10/29/2010 PERMALINK
Can Chinese prosperity bail out the struggling world economy? Mish looks at this question on his Global Economic Trend Analysis blog this morning. Here are two excerpts:

Total Chinese money supply is up over 4 times since '03, a 17%/yr. rate at a doubling time of just 4 years; up 66% since Jan. '08, a 19%/yr. rate at a doubling time of 43 months; and up 40% since Jan. '09, a 20%/yr. rate at a doubling time of 40 months.

Knowingly or otherwise, China has experienced a textbook faster-than-exponential money and debt/asset blow off or crack-up bubble that mathematically cannot continue. All faster-than-exponential bubbles burst and collapse, with prices falling back to the levels at which the differential rate of GDP and money began to diverge at an order of exponential magnitude, which was around early '02.

Ironically, Bubble Ben bashers claim the Fed is going off the rails with debt-money reserve growth?! Imagine what would happen to the Renminbi were the currency to be floated/convertible with money growing at arguably near hyper-inflationary rates in China!

Do Schiff, Faber, or Rogers ever talk about China's reckless, hyper-inflationary money supply growth? This kind of money supply growth is banana republic-like, making our feeble efforts appear benign by comparison.

This situation is INSANE, and the crash coming in China-Asia will be unprecedented in world history.

It is important to understand the drivers behind China's growth.

1. Rampant monetary expansion
2. Property bubbles including completely vacant cities
3. US and European outsourcing
4. Malinvestment in infrastructure

Mish also touches on China's bank problem, mentioning that China forced all their banks to make a lot of bad loans during the current crisis. Alas, the situation is actually much worse than that. China has been forcing their banks to bail out failed state enterprises for decades. There is simply no way to know how many worthless or near worthless loans Chinese banks are keeping on their books at full value. I think it is safe to say that the figure is an even higher percentage of their assets than the massive number of bad loans that the US government allowed US banks keep on their books at full value. When they pressuring our nation's accountants to suspend mark to market rules at the start of the current financial crisis our leaders became co-conspirators with the banksters.

Politicos in both the US and Chinese governments are actively complicit in an ongoing conspiracy to defraud the investors and depositors in the banks of their respective nations, by making it possible for them to hide the dire nature of the financial condition of those banks.

This complicity is why, unlike in the savings and loan crisis when over a thousand executives were prosecuted for their malfeasance. None of those responsible for originating the current mountain of clearly fraudulent loans have been prosecuted. The same people that joked among themselves about their ability to package and sell 'liar loans' to unsuspecting investors all over the world are still running America's banks. Indeed, they are still being allowed to give themselves tens of billions in annual bonuses for their orchestration of the continuing fraud. Bonuses funded entirely by taxpayer bailouts and the regulator-sanctioned fraudulent 'profits' of the bankrupt institutions that they run.

Another negative factor in China is its growing instability. Best evidence indicates that something over 1,000 riots were put down by force across China last year alone. Far from an island of economic prosperity in a trouble world economy, China is more like a tender box with a match dropping towards it.

The last time a world reserve currency went down, the USA was solvent enough to bail Britain out, averting a worldwide economic catastrophe. Those looking to China to play that role today will be disappointed. China can't, nor can the Euro-zone or Japan, the world's two other large economies.

All the nations of the world have followed the USA and Europe down the Pied Piper delusional trail of converting their currency into paper backed by nothing more that the promises of politicos to be frugal.

When nations backed paper currencies with gold or silver, politicos were forced into frugality. Print and spend too much paper money, and their national vaults would soon be emptied of gold and silver by citizens and foreigners cashing in the fiat money for money with real intrinsic value. History shows plainly that without a mechanism like this to help keep them honest, politicos will always bankrupt their nations and people.

Fiat money has been tried numerous times all down through history and it has always failed. The longest it has ever lasted is 42 years. America's premier presidential crook, Richard Nixon, converted the dollar into fiat money in 1971, 39 years ago, and we are now suffering the consequences of that folly. We will continue to suffer the consequences until the failed fiat money meme is buried for good.

For the first time in human history, we are about to witness what happens when a fundamentally flawed economic meme like fiat money, gets adopted by every nation on Earth, then hits the iceberg of reality head on. It won't be pretty. Be ready.