Yves here. Get a cup of coffee. Those of you in finance will recognize the name of storied short seller Jim Chanos. Here Chanos gives a very broad ranging interview, building on the observations he’s made professionally and espoused for 13 years in his course A History of Financial Market Fraud: A Forensic Approach. The talk also turns to China, where Chanos has been a long-standing skeptic (note I have no idea how his China-related trades have worked out; even though an overall bearish position looks like a loser unless one was spectacularly skilled or lucky at timing, but he could still have been successful with specific shorts).
By Robert Johnson, president of the Institute for New Economic Thinking. Originally published at the Institute for New Economic Thinking website
Jim Chanos, the president and founder of Kynikos Associates and well-known investment manager talks to Rob Johnson about the post-pandemic financial system, which has become more steeped in a casino culture than it has been in a very long time, and whether China’s financial situation serves as an example or as a warning.
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Welcome to Economics and Beyond. I’m Rob Johnson, president of the Institute for New Economic Thinking.
I’m here today with an extraordinary man, well, I’ve known back to the days when I worked in finance, but knowing him and being able to keep up with him are different things. This is Jim Chanos, he has his own investment firm, has been involved in the markets now for over 40 years. Recently, he’s been teaching a course, not just recently for the last 13 years he’s been teaching a course called A History of Financial Market Fraud: A Forensic Approach. Jim has written things on the INET website and in many other places related to financial instability. He’s written about China and he is one of the people that when I look at who is successful, independent, high integrity, courageous and practices what he preaches, Jim Chanos fills that bill as well as anyone I’ve encountered. Jim, thank you for being here today.
Well, thank you for that over-the-top introduction Rob, it’s good to be here.
Well, you got to have a bubble before you can have a crash, but we don’t quite have a crash today. But let’s start talking about recently the phrase the golden age of greed. You’ve talked about what you’re observing, what kind of things are happening in the United States and perhaps in the world economy. And with a global financial market it’s not even clear where the sovereigns are sometime. Paint the picture for us, what is the golden age of greed.
It’s actually worse than that, it’s the golden age of fraud. And so I coined that term a couple years ago as I started to see post pandemic the excesses really begin to build in the financial markets, both public and private, culminating in 2021, which was the most speculative year that I’ve experienced in the markets in over 40 years. And one of the things I teach in my class, Rob, is that the fraud cycle follows the business and financial cycle with a lag.
That is the longer you have an expansion, the longer a bull market goes on the more incidents of fraud occurs as it matures. And then of course once things turn down you begin to get fraud exposed, because many frauds are at their basis a Ponzi scheme and need to raise new and new capital. And so the poster child for that obviously is what we saw happen in crypto last year, which was the red hot culmination of speculative frenzy, lack of oversight, lack of law enforcement, and just pure unadulterated greed that got caught up, and then exposed in all kinds of schemes that at their very nature simply Ponzi schemes.
And I think that now we see another aspect of what I teach in the class, and that is when people ask where’s the regulation? Where’s law enforcement? One of the things that is as old as financial markets is that we don’t see oversight or new laws and regulations until after people lose money. And that is certainly now the case in crypto where after the fact we’re going to see much more regulation. As we speak the SEC is cracking down now on both onshore and offshore crypto firms and so on.
It dovetails with what I teach in real time. In fact, last year anecdotally the now infamous interview in Bloomberg with Sam Bankman-Fried was released on a Monday afternoon in April, and I teach my class at Yale on Monday afternoons. And I was reading this while I was having my coffee before class, and I ran up to our audio video guys to ask them if they could put this interview that I was reading on my smartphone up on my PowerPoint for that afternoon’s class. Because it’s very rare that in real time you see an industry luminary discussing his industry by describing it as a Ponzi scheme, which is exactly what SPF did in that interview in late April with Matt Levine and Joe Weisenthal on Bloomberg.
And so it all came together last spring and summer in this particular subspace of the financial markets to prove what we’ve been talking about and what I teach about these cycles of greed and fraud that occur in financial markets when things go too long and oversight becomes lax.
And do you see what you might call a recipe or a vision for a corrective structure of governance, that would diminish these what I call overreaches or these calamities that follow excess?
Yeah, it all depends and I know that’s a weasel answer. But in past cycles where we’ve seen large amounts of speculation and large amounts of fraud the evidence is mixed. So for example, if we just look at the market since the 20th century, after the crash of ‘29 and the resultant amount of fraud that was exposed, and people forget about that. If you look over my right shoulder back there there’s some stock certificates of Ivar Krueger’s firm, the great Match King as written about by Frank Portnoy. And the Securities Acts of ‘33 and ‘34, which came after the crash, was not really about the crash, it was about all the various different pieces of paper that were floated on American investors through state regulatory vehicles and so-called Blue Sky Laws that ended up basically being worthless.
And so that was the real impetus to get the framework for the SEC and the securities laws that we still use today, so there the backlash was tremendous. But if we go to say the global financial crisis, we got Dodd-Frank, but there was a lot that was undone or not done after that wave of fraud and excess that we saw in the residential real estate market. And of course, part of the problem there politically was that lots of everyday people were committing the fraud. People were relying on their mortgage applications and then Wall Street was going in on the lie or looking the other way, or did willful blindness and looked the other way as these things were packaged into leverage securities and then distributed throughout the global financial system.
So it became very, very difficult to prosecute the bad guys when we were all the bad guys. And then you could look at the corporate waves of fraud in the.com era with Enron and WorldCom. And then also go back to the savings and loan crisis where George Bush Sr. put thousands of bankers into jail for simple loan fraud back in 1990 and 1991. So it all depends, we’ve seen pendulum swing where the public gets outraged, loses lots of money and demands change and justice. And then there are other times where the public shrugs and says, “They’re all crooks, what are you going to do?” So we’ll see.
I would guide our audience to look at this or listen to this podcast, it’s a six or seven part series by Alex Gibney and David Sirota called Meltdown. And it was not about the meltdown of the financial markets in 2008, it was a meltdown in the confidence of governance, regulation and expertise that fostered Tea Party, fostered Occupy Wall Street, a Republican house, a Republican senate, and Donald Trump.
Well, and the feeling and that everything was rigged, right?
Rigged on behalf of the rich guy and market participants and not rigged to the detriment of the public. But what’s really crazy, Rob, is that in the 10 to 12 years that followed, that the public decided the way they were going to get even was to speculate themselves in crazy securities in 2020 and 2021. So they started buying crypto, they started buying worthless meme stocks, they started buying SPACs and to get back. And if you get on social media and read what’s in the mindset of these small investors is they want to get back at the man, they want to get back at hedge funds and regulators and the SEC. And not understanding that in fact they’re the ones that are being basically duped again to buy these securities. It’s a remarkable experiment in human psychology.
