Has the world run out of credit boom and credit busts?
The reason I ask this question today is because China is having its own bust. The culprits are the same as usual: too much lending; too much borrowing; too much optimism and too little foresight. As Led Zeppelin might say, the song remains the same – we’ve all seen this before, we know the chorus and we know how the song ends.
The great Chinese credit boom of 2008 to 2015 was the fifth major global credit boom/bust episode of the past 25 years. It is now over, with dramatic consequences. It’s worth looking back at recent history to see how we never, ever learn.
The first major splurge was the Japanese boom/bust of the late 1980s – leading to a ten-year recession in the land of the Rising Sun. This was followed or coincident with the American “saving and loans” boom/bust disaster of the early 1990s. Did we learn? Not on your nellie. We simply changed direction.
The next great credit crisis came in Asia in 1997, but it was building from almost the day the American savings and loans banks collapsed. The Asian credit boom lasted from 1992 to 1997. Then it imploded.
This was followed by the dotcom 1998-2002 boom/bust, which wasn’t so much a credit boom as a stock market jamboree financed by other people’s money which ultimately went sour.
In 2002, we saw the beginning of the mother of all boom/busts when America, Britain, Europe and, of course, Ireland, decided that borrowing was the road to riches. This sorry cycle collapsed in 2008 – and we all know the story.
In 2008, the only country with no debt was China. However, terrified that the rest of the world wouldn’t buy its exports, the Chinese started their own credit extravaganza.
In late 2008, after the collapse of Lehmans, when the world economy went into spasm, no country was more potentially exposed than China, despite having no internal debt.
The reason for this is political. For the Communist Party to survive, it had to ensure no social tensions – the type of social tensions that come with recessions.
Beijing was determined not to make Moscow’s mistakes of the 1980s. Therefore, control of the economy was paramount. It couldn’t allow the Chinese economy to be dragged down with the Americans and Europeans.
Unlike most countries, China had money in 2008. While countries like Ireland needed other people’s money to survive, China had the cash. Having spent 20 years exporting to the world and building up massive foreign reserves, the Chinese government had money to spend. And they spent it.
After the global financial crisis, China pumped four trillion yuan ($586 billion in 2008 US dollars) into its economy to protect it from the global fallout.
The story of what happened next will be familiar to everyone in Ireland. The double-digit growth attracted foreign investment and as all this cash came in it drove up prices. Everything looked brilliant.
China has experienced the triumvirate that Ireland knows too well – (1) easy money, (2) easy lending leading to (3) easy growth.
The result tends to be too much investment, too much optimism and then too much extra borrowing. Again, think of the dynamic in boom-time Ireland.
With everything going up and everything looking rosy, all sorts of investments looked attractive and the sky was the limit. Easy money begat yet more easy money. Chinese companies borrowed from “everywhere”; and “everywhere” was prepared to lend to Chinese companies. The whole world was beguiled by the “Made in China” idea. This is now coming to a shuddering end.
But the Chinese boom of 2008-2015 has changed the world, because during this period the traditional moniker to describe the Asian giant has changed. Now it’s much more accurate to describe the relationship between China and the world not so much “Made in China” but “Sold to China”.
After ten years of hyper growth fuelled by borrowing, China is the world’s largest consumer of copper, steel, iron ore, cars, aluminum, mobile phones, nickel, rice, cigarettes, meat, Swiss watches, television, rubber, potash, energy, robots, beer, red wine, machine tools, dried milk, wheat, rare earths and coal, as well as many of the luxury goods that we associate with Europe and the US.
Because of China’s seemingly endless demand for everything, many companies – and entire countries – have tried to build their business and economic strategies around selling to China.
Over the past few years, China’s borrowing has exploded. Today there is a huge $28 trillion of debt in China. This is the problem now. China is deeply in debt. Even though the debt is largely internal, it still has to be paid.
When the economy is growing at 8 per cent per annum, debts don’t matter so much. But when the economy slows quickly, debts become not only material, but hugely and horribly significant.
