Thursday, May 19, 2011
When China's bubble bursts
"A lot of people are willing to say China will slow down," he said. "The really scary thing is if you do the numbers and they cut back on construction it's not a slowdown, and they go negative real fast."
How then, can a pool of savers as large as America’s entire retired population expect to draw 5.5% on their investments, after inflation, for the next several decades? The reason these returns existed in the past was because we were experiencing debt fueled, unsustainable rates of rapid economic growth. Now that debt levels have reached their ceiling – even with rates at virtually zero, total debt is not increasing any more – growth must slow because less new cash is being loaned to borrowers and injected into the economy.
A rising stock market, low inflation expectations, and lots and lots of cheap credit for even the riskiest companies. What's not to like?
The main problem is that this is all an illusion. If it were truly possible to print one's way to prosperity, history would have already proven that to be possible, yet such efforts have always failed. The reason is simple enough: Money is not wealth; it is a commodity that we use as a temporary store of wealth. Real wealth is the products and services that are made possible by an initial balance of high-quality resources that can be transformed by human effort and ingenuity.
For some reason, however, this basic concept has managed to elude the high priests and priestesses of the money temples throughout time. Somehow it always seems compelling to give money printing a try, maybe because this time seems different. But it never is. And it's not different this time, either.