Yeah, it’s almost a imitation of the person that harmed you. There’s got to be a Freudian term identification with the aggressor I think was the Freudian phrase for replicating the practices of those who abuse you.
I kept pointing out to a number of them on social media during the meme stock crazes, and there’s been a few of them that overpaying for worthless pieces of paper is not going to stick it to the man, it’s going to stick it to your portfolio, and making these statements in the markets can be dangerous. And so it really has become a bit more of the wild wild west and certainly so in 2020 and 2021. And I think we’re going to be paying for that going forward in maybe some unspecified ways.
In the middle of 2021 I was down in Coronado Island for an event celebrating the life of a man that was extraordinary. And one of my friends came up to me and said, “You used to be really interested in all these financial markets.” And he said, “I’ve been making lots of money.” And I said, “I didn’t know you were a financial guy, I thought you were a surfer.” He said, “In these financial markets you get your toes on the nose and you ride the front of the board.” And I said, “Be careful there’s sharks out there with their jaws open.” But it was just a silly thing, he was so enthusiastic, this is June of 2021. And he was very what I’ll call emotionally intoxicated by the momentum.
We’re still seeing the echo chamber of that, option trading is hitting new records. And what has a lot of people like me concerned is that now the volume is all coming in what’s called zero DTE options, zero days to expiration, meaning people are buying options for stock prices on that day that expire. And so this is literally gambling going down and just betting on red and black. And so we’ve really gotten a casino like culture coupled with the equity culture that is a bit frightening in terms of market structure. And again, regulators have kept their hands off this, I don’t want to date myself too much, but if we go back far enough, one of the ideas was that the Fed was supposed to not only take away the punch ball, but was supposed to warn people when things were getting overheated by such indications as raising margin requirements, that are completely quaint and antiquated in today’s markets, but nonetheless would send a message.
And as we know really since Volcker, the Fed and others have had as their third mandate financial market stability and some might say maintenance, and that’s now the unlegislated third mandate for all central banks. And in and of itself after enough years where people get used to that, the so-called Fed Put, it breeds its own instability because people take more risks than they otherwise would, assuming that the government has their back. And every once in a while they find out to their horror and misery like 2002 and ‘08, that it doesn’t necessarily happen that way and so it’s concerning. And then of course we overlay on that the fact that in this golden age of fraud as I’ve called it, we’re seeing all kinds of egregious corporate actions that I think really should be cracked down on an arch. The most prominent when people say, “Well, where is the fraud occurring right now?”
The most prominent is right in front of our faces by the aggressive use of proforma reporting metrics by corporate America. If you look at most corporate reports right now they do not publish at first and foremost and front and center their gap results, they report adjusted metrics. So GE, stogy old GE is a great example of this. GE put its earnings out two weeks ago. And GE had 16 pages of adjustments in its earnings report for the fourth quarter, to get you to the number that they wanted you to get to as to what they thought their profits would be adjusted. Not what they were, what they were adjusted if you take out a bunch of bad stuff. And Silicon Valley has taken this almost to an absurd level. I have companies that are going to report that have 80% of their revenues are share based comp expense, where they’re just issuing stock instead of cash to their employees.
And under the current guise companies add that back to their P&L, they say that’s not an expense. So increasingly, it gets to this equity based world that we’re in, more and more companies, particularly aggressive companies are paying their employees lavishly in stock because they don’t consider it an expense. And the SEC has guidelines on this that it is just not enforcing. And so routinely you’ll hear someone like an Uber or a company like that talk about, “We are now adjusted profitable and this is the first time in 10 years we’re a prof-” And then you look at the financial statements closely and you realize they’re still losing money. And that is to me kind of black is white and white is black. And I think it’s something that the SEC and other regulators should have cracked down on a long time ago. I’d love to report to my partners our investment results without the bad stocks. I’d get thrown in jail if I do that.
Yeah. No, it’s an interesting dilemma to see all these machinations that you can be because of your expertise alert to. We’re also seeing a lot of the public that you mentioned a few minutes ago wanting to catch up, but they don’t have that insight or that equipment. And then you have let us say the large number of people that don’t do much beyond subsistence. And as the despair in all these categories starts to rise in the loss of faith in governance, like you’d said, system is rigged, which was a mantra of Donald Trump’s 2016 campaign.
And I always encourage people to look at the video of the three minute speech that he made on the night of game seven of the World Series, which was the Sunday before the Tuesday election when the Chicago Cubs were striving to overcome. I think they hadn’t won since the early like 1904 or something. And the turnout for those games were huge. He played this ad six or seven times over the course of the game to the national audience, and he kept saying, “The system is rigged and the only people strong enough who could band together to fix it are the American people.” And it was this piece of propaganda that showed Lloyd Blankfein with Hillary Clinton, or Hillary Clinton with Xi Jinping, or George Soros and others in the background, and he’s casting all of this we call discord and them saying, “We’re going to fix it.” And a lot of people bought into that.
The guy who took six or seven of his companies bankrupt, and I was short a number of his securities in the ’90s and the early millennium in the junk bond market and the equity market. And being short Donald Trump’s companies was like watching numerous slow moving ocean liners hitting multiple icebergs for kids. I said that on a fundraiser and President Obama loved that and stole the line. But it’s true, to have Donald Trump give us a lecture on the system being rigged is high comedy in my eye. And that has nothing to do with his other politics, it’s just as an observer of financial markets he was a master of that. And so it really is ironic, but what’s even more frightening as we’ve alluded to is that the outrage of 2009 and 2010, which was Occupy Wall Street and Tea Party as you mentioned, has turned itself into, “Well, I’m just going to go to the casino myself and put it all on red.”
That to me is even more frightening because it’s as if, and someone said this the other day at a meeting I was at, he said, “It’s kind of like the public is that guy at 3:00 AM in the casino at the roulette table with eight or nine drinks in him, and half his stack is gone, but he’s going to be damned if he doesn’t get his money back before he goes to bed. You know he’s going to lose everything.” And I just worry that where this is going to put us politically come the next true bear market where a lot of these small retail investors who are in the market like never before they get wiped out and they’re going to get wiped out. And so I think that that would worry me as an observer of political economy through the lens of finance. And then what will the backlash be? What will people want to do at that point? And so will it be anti Wall Street? Will it be anti-corporate America? Will it be some combination of both? And how will the politicians on both sides of the aisle stoke that fear?
Yes. Well, Martin Wolf, the famous columnist for the Financial Times has just released a book on The Crisis of Capitalist Democracy. And I worked with him quite actively on the book, and we just did a podcast a couple weeks ago that just came out on 7th of February. And he comes from a family, not his mother and father, but relatives who were destroyed by the Nazis. And the ominous sense that he has it’s not even what will the government do, it’s what kind of government will people submit to in the despair, say after the fall down of the markets in the next recession or bubble breaking deeply? And then the last piece I want to add to make this tension even greater is we have the baby boom aging out now and those people with 401ks or whatever, if those all evaporate, given the cost of elder healthcare, what kind of crisis are we going to have when the people who need support money evaporated, and the size of the working age population relative to the retired population is it an all time low? There’s a lot of stress on the horizon.
So two thoughts there. So the first one on Martin Wolf’s book, and I look forward to reading it is that what was really terrifying and what brought forth the ’30s, particularly in Germany and Italy and even Soviet Union was the first crisis of the early ’20s and then amplified by the global crash in ‘29. And so you had in Germany and Italy and of course through Civil War and Soviet Union, you had this horrible wipe out of savings in capital in the early ’20s in Germany through hyperinflation, and in Italy through economic depression and in Soviet Union through civil war.
And then just as things were sort of maybe trying to right themselves, even though politically it polarized those countries, well, certainly Germany and Italy, then you had the crash for ‘29 and ‘32. And that’s what brought Hitler in for example, was the fact that not only did people lose their life savings in the hyperinflation in ‘23, but then everybody hit the breadlines in 1930, ‘31, ‘32. And at that point people said, “I have nothing to lose. I’m going to either vote communist or National Socialist,” and we know what happened. And that’s what worries me is that if this occurs within anyone’s memory of ‘08, ‘09, and then the backlash is going to be I think significant, number one.
Number two, as in terms of 401ks and healthcare costs, I really do think that one of the other aspects of what we’ve seen in the equitization of society and the financialization of society is beyond just the Fed Put in the markets, is now a general sense particularly post pandemic that, “Well, if worse comes to worst, “The government will send me a check, will make me whole, will open up the floodgates and we’ll get national healthcare,” or whatever it might be. And that is the flip side monetarily and inflation deflation side of what happened post pandemic. We now have a belief in light of what the government did to stem the pandemic, what makes people rationally think they won’t open up the floodgates in the next depression or recession.
And probably they will, and that’s fine. But I’m just saying that we now can see a different script from the deflationary 40 years from 1979 to 2020. When I got on Wall Street in 1980 rates were 14% going to zero, and that’s not going to be repeated. And so we saw labor ascended in the late ’70s. I was earning $14 an hour working in a steel mill in Milwaukee, Wisconsin to pay for my college education. And I got all the hours I wanted at night, weekends, holidays because the union workers there were making a lot of money and all had lake homes and whatever. And when I got on Wall Street in 1980 I made more money in two months in the summer of ‘79 working in steel than I made in my first full year on Wall Street. Imagine that today.
That was the peak of labor, that was Thatcher’s election in ‘79 and Reagan in ‘80, and the pendulum has swung back. And now of course it’s all capital and no labor. And if that pendulum swings back the other way, we’ve seen it happen a couple times in American society in the last 150, 200 years, people are going to be wrong-footed. And there will be like we’ve seen when those things change, wholesale societal changes and political changes, so it will be very interesting.
And the movement they now are calling deglobalization may play a role in that.
It might indeed, which gets to our friends in China.
Yes. Well, how would I say people like Branko Milanović and others have made a good point, which is God wasn’t necessarily born in Pittsburgh and Detroit, and the globalization development did create a rising tide for living standards for many, many people on planet earth. But that process perhaps was maturing, but also with some of the breakdowns related to adversarial nationalism and the pandemic and so forth.
I would edit he may not have been born in Detroit or Pittsburgh, but he ended up vacationing in Davos.
Yeah, man, Peter Goodman will have to put that on the jacket of his paperback edition of Davos Man. But I think the sense that I have now is that we are in a what I’ll call an unstable dynamic, and there is all kinds of tension directed at governance. I know a lot of people the other night who said, “The State of the Union Address was brilliant, but can we practice what we preach?” And I said somebody said to me later and it reminded me of your comment moments ago, “Trump preached what he practiced but with a mask.” And Biden has put out something whether it’s dealing with the cost of medical care for elders or financial transparency, he just went through a whole laundry list of things. But the sophisticated people I know are saying, “How is he going to implement that in the world of money politics?”
And I don’t want to fan the flames of cynicism and drive us further towards that authoritarian alternative. And I do myself find myself grateful that the president of the United States did, what you might call shine a light on directions he would like to see us go for better balance, not necessarily every single thing he said, but the thrust of it. But nonetheless, his stepping out like that made me think we really are in a treacherous place, the impetus to his breaking away and making that speech is probably related to concerns of despair within the White House.
I can’t speak to that, I don’t know. But I would say that the inability now… obviously, like most presidents he got whatever legislation he’s going to get through, he got through in the first half of his term and now it’s going to become incredibly difficult with the Republican house. So it has to be via executive action and the regulatory system. And so that’s why you see the initiative about things like junk fees and things like that. But even then it becomes more and more difficult and politicized as we get closer to a presidential election because if the White House does do that, and I think they should in many cases it will be painted as regulatory overreach and big government stomping down on business. And so it’s a tough road to hoe without a doubt politically.
Yeah. Well, as I mentioned Bill Greider used to say, “The Fed is independent,” and he’d say, “their independent from whom?” And now people are saying, “How are we going to protect freedom when the only freedoms that seem to be protected are things like a space program for Elon Musk or Jeff Bezos on his own? And where’s the common good? Where’s the protection of students from the profits of gun makers?”
I’ll go one step further with Tesla, and that’s the company we’re short in the interest of full disclosure.
Is NHTSA allowing them to test their full self-driving beta software on roads that you and I are on. Where other automakers legitimately use test tracks and test for years, he’s testing them on our highways. And I think if it was any other company, if it was Toyota doing this, the federal regulatory apparatus would’ve told him to stop it immediately. But because it’s Elon Musk, he gets a pass. And part of that gets back to the equitization of this country and the financialization of this country that I talked about. He’s held up as a hero and Tesla is the most owned stock by retail investors in the world, and so he’s going to get I think special treatment.
I think that’s an interesting hypothesis. I hadn’t thought about that broad-based retail coalition that might be underpinning it, and he can play the common man in the theater of the financial markets now. Wow. Let me reach back a little bit in history. My former wife was the head of Japan analysis in the ’80s for the Federal Reserve under first Volcker and then Greenspan, and we watched that bubble burst and we watched that country aging. And yet when you look at satisfaction in life, you look at surveys, longevity, whatever measures you want, the Japanese didn’t collapse. And I want to contrast that with some of the ominous things that you and I have put on the table. How was Japan and how would I say these are still dynamic things, the downturn could still be tomorrow. But were they able to step aside and have a US-China positive multiplier be the rising tide that raised all boats and sustained them to avoid a crash? Or are there things we can learn from them, so that we don’t you may say fall off to cliff?
Well, one thing that everyone forgets about and the Japan analogy is somewhat apt, but I think it’s more apt as it applies to China than the US. But what everybody forgets about that the 30, 40 years, no, 35 years at this point that Japan has stagnated, is that Japan has had declining population. So it’s flat GDP over that period are up slightly on a per capita basis is actually up in line with the EU and the United States or not far off. So because the country is shrinking, again the way the math works is people really haven’t individually felt it.
And so that’s a really important point people should consider. However, Japan in 1989 at its peak had is eerily similar to China in terms of the economic model. I have a slide in my China deck about this. Japan was heavily an investment driven GDP model although nothing like China. It was at its peak, it was investing about 30% of its GDP in investment. China is in the mid 40s and has been for better part of 15 years, it was investing in greater Asia. Now in China’s case they’re investing internally, but greater China is supporting that in terms of Hong Kong and Singapore and South Korea. It had a basically government driven economic model. If you remember MITI and METI were directing investments by corporate Japan in many cases.
It had an export driven economy with a pretty controlled currency. So there were a lot of similarities between the Japanese economic model of the late ’80s, which was the miracle and the Chinese economic model from say five to 10 years ago when it was still putting up those big numbers. And then the final similarity, which is the most ominous, was Japan had a real estate bubble and had a banking system that peaked out at about 400% of GDP in terms of assets. And now let’s go to China and take a look at what happened in China over that period. So when China entered the WTO in 2001, it had an economy about $1 trillion US in terms of GDP, it had a banking system that was about 1 trillion US in assets.
40% of those assets were bad, they were loans to state-owned enterprises that ultimately had to be worked out over time. They wrote some of them off over time, because they had to recapitalize their banking system in the western financial markets in Hong Kong and New York. And so it took them a while to work that out of their banking system. Fast forward to today, Rob, and China’s economy is about $15 trillion US and assets in their banking system are roughly, well, actually over 60 trillion. So they’re four X, that’s very similar to where Japan was at the peak. It’s very similar to where some of the bad European countries were in oh ‘07, ‘08 like Ireland and Spain and Iceland.
And so you start to get up to a banking system that’s four or five times the size of your economy, and it’s the banking system tail that wags the economic dog. And how does this happen? Well, it almost always happens because of real estate, which is a leveraged asset class. I joke that Chinese apartment prices are the second most important price you got to know other than US treasury rates, because it’s roughly a quarter of China’s GDP is residential real estate. And China is still building 20 million flats a year even though it doesn’t need them.
And a declining population.
And China, I’ve joked long that China’s the only advanced country that knows its annual GDP on January one of that year.
They can preset it.
Well, and legally, and it’s an accounting identification. If half of your economy’s investment you could literally direct investment to make a GDP number if you never write off the bad investments.
But I guess what you’re saying in a dynamic sense, these buildings or what you might call excess apartments don’t add to productivity and therefore income to service that growth in the balance sheets of the banks or the financial institutions. So if they were investing in productivity enhancing resources, human capital or physical capital or whatever, you might have a more optimistic sense.
Which they were in the Deng Xiaoping reforms after Tiananmen Square and even in the first 10 years of the new millennium after they entered the WTO. It wasn’t until after the GFC that this went crazy. And we’ve seen this massive increase in banking assets and apartments and apartment loans driving GDP and a lot of it was government driven, they needed to make numbers. The way the communist party worked was the local party was set targets by the National Party, you need to grow seven or 8% this year. Well, what’s the easiest way to grow seven or 8%? Stick a shovel in the ground. Now the problem with this is that you can’t segue into a consumer driven services economy, which is what most modern economies are because you remember your macroeconomics, Rob, S equals I. So the fact that if you’re going to invest 46% of your economy every year, you’ve got to save 46%.
And thus the problem, the segue to a consumer driven economy will create speed bumps, the like of which no Chinese premier wants to encounter. And every time that they try to reign this in, and they’ve tried three times since I’ve been following China closely in ‘09, three times they’ve tried to hit the brakes and all three times they’ve let up and hit the accelerator again. Because the economy immediately goes into stall speed and they panic, and I’ve called it the treadmill to hell, they can’t get off it, and there’s no other playbook. And so the inevitable reset is going to happen, it’s just a matter of when and from what level.
Where Japan hit this reset in ‘89, and Japan’s alternative is to muddle through for 40 years with no growth. I don’t know if China has the cohesion internally and politically and they might to do that. And that is either that or you’re going to have to face a severe downturn, clean out the system, clean out the bad debts and start over. I don’t know if they have the stomach to do that. And/or if they don’t try to find foreign adventures to offset that risk starting 2019 in Hong Kong, now the Sabre-rattling over Taiwan and that’s always a possible response policy-wise as well.
Ominous for all parts particularly with an end game of nuclear threat. It’s interesting to me I spent a lot of time going back to the time of Tiananmen Square in China. And I remember there was a place probably around 2012 where a lot of professors at universities were saying to me, “We had this old model where you’d run around the country say the equivalent of high school students and test who are the best and the brightest. You bring them in and teach them to be the government.” But now in the advent of the digital age there’s a whole lot of what I’ll call private sector potential. And there are a lot more people who want their children educated, whether it’s in engineering or skills, the three Rs or what have you.
And these professors were talking to me about their frustration that the economics of the support for the universities by the state wasn’t what I will call working to upgrade human capital where all the potential lied. And they said, “We’ve had a lot of people migrate from the farms to the cities, and they work many times with their hands. Then they moved in manufacturing in the beginning, then they’ve moved to construction of infrastructure and construction of real estate, but we’re not building the human capital.” And I think just to conclude that vision, the way in which Jack Ma has been dethroned is sending a very negative signal about technology is creating what I’ll call freedom and independence that maybe the government doesn’t want the society to inhabit.
Well, as we know from our own wrestling with big tech, big tech becomes a power center literally in and of itself. And that’s the one thing the Chinese Communist Party won’t broach, it won’t broach any political power by a new power base. Technology, entrepreneurs, big technology companies like Alibaba, Baidu, Tencent and so that’s why we saw that. Those companies and those executives were getting fabulously wealthy, and that became a political threat that the CCP was just not going to tolerate, so that’s number one. Number two, it’s coincided with the deglobalization as you’ve called it, and a little bit more hard-headed look at Chinese technology through the national security lens. And whether or not we want Huawei equipment or TikTok on our phones, and so increasingly that’s going to be an issue. And so it’s tough because the Chinese labor market having gotten wealthier has priced itself out of making sofas and bicycles and things like that.
