Trade War or Not, China Risks a ‘Minsky Moment’

By Marshall Auerback, a market analyst and commentator. Originally published at Alternet

The transformation of China’s economy, both in terms of GDP growth rate and poverty reduction since it started its transition to the market system in the late 1970s, has arguably been the biggest macroeconomic event of the past half-century. The model that has characterized the country’s high output growth rates has followed in the footsteps of the Asian “tigers“: first, its high growth rates of capital accumulation, driven by high investment-output ratios; second, a marked outward orientation through export-led growth policies; and third, the pursuit of industrialization (in particular the production and export of manufacturing goods), a key ingredient for fast growth and development. By almost every metric, China has advanced from economic backwater to the world’s second-largest GDP (and by some measures, is now the largest economy).

But in spite of signs of renewed economic activity in March, the country’s debt build-up has provoked increasing concern amongst Beijing’s policy makers, as it points to an underlying long-term financial fragility, particularly if trade war pressures intensify. Just last October during the Communist Party Plenary, Zhou Xiaochuan, then head of the country’s central bank, warned of a “Minsky moment“:

“When there are too many pro-cyclical factors in an economy, cyclical fluctuations will be amplified. If we are too optimistic when things go smoothly, tensions build up, which could lead to a sharp correction, what we call a ‘Minsky Moment’. That’s what we should particularly defend against.”

To elaborate on Zhou’s statement, the economist Hyman Minsky described how once the debt “disease” goes metastatic, there will come a “Minsky moment” (a term originally coined by economist Paul McCulley) when euphoria gives way to concern and then to panic liquidation and credit revulsion. When that dynamic is in full flower, policy makers are powerless to avert it, no matter how much they want to bring the punchbowl back. Governor Zhou’s public warning was no doubt in response to recent rapid increase of debt which, according to Professor L. Randall Wray, “increased from 162 percent to 260 percent of GDP between 2008 and 2016,” and remains “a topic of discussion, if not deep concern.”

It may seem odd to warn of a Chinese slowdown, given the recent renewed surge in exports and the corresponding rise in both the manufacturing and non-manufacturing purchasing managing indices (both the manufacturing and service gauges remain above 50, and therefore indicative of robust economic activity). But these gains ought to be viewed against the backdrop of a more hostile external environment for Chinese manufactured goods. Discussing the recently imposed tariffs on steel and aluminum, the New York Times reported that Trump has already provided brief exemptions to “Canada, Mexico, the European Union, Australia, Argentina, Brazil and South Korea” (countries that “account for more than half of the $29 billion in steel sold to the United States in 2017”), which reinforces the idea that it is largely China that remains the major target of Trump’s economic nationalists.

In that context, China’s ramped-up production in March could well be interpreted as an effort to evade the tariffs by exporting products into the U.S. under the wire, suggested economist Raymond Yeung of the ANZ group. If so, that could provoke further aggressive responses from Trump’s trade hawks, especially if it results in an expansion of the bilateral trade surplus with the U.S. Adding to the pressures, Reuters reports that “Top Trump administration officials are asking China to cut tariffs on imported cars, allow foreign majority ownership of financial services firms and buy more U.S.-made semiconductors in negotiations to avoid plans to slap tariffs on a host of Chinese goods and a potential trade war.”

But how serious are these threats? Are they simply a case of “smoke and mirrors,” as the economist Dani Rodrik has suggested? China itself appears to be taking the risk of a trade war seriously, imposing retaliatory tariffs of up to 25 percent on 128 food imports from the U.S., an understandable negotiating posture given its position as a major creditor nation. But the very fact of its creditor status might presage problems for Beijing. If anything, history has shown that it is trade surplus nations, not debtors, that tend to be the biggest casualties of trade wars, as this account of America’s ill-fated Smoot-Hawley tariff imposition illustrates:

“World War I… made America the world’s creditor. The center of the financial world moved from London to New York, and billions of dollars were owed to large U.S. banks. The Smoot-Hawley Tariff threw inter-allied war-debt repayment relations into limbo by shutting down world trade. An international moratorium on debtor repayments to the United States froze billions in foreign assets, thus weakening the financial solvency of the American banks. Specifically, over $2 billion worth of German loans were obstructed by Germany’s inability to acquire dollars through trade to repay its debts. This same scenario played out in many other countries as well.”

