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July 13, 2019 - Freedomain Radio - Stefan Molyneux
23:06
The Fall of China. There Will Be No Economic Recovery.
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Hi everybody, this is Stefan Molyneux from Freedomain Radio.
So as Greece burns, China sinks into a sea of staggering, virtually unimaginable economic losses that may well fracture the world economy as we know it.
After more than doubling in value over the last year despite a slowing economy and weak corporate earnings reports, The stock market in China is currently in a free fall with no end in sight.
Since June 12, 2015, the Shanghai Stock Exchange Composite Index has fallen 31.2%, wiping out over 3.2 trillion US dollars worth of the market's total value.
There seems to be no immediate end to the market plunge.
So to put this in perspective, in just 27 days, China has seen a loss of value roughly equivalent to the entire economic output of the United Kingdom for 2014.
Since November the 1st, 2014, the People's Bank of China, conspicuously named because the people are absolutely not in charge of it.
If you want to put people in charge of a bank, make them depositors, that can be subject to risk and loss.
You don't put it in the hands of a central bank.
The People's Bank of China, PBOC, has reduced Chinese interest rates four different times, which lowers the cost to borrow money and encourages further consumption.
So very briefly, interest rates at the price you pay because we're mortal because we like things now rather than later and to consume now rather than later you pay a premium for that and that premium is called an interest rate and it should be set by the free market because it signals very very important information that the entire economy needs.
So when people are saving a lot of money and the Chinese have Staggering sums of savings.
The U.S.
has like $630 billion saved up.
Consumers, Chinese have over $22 trillion of savings.
When people save a lot of money, they're deferring consumption.
When you save a lot of money, the availability of money is greater.
And whenever the availability of something is greater, the price of it goes down.
All other things being equal.
And so when people save a lot of money, interest rates should go down.
And this signals to entrepreneurs that now is the time to invest in capital upgrades, to hire more people, to open new restaurants or factories or offices, to expand.
Because consumption is coming, right?
When people save, at some point they end up spending.
So when interest rates are low, that signals to entrepreneurs to invest in capital equipment and upgrade things now, rather than try and sell directly to the consumers in anticipation of the coming consumer demand.
When this demand fails to materialize, in other words, if the government has been pushing down interest rates artificially, then businesses go bust and there's a huge malinvestment in Capital equipment.
So, for instance, China has, over the last 10 years, used more concrete than America has over the last 100, building these ghost cities in the middle of nowhere.
And this has created a lot of artificial economic activity, been incredibly destructive to the environment that we know from air, water, and land pollution in China.
And it is all a mirage.
It's a house of cards, as the analogy goes.
So, of course, the eyes of the world are on Greece and the European Union, but China's economy is imploding.
This is going to have massive effects on North American housing markets.
The Chinese have this cap.
Legally, you're only allowed to take $50,000 or its equivalent out of the country every year.
But, you know, they get a bunch of friends to wire 50k a piece to a bank in Hong Kong, and then they can use that money to buy very expensive homes in the U.S.
and in Canada.
The Chinese buyers are the biggest foreign purchasers of the United States real estate, both by sales and dollar volume.
It's almost 30 billion dollars of real estate snapped up by the Chinese over the last year.
That's a quarter of all the international spending on real estate in America.
Now Chinese homebuyers paid cash for almost 70% of their purchases recently, and they generally are buying more expensive properties.
Canadians are spending about $200k, but the Chinese are spending $831,000.
And, of course, when you bring a bunch of cash to a bank, it's great because it doesn't get it trickled in over 20 years or 15 years or 25 years.
It is quite a boost for the bank.
It allows the bank to lend a lot more because it's got cash rather than a trickle-in situation.
And so you've got this massive stimulation of housing, particularly in Canada, in Vancouver, and in America on the West Coast, both to be close to Asia because of the tech bubble.
And it's crazy stuff.
It's crazy stuff.
When this money dries up, as it is likely to do, then there's going to be a crash in the housing market, particularly on the West Coast.
There are financial institutions, the same financial institutions that made a fortune shorting the US housing market in 2008, are now doing the same thing in Canada, likely because they anticipate a reduction in the demand from Chinese people for Canadian and American housing, which will cause another crash.
Let's have a look at this compared since June 12, 2015.
Total Greek debt, 350 billion dollars and that of course is causing massive paroxysms in the European Union.
350 billion dollars of Greek debt.
China's losses, 3.2 trillion dollars plus.
Dwarfing it enormously and this is where we need to focus our attention.
