This is a terrific discussion of Chinese banking by two experts who do not mince words, Carl Walter of JP Morgan and Victor Shih of Northwestern University. Both have a great sense of history and go to some length to portray how economic and monetary arrangements for these “banks” differ from what most of us would assume. The discussion includes periodic crises and the creative means used to rescue banks, the unusually high level of financial assets for an emerging economy, the sustainability of growth, and the role of banks in the political system. Hat tip MacroBusiness.
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i am barely aware but I can’t find the link to the “discussion”… Where is it?
Erm, there are 4 videos embedded in the post?
May have been looking at it on a mobile device. I’ve come to expect when something seems to be missing while reading on my phone it’s probably a video.
http://static8.businessinsider.com/image/4bed8a047f8b9acc581e0100/apple-adobe.png
I don’t see much diffence between the Chinese financial central planning committee and the FED.
They both give money for free (discount rate= almost zero) to their friends (= people from the same social class).
Also, the US systemic banks, Too Big To Fail, are big corporations, central top-down panning, no dissent allowed and the same capitalist predator values must be shared, or else you are kicked out.
Also, the US banks have no “due dilligance” when lending to customers: more is more bonus=best. A decent cost-benefit analysis is never made.
Great, your comment. I was just thinking that the similarities are striking and that banker did hardly ever look into the camera, well, maybe a sign that he knows some things he should be ashamed of.
The banks seemingly were not diligent enough as they were ordered to make loans by the government and now they sit on more and more non performing loans; that is the essence it seems.
Talking about Western societies and banks, here, too the banks have been given the very important privilege to create money in the form of extending credit. I doubt that they have been diligent enough when considering the most western countries have total debts (private, government, business and the rest combined) in the range of 300-400% of gdp. A rate of interest of just 2% will burden the economy with about 6-8% on gdp. If you have some of the debt in doubt for repayment, let us assume a third for simplification, and the market demands 8% on that portion of debt, the economy will be saddled with a burden of between 12% and 16%.
How is that for sustainability?
The most interesting part is the fact that those people who produced this mess of irresponsible build up of debt, are still there enjoying their great benefits instead of being made accountable.
is it really the bankers faults? or the fed reserves for making it so easy and blindly believing in an economic theory that turned out to be false in the end? anybody put in the position of those bankers would’ve done the same thing. You don’t blame the five year old who got behind the wheel of the car and crashed, you blame the thirty year old father in the passenger seat saying “you can do it son”. we just need better regulation, because we’ll never get bettter people.
Thanks for reporting this brilliant stuff.
Of course, we all knew. Especially those of us with an Austrian grasp on economics in view of the lousy interest rates served on savings. But this kind of post just offers some flesh on an issue that is still very much under the radar.
Thanks for posting this, it was excellent.
It elucidated an aspect of the 2008 crisis which I had not previously understood, the risk of capital flight. Walter stated that because the Chinese elite assume the US financial system has the full backing of the government, they took the collapse of Lehman Bros. as an indication that the US government was tapped out financially. This was frightening for them because they hold so many US treasuries. So this is a strong argument that in a sense institutions like Lehman Bros. really can’t be allowed to fail, because allowing them to fail might lead to extreme disruptions like the Chinese suddenly selling all their US treasuries. I find this quite disheartening, because it seems like a number of US financial institutions are holding the US financial system hostage with this threat. Is there a way to allow a major financial institution fail without precipitating large-scale capital flight from the US financial system?
From what little I have been able to figure out, China has its treasury debt as interest bearing savings(reserves) at the Fed. Selling them would only amount to the Fed moving the money to a non-interest bearing checking-like account called a securities account with China losing its interest. Just like dollar bills are Federal debt that doesn’t pay interest T-Bills and T-Bonds are Federal debt that pays interest.
To paraphrase Luutzen’s comment above, in China, they have state-controlled banks. In America, we have a bank-controlled state.
well said.
Karl Marx’s famous line: Power is corrupting, applies also to the Chinese elite.
Even the current Chinese communist party, is unable too tax the rich more, or set limits to personal wealth. Because this would mean: limit themselves.
In the old communist Mao Zhe Dong times, they would be punished as capitalist traitors.
And so they are now!
What does sound financial system look like?
Really fascinating piece.