China today occupies a creditor position comparable to the U.S. in the 1930s. Trump was certainly exaggerating when he suggested that “trade wars are good and easy to win.” But the U.S. is a largely self-sufficient economy; China is not—which is what Trump was implicitly highlighting when he made his comments (albeit, typically oversimplified and ignoring the fact that the U.S. itself still has quasi-bubbleized assets and very high levels of indebtedness).

Even if the trade war threat turns out to be more talk than action, there are other ways in which Beijing might risk a Minsky-style deflation. There is a very old idea from business cycle theory prior to the Second World War that private sector over-investment can become so unsustainably high that even without a fiscal/monetary shock, there could be a fall in autonomous investment. Once that begins, accelerator multiplier dynamics can lead to a cumulative economic contraction even if interest rates plummet and monetary conditions ease.

There are grounds for thinking this is an idea whose time has come again. Though fixed investment is very low in the U.S., it is not so globally, especially in China, which has a condition of over-investment that is historically unprecedented. A decline in global autonomous investment that threatens accelerator and multiplier dynamics should follow.

Some would argue that the global capex overinvestment problem is purely a product of low interest rates, but in China’s case, it is also a product of their economic model. Although the reforms undertaken over the past few decades have given China the appearance of a market economy, it is not in many important aspects, notably in regards to the allocation of capital, which is not market-determined.

In essence, China’s economy is a historical blending of three distinct strands: First is the old Communist, command-style economy, which, on the most conservative measure, accounts for at least one-third of China’s GDP (and possibly higher, according to some studies). This sector is comprised largely of the old “white elephants,” the state-owned enterprises (SOEs).

Second is the East Asian model, whereby the government directs investment into particular areas via the aegis of private companies, but with considerable state backing. This “dirigisme” is a variant of the old Japanese “MITI administrative model,” wherein the government essentially targets priority sectors (such as agricultural products, high-speed rail, aerospace, semiconductors, robotics, AI, and civil aviation). You can see evidence of this “state-directed capitalism” in the country’s recently published “Made in China 2025” document, an explicit policy of import substitution designed to make the country largely self-sufficient in a broad range of industries by 2025. (Import substitution is a red flag for trade hawks, especially as many of Beijing’s newly designated priority sectors are areas currently dominated by the U.S., and seeking to expand exports into China.)

Essentially, here the Chinese state often acts as “loss leader” as it tries to develop national champions, mobilizing the financial resources of large oligopolistic conglomerates to enable them to make long-term investments in research. (As an aside, this used to be a model embraced by the U.S. until the anti-government attitudes of recent decades took hold; the private sector was thought to be unable to make sufficient large-scale R&D investments because no single company on its own would have the resources/longevity to exploit the potential financial returns.) China has already done this in areas such as solar power, and it is one of the reasons why global solar costs have fallen so precipitously over the past decade (as well as contributing to the bankruptcy of Solyndra here in the U.S. back in 2011).

Third, and finally, is China’s “wild west capitalism,” which has been manifested in areas such as property speculation, “wealth management products,” the shadow banking system, and the country’s comparatively young capital markets (including a newly established oil futures market). Odd that despite the Asian Financial Crisis of 1997/98 and the global meltdown of 2008 (both products of global financial liberalization), China persists in expanding this “third leg,” given the challenges the country has experienced attempting to curb its speculative excesses, while simultaneously seeking to restructure the state sector.

In any case, the challenge for China is clear: If policy makers move too aggressively in countering any one of these vulnerabilities, they risk setting in motion a huge debt deflation dynamic. This is especially dangerous, given that overall capital expenditure in China is still in excess of 40 percent of GDP. By way of comparison during Japan’s bubble years, capex as a percentage of GDP got as high as 32 percent, and that was considered bubble-like territory, while U.S. capital expenditure as a percentage of GDP has typically stood around 15-17 percent.