So what is the Chinese government doing?
Well if you are a An evil person in charge of a hospital and you're running out of money and you shift all of your resources into the terminally ill ward to keep people alive on tubes and you take all of your money out of the maternity ward and then all the children die.
That's kind of what is happening in China.
Chinese government and what are nominally called private companies, they take actions to combat the popping of this massive Chinese stock market bubble.
More than 1,300 companies have announced trading halts.
on the Shanghai and Shenzhen exchanges.
45% of the market or about 2.6 trillion US dollars worth of stock has been completely frozen.
The prices can't fall as the shares can no longer be bought or sold.
Now, price signals are absolutely completely and totally essential in a free market and the degree to which government agencies interfere with the price signal is the degree to which they take a wrecking ball to the delicate ice structures of economic decisions.
It's unbelievably brutal what happens.
When a stock market is correcting, it means there's been a series of malinvestments.
You haven't invested in what the consumers actually want.
So you need to change.
You know, if you have a restaurant and nobody wants to eat what's on your menu, you change the menu.
But if people are forced to eat there, you can just keep serving up the same Soviet slop over and over again.
And so it's really, really important that there are price signals in these kinds of situations.
When governments shut down price signals, which is basically what they're doing here, freezing the stock trades, what's happening is you're landing a giant airplane in a particularly bad windstorm, and your best advice, your best solution is, hey, first, turn off the instruments.
Second, blindfold me, because that's going to be great.
Get rid of all the signals that I need to land this plane well.
That's what's happening with these price controls.
Various brokerages and funds have announced plans to buy massive amounts of stocks, essentially funded by China's state-backed margin finance company, which was given, quote, a direct line of liquidity from the central bank.
So the central bank, just as happened in China in the 90s, producing, I think, what is the last two decades and a lot of young people who don't want to have sex.
It's called the last decade.
It's the zombie economy where you're propping up failed institutions at the expense of anything new being created.
And so central bank is giving money to the margin finance company, which is making people or giving people the opportunity to buy stocks extra cheap in an attempt to prop up the price.
The Chinese central bank created more money out of thin air, gave it to people to buy stocks to prop up their economy on paper, which devalues everything in the economy.
These same mistakes are being made over and over.
The parallels, as we'll talk in a minute or two, the parallels between what's happening in China now and what happened in America in the lead-up and the follow-up to the 1929 crash, which produced 13 years of staggering 25% unemployment depression, culminating in a giant 40 million soul-eating World War, the parallels are eerie.
You've probably never heard that there was an even worse market crash in 1920 to 1921 in America after the First World War.
It was worse than the 1929 crash.
Why have you never heard of it?
The president at the time simply lowered tax rates enormously like threefold and did not interfere in the market and the crash was largely resolved in 12 to 16 months.
You've never heard of it because it did not lead to this massive depression which led to a world war because the government stayed out of it.
Well, the government is not staying out of this which means it's going to get worse until we learn the lesson that there is no substitute for liberty.
28 companies have halted their IPOs, their initial public offerings.
In separate but similarly worded statements, tactic authorities are previously used to control markets because if you offer an IPO and it comes in really undervalued, that's scary to investors.
So you just keep people out of the market to keep that price mechanism that would be revealed through IPOs away from investors.
The China Securities Regulatory Commission, CSRC, took the drastic step of banning shareholders with stakes of more than 5% from selling shares for the next six months.
and said that any shareholders who violated this rule would be dealt with severely.
Now, of course, how on earth would you prove all of this in a court of law?
Alright, it's China.
That doesn't really matter.
So basically they've reached in with the bloody tentacle arms of the state, wrapped itself around people's private property, and forbade them from trading.
Something my six-year-old daughter would never allow in a Monopoly game, but somehow is allowed in the second largest economy in the entire planet.
China's stock regulators also noted that they would look into possible market manipulation by evil forces.
I think that's your central bank, people!
They're going to look into possible market manipulation by evil forces aiming to damage the economy, even naming Morgan Stanley as one of the many potential investment See, you've got this giant predator called the state, which is a shark, and then you have these little fish that hang around the shark's jaws and pick up the scraps.
These are the investment companies.
The idea that the investment companies are in charge when the government has all the guns is kind of ridiculous.
Morgan Stanley downgraded the Chinese market in May for the first time in over seven years, noting, quote, It is probably fair to say that we are known in the market for being bullish China.
Some might say permeables, bullish on China.
So for us, this is a big call.
See, the problem is not the illness, but the diagnosis.