Now the process of too much debt, leading to bankruptcy, leading to more panic will take hold – as it did in Ireland. Good companies with too many debts will become bad companies with too much debt overnight. The money that flowed into China will flow out and the growth rate will fall. The problem for China is that after years of 7 per cent growth, a 4 per cent growth rate will feel like a recession.
We know in Ireland what happens to human nature when things suddenly turn for the worse. The Chinese are no different. Years of ridiculous optimism are followed by a bout of irrational pessimism. We are seeing this now in the Chinese stock market, with greed rapidly giving way to fear. This torpor will spread to the real economy too, as it did in Ireland.
We’ve seen the story before. We know how it ends. Is it any wonder that financial markets are in spasm?
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The one unsaid is where does all the money come from?
When are you going to examine the process of the production of money.
When are you going to stop ignoring the fact of the elephant in the roon is the central banking ponzi scheme of money production.
All this money is issued as debt. It is loaned into existence at interest.
It is this huge mounting debt of money production plus the compounding interest that is destroying the world economy.
Please address this issue.
Good day Adam
Too much lending
Too much borrowing.
Economists and Lending professionals have a duty of care to recognise “Real Value Debt” .
It is neither political or subjective.
Irish Economists tell us that THEY ARE POWERLESS to identify False Value Debt.
Experts on every other country but Powerless when it comes to Irish Banking Failures.
“We have seen this before and we know how it ends”
Maybe it should end here the way it does in China;
http://exiledonline.com/china-executes-more-corrupt-millionairesmeanwhile-in-the-peasant-states-of-america-aig-takes-another-242-million-in-bonuses/
“Record highs predicted for bitcoin in 2016”
https://corporate.bankofireland.com/news/2746805/record-highs-predicted-for-bitcoin-in-2016
All well signaled if you were looking. https://www.youtube.com/watch?v=SSuUM3Abe00 :Uploaded on Aug 2, 2009 Rick Wolff: China’s growth is either a miracle or something frightening – numbers disconnected from reality Maybe the reason ‘we’ never learn is ‘we’ are not in control. When times are good for a while the population begin to notice and start agitating for a fair slice of the pie. Those with the power have learned that this is the time to push the system into overdrive to quell dissent and centralise the benefits. Somehow the economy is flooded with credit, rules are loosened, malpractice becomes the… Read more »
A Financial Apocalypse is nigh David.
That is the opinion of not a few of your poster fans here.
So what have you got to say for yourself on this issue.
Are your colleagues scared and how scared are they.
On a scale of 1 to 10 how close is the financial world to it’s appointment with a financial day of reckoning.
Is bitcoin being subjected to spread betting (or any other of the nefarious financial instruments) because if it is it’s only worth as much as any other currency.
If derivatives were denominated in bitcoins where would that leave us?
I have only questions I’m afraid.
Thanks for the investing hints/advice last year.
It has been informative if not rewarding (not completely – yes that’s a double negative) which is mostly down to my own inertia but it takes quite awhile to deprogram ones self from years of ignorant bliss.
“Ireland decided that borrowing was the road to riches” In fairness there was the concept that rent was dead money and it made sence to borrow when a 1000e mortgage was better than paying 900e rent. Or A buy to let worth ten times the annual rent would service itself with a 50% LTV 25 yr mortgage. The rent would service mortgage, taxes, service charges and repairs etc. Ideal pension support for self employed with nonsecure income. Borrowing was not the problem. Grossly Overvalued Debt was the problem. Not having a proper discussion on grossly overvalued debt is alarming. Step… Read more »
Sense
The resident gold bug on the site tony brogan has demonstrated over and over again how the metals prices are being manipulated in the derivatives markets so the prevailing wisdom is a max 10% allocation to metal or buying g shares in a metals mining etf like gdx etc.
The historical value of silver was historically fixed at 14/1 by newton I think. Based on the relative rarity of the metals on earth. In recent history it traded in the 45/1 range so at the current 75/1 ratio silver should do twice as well as gold in the currently resuming bull market. The ratio narrows in a bull market and widens in a bear market. Put half your PM investment in silver and half in gold. Every so often adjust the ratio back to 50/50. As the market rises you will increase gold ounces and decrease silver. In a… Read more »
Answering the rhetorical question at the start of the article, I would say the most obvious high profile credit bubble around at the moment is in technology stocks, in particular the so called “unicorns´´ and “decacorns´´. Given the presence of so many these companies in Ireland the impact of a that bubble bursting would be most likely felt here, in terms of loss of investment and actual direct jobs losses.