So China’s policy makers have a fine line to tread. In essence, they have been using the old command economy to arrest any incipient debt deflation dynamics in the free market segment. The problem is that the command economy is home to all of the white elephants, notably construction, heavy machinery, bulk chemicals, steel, coal, and shipbuilding, all of which contribute significantly to global overcapacity. As Jianguang Shen, chief Asia economist at Mizuho Securities Asia, notes:

“SOE reform, debt, overcapacity and ‘zombie companies’ are all deeply connected issues. For private companies in overcapacity industries, after several years of losses there’s no way to continue. The owner will shut them down or sell them off, but at SOEs they can keep getting bank loans or government support.”

Shutting down these companies would create mass unemployment. So the government keeps them going, via subsidies, bailouts, and low interest rate loans. Excess capacity, therefore, gets dumped on China’s trading partners, thereby imparting an ongoing deflationary bias to the global economy, while China builds up global champions at home, which will ultimately squeeze out foreign competition.

This is in effect what Trump is seeking to counter right now via his latest salvo against China. But will the threat of more tariffs prove effective against Beijing? Bear in mind that China’s political imperatives are considerably different than those of the U.S. In the U.S. (as well as most other western democracies), if a governing party screws up, it can be voted out of office. In China, the entire political legitimacy of the Communist Party is tied up with the country’s economic prosperity. They miscalculate, and the party risks losing its monopoly on power, party members get arrested, and probably a few are shot as well. There are limits to political liberalization.

Shutting down excess capacity in the state-owned enterprises in response to tariff threats, then, would likely risk a severe economic downturn in China. It would create the prospect of mass layoffs, heightening domestic turmoil, while simultaneously undermining the political standing of the ruling party. To avert this outcome, we should therefore expect that China’s policy makers will respond as they always have: continuing to guide financing to all of these white elephants, effectively exporting deflation to the rest of the world and risking a trade backlash. Hardly ideal, but understandable, given the competing domestic political imperatives. For all of today’s market chatter about “creeping inflation” in the U.S., then, this will likely prove ephemeral if China continues to dump much of its excess capacity on the rest of the world to offset the political fallout from tackling its own domestic bubbles. The resultant pressures China’s competitors will face could engender a tougher response in line with that of Trump, which is what appears to be happening right now. So while today’s political machinations may well appear to be nothing more than a high-stakes game of poker bluffs, the longer-term dynamics suggest that it could well herald the start of a dangerous dynamic in which China and the rest of the world are fated “to live in interesting times,” as the apocryphal Chinese curse exhorts.

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  1. cnchal

    . . . Adding to the pressures, Reuters reports that “Top Trump administration officials are asking China to cut tariffs on imported cars, allow foreign majority ownership of financial services firms and buy more U.S.-made semiconductors in negotiations to avoid plans to slap tariffs on a host of Chinese goods and a potential trade war.”

    A warning to China. Do not let the finance phuckers in. They are a cancer on our society and if you let them in to your society, they will eat you alive, just as they do us here.

    Listen to the only honest politician in America, and believe him.

    Bernie Sanders: The business of Wall Street is fraud and greed.

    1. nervos belli

      This one demand is a totally strange one. It doesn’t really make any sense. Maybe it’s an error in the article.
      As I understand, you cannot have any majority position in any chinese company as a foreigner. You always can have at most 49%, no matter what type the company is, manufacturing, services or financial. So why would the US only demand majority ownership for financial companies, especially when they know that china would never grant that. Maybe for some agricultural company, or manufacturing, but never financial since it would totally endanger their whole economic model and especially their policy in the longer term. It’s the most destructive thing you can ask the communist party functionaries ever.

      So the normal way in negotiations you would simply write “majority ownership in companies” and negotiate from there, in the end getting it maybe for a few sectors as opposed to none. At first I thought it was a negotiation ploy to demand something china would never ever give, a bargaining chip of sorts. However as explained, that doesn’t really make sense either, why make it such a specific obvious specific one when you can make it more general. The bigger the possible bargaining chip the better.
      So if you actually demand such a concession could only be to make the opposite as angry as possible. Basically, it’s when you make an negotiation offer that is no offer but a hope that the other side will angrily run out of the room. End of trade discussion.

      1. The Rev Kev

        To add a bit more, I see that the US wants to import more cars into China and this ties into a story on tonight’s links how Trump wants to protect the domestic car industry ( This may be an area that the Chinese may be willing to negotiate with.
        What will not be negotiable is the demand that the Chinese buy more U.S.-made semiconductors. The Chinese would always wonder what secret back-doors or booby-traps would be buried in the circuitry of those things and I am sure that the Chinese would be seeking to avoid them like the plague. This one would be a non-starter.

        1. Octopii

          And sadly it seems the US is too stupid to recognize the same practice from the Chinese chip manufacturers, and put a stop to sourcing Chinese parts and equipment. The technical industry I work in has seen numerous compromises in Chinese equipment, both intentional and not. One of the largest surveillance camera and recorder manufacturers in the world, Hikvision, is a state-owned company run by a Party secretary, and numerous security flaws such as back doors and phone-homes have been discovered in the products by security analysts.

          Hikvision equipment has been purchased by US military installations and may still be in use there. We continue to use Chinese equipment and products at our peril.

          1. Lord Koos

            “U.S. is a largely self-sufficient economy…” Is this true? Hasn’t the US been a net importer of food for some years, for example?

            1. JEHR

              Well, I think that the US depends on at least two other countries to maintain its “self-sufficiency” and economic prosperity–one located in the North and the other in the South. That’s what NAFTA is all about.

              Canada is a vast country with huge resources; e.g., the Koch brothers became billionaires from Canadian oil production.

            2. RepubAnon

              I’m not sure how the US can be “largely a self-sufficient economy” when so much of the supply chains for US industry are global.

              1. David Swan

                The point is that every category of good one could want can be purchased in the US economy. There are substitutions that could be made for anything that we import. We are not dependent in the sense that there is anything we “can’t” make, only in the sense that we often choose to buy it more cheaply elsewhere.

      2. Off The Street

        Control of financial services means seizing the high ground. With the risk comes great opportunity to squeeze a compliant debtor populace. Take away the means of coordinated response and keep them sullen but not rebellious. In a prior, simpler era, that was shown in the policy of a French taxing authority toward the geese: How to elicit maximum receipts with a minimum of hissing. The more modern version is to keep those restive geese so indebted and unsure of tomorrow that they do what they are told, and by all means keep them away from weapons.

        Prior revolutions and periods leading to war (French-1789, Russian-1917, Weimar Germany-see lead-up to WWII, etc) have had as contributing factors inflation, food prices, other material discomforts, take your pick.

      3. cnchal

        What I see is that the elite here, which have profited immensely from globalization, are using the plight of the stupid men and women that made stuff as a crowbar to pry open the Chinese system for their own demonic ends.

        The tariffs on stuff is the delivery mechanism for financial fraud and greed. We are being played and used for nefarious ends.

  2. Randy

    US made semiconductors? IIRC the US semiconductor industry moved overseas long ago. We may design them but they are made elsewhere. Correct me if I am wrong.

    1. Left in Wisconsin

      According to wkpda, Intel and Global Foundries (formerly AMD) still have several mfg plants in the U.S. and there are a handful of others. GF built a huge plant in upstate NY a few years back.

    2. Adam Eran

      There are Intel chip fabs all over the U.S. I’m not sure about AMD, but that portion of the manufacturing is at least partly domestic.

      1. marku52

        It is common for process development to be done in the US (Intel”s big fab is in HIllsboro, OR), then move the process to other fabs in the US or Ireland. Packaging (bonding the raw die onto leadframes, molding the packages) and final test is often done in Asia

  3. Ignacio

    After reading this pretty good analysis my impression is that these “trade wars” or intents of the main economical regions to become more self-sufficient looks like an unavoidable outcome after the globalization period. Trump just accelerated it. I yet don’t see how this will unfold in the EU where Germany is still following a similar merchantilistic path. It remains unaddressed but almost certainly it will. Somehow, brexit is part of the unfolding. One can consider that brexit is leading the path.

  4. Rates

    For all we know, this is all a plot to allow the Chinese to devalue the RMB without losing face to the populace.

    Next, Trump will have all the Chinese united behind Xi viewing Murica as the enemy for “causing” a devaluation. Then we’ll have a REAL World level Minsky moment.

    The offshore Yuan has slipped 300 pips since all of this began.

    1. susan the other

      I was thinking ‘what happens when China stagflates?’. If they decommission their SOEs it will be like us shutting down our MIC. The most interesting thing in this post is Auerbach’s point that ever since the great depression we have known that “private sector overinvestment can become unsustainably high… leading to a fall in investment… due to a threatened accelerator dynamic.” So not necessarily a debt problem as an overcapacity problem. Threatening the whole growth ideology of neoliberalism. So it doesn’t matter so much if the debt is private or state – but private spending on capex leads to big recessions because it topples the unbalanced economy whereas state spending maintains the necessary level of employment, etc.

  5. Jen

    Isn’t this a normal dynamic of capitalism? Overproduction and over indebtedness? Maybe the Chinese political system can allow for quick and efficient debt write-offs but what about overproduction? About time we had global coordinated efforts to take care of capitalism’s excesses instead of silly trade wars. The USA and other countries should come up with a plan to use up all that overproduction.

  6. Steven Greenberg

    I just don’t get this debt worry for China. The economy as a whole holds massive reserves including in US dollars. Its massive trade surplus and massive holdings of reserves means that its growth is subsidized by the Chinese government. If the importing nations no longer want the Chinese subsidy, China can turn the subsidy around and use it in the domestic economy.

    I have never understood how people can believe in MMT in one part of their brain, and then worry about Chinese debt in another part of their brain. I would very much appreciate someone making an explanation of how these two opposing ideas can be reconciled.

    1. Henry

      Agreed. The article should have been clearer about which debt its talking about. As steve keen has very nicely shown in his videos, its china’s private debt that is a problem along with over production by state owned enterprises which are being run to support employment rather than any economic notion of efficiency.

    2. Ignacio

      Uff! some lectures needed here. I suggest reading this and this for a primer.

      I don’t think MMTers believe that debt doesn’t matter. You are confusing financial debt in general (what worries in China) with state debt issuance that MMTers consider unrestricted and without crowding out effects. The questions are : 1) how debt is structured in balance sheets. Who is creditor, who is debtor. 2) when new debt is used in productive/improductive investments and how vested interests influence this 3) how new debt is increasingly useless in terms of production 4) how bad debt will be resolved and who will pay the bill.

      Debt capacity limits are reached, as I have long maintained, when debt cannot grow fast enough to cover its two main functions: First, it must grow at a geometric rate to roll over old bad debt as well as new bad investments whose principle and interest cannot be met by increases in productivity, and second, it must grow at a linear rate to invest into new projects that generate the targeted growth in economic activity.

      Debt, of course, matters!

    3. PlutoniumKun

      There is a good explanation in FT Aphaville of why Foreign Reserves in China can’t be used to pay off domestic debts to any large degree – short version is that it means in reality flooding the market cheap money, which would just make things worse.

      There is also a long but interesting article by Michael Pettis on the real core problem with China’s debt – in short its the malinvestment.

      1. jsn

        The Pettis is definitely worth a read.

        If Xi finds his Marinner Eccles he’s well positioned to become the “dictator” the American right worried FDR would become. China’s challenge is the same distributive one every industrial economy has: how do you distribute the gains from technological improvement to strengthen society at larger rather than just making the rich richer.

        The Party Capitalism Xi has inherited as Deng’s legacy has in recent years been trending toward the capitalist default setting of maximizing exploitation to make the rich richer. When finance blows itself up, which it will, all the centralized state tools the Brandies court tried mightily to deny FDR are already in place in nominally communist China. If Xi allocates the cost of malinvestment to the individuals and entities that made the malinvestments and uses the currency to reflate the base of the economic pyramid rather than as a lifesaver for the 1% as done in the West, he may just yank China definitively out of the middle income trap.

        Over the last decade I’ve come to think of the “middle income trap” as that moment when central authorities lose control of the overall system to entrenched, private economic interests and with that the positive distributive outcomes of “development” begin to erode. Xi’s moves with regard to the Capitunist Chinese elite in the last year look like he intends to manhandle them into supporting popular goods like employment, the environment, national security and increasing self sufficiency. Should he succeed in doing so, like Putin he will become a very popular central leader despite whatever residual corruption remains throughout the system.