What I find incredible is Walter & Shih grinning & hawhawing at the ‘mess’ & ‘profligacy’ of the Chinese financial system. Really the only thing they can throw at it is 6% inflation, but they make no distinction in that between (external) cost push & (internal) demand pull. I don’t know the actual data but I would think the rising cost of energy in China & food too (both cost push) must be a big chunk. That is, unavoidable. They then claim that this inflation is bad for ‘ordinary people’ who can get a mere 3.5% on their savings. What about all those workers who would have no job & zero savings if their Gov had decided not to ramp up spending (under the guise of ‘loans’) & all the wage deflation that would have gone with it?
They claim that China is ‘printing’ 15 to 25% of GDP in new money. So where is the much hyped hyperinflation monster that all our ‘serious’ mainstream economists & commentators get all spooked about, if ‘printing’ (or ‘keyboarding) is mentioned for stimulus financing here?? Take the external cost push they can do nothing about & there’s feckall.
Sure, the Chinese elite have creamed off plenty of cash, but compare & contrast the shafting workers have taken in the West following the crash of our own model of ‘bent’ banking. Some of the spending has gone into a property bubble, but a lot has also gone on infrastructure which will likely have future benefits in a number of ways.
Definitely some validation of MMT & a bigger role for counter cyclical gov spending imo.
The “hyperinflation” is in the form of wildly overvalued assets of all kinds. Just the example in this piece, of slowing rail service on good quality older lines in order to force cash flow for the new line that can neither serve everyone nor possibly pay for itself, demonstrates the irrational contortions already visited on the Chinese economy.
It’s the biggest bubble of all time. To avert a bust entails much more present pain than people are willing to endure to avert far greater future pain. That’s where real leadership comes in – they can’t possibly do worse than the West on that score.
Speaking of banks, I’d love to hear Yves Smith’s take on the state of Canadian banks. An article posted by Zerohedge and later in the Globe and Mail has stirred some controversy, to put it mildly…
http://www.zerohedge.com/news/next-domino-fall-canada
http://www.theglobeandmail.com/globe-investor/investment-ideas/streetwise/who-is-zero-hedge-and-why-should-we-care/article2134968/
http://www.zerohedge.com/news/who-john-paulson-and-why-should-globe-and-mail-care
At least they got something in return. Unlike in the West, where financial central planning and oligarchies by the likes of JP Morgan where we got diminishing public investment and returns with that financial corporatism.
What I mean is: there is not much difference between regimes in this issue, the difference here is that at least a totalitarian party like PCCh has to do something in return due to political unrest. But here we only get austerians and hysterians.
Personally, I hope it all blows up.
Odd, that “a totalitarian party like PCCh” has to deal with “political unrest”, while democratic parties like, well, the Democrats and Republicans don’t.
What’s not widely known is that China is in default on bonds issued before the 1949 revolution and widely marketed in the US. These were gold-backed sovereign bonds (real bonds, used for infrastructure projects, not “warlord bonds” or corporates), and with the rise in the price of gold and the power of compounding, the total amount is now close to $1 Trillion (yes, with a “T”)! China paid off UK holders in 1987 to gain access to UK capital markets but refuses to pay US holders.
We need our politicians in DC to stand up for US bondholders and the rule of law and demand that China acknowledge its debts. Even a discounted settlement could significantly reduce the US debt, and could be worth tens of billions to the federal tax coffers and, under a creative plan floated recently, in direct payments to cash-starved state governments. See eg
http://www.familysecuritymatters.org/publications/id.10042/pub_detail.asp
Let me guess: it just so happens that you own some of these bonds, don’t you?
Those are Republic of China bonds, and the ROC still exists. In Taiwan. Perhaps you should make your claims in Taipei.
The PRC is the internationally recognized government of all China. The bonds at issue are full faith and credit sovereign obligations of the Chinese government. Under the successor government doctrine of settled international law, providing for continuity of obligations among successive governments, such obligations are the repayment obligation of the PRC.
There is no “rule of law” with sovereign states: They can, will and always have done just tell bondholders get stuffed. If the USA is so special* that it wants to go and whine about this it will just show weakness with Obama/Geitner coming back from China with a boot up their arse.
*) As in “special people”…
Ceci n’est pas une pipe.
Thank you for this posting. It was way interesting. I fear all the old fashioned methods of analysis are useless. Even Deng’s “crossing the river by stones” doesn’t hold. If Shih’s comment about not just ghost towns but 300 ghost industrial parks is true, they must be anticipating the green revolution.
Amazing videos.
Eerie how the “Eastern” (“communist”) and “Western” (“capitalist”) systems are pretty much isomorphic in so many ways: pump-n-dump, cross-your-fingers-and-hope-for-the-best, kick-the-can-down-the-road, bilge-n-bail economies – of by and for the elites.
As an aside: It seems rather beside the point for MMT to assert that “it’s ok to create money.” The real questions are: for what? and by whom? and when? and how?
Exactly right, ScottA.
I think conceptually people have to understand that it’s OK to create money, that it happens all the time.
Then they can start discussing the important question: who gets to create the money and what is it used for?
Amazingly, this sort of debate was active nationally in the late 19th century (gold standard vs. free silver vs. Greenbackers). People as a whole are a lot more ignorant about money now than they were then, strangely.
Indeed a delightful discussion. Also agree with other comments: What’s the difference to TBTF American Style? Bush/Obama in fact did flood the economy with guaranteed “loans” to the financial sector.
It also makes me think of the recent discussion about ‘military Keynesianism’.
When you compare the social impact of ghost cities and empty industrial parks vs dead Muslims and piles of rubble, it looks a lot less risable.
There’s no multiplier effect from bombing a village. The construction workers may end up unemployed, but they’re not lost in PTSD and addiction to antidepressants.
Empty building or burned out soldiers? Millions of refugees or dusty corridors? A pity we were never given the choice.
There are two main lines of thinking now taking place in the world in response to the global recession. The first is MMT of which China illustrates by example and the second is the rediscovery in Adam Smith’s work that capitalism can only properly work with a strong emphasis on ethics which is nothing more than the morality we use to back up human cooperation. Clearly in China there are many ethics issues but not least is the danger that MMT can be used in a way that warps the effective use of resources and that is an ethics issue in the sense that society has to pay more than necessary for its goods and services. The two pillars of a healthy society are, therefore, to maintain a non-inflationary flow of “active” money through the economy. This money to be invested efficiently in the real economy, not hoarded and not invested in commodity speculation to blow bubbles, and all to be done whilst maintaining an active attention to ethics throughout the investment process.
i have a question if someone would do me the honor of answering it, did the real estate bubble have anything to do with excessive capital inflows from china and other governments investing in us, or was it a completely domestically produced bubble?
I’ll do you the honor – but bear with me for a minute. The real estate bubble had 3 primary causes, all of them interrelated.
1. The Fed (and other central banks, but let’s keep the story simple) kept interest rates too low, especially post 2001. This has two effects: directly expanding the money supply (i.e. printing money) and more importantly, causing investors to seek higher yields, thus taking more risk. We’ll come back to why the Fed did this later, which gets to your question about the Chinese.
2. Incentives (especially of individuals within the financial services industry) were such that excessive risk taking, and financial “innovation” was rewarded. The mainstream view is that this was the result of insufficient regulation (e.g. repeal of Glass Steagall, non-regulation of derivatives, effective elimination of bank reserve requirements, etc.) The Austrian view is that this was the result of too much regulation/gov’t intervention (e.g. repetitive bank bailouts over the past few decades which ingrained a culture of privatizing profits and socializing risks, the “Greenspan/Bernanke put” designed to inject liquidity whenever the stock market goes down, and regulations dating back to the 1930’s such as FDIC insurance which, for example, eliminates the incentive for consumers to select their banks based on conservative lending practices.
3. The gov’t actively encouraged home ownership, through tax policies (e.g. mortgage interest deduction), through the creating of Freddie and Fannie and other GSEs and through lots of other laws and policies.
So where does China fit into this picture? Going back to reason #1, the Fed thought they were okay keeping interest rates low because inflation in the U.S. was benign (i.e. low), that is, if you take the Fed’s definition of inflation as an index such as the CPI. Econ 101 teaches that at times of underemployment (such as coming out of the 2001 recession and today, of course), printing money helps raise output and employment, at least in the short-term. Which is true. Except that Econ 101 essentially assumes that all of the money printed stays in the U.S., and therefore, creates jobs in the U.S. Which is not true. Again keeping the story simple, the money went to China (and elsewhere – including U.S. real estate), through consumption of Chinese goods and through investing and therefore, the jobs were created in China.