See, you wouldn't be ill if the doctor didn't say you were ill, because magic.
Chinese regulators called the forecast a malicious remark, carelessly, or actions which were harboring ulterior motives.
The problem is not that the central bank is entirely in control of the money supply and the interest rates and that there's massive amounts of corruption in China.
That's not the problem.
The problem is that somebody says that may have an effect on the economy.
Noted China policy research analyst Oliver Barron, great name, Said, after the market continued to fall, despite myriad support measures, the government reached peak panic mode and must have worried that investors would not only lose confidence in the markets, but in the government itself.
You see, this is the kind of economic cataclysm that can lead to, to put it as nicely as possible, significant social unrest and discontent.
They're not just fighting for their political careers.
These people may in fact, at the top, be fighting for their very existence.
When approached by a reporter, an unnamed Chinese citizen noted, quote, uh, we can't talk to foreign reporters about this topic.
It's way too sensitive.
They're going to arrest me for doing that.
So it's a good thing they got rid of their totalitarian regime in the nineties, right?
So let's look at the interest rate.
One year lending, as you can see in 96.
11%!
Pretty pricey to borrow money, and that's because when the government isn't creating monopoly money out of its ass, then you actually have to bid with other people to get resources, and those who can bid the most get those resources.
Those who are willing to pay 11% rather than 10 or 9% get those resources.
In a free market, the resources generally flow to those who can make maximum use out of those resources to increase the wealth and security and stability of society.
Kind of important, but When the government starts creating money out of nothing, then of course people bid up, the price of money goes down.
So they're crushing down these interest rates.
And you can see this happening quite regularly.
In China, the interest rates are set by the People's Bank of China Monetary Policy Committee, thoroughly unenvisioned by Karl Marx.
This artificial decree as to the price of borrowing and lending money creates artificial signals to the market, creates bubbles, distorts indicators for businesses we talked about before.
Shanghai Stock Exchange Composite Indexes.
Let's look at how the interest rate cuts have affected this.
Now one thing that's also happened is the Chinese market over the last year for housing has largely collapsed as well.
And this is why we have these ghost cities out there, because there was too much overbuilding.
In order to stimulate GDP in the same way that a stockbroker wants to stimulate happiness with cocaine, the government creates all of these mega projects.
It loves being able to hand out all this money to its political cronies.
And so the housing market collapsed, and since a huge amount of Chinese wealth is stored up in real estate, they had to flee.
Not only the low interest rates, which means you're not getting any money out of your bank account, but also if you're losing money in your house, you've got to go and get your money somewhere.
You're hiding from the central bank's constant manipulations and distortions in the market, and so you go to the stock market, particularly if the government's giving you virtually free money to invest with.
November 1st, 2014.
Look, they cut the interest rate.
And look, the stock market went crazy.
Ah, March 1st, 2015.
They cut the interest rate again.
Oh, look!
The stock market went crazy.
Oh, it began to dip a little, so they cut the interest rates again.
And the stock market went crazy.
So, this is not so much a crash as it is a correction, right?
It should be going back to where it was.
Before, at least, growing more gradually.
You want growth like puberty, not growth like cancer.
This sort of looks like a topographic map or a side view map of Mount Everest.
And this is where all the people died climbing it.
Frozen bodies of Chinese investors that you can trip over on your way to an illusory peak.
M2, money supply.
Ah, I know, it sounds dull.
It's actually quite important.
So M1 is just basically cash, but M2 is a measure of the money supply that includes cash, but also checking deposits, saving deposits, money market, mutual funds, other timed deposits, like you say to the bank.
I'll give you money, I won't withdraw it for 30 days.
And the bank has a little more flexibility on what they can do with it, so they'll give you a bit more interest on that.
So stuff which is not as liquid as pure cash, but nothing's as liquid as Bitcoin, not as liquid as pure cash, but not as restricted as other.
Less liquid, not as suitable for exchange mediums, can be quickly converted into cash or checking deposits.
Changes in interest rates have a direct effect on M2.
So if you create a bunch of money, then you of course expand M2.
And it's one of the desired effects of central banks.
They decide to adjust interest rates.
They like to adjust this M2.
These are the levers used by central bankers to change overall money supply.
So what is the money supply in China since 1996?
As you can see, it was hovering around, you know, five or six trillion and now it's pushing 130 trillion so so that's quite a lot and of course you know some of that is legitimate growth through the expansion of their economy but a lot of that of course is the kind of blow off a hooker's ass that passes for financial growth these days and
As the interest rate keeps crushing down, as you can see, the money supply goes through the roof.
And this creates all the distortions that are currently causing such paroxysms in the Chinese market.
Government spending in billions!
Well, actually in 1994 they had a relatively small government and now the government spending is going through the roof and this is part of the corruption, this is the part of the misallocation of resources, the environmental depredation and destruction that is occurring and believe it or not, believe it or not, people might still call this capitalism or a free market.
it's not now the chinese economy the american economy have wild disproportionate and of course there's big changes big changes in population the China has nearly $4 trillion in foreign reserves.
The U.S.
only has $121 billion.
As I mentioned, Chinese citizens have $21 trillion saved.
Americans only have $614 billion.
So it's a huge mismatch, and this is why what happens in China has ripple effects on the world economy.
And heaven forbid that China needs to start selling its U.S.
Treasury bonds in order to cover any holes that it has in its income.
That will cause a huge dislocation.
So in June, the personnel data of current, former, and prospective U.S.
federal government employees, including those applying for security clearances, was compromised.
This is a huge story which is related, potentially, to what's going on in China.
As many as 18 million Americans in total could have impacted in the hack.
Including many working in intelligence-related operations.
China has been named as the top suspect in the attack.
Matthew Olson, a former National Security Agency General Counsel, said the breach is truly significant.
The data can be used in many different ways to target people, quote, whether it's blackmail to recruit to punish individuals in China who are connected to people in the United States.
What this means is the multi-trillion dollar investment of since the Cold War that the U.S.
has built up in its intelligence operations has, in my opinion, been rendered largely useless because so much sensitive information, people's drinking habits, their problems, their criminal records, their sexual fetishes, you name it.
Everything that has been gathered about people in the US government, particularly those with security clearances, can be used to bribe, to blackmail, to know their weak spots, which means that your intelligence operations are now largely useless and can be countered.
Productive.
And this is a huge sea change in the flow of information around the world.
Now, on Wednesday, New York Stock Exchange, United Airlines and the Wall Street Journal were all impacted by massive technical glitches within several hours.
China has talked about the fact that evil Americans may be manipulating their stock market and I'm sure vengeance is part of the equation.
New York Stock Exchange halted all trading at 11.32 a.m.
Only reopened at 3.10pm, the longest trading halt since Hurricane Sandy hit the East Coast in 2012.
Is that a coincidence?
Could it be retaliation?
It certainly could be.
Could it escalate from here?
Time will tell.
The parallels with the Wall Street crash of 1929 in the U.S.
are unbelievable, truly remarkable.
So after more than a decade of frantic growth, extraordinary wealth creation and excess, both economies, the U.S.
in 1929 and China today, are at roughly similar stages in their economic life cycle.
Both booms are easily explained by the monetary policy of the respective central banks and the subsequent increase in the availability of cheap money through credit.
This is very important.
Even Bernanke has admitted that the 1929 boom and crash was the result of Federal Reserve monetary policy.
It's a war crime against the economic life of the planet.
So, let's give tons of people tons of money to borrow and encourage high-stakes margin investment.
Because when you have a progressive income tax, the more wealth you can stuff into people's wallets, the more wealth you could steal from people's wallets and use it to buy votes in the here and now and bribe all the usual suspects.
In your unquenchable thirst for the Boromir-style ring of power.
And so, you create all these bubbles in the market.
Chinese stock market bubble was already large, had more than doubled over the past year, despite, as we mentioned, slower growth and lower profits.
The Wall Street crash of 1929 led to the Great Depression in the United States, which wrecked the economy as a whole.
It led to the crash in Germany that produced the Great Depression, which produced Adolf Hitler.
So, yeah, lots of problems when you destroy the middle class and the most productive people in society.
Retreat, Galt style, in bitterness and futility.
So what is this going to mean for China and the world's overall economic system?
as classical liberals as austrian economists as uh...
Idiot pundits like myself have been saying literally for decades, you cannot sustain an economy on fiat currency.
You simply can't.
All you can do is create massively escalating bubbles that are going to cause more and more problems.
The world economy, of course, still reeling and trying to survive the housing crash and subsequent financial crash in the US that spread worldwide in 2008, is not in the same position.
It does not have any reserves left to attempt to stimulate economic growth, however artificial that may be.
The world is in an exhausted state.
It is down on its knees.
One more kick might bring us freedom from these predatory banksters, these central banks, these unbelievable, hideous leeches and their propaganda merchants known as the mainstream media.
We might finally get the tentacles of illusory finance free from human potential.
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