        1. Norb

          In Common Sense, Thomas Paine pointed out the problem of conflating society and government. He saw they had different origins. Society could be seen as positive in that it bound people together by uniting affections, and government as negative in that its main purpose was restricting vices. It is very instructive to take his point of view that society has its roots in the satisfaction of human wants and government in human wickedness. Society is found everywhere, but government is a necessary evil. Some force or system must restrain human propensity for wickedness.

          The worst form of government is one that brings suffering down upon it’s own people.

          While there is zero chance of ever forming a society in which there is no disaffected faction expressing dissent with the current order, there must be a means to address, and alleviate that discontent or minimize its effect. The system must provide relief. It discredits itself when suffering is ignored.

          Looking out into the world today, it seems an inversion is going on. The “freedoms” of the West have been subverted by stealth authoritarian forces, using the language of democracy as a cudgel to suppress any alternative forms human relations.

          To ensure the common good is the root of all human activity. Listening to elites trying to justify gross inequality and world-wide suffering of every living system is reaching a breaking point-literally.

          The West tries to show wickedness in China and Russia. The lesser-evil arguments are loosing effectiveness because it is the West that is driving the confrontation and suffering in order to maintain economic inequality.

          Complex societies are made more problematic when unnecessary complexity is introduced into the system. This seems to me the failure of Western Democracy and the strength of totalitarian regimes today. Fake Democracy is no match to open totalitarianism. What you end up with is strong and weak totalitarianism worldwide. The lesser of evil being defined as which one can provide for its citizens more effectively.

          1. Norb

            I would also say, that that is why Fake Democrats, party of the people, don’t stand a chance against real Republicans. Also, why most people today see themselves as independents. They are looking for true alternatives and aren’t getting them.

    4. Rates

      Well MMT stands for Magic Mushroom Theory after all.

      One commenter said that the worry is over private debt. Well in this case the state China can take it on through a transfer. Just like for Obama, everything is a PR problem, for MMTers, it’s just a structuring problem. In fact China is the very notion of an ideal MMT state. With the state so strong, in the end it can do everything.

      Also, productive/unproductive is in the eyes of the beholders. On the one hand, people here argue for a Universal Job Guarantee but then they look at the Chinese state companies and complain. Isn’t that what the state companies are somewhat doing? Providing a Job Guarantee.

      Conclusion: being a Magic Mushroom Theory, MMT can be whatever it means, but in the end it translates to Murican Muppets Theory i.e. it can only work in Murica.

      1. jsn

        “Also, productive/unproductive is in the eyes of the beholders.” Only through the lens of “money profits”. In the real economy waste is waste, pollution is pollution, ill health and bad diets are ill health and bad diets.

        In a world of nuclear risk and anthropogenic climate change, if the judgement of productive/unproductive is made from the point of view of strengthening the society at large or the viability of civilization and its populations, while much is debatable because of the breadth of human experience, there are increasingly obvious real, huge and destructive malinvestments being made world wide in pursuit of “money profits.”

        1. Rates

          And from the point of view of Mother Nature, what human beings are doing i.e. driving themselves to extinction, might be the most productive work of all. I think you and I agree i.e. it depends on whose point of view.

          1. jsn

            My problem is I know more people I like than people I don’t like, so I harbor some persistent desire for our species to pull its collective head out.

            One can hope, and try to help.

  7. chuck roast

    I apologize for being glib…it’s my advanced age. But, why wouldn’t the Chinese respond to a “severe economic downturn” with the tried and true mutual methods of chauvinism and military Keynesianism. Add debt forgiveness similar to their post 2008 actions and things keep humming along until the great apocalypse.

  8. third time lucky

    Three distinct economies? Left off the very significant economy of overseas Chinese investment in export production, one which if the three Li families of Hong Kong are any indicator are trying to spin out of China and away from unstable CCP control.

  9. Sound of the Suburbs

    China’s situation did get really bad, but they have understood the problem and are dealing with it. One of the Chinese regulators was at Davos and they have learnt lessons from 2008 that have escaped us in the West.

    They have seen their Minsky Moment coming unlike the West in 2008, and they have identified the debt-to-GDP ratio and over inflated asset prices as causes of these financial crises.

    The “black swan” was obvious all along.

    Steve Keen saw 2008 coming in 2005 by looking at the US debt-to-GDP ratio and he has been monitoring the Chinese situation.

    He thinks they are doing the right things, but it did get pretty bad before they took action.

    They may have read Steve Keen’s book “Can we avoid another financial crisis?” and been horrified when they turned to page 97.

    Steve Keen has been looking at this for a while and has now taken to super-imposing the graphs on top of each other.

    Everyone is doing the same thing, with Japan being the canary in the mine that no one noticed (unless you include the Wall Street Crash of 1929).

    You can compare China to everyone else (25.30 mins.).

    1. Sound of the Suburbs

      In the Davos meeting the chairman of the meeting first goes to the Western expert, Kenneth Rogoff, and they start talking about his book “This time is different”. Reinhart and Rogoff collected an enormous amount of data in this book, but are missing the key indicator the Chinese have found, the debt-to-GDP ratio.

      Reinhart and Rogoff highlight the problem with econometrics.

      1. jsn

        Language creates the illusion of communication.

        Keen & China: private debt to GDP ratio.
        Reinhart & Rogoff: “Government” debt to GDP ratio.

        Very different things when the Government is sovereign issuer of its own currency and denominates it’s debt only in that currency.

  10. Chauncey Gardiner

    Development of organic demand and supplies of raw materials and energy is behind China’s endeavor to build its various ‘New Silk Road’ infrastructure; far-flung efforts to develop proprietary sources of food, energy and raw materials; and financial markets initiatives like the introduction of petroleum futures denominated in yuan on the Shanghai exchange. Seeing China’s pervasive development initiatives, intellectual property transfers, joint ventures and expanding military presence, I think a “Minsky Moment” would be dealt with in much the same way QE-ZIRP and direct cash infusions were used to address financial system losses in the West in the aftermath of the GFC in 2008. Similarly, of course, such massive state subsidies would not likely be televised.

  11. L

    Good analysis but I think that you omitted one other potential problem for China, Vietnam. Prices are high in China and the cost of labor is going up, despite the government’s efforts to stop that. For companies that moved to China solely to take advantage of cheap labor have been eyeing Vietnam for some time. Also automation is now kind of a thing and that is both taking jobs away as they are replaced by automation there in China or back in the U.S.

  12. RenoDino

    Scary to think that the first and second largest economies in the world are both fascist economic models with slight variations. America is corporate statism and China is state corporatism. With so much in common, I guess conflict was inevitable.

  13. ewmayer

    “If anything, history has shown that it is trade surplus nations, not debtors, that tend to be the biggest casualties of trade wars…”

    Ssshh, don’t tell Jim Haygood, it’ll deprive him of most of his daily material, in form of Smoot-Hawley prophet-of-doom warnings and Trump-as-Herbert-Hoover snark broken-recordism.

  14. ObjectiveFunction

    Great piece, many thanks.

    Apostate Reaganite David Stockman is in fine froth here….

    “The US has essentially borrowed the entirety of its current GDP from the rest of the world in order to temporarily live high on the hog.

    “China is not a $12 trillion growth miracle with transition challenges; it is a quasi-totalitarian nation gone mad digging, building, borrowing, spending and speculating in a magnitude that has no historical parallel.

    So doing, it has fashioned itself into an incendiary volcano of unpayable debt and wasteful, crazy-ass overinvestment in everything. It cannot be slowed, stabilized or transitioned by edicts and new plans from the comrades in Beijing. It is the greatest economic trainwreck in human history barreling toward a bridgeless chasm.”

    Don’t shilly-shally there, David. Say what you really mean!

  15. Steven Greenberg

    Oliver Green in conversation with Steve Keen, Contrarian Economist and Author

    This is the best talk I have heard from Steve Keen. All the other ones I have seen have been talks about his Minsky Computer Model that get so deep in the weeds that I get lost. I think I have maybe as high as a 90% understanding of this talk. It explains the issue about private debt, and at the very end even talks about a solution that will never get implemented and one that will be forced upon us.

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