Because Chinese (and other emerging market) goods are cheaper due mostly to the labor differential and because the U.S. was buying a lot of them, this helped keep U.S. inflation rate much lower than it otherwise would have been, given the Fed’s loose monetary policy (i.e. China was exporting deflation). All of the demand for Chinese goods results in demand for Chinese Renminbi, which would otherwise have had the affect of causing inflation in China, and a less competitive and slowing Chinese economy. Of course, the Chinese gov’t didn’t allow this happen (i.e. through a freely traded currency). Instead, the Chinese gov’t, in order to maximize growth, kept the Renminbi from significantly appreciating by holding all of those dollars, specifically Treasuries and bonds of the GSEs.
This enormous demand from China (and others) for Treasuries and the like, certainly helped inflate the bubble and keep it going longer by keeping interest rates from rising in the U.S. and by keeping the cost of Chinese goods lower, and allowing more U.S. (debt fueled) consumption.
So finally, to answer your question. The Chinese (and others) were certainly complicit in this game, and certainly contributed to the size and length of the boom/bubble. However, it is really the U.S. that deserves the vast majority of the blame since the bulk of the excess money was created in the U.S. and through U.S. financial institutions.
Thank you Yves! An honest discussion by informed observers of a vastly complicated and fluid politico-economic configuration is a very rare thing in these times. So much food for thought requires a second serving (watching the interviews again) for me, but three preliminary points seem to stand out: (1) The fragility of the Chinese financial system is an emerging-market experiment in the Keynesian dream of unlimited fiscal and monetary “profligacy” (banking scholar Walter’s term) by the sovereign state, mediated by nominal banks (Walter’s emphasis), and distributed over an institutional structure of powerful “elite” interest groups, mainly state-owned enterprises and local-government-owned enterprises (political scholar Shih). Both scholars argue that the situation has gone from inefficient but effective to inefficient and increasingly ineffective–nonperforming loans on vast projects that cannot be amortized by real economic activity, for example. Walter says that the interest groups strongly resist any reform; Shih says outright that they will continue to prevent same. This situation abets the remarkable wealth/income disparity noted by both scholars, requires domestic inflation that precludes growth in real income for the vast majority, and threatens capital flight by the domestic rich in case of any serious economic breakdown. The Chinese Keynesian laboratory nicely complements the Japanese and U.S. experiments in Keynesian remedies, aka quantitative easing, stimulus, etc. –The disappointing outcome of both sets of experiments calls into question the proud boasts of government-as-money-printing-philanthropist recently aired by MMT-style reformists on this website. (2) Only alluded to by Walter and Shih is the class crisis brewing in China. They indicate that the money printing “works” for the vast majority simply because they have no alternative (“financial repression” is the term of art); the 40% Chinese savings rate is mentioned in this connection, abetted by the utter want of economic security for the Many (no social security, no Medicare, etc.). To this should be added the dispossession of hundreds of millions of peasants, whose land goes to “development” and whose labor power has nowhere to go but dismal jobs paid for with inflated currency. This amounts to a massive “primitive accumulation” (Marx) of capital that makes the English Enclosure Movement look like a charity bake-off; but the important thing to remember is that this gargantuan “clip” can be done only once. If the system cannot “take off” on its own, stagnation and decline are inevitable. –Despite the “communist” government’s rigid control of information, more and more reports of domestic unrest (demonstrations, strikes, etc.) are filtering out. The regime is quite aware that its days are numbered if independent mass organizations take root on a national scale; which is why they so brutally repressed the seemingly innocuous Falun Gong movement. If the Many decide that they have nothing to lose but their chains, the “communist” farce is at its end. (3) Not at all mentioned by the discussants is the vast environmental destruction wreaked by the mad drive for capitalist accumulation. The Chinese are bent upon breaking all “advanced” capitalist records in this regard. The Three Gorges Dam project is a case in point; as also is the expansion of China’s already massive reliance upon coal-fired energy (abetted, by the way, by the World Bank and the Export-Import Bank).
Walter provided an opening to yet another issue when he mentioned that China’s financial fragility was “risk-event prone,” in the physics sense of unstable equilibrium. More interview time might have permitted reference to China’s self-concept as a global strategic power, bent upon playing the grand game of great power politics in the classic style, setting the stage for unanticipated outbreaks of violent conflicts in a very dangerous “neighborhood”–U.S. nuclear-armed ships/planes off the Chinese coast, the mad regime in N. Korea, rivalry with almost-nuclear Japan, nuclear India, alliance with nuclear Pakistan, and so on. –This is a ride that can only get wilder.
