Sunday, February 22, 2009

Lending Thaw in China

The Economist reports that lending is up in China:
Whereas most economies are being squeezed by a credit crunch, Chinese bank lending surged by 21% in the year to January. There are a few other hopeful signs. Are these the first green shoots of spring?...
Naturally, the Keynesians who write for The Economist interpret this as a positive development. Now, it is entirely possible that the 21% jump is an anomaly, as I have little doubt that lending has taken a beating there in the past few months. A jump of 21% may actually be relatively insignificant and within the realm of the reasonable for an economy in the shape that China's is in. But make no mistake: a meaningful resumption of lending will begin to stoke credit expansion as fractional reserve banking works its magic, and the dreaded specter of nosebleed-level price-inflation will begin terrorizing the poor folks of the Middle Kingdom. The excesses of three decades of raucous growth fueled by monetary expansion and mercantilism cannot possibly be cleared out in the span of six months. Monetary expansion is highly unlikely to touch off another boom at this point, as much as the government might like; rather the inflation will have an almost purely price increasing effect, with little positive effect on employment and possibly accelerating layoffs. This is the perfect setting for the dreaded Keynesian nemesis, stagflation. We need not ponder the question long. The Economist graciously confirms our price-inflation fears only a few paragraphs later:
One cheery sign is share prices, which have jumped by 30% since November—although they fell sharply this week. Some optimists have also pounced on the purchasing managers’ index, a gauge of manufacturing activity, which increased in January for the second month running... ...The expectation of increased spending on roads and railways has helped to lift raw-material prices. Chinese prices of steel have risen by 20% since November, and the Baltic Dry Index, a measure of shipping rates and hence the demand for commodities, has more than doubled, although it is still 84% below its 2008 peak. This suggests that firms are rebuilding stocks of raw materials.
Increasing stock and commodity prices are still inflation, whatever the immediate effect on consumer prices. It is only a matter of time, and probably not much time at that, before the effect is felt by consumers, especially and most painfully, by the unemployed. It is sometimes staggering just how bone-headed Keynesians can be, because immediately following these statements we read:
However, according to Stephen Green, at Standard Chartered, stocks of finished goods are still rising, which will curb production over the next few months.
The answer stares them in the face, yet they are blind. An increasing monetary base, credit expansion, coupled with backed up inventories means... wait, no, let me think here... no production, which means... no, it can't be price inflation... it must be:
Because of this, the economic numbers are likely to get worse before they get better. The first shoots of spring are often vulnerable to a frost.
Just a slow economy. No imminent recovery. We'll just have to wait a bit longer for the thaw, that's all. Pathetic. Not a word about price inflation or stagflation, the patently obvious answers. Supposing the present trend continues, let me tell you what to expect:
  • price inflation
  • accelerating unemployment
  • political desperation and confusion
  • price controls and other counterproductive measures
  • further economic contraction
  • possibly serious civil unrest
This requires, of course, that the increased lending is actually real and continues and that the government response is in typical Keynesian fashion, which is to say, the exact opposite of what needs to happen. China may have a rosy future on the horizon, but I see some serious bumps in the road before we get there.

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