@Mike, I started to accumulate 1OZ silver proof coins, although they all weigh the same, they are valued differently due to qty’s produced, beauty of the design, presentation etc. my problem with silver is the relatively low value, therefore the amount of the stuff you need to store to hold any reasonable value. I switched over to 1OZ proof gold krugerrand’s of the highest quality, PF70 NGC certified. Beautiful pieces that will stand the test of time. Whenever I have some spare cash, I buy another. Why not?
Hi David, In China if they don’t want you to have a normal sized family they just say “fuck you, one child and that’s it”. In Ireland however we fuck our young people far more subtlety both literally and metaphorically; http://www.independent.ie/life/unpaid-internships-zerohour-contracts-low-wages-are-irish-twentysomethings-cursed-34344672.html I can only imagine what suds would be thinking reading the article at the link above; “This is great news not only can she not save or buy a house she now won’t be able to get married and have kids and sure we will just flood the fucking place with Syrians if the Poles get sick of being… Read more »
“Sell everything ahead of stock market crash, say RBS economists”
http://www.theguardian.com/business/2016/jan/12/sell-everything-ahead-of-stock-market-crash-say-rbs-economists
“It’s worth looking back at recent history to see how we never, ever learn.” Lets face it, If the Irish journalists, politicians and economists wanted to learn then they would ask the CORE FINANCIAL QUESTIONS about financial failures. They would demand answers to core questions. They are really not interested in learning. It could be an age thing. This generation of Irish 50 to 70 year olds in charge are shamelessly benefiting on the shafting of the next generations. No Long term vision of what is best for the greater public good. They have a lack of pride and self… Read more »
“It’s worth looking back at recent history to see how we never, ever learn.” As I look back in history I see how it is YOU who never learns McWilliams. What a stupid idiotic statement. I am motivated to post because I read your facebook page where the Japanese birth rate has collapsed and 50% of japs between 17 and 50 haven’t shagged each other in 12 months. So after 20 odd years of qe in Japan the population have had so much wealth taken from them in the qe madness by stealth of devaluing the currency they now can’t… Read more »
China will experience an economic crash. But China will come back. And when it comes back it will suck even more jobs than it has been sucking to date. Many of China’s non-real estate investments are with respect to infrastructure that will make China more efficient. Meanwhile the clowns in the Dail are going to invest 3 Billion Euros of the people’s money in PR stunts to instruct the people to thnk everything is fantasitic here. And 3 Billion euro is the cost of the DART underground that would bring public transport in the East region to an entirely new… Read more »
“Fossil fuel burning ‘postponing next ice age'”
“Climate change is altering global cycles to such an extent that the next ice age has been delayed for at least 100,000 years, according to new research identifying Earth’s deep-freeze tipping point”
http://www.theguardian.com/environment/2016/jan/13/fossil-fuel-burning-postponing-next-ice-age
100,000 years? Did you ever hear such shite lads?
The only way to change things is for the population as a whole to be educated.
That is David’s proclaimed job. Educator. . ….
It is time to get into actions. Words are cheap.
Rand’s audit the fed bill was closer. It got a majority vote but not 60% plus.
If the Americans do not get the truth they will revolt for other reasons but not the right ones.
Meanwhile http://kingworldnews.com/
the latest bust unfolds
“China at the economic crossroads”
http://www.bostonglobe.com/opinion/2016/01/11/china-economic-crossroads/5Y37ZljkOUTypYNy1Tc0KO/story.html?s_campaign=email_BG_TodaysHeadline&s_campaign=
Dan O’Brien is predicting a soft landing:
“Come crash or conflict, we’re pretty well padded against the worst of it”
http://www.independent.ie/opinion/columnists/dan-obrien/come-crash-or-conflict-were-pretty-well-padded-against-the-worst-of-it-34363142.html