As I understand it the #1 purpose of the Three Gorges Dam project was to shortcircuit massive flooding of the Yangtze. Historically this has been responsible for the deaths of millions. Nowadays it would wreak devastation on China’s most productive regions.
@Ian Lucas: (1) Your reply says nothing against my criticism, which referred to the environmental devastation imposed by the project; to which I should have added the millions of humans displaced. As to flood control: You assume that a giant dam is needed to this end. Not so: Here in the Pacific Northwest, where I live, the trend in the past several years has been to decommission large dams and replace them, where necessary, by plural smaller dams–cheaper, easier to control, and much less devastation to the environment, wildlife, and humans. (2) The Chinese government’s principal rationale for the giant dam was “productivity,” pure and simple; with flood control ancillary to same. Cheap electricity is good for business, a.k.a. the accumulation of capital. So is a very expensive, and destructive, giant dam project. (Guess where all those displaced millions ended up?)
Don’t quite agree with your attempt to characterize PRC financial policy as Keynesian. You write:
“The fragility of the Chinese financial system is an emerging-market experiment in the Keynesian dream of unlimited fiscal and monetary “profligacy””
It’s inappropriate to characterize Keynesian theory as a dream of unilimited fiscal and montary excess. From the General Theory:
“It is not the ownership of the instruments of production which is important for the State to assume. If the State is able to determine the aggregate amount of resources devoted to augmenting the instruments and the basic rate of reward to those who own them, it will have accomplished all that is necessary.”
The discussion above indicates that the authorities did not seriously try to determine the aggregate and the basic rate. They concluded from the collapse of Lehmann that it was unnecessary to use objective measures and irrationally began printing money.
As The general Theory and yourself are saying “if the State is able”,…and I would add If the State want..
@bmeisen: “Profligacy” and “profligate” were appellations pronounced by banking expert Walter in the video. (1) Your defense of Keynesianism against my charge that it involves dreams of unlimited fiscal and monetary excess cites a quotation from Keynes that is both a conditional and strictly irrelevant to my charge. I suggest you go back to the General Theory and look to p. 131, where Keynes fantasizes on the salutary effects of, as he put it, “To dig holes in the ground.” He also suggested putting paper money into bottles for folks to dig up. This, in principle, is the heart of Keynes’ great discovery, although he of course preferred a more politic application of same. Would such a “holes” progam be “rationally” proceeding, as opposed to your “irrationally . . . printing money” reference to the Chinese? Also, you should be aware that a plurality of economists agree on the benefits (for capitalism) of a particularly lethal type of fiscal/monetary profligacy, namely, “military Keynesianism.” (Its economic downside was experienced in the aftermath of Lyndon B. Johnson’s guns AND butter experiment of the 1960’s. The human downside numbered in the millions of innocent dead, environmental obliteration in the affected areas and, of course, yet another nail in the coffin of the U.S. Constitution.) (2) Ever hear of “Helicopter Ben” Bernanke? Ever hear of James K. Galbraith, money printer par excellence and consultant to the Chinese government? Young Galbraith epitomizes the synthesis of old-fashioned Keynesianism and one of its new offspring, MMT, recently celebrated on the pages of this website. (I suggest you read Galbraith’s latest book, “The Predator State,” where he defends of his father’s falsified economic theory and pines after good capitalists–I kid you not– their goodness being defined by the extent to which they follow directions from such as James K. Galbraith.) (3) If not by real-world experiments such as I cited, how do you propose that Keynesianism could be falsified? (I remind you that any theory claiming the appellation “scientific” must state how it can be verified/falsified.) (4) As the video argued, the “aggregate” and “basic rate” per your scruple were, to put in the vernacular, to print and spend as much as possible in as short a time as possible in order to bring the greatest rate of profit to the favored few. –That is how real world capitalism, and Chinese Keynesianism, works. The video well wonders how it will pan out.
My greatest fear regardless of how the economic financial systems collide (see galaxies), is the mitigation required in regards to stored potential.
Skippy…electrons of price = trigger mechanism + detonation, obliterating environmental stability.
PS. how much is that doggie in the window…sigh.
Bystander love your comment:
“To paraphrase Luutzen’s comment above, in China, they have state-controlled banks. In America, we have a bank-controlled state.”
