure. It is no coincidence the current bull market in commodities commenced at the beginning of 2016, roughly the same time as the commencement of the current five-year plan.

Secondly, China is progressing with her plans to revolutionise the whole of the Asian continent, creating an industrial transformation for the whole area. Most analysts have heard of the two silk road projects, but fail to grasp their scale and of their associated developments. One is overland, tying together the countries to the north of Tibet with the Mediterranean. The other is the sea route from China through the Indian Ocean, to link the populous countries south of the Himalayan ridge. The sea route ends in East Africa, where a new Uganda railway is to be built, shipping both agricultural products and other resources from the heart of Africa back to China. To finance the Silk Roads and associated infrastructure, China set up the Asia Infrastructure Investment Bank, which no Western financier can afford to ignore, because it will be raising the equivalent of many trillions of dollars. These plans are already well advanced, and China is aggressively acquiring the necessary raw materials.

All this is overlooked by Western data-watchers in their day-to-day analysis. If they got off their butts and went to Shanghai, they would see how incredibly busy that port is today. If they travelled round South-east Asia, they would see that China’s supply chain, comprising the whole region, plus South Korea, Japan and Taiwan, is booming. Yes, even the Japanese zaibatsu haven’t had it so good, at least since the 1980s. And if they travelled further afield to Europe, they would see British services and German engineering are being exported into China and the Far East in increasing quantities. Yes, even Europe is benefiting, putting the EU on the road to economic recovery.

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