Years of Poems and Spirits

It is a day of mixed feelings. On the one hand, China is truly a great country today. On the other, it is not the China I wished it is.

Every great nation in the history can point to a legendary past and say: that is what made us who we are. For the British, it was the birth of liberal capitalism, For the French, the French Revolution. The Americans, the first constitution in human history. Even Taiwan can say it was the first that transitioned from a dictatorship to democracy without bloodshed.

Modern China is identified with phenomenal economic growth that resulted in the improvement of a billion life in the shortest period in history. One may argue that some others, like the Germans and the Japanese, all went through industrialization quickly. Impressive as their respective history may be, the scale is still quite far apart.

At the same time, today’s China is also painfully lack of humanity. Not to say Chinese are innately lack of sympathy or empathy. Rather, one just don’t see organic growth of communities based on trust and reciprocity. As the country grow richer, instead of seeing more vibrant civic life, it is constantly flirting with a Hobbesian model: people don’t trust each other but are willingly submit to a Leviathan.

I have been following economic news in China. What I don’t understand is how China can develop so quickly without incurring some kind of severe financial crisis. There were small tremors, like the real estate bubble in Hainan in the late 80s. But nothing as debilitating as the Asian Financial Crisis or the Russian default in the late 90s. Even Hong Kong, where credit market is largely self-regulated, is spared.

None of the above (getting richer and more authoritarian, having spectacular growth but no bubbles, or inflation, or devaluation) makes sense to me. The same puzzle that haunted DS too I believe. If Americans can point to their greatness as evidence of “American Exceptionalism”, isn’t the Chinese experiment qualified for no less a grand claim? No to glorify China, but I just find the word “Exception” very disturbing.

But I still believe that China is heading toward a Crisis. Unlike the financial crisis in here, when the Crisis hits China, it will be as much social as economic. My arguments are, the Chinese economy is not efficient. Capital is very poorly deployed in an unbalanced industrial structure. The social fabric is fragile and the country is hold together by a blind faith in the future.

To be fair, not having the most efficient economy is not a predicament in itself. In fact, it is an opportunity. It depends on whether the incentive is for the capitalist to invest in long term efforts to improve the economy, or to exploit whatever short term gain there is at the expense of structural change.

I firmly believe the current political and economic environment inevitably lead capitalists (or every homo economicus) to choose the latter, so much so that those who made the other choice are only to prolong the arrival of the Crisis–which makes whatever lesson from the Crisis even harder to crystallize itself.

I understand that the $400 billion stimulus package is not likely to trigger massive inflation nationwide (although very likely regionally), because China still has excess labor that will absorb excess capital. In fact, as long as China has high unemployment or underemployment rate, spending won’t automatically trigger inflation.

China’s perfect storms will only arrive when natural resources become an issue, when worldwide commodity price rise quickly. Then, inflation, unemployment, and social inequity will mix together to be very explosive. In fact, before the credit crisis hit, China was heading down this path and the leadership was very concerned.  To them, the economic crisis was a gift from heaven.

But my guess is still that: a Crisis is coming. When it hits China, it will hit it very hard.

The first human who hurled an insult instead of a stone was the founder of civilization.

- Sigmund Freud

How come I never heard of it while in school? If I were Joel, I’d use it as my opening line.

I used to think Greenspan was the single most culpable person for the last financial crisis. Gradually, I am not sure anymore.

I didn’t like Greenspan for his libertarian ideology (or his association with Ayn Rand). I thought his monetary policy was too loose, his assumption of “what is good for the financial market is good for the overall economy” wrong headed. I still do but I am just not sure whether it is enough to cause a crisis of this magnitude.

In the end, I think it boils down to the question – what is the relationship between monetary policy and the level of speculation on the credit market? Let’s say the monetary policy is measured by the Federal funds rate, and the risk/liquidity/entropy level by LIBOR-OIS or TED spread. For a broader measurement, we may even look at the growth of some CDS indices. It is safe to say even the most forgiving interpretation can not correlate monetary policy and credit market entropy level.

To take a different look, the Fed’s balance sheet has $900 billion on it as of Sept. 2008). Given a reserve rate of 10%, the money from Fed goes no more than $9 trillion. During the height of the crisis, the Fed pumped in $3 trillion of credit (not money supply). But if I am not mistaken, the credit default swap market alone has $500 trillion. Given those numbers it is hard to assert that central bankers can directly influence the credit market.

Even the effect of “signaling” only goes so far. Greenspan was fairly blunt when he called it “irrational exuberance” back in 1996. The market took a hit but absorbed it as if a Hummer driving over a street bump.

Bernanke raised the “global savings glut” hypothesis trying to fill in the gap (of what else influence credit market other than monetary policy). And Greenspan further explained that in today’s inter-connected global market, central bankers have only limited influence over market excess.  I didn’t give them enough credit when I first heard them. But the more I think of it, the more I come around to their point of view.

China’s stimulus package, in some way, may ease the credit crisis by cutting down the savings. If it were the case, we should see a steady appreciation of yuan. Short of that, I don’t see how the credit risk could go away.