Those are made elsewhere for Walmart. And really they were supposed to go up the value chain through technology and more advanced products, but with this deglobalization trend that’s going to be more problematic for China. And so they have a series of issues on their table that are not pleasant and alternatives that aren’t that pleasant right now. And that’s what makes me worry a little bit about the Sabre-rattling, because one of the classic misdirections for any authoritarian government is to set up enemies outside the border, that’s the cause of our problem not our own policies.
And I know my friend Orville Schell, who’s spent a lot of time studying China, and he wrote a book with the John Delury called Wealth and Power. And it was about what he saw as a coming crisis between the US and China, they call the Century of Humiliation from the opium wars through the Japanese invasion. The idea that China has to what you might call regain its stature at the head table is very powerful. At the same time you have the United States leading a Western system doesn’t want to be a partner, it wants to be the captain. And the United States comes from what I’ll call a Cartesian enlightenment system, the Daoist, Confucius… the Eastern philosophy. In China it means that it’s quite possible for the two sides to misunderstand each other, because they make projections from their own imaginative mindset onto the other that Zbigniew Brzeziński talked about this a great deal in 2010 and ‘11 that it was going to be very hard to have a G20.
But as this distrust is reinforced by what you might call a stammering or sputtering economy and discord within both the United States and China, that Bismarck recipe, find something that you can dislike outside and unify the people behind you. As a matter of fact one of the other teachers at Yale, Stephen Roach, formerly at Morgan Stanley, I did a podcast with him a couple of months ago about his new book on these questions. And I read something by Chas Freeman last week about what you might call a lose-lose framework, unnecessary losses that might be on the horizon.
But don’t underestimate also the fury that China has toward our ally Japan who’s announced a rearmament program.
Because for whatever differences between west and east there are in philosophies and the ability to misunderstand each other in any kind of policy square off, there is just outright hatred in China for the Japanese, much of it legitimate I might add for what happened in World War II. And we forget that there was a massive land war while we were fighting our way across the Pacific via our Navy and Marines. There was a massive land war going on in China between the Japanese army and the Chinese army replete with many of the atrocities we saw from the Third Reich. And so that has not been forgotten in China, I can assure you. And so the fact that Japan is now embarked upon a new policy to re-arm itself is raising strategic issues in Beijing, that heretofore it didn’t worry that much about, it worried about the US. But a re-armed Japan is a different animal in the Pacific. So it’s something they talk about a lot more than we do, obviously.
Yes. And it’s hard to figure for me what the Chinese government thought it was doing in siding with Russia when so many of their trading partners are on the other side. I’ve wondered if that decision, while it’s a way of showing how do say beating your breast or stiffing your spine in some simple way, if it’s not going to exacerbate the economic stresses because the Australias, the EU and others are going to step back themselves.
Well, keep in mind that Xi Jinping the first thing he did when he became the leader back in 2013 was given a speech about the weakness of the Soviet Union in allowing Perestroika, and how it was one of the biggest disasters of the 20th century was the fall of the Soviet Union. And there’s actually an institute for the study of the fall of the Soviet Union in China. But perhaps more interestingly and ominously remember that the only major foreign leader that attended the Sochi Winter Olympics that were Putin’s showcase was Xi Jinping, and this was well before the Ukrainian invasion. So there has been a growing warmth between Russia and China I think because of shared interests against the west for a while now.
Yes, I think that’s right. In my own work when I was running the Quantum Emerging Growth Fund, I used to ride around all of these countries in emerging Asia and read their novels and watch their movies. And seeing from that how we say I like to read the analyst reports, but I also like to get the kind of what you might call the cultural vibe that’s coming forward. And one of the things that haunted me in recent years was the movie Wolf Warrior 2, which absolutely characterized China as the savior of the global south from the global north of it led by America, but America and Europe oppressors.
And all kinds of things including the national museum exhibit in China were emphasizing more and more and more what you might call pride on their side and defiance. And it feels to me like at a very subtle level, but that’s now accelerated that these tensions that Orville Schell and you and others have foreseen, are quite ominous, they’re really coming to the surface. What would you do if the president called you in tomorrow and said, “What do we got to do to take the steam out of this? How do we come back to a win-win situation?”
Well, it’s tough because we have one major obviously issue sitting there right in the South China Sea called Taiwan. And Taiwan is important not just because we have backed Taiwan, but because Taiwan along with South Korea and to a lesser extent Japan is the center of the most important commodity in the global economy right now, which is semiconductor chips. Semiconductor chips are to the economy today what oil was to the global economy in the ’70s and ‘80. And it’s crucial that we keep that supply going now we are trying to build up domestic production, but if there were to be a shooting war in Taiwan and or Korea that would disrupt the global chip supplies. It would make the pandemic look like child’s play in terms of how quick everything would collapse and so that’s a problem. And I think that first and foremost, I think the West needs to buy time to deglobalize in effect and onshore the importance of semiconductor chips that are essential to our economy, that’s number one.
So Taiwan is everything and how you diffuse that, I don’t know, because the rhetoric is getting more and more bellicose. What if China does a naval blockade around it? What do we do? There’s lots of scenarios that are at pay grades above my level, that I’m sure the national security apparatus is trying to think through. As it relates to financial and economic policy China has got the best of all worlds with access to Western financial markets without being a full participant. One of the things I rail about in finance is the Chinese VIE structure, for example, which has enabled companies like Alibaba and others to raise billions of dollars in the West in what’s basically a fraudulent structure, governance structure. The Chinese courts do not recognize the VIE structure and for the listener and the viewer, what it means is that Western investors cannot own the corporate assets inside of China by law for the most part, there’s some exceptions.
But Elon Musk, for example, owns his plant in Shanghai, so go figure. But for the most part you and I can’t own Alibaba’s actual assets within the People’s Republic. So what they’ve done is they set up this artifice where they set up a holding company in the Caribbean, in the British Virgin Islands or Cayman Islands, and you can buy the stocks and bonds of that holding company. The only asset you have is a piece of paper in a safe in the British Virgin Islands that says you will share in the economics of this enterprise in some unspecified way going forward proportionate to your ownership, but it doesn’t really mean anything legally in China.
So to the extent that something happens in China to those corporate assets you have no recourse, the Chinese courts won’t recognize you. So for example, years and years ago when Yahoo and SoftBank owned a piece of Alibaba, and one day they woke up and they found out that the financial arm of Alibaba had been stripped, and sold to a group of affiliates of Jack Ma for a bargain price. And the company said, “Well, the Chinese regulators told us we can’t have Western indirect investors in financial services, so we had to do this.”
Well, to this day they’ve never told people or shown those people what those regulations were or what the order was. And the Western investors in Alibaba were left holding the bag with no recourse. And so this is the problem that they have access to our financial markets, but we have no governance on their companies. So all these kinds of things are going to play into any future increasing level of conflict with China. Obviously, I tell my clients to be as disassociated with China as you possibly can in any case because the risks aren’t worth the rewards.
It is interesting to me, I’m thinking about directions of innovation. When Silicon Valley starts and it starts moving towards China, but not just the plants for assembly but the use of, I don’t know, things like smartphones or laptops or what have you, you can see the benefit to the consumer. Then I remember meeting with Chinese leaders who said a little bit like the movie that Tristan Harris and others made The Social Dilemma, you are the product. And they started saying, “Okay, these are platforms for commerce, but they’re also data sets for intelligence. And we got to figure out how those are governed, how those are blended.” But what I’m seeing now is there are things, for instance, some of the things Huawei’s created with the 5G stuff and so on, that the direction of this tension has reversed. Now, some of those things could be deployed in the continental United States, but is it opening a window to espionage and surveillance on the part of the Chinese?
Well, look at just two big examples. TikTok, which is owned by a Chinese company, which is now one of the largest social media platforms. And of course we’re not on it right now, but Zoom, how many Zoom calls have you been on since the pandemic?
I don’t have enough fingers and toes to count, over and over and over again,
A lot of those calls get routed through China, through Chinese servers, so it’s interconnected in many ways. And these are all issues that people are thinking about in terms of the deglobalization and our interconnectedness with China as you point out.
But what I’m alluding to is there are potential losses for the wellbeing enlists, what you might call a technological firm an American can imitate those things and put them into the marketplace very quickly. The source of all innovation in the early Silicon Valley days was largely the United States. Now the source of innovation is more what you might call is more spread around a little bit what happened with the auto industry, where Japan and Korea started to take the lead in some respects.
The good news is that like Japan the Chinese financial situation is probably not a huge contagion risk. Unlike the US and EU financial situation in the global financial crisis where we were all interconnected and lending to each other, and distributing highly leveraged products to West German Landesbanks and Norwegian pension funds, that’s not the case by and large with the real estate debt in China, that’s held on the Chinese banking system for the most part. There’s some bonds that are held offshore, but for the most part the contagion risk is like Japan it’s basically centralized in their banking system. So they can deal with it internally by flooding their own economy with currency, but there’s not as much a transmission risk as there was in ‘08 between Western banks.
Well, Jim, I remember I just wanted to, how do I say take our audience on a broader voyage. They can look at your reading lists and so forth vis-a-vis Yale and your course. I listened to a podcast with an Irishman, I think his name was David McWilliams that you did recently that explored some of the things we have, but other dimensions also quite vivid. And I particularly want to encourage our young scholars to engage in following your writings and your interviews and so forth, and think about the financial markets with the what you might call depth and breadth that you do. Because there’s a whole lot of pressure to just be a member until like you’ve said several times until the boat goes over the waterfall and then you find out you got hoodwinked again. We all have to take responsibility for not getting hoodwinked, and you’re about as good at smelling a rat and also seeing the prize as any financier I’ve ever met.
Well, thank you, Rob.
Thank you for being here today. And I look forward to another episode and how would I say in guiding our young people, Young Scholars Initiative to learn from your example and from your ranks.
And check out more from the Institute for New Economic Thinking at ineteconomics.org. (singing)
This is a very worthwhile interview, but I am not sure if Rob Johnson is familiar with the start of WW II (in the Pacific theater) and China’s scant energy resources:
“Yes. And it’s hard to figure for me what the Chinese government thought it was doing in siding with Russia when so many of their trading partners are on the other side”
It does now appear that China would have made better use of its resources if it tried to build a semiconductor industry in the early 2010s instead of churning out more high-rise apartments
Back when I was a young pup at the University of Michigan, one of my economics professors was a world-renowned expert on the Chinese economy. Two things stood out about his class:
1. He and his colleagues had to do quite a bit of data parsing in order to get the real story about what was happening in the Chinese economy. The figures from the State Statistical Bureau simply couldn’t be trusted.
2. The Chinese Communist leadership had initially accepted economic development help from the Russians, but it wasn’t a marriage made in heaven. The Chinese kicked the Russians out, oh, I think it was during the 1950s.
Aside from the cultural bias for real estate, local governments rely on real estate for revenue. There’s a now geographical mismatch between supply and demand for housing. Compare the northeast rust belt with Shanghai.
The other mistakes, in hindsight, are the embrace of auto culture, to the point of removing bike lanes and initially banning electric bikes, and not planning for mass transit from the beginning. Beijing didn’t open additional subway lines until the 2008 Olympics. Also, China doesn’t have universal healthcare system.
As for semiconductors, I believe the original plan was to bind Taiwan with trade, so Taiwan made chips which are largely sent to China to be incorporated into high value products. Even now, hundreds of thousands of Taiwanese live and work in China, while companies like Foxconn have large operations there. This was when One Country, Two Systems seemed plausible. Then events: the Greens got elected so China cut off tourism and pineapples, and then cracked down in Hong Kong.
Makes me think about William K. Black, too. Will be interesting to read his next works.
“And what has a lot of people like me concerned is that now the volume is all coming in what’s called zero DTE options, zero days to expiration, meaning people are buying options for stock prices on that day that expire. And so this is literally gambling going down and just betting on red and black. And so we’ve really gotten a casino like culture coupled with the equity culture that is a bit frightening in terms of market structure…”
Mutual funds – slot machines
Stocks/ETFs – poker/blackjack
Options – roulette/craps
Thank NC for locating and sharing this fascinating wide-ranging interview. Great Read.
The rot of which he speaks is why I will not work in the financial industry. Period.
We do need to get back to basics. The reason I got into banking long ago was to support banking’s enabling of commercial business growth. Working capital loans, construction loans, asset financing, all of the things that help businesses compete in the marketplace. What we have now is, as he says, a casino. A rotten, foetid, gangrenous, leprous, cancerous pool of filth of rampant speculation.
So the first step is to bifurcate, at least, the speculative “investments” from the capital business investments that actually fuel commercial and not just financial growth. Carve out the casino and make it clear that the government will not in any way be backstopping any of the nonsense therein.
And I include short-selling in my list of nonsense. If you don’t like a stock, don’t buy it. Don’t go borrowing someone else’s stuff to gamble with. Just don’t buy it. If there are no buyers, then the price will go down until maybe it does make sense to buy into the company, maybe even take a controlling stake and implement some needed changes.
But that’s a value cultivation way of thinking, and what we have now is a market philosophy of value extraction.
Derivatives need to go into the casino. They should not have the kinds of priorities that they have, no thanks to Phil Gramm that PoS. The damage his work has wrought is pervasive.
Glass-Steagle needs to come back. I bewailed at the time that the U.S. did not have the mercantilist kind of background that works in Europe and Asia. It was a recognition of the avaricious nature of financiers and an attempt the keep the savings of regular folks out of their hands. Repealing it was a mistake.
And here’s some really heretical thinking: If labor is the source of capital, then why is labor taxed at so much higher a rate than it’s product -excess value?
Words cannot plumb the depths of opprobrium and revulsion I have regarding where the financial industry is today. And the looters are going to make damn sure that things continue until there is nothing left to suck from the desiccated corpse of what was once a healthy U.S. economy. [Family blog] them.
>”And I include short-selling in my list of nonsense. If you don’t like a stock, don’t buy it. Don’t go borrowing someone else’s stuff to gamble with. Just don’t buy it. If there are no buyers, then the price will go down…”
As much as I think that it is a mugs game, short-selling is a necessary corrective to markets which are institutionally biased to the buy side. It ought to be, but sadly isn’t, made more readily available to the retail investor.
When a company or a market is in trouble, what is the first thing the regulators do? Ban short-selling! That should tell us something. They never ban buying in a bubble market.
Back in 2008 a hedge-fund operator by the name of John Paulson made $3.9 billion (in one year, not for the fund but for himself) by shorting the sub-prime housing mortgage market. The investments he bought (credit default swaps) were not available to the general public. But John Paulson, a connected investor, was able to buy them. You or I instead could only go long by buying “triple AAA rated” CDOs, MBS, etc. paying ~5% per annum or sit on the sidelines.
And that’s how ya make $3.9 billion in one year. Don’t buy the sh*t on offer. Bet against it.* And then wait for the issuer of the credit default swaps (AIG) to be bailed out by the US government. Because that’s what happened. After AIG defaulted on its obligations, the US government in 2008 bailed it out along with creditors like John Paulson. John Paulson made $3.9 billion. The American taxpayer paid.
*Don’t go getting any ideas. These riches and opportunities are only available to the already rich.
So effectively bring back Glass-Steagall?
And yeah, short sales a just an insane concept.
If i tried to do that with a car, people would look at me like i was mad.
I think a watershed moment in the advance of fraud and “crimogenic” environments was when Sandy Weill bought Citi in the face of Glass-Steagal, counting on the Clinton DoJ folding like a cheap suit. Which of course, they did. This was at the same time that Wall Street “innovation” was producing things like Credit Default Swaps, which are prima facie insurance contracts but with the honorable exception of Brooksley Born were treated by the Clinton mob with a wink and a nod and allowed to burrow their way into the financial woodwork, only to explode in 2008.
CDSs were only part of the picture, I’m sure there were hundreds of other ‘products’ that the gnomes at JP Morgan, Goldman, et al created that trampled existing security laws. I don’t know when Total Return Equity Swaps were created but if anyone can explain a purpose for these apart from skirting security regulations I’d like to hear it; it was a thing of beauty to watch the financial press try to explain these after the Archeogos debacle.
Then you have the whole crypto world, which we discussed when FTX imploded. All I’ll say there is that a financial regulatory structure that can look at Initial Coin Offerings and not call foul is a financial system that is living on borrowed time. Having lived through 2008 and other financial crises, I watch each headline and wonder ‘will this be trigger?’ Given that Obama’s DoJ did *nothing* and Trump’s was, well, Trump’s, you have to know there are still bombs aplenty waiting to go off.
In short, it’s the insanity of the continuous piling on of risk to avoid risk.
I guess the benefit is the effect of camouflage.
I read a book on the stock-market and investing many years ago. The author (I believe it might have been Andrew Tobias) strongly advised against shorting stocks. His reasoning? Management of publicly-traded companies is almost always focused on share price and it has all the weapons. All you’ve got is your opinion.
Your opinion might be right. But in the face of management’s arsenal (stock buybacks, stock splits, loans from lenders who always seem willing to lend, management’s rosy projections duly reported to the public by an unquestioning and enabling coterie of financial analysts, *surprise* announcements of good news, delayed reporting of insider selling, short-squeezes, etc.)—in the face of all this weaponry, the short-seller who knows a company is rotten must still be well-heeled and have nerves of steel in order to hold his position. And probably for quite a while.
Through the tactics listed above and more, terminally-ill companies can live long after their natural expiry date. (See: Enron, Bear Stearns, Lehman Brothers). That is why, imo, their collapse seems so sudden to the casual observer. Management has expended months or years into propping up a corpse—and succeeded. But then one day—almost out of the blue and usually on a weekend—the plug is pulled and the death of the company is officially pronounced. Short-sellers can finally rejoice. That is, if they haven’t already sold out their position.
Jim Chanos seems to be a dedicated short-seller and as he discloses he is short Tesla. Okay, we’ll see how his battle with Elon Musk, master stock-manipulator, works out. David, meet Goliath.
As Keynes said, markets can remain irrational longer than you can remain solvent.
Thank you, this was very accessible info. Chanos is so easy and fluent. So it sounds bad. If it really has come down to one big casino and consumerism is the fastest treadmill to hell, then logic dictates we eliminate the profiteering and just regulate it and make it a circular flow of commodities and finance. Aka economic socialism, which would be fine with me except for the little problem of diminished resources and a trashed environment. Calling regulation “authoritarian” is a little like calling fraud “freedom” to my thinking. In a time that is begging for solutions to our environmental mess it seems like all profits could be put back into the environment to repair and stabilize it and that would go a long way toward preventing the dreaded collapse. Just fix it. It will be a driver of the “economy” and well being for centuries if we do it right. Profits as we have known them are already virtual absurdities. Competition likewise. Just my usual rant. Good interview.
Chanos’s views on the international situation are in accord with lots of links we see and read on NC. That is another confirmation that we are living in a society that’s probably deteriorating in an increasingly dangerous world.
One thing I want to look into further was the point Chanos was making about a no-growth Japan. As a degrowther myself, I’d like to learn more about how an advanced society has handled no growth for decades. I remember anecdotal and media-based stories about the phantom businessman who left home every day to pretend they were working. But it’s worth looking into more deeply.
Spitzer only got as far as the insurance bid-rigging. Never had a chance to get to the synthetic credit default swaps “insurance” (wink-wink!) with AIG, GS, et al.
As far as his personal peccadilloes, as they say in politics, coming to light, he of all people should have known who was connected to Kroll.
Talk about a world that’s been turned upside down. Chanos mentions working in a steel plant to pay his way through college at $14 an hour, which would be, what, 35-40 an hour today, or more? For a relatively menial job. And then goes as far to say that he made more his last summer than his whole first year in finance. Today, kids intern for free at those same finance firms, and don’t even bother actually working to pay for school, because, why, when they’d barely make a dent in the total bill, considering the paltry wages out there for the sort of work a 19 year old can get. Besides, if they play it right, that first year in finance or tech could bring a six figure income with equity incentives.
I remember those days. Coming out of high school, I had a serious fork in the road in front of me. A pretty decent income and union card at the Ford plant nearby, or an almost free college degree at a very good state U. That world is a distant memory today.
I paid for two years of college with a good union job in a chemical plant during long academic quarter-system summers and holidays plus 20 hours a week during the school year at slightly above minimum wage ($2.00 an hour). Then the Ford Recession of 1975 happened…My recovery took a lot longer. My annual union wage for that entry-level position was $53,000 in 2023 dollars according to the Bureau of Labor Statistics Inflation Calculator; I spent about 13 months in that job overall. Goes without saying that 90% of those jobs in my hometown, as with everywhere else, are gone with the wind.
Regarding The Crisis of Capitalist Democracy, by Martin Wolf, take your pick: Contradiction in Terms or Category Mistake. Still, it will be worth the read to see what the Pink Paper thinks. I expect few surprises.
Wolfgang Streeck in “How Will Capitalism End” explains the contradiction in these terms: ‘capitalist’, currently ‘liberal-democracy’, sets up two constituencies against each other: the winners in the market and the winners at the polls (‘one-dollar-one-vote’ vs ‘one-person-one-vote’). While the balance between liberal markets and democracy might work for a while, once the balance goes to the market winners there is no way back for democracy; all levers of democracy are in the market-winners’ hands. Unfortunately the proles are hoodwinked into thinking ‘liberal’ is about social issues, and not primarily about markets, so are blind to the contradition.
Shorting Tesla ?
What timing, Jim, what timing ?
An excellent podcast, thanks for posting.
I don’t think the “Golden Age of Fraud” can be confined to finance. It’s now a living, breathing, monster inside of American industry right down to the worker on the factory floor. It’s the culture imbued on us by the CEO and upper management.
It seems that Chanos has read his Minsky, who was famous for his “instability hypothesis” that stability begets instability. Stability creates a complacency about risk, and Ponzi risk takers come to the fore, reaping high (occasionally fraudulent) returns. This starts a positive feedback loop (higher and higher leverage by more and more investors, etc.), a sort of “What me worry?” Alfred E. Newman type of casino capitalism. In this casino, before the players are wiped out, they get stacks of new chips from the Fed to play with. The Fed has an infinite number of chips, so everyone wins. Right now the total of QE “chips” on the Fed’s balance sheet is in the neighborhood of $9 trillion. Does the Fed think it can keep doing this (and letting the bubbles keep growing)?
If Minsky is correct, the unofficial “third mandate” of the Fed, according to Chanos–to promote market stability— will prove ultimately self-defeating because stability promotes more instability. This artificial “stability” can only be temporary as more and more investors want to play in this very profitable and low/no risk casino. For the Fed this becomes a “treadmill to hell,” as Chanos would call it.
The Fed should abandon that third mandate and stick with the first two–fighting inflation and promoting full employment.
Well Minsky was letting off the Bankers too easily. It was the Bankers who kept the assault ongoing on Glass Steagall throughout the 1980s onwards till the grand genius Bubba arrived. It is the Bankers who retain institutional memory of how to conduct fraud or rather how to write legislation that allows fraud by the less honorable of their dear brethren. Unless you remove banking from the private sphere we will continue to stagger from crisis to crisis.
Would Chanis support converting banking into a public utility? I am guessing no. I think it is time to return to strict Glass Steagall. When you read “Age of Greed- Jeff Madrick the one fact that sticks in your mind is how people like Walter Wriston and Sandy Weil detested GS because it made banking very ‘boring’. It was boring because it plugged every way to speculate is my guess. Bankers want to make as much money as possible in as short a time possible for their shareholders and investors. We should stop listening to these ‘good guys’ from Wall Street because they personally have high moral values.
Consider the peculiar notion that China started and is promoting the Taiwan sword rattling as cover for impending doom in the Chinese real estate markets. From where I sit, the u.s. started kicking the Chinese Dragon with Obama’s pivot to Asia, and the u.s. government has much more reason to raise international issues to cloud its interior collapse than China. And I recall some of the explanations for Japan’s deliberate inflation of its real estate market as a means to capture and hold Japanese consumer spending to help promote Japan’s export economy. China’s real estate construction boondoggles reminded me of Keynes’s suggestion that a government could pay people to dig ditches and fill them up again. Nothing is created, no one is better off for the labor, but there are incomes where there was unemployment. I doubt China has a problem with human capital or lost production due to real estate construction. Chanos’s hint during his discussion of China that he believes there is some sort of “Progress” moving economies from Agriculture, to Industry, to a “Services” economy at its pinnacle floored me.
When Chanos expressed his concerns about the “Crisis of Capitalist Democracy” that worries Martin Wolf and alluded to the rise of Hitler in 1930s Germany as warning about possibly similar outcomes in the u.s. — I wondered at his understanding of history. The German people did not choose Hitler, they chose something other than a continuation of the Weimar regime, just as another third of the German people chose a Left leaning leader. The Power Elite in Germany promoted Hitler believing they could control and direct him. I believe the u.s. Power Elite [which I understand had more than a small part in building and promoting Hitler] would likely promote a fascist government over a socialist/communist government if the 2020s and 2030s in the u.s. mimic those times in the 20th Century — need I recall the Power Elite’s horror at Bernie. But that is a far cry from the fear Chanos expressed.
These are just a few hi-lights from my impressions of the Chanos interview.
This is not the first time I have been disappointed in the posts coming from INET.
See Richard Werner’s “Princes of the Yen” on how it was the neoliberalisation of the upper eschalons of the Japanese system – in cahoots with US neoiiberal ideologues and with ideological blinkers learned at top US schools – that brought an end to the Japanese model. I’ve read the Louvre Accords and the Plaza were both US initiatives to take the wind out of the sails of the EU and Japanese economies respectively, which were competing too well with the US.
I think Chanos is living inside an extreme version of paradigm which he clings to as having some objective validity – ie financialised capitalism. One thing I do welcome in the Hudson-Desai podcasts is that Desai gets to add some other dimensions to Hudson’s oft articulated narrative; one being that the financialised capitalism that US promoted was a sign of its weakness relative to the UK earlier empire: the UK she says had actual capital to export, the US only fiat dollars, and it has had to build a ginormous financial pyramid of an ever more exotic variety to promulgate it and sustain it. Yet Chanos thinks that a less fraudulent version of financialised capitalism (services etc) is an objectively ‘normal’ and ‘sustainable’ and workable model. The overhead of the financial industry, with alot of its financial market concepts, metrics and tools will be blown away (or slowly disappear) as the US dollar diminishes…..lead to the birth of a fresh incarnation of capitalism….which Wolfgang Streek in “How Will Capitalism End” can’t imagine, and Hudson hopes the Chinese can evolve…