03-07-2017, 07:09 AM
(02-27-2017, 11:57 AM)X_4AD_84 Wrote: 1980 - ~ 2000 is the most anomalous part of the chart. For budget hawks, those were good times.
1990's sure. The 1980's were terrible for budget hawks, peacetime deficits were the highest in history up to that time. At that time I was a budget hawk. By 1989 I had despaired that the budget would ever come under control. Around that time I did calculations that suggested things could hold together until around 2040, when I would be 80, either dead or too old to care. Then I watched the deficit go away and I thought hot damn we fixed this. Then I watched during the 2000 election one candidate promise to use the surplus to reduce debt/GDP (remember the lockbox?) and the other who promised to piss it away. Then the spendthrift got elected and true to his promise pissed it all away. I stopped caring about the deficit around 2003, as I has learned more about how these things work--besides worrying does no good--what will be, will be. A few years after that I stopped being a realist in FP and started to think more and more along isolationist lines. Sometime over the 1997-2003 period I stopped being a free trader and some years later (2007ish?) more of a protectionist:
(ref: http://www.safehaven.com/article/2709/in...erspective )
me Wrote:Louis Vincent Gave of Gave-Kal research discusses a misperception about Chinese debt that may shed some light on my argument [5]. Chinese banks currently hold a large amount of bad domestic debt. Normally, one would expect them to be reigning in domestic lending, which would lead to higher domestic interest rates, which carry a risk for economic slowdown. It is the Chinese banks that are the losers in the maintenance of the Chinese economic boom. During WW II, it was American bond investors who were the losers, but a putative case can be made for patriotism leading to a willingness to buy war bonds yielding a negative return. Why should Chinese bankers be willing to do the same?
Gave tells us that Chinese banks are different. Unlike in the West, where bankers are capitalists, Chinese banks are an extension of the government, a holdover from China's communist past. Politics is central to their motivation for lending; profit is of secondary concern. Not only will Chinese banks continue to fund the economic boom at home when profits become negative, but the Chinese central bank will continue to support American borrowing to keep the dollar from falling relative to the renminbi, despite certain financial loss. The reason for doing this is to continue the economic boom, which will employ China's potentially destabilizing labor force and build the economic underpinnings for national power in the future.
The way this works, when loans go bad, rather than liquidating the assets and taking a loss on the bank's books, the government will print money to make up for the bank's loss. This is analogous to how the US government monetized its massive WW II debt, which represents a loss (waste) of wealth (productive capital). In both cases what is financially irrational behavior turned out to be politically rational, and since the agent responsible for both (government) is motivated by politics, not financial returns, it makes sense that such a policy would be pursued.
Debt monetization can be highly inflationary (e.g. the Weimar inflation of 1923) and represents a confiscation of private savings, which is why it is rarely pursued in capitalist countries during peacetime. Debt monetization also results in a decline in the real value of the currency (i.e. a rise in commodity prices expressed in that currency). A weak Chinese renminbi will be unlikely to rise against a weak US dollar and both currencies should decline together in real value. That is, China will be able to maintain its currency peg to the dollar, and may even see the renminbi fall relative to the dollar. Gave opines that betting on a renminbi (upward) revaluation might play out like a bet on Ringgit or Baht revaluation in 1995-96.
What is likely in the face of Chinese debt monetization (both domestic and foreign) is continued commodity inflation in both America and China (but not necessarily in Europe). Relative prices between China and the US will remain the same, allowing American consumers to continue to buy cheap Chinese goods and US businesses to continue to outsource to China. Chinese banks will continue to be able to recycle dollars back to the US to fund enormous federal deficits. Interest rates will remain low despite high inflation.
The strategy being pursued by the Chinese to accelerate their development has been assisted by the Bush administration choice to pursue an expensive project of nation building in Iraq (something conservative Republicans would normally eschew) while cutting taxes. These actions have provided an abundant supply of US Treasuries in which to park dollars. Had Bush been running a surplus like his predecessor, the Chinese would have had to invest in non-governmental debt or equities, which adds investment risk to currency risk. The decision to undertake operation Iraqi freedom, with the goal of regime change and replacement with an elected government was strongly influenced by the World Trade Center terrorist attack. This event produced what amounts to a "paradigm shift" in US foreign policy from the humble policy espoused by Candidate Bush in 2000 to the transformational, or even bellicose policy outlined by President Bush in his 2002 State of the Union message. The 2001 terrorist attack, it would seem, may be a triggering event for the secular crisis turning. Turnings are historical periods used in William Strauss and Neil Howe's generational model for cyclical history [6]. The secular crisis turning is correlated with Kondratiev winter [7]. Thus, we see non-economic support for the idea of a season change from Fall to Winter in 2001.
The Kondratiev Winter paradigm means that interest rates will not rise dramatically, because the Chinese (and others) will continue to support low interest rate policy, fully understanding the financial costs, in order to build the power of their state. Thus, the economy will not be thrown into recession, sending stocks into a deep bear market, despite burgeoning debt and high oil prices, both of which will likely persist. I do not expect a recession coinciding with the next Kitchin cycle low in 2006, but rather with the next Kitchin cycle low in 2010. As I discussed in my article last month[8], stock valuations according to P/R are not unusually high and advances to considerably higher levels before the next recession in 2008-2010 are to be expected.