At least the Chinese people get infrastructure and money without the illusion of debt needing to be paid back. But they still are at the mercy of corrupt politicians. Westerners get to be at the mercy of corrupt bankers and MNCorporatists and become brainwashed into lowering life quality and servicing a larger and larger debt.
Using any debt instrument for currency requires a hierarchy and mandates an elite power controlling the monetary system for the masses. Which do we prefer the Financial Corporate Plutocracy or Privileged State running oligarchs?
Perhaps finally in the end, when we tire of this bipolar, left vs. right mirage of a debate – we will see that it what we are using as Money is really where the problem lies.
Interesting how people like Michael Pettis and to a lesser extent Shih first say that things are terrible, then go on to say they don’t expect a really big crisis, especially a social crisis. Shih practically said that citizens don’t matter at all, only the elites who may see declining returns at home and cause a disaster by parking their money abroad. I think this is rather contradictory. If things are really that bad in the financial sector, which especially in China is the lifeblood of the economy as they say, then the coming crisis may rather resemble a collapse. Japan, of course, pulled itself together in a similar situation, but I highly doubt China can do the same. Societies as imbalanced as China tend to rock solid until they collapse (think USSR).
China has had an amazing economic run for the last 20 years, but… Tiananmen was in 1989 (sure enough, it was never mentioned in the discussion). It may yet happen again, with a very different result.
But still a very interesting and useful discussion overall.
Yves,
Awesome interview. It looks like the more the banking system is centrally controlled the easier it is to kick the can down the road. If true, the GFC II will be a European event that lowers all boats.
Solo, thanks for drawing attention to the class issue in the modernizing PRC–something that is often overlooked.
Look, I know some of you think (reasonably) that the FED is just like the PBOC. However, the Fed finally resorted to QE during the financial crisis, but the Chinese have been printing money through “relending” operation–lending to banks– for the past 30 years. Lately, they haven’t had to do it as much due to huge FX inflows. If that flow reverses, they will have to print money on a large scale again, and will make like QE look like child’s play.
It would seem that China is following Keynes (see General Theory).
“‘To dig holes in the ground,’ paid for out of savings, will increase, not only employment, but the real national dividend of useful goods and services”
“The General Theory” (1936), “Pyramid-building, earthquakes, even wars may serve to increase wealth”. In fact, pyramids are even better than the usual government project. Keynes said: “Two pyramids . . . are twice as good as one; but not so two railways from London to York.”
However, they have given another twist to Keynes: 3 railways (Ordinary, Medium-speed and High-speed) between Beijing-Shanghai are better!
The problem with this is only that Keynes does nothing but regurgitate a variation of the broken window fallacy here, which Bastiat had already unmasked and rebutted about a century earlier. This is in short just abject nonsense – neither ‘pyramid building’ nor earthquakes nor wars can ‘increase wealth’ – they can only consume and destroy wealth. Keynesianism has ruled the roost for decades – and we have now finally arrived in that famed ‘long term’ when we were all supposed to be dead. Now we have a variant of the Keynesian zombie economy of Japan enfolding the entire developed world. Apparently it does not matter how often and how thorougly Keynesian policies fail – they remain as popular (with the ruling class and its courtier economists, understandably) as ever. Why they fail should be clear – you have mentioned the core fallacies yourself.
A reason I read our economy is in such bad shape is that 50,000+ factories moved to China in the last 10 years and 150,000 since 1980 to take advantage of China’s devalued currency. Items could be manufactured at a very low cost in US Dollars, one-half to one-sixth then sold at same price as when produced in the US since the US companies still owned the patents and trademarks.
Whatever economics China has been using it has been working well for them. They put 300 million of its citizens to work in the last 25 years and lured most of our light consumer manufacturing to China. They even have taught 300 million of its citizens English, coincidentally I hope, about the same number of citizens as in the US.
The main feature of the modern Financial sector is it separation from economy. This separation begins with development of the Derivatives market. If payoff of options comes with real stocks the prices of the options along with underlying stocks will be different. Settlement in cash has activated the process of printing bonds. Derivatives market began to work as casinos. Governments’ print money for participants and banks actively started to play. Developing derivatives instruments enormously grow this market and now after about 40 years money surplus from derivatives press everything: stock markets, food prices, gold, oil, and many other everyday needs. Adding also to money flows from the Wars and Stimulus plans and new EU tranches to EU countries and we arrive at the money surplus. How world economy can consume this money surplus. Excessive surplus leads to global bankruptcies.