Comment by narrator | Hacker News Reader

Comment by narrator | Hacker News Reader

Except all the borrowing is in Yuan and People's Bank Of China prints all the money they want to, hands it to the banks, tells them what industries to lend to and on what terms and shoots corrupt bankers. The government, and eventually the taxpayer is not on the hook for the bailout like they are in the west. In China, banking is basically partially privatized central planning. This difference in how Chinese banking works vs western banking is a source of endless cognitive dissonance in the western financial press. They can't understand how a capitalist financial system could be set up differently where the government's finances aren't subject to the whim of the private financial industry.

As James Carville once quipped : "I used to think that if there was reincarnation, I wanted to come back as the President or the Pope or as a .400 basball hitter," he said. "But now I would like to come back as the bond market. You can intimidate everybody. [1]

http://www.nytimes.com/1994/06/12/weekinreview/ideas-trends-...

Your post doesn't make a lot of logical sense. Government finances are subject to the private financial industry in China. If the PBOC keeps printing money, it sinks the Yuan and effects international trade, capital inflows/outflows. You can't escape economic realities. China has been allowed to do so largely because its growth rate has been astronomical...that is no longer the case. People made similar nonsensical claims about Japan in the 80s.

Not just the growth rate, but also the very high savings rate, which is a consequence of demographic policies as well as restricted available investment options, allows those banks and SOEs to borrow much more cheaply - who knows how long that will last.

China has strict capital controls. You can only get $50,000 per year in and out of the country. Otherwise all the bank money would flood out of the country into hard assets since it doesn't always have to be paid back. The borrowers would also leave the country, knowing that bank fraud isn't treated lightly by the authorities in China. They actually prosecute people for things like illegal loans in China.[1]

http://www.scmp.com/article/625045/23-arrested-probe-93b-yua...

>"The audit office found that the banks had lent money to fictitious individuals and companies with insufficient capital."

>"They also lent more money to certain developers than they were entitled to, it said."

Can you ever imagine arrests and hundreds of employees of a bank disciplined for something like that in a western country?

Inflation is not caused by money printing. Inflation is caused by poor capital investment or capital destruction. Central planning can cause this if the planners are not careful to make bad investments fail on a regular basis and free up goods of higher orders for alternative investment.

Japan has a western financial model where the government is on the hook for bank bailouts and has to borrow money from a central bank to fund spending so it obeys the western "economic realities" which are an artifact of that system.

I'm confused. What do you mean $50,000 in and out of the country? Firms and individuals regularly move a lot more both in and out. (Is such behavior only quasi-legal?)

Converting RMB to USD is restricted. Individuals can only exchange $50k per year from RMB to USD legally, though there are guys parked outside banks with piles of USD they can sell you.

>Inflation is not caused by money printing.

That is...completely an utterly false. You just disqualified yourself from discussing this topic and be taken seriously imo. Inflation is a monetary phenomena. There is more to it than just money printing, but an excess amount of cash/liquidity in markets is what causes inflation. The velocity of money is also important. Seriously, there's even an equation for this and none of it involves whatever you just said.

This is something that every major school of economics, both left and right agree upon since the 1960s (and it has roots way before then.) I honestly have no idea where you got this idea from. Even Keynesians, who once denied it, now acknowledge it but with their own methods.

If you print 10x as much money, but it all goes into capital investment such that 10x as many goods are produced because of higher efficiency of production thanks to said capital you won't have rising prices. This is why the price of semiconductors and other mass produced goods have fallen even though the money supply has expanded significantly in recent years.

Similarly, if you destroy a country's infrastructure in a war and keep the amount of money the same, you'll have rising prices for what production is available.

The problem with most monetary systems is that the increased money is not well invested enough causing the supply of goods relative to the supply of money to become imbalanced thus raising prices. This is the difficult problem that the Chinese have to solve in their monetary expansion: channeling the money into productive uses instead of hoarding or capital consumption (e.g burning the furniture to keep warm).

You are confused between banknotes and actual money. You are confused between the central bank and the executive government. Just because the Government controls the central bank, it doesn't mean it IS the central bank.

And Yes, printing more money does increase inflation. https://en.wikipedia.org/wiki/Seigniorage

The government mints banknotes, it cannot create money without reducing it's value. Banknotes are backed by government's own debt to the central bank. So, even if you print 10x the number of notes already in circulation, it's backed by the same government debt, and so, the value of yuan will fall to a tenth.

The bureau of printing and engraving mints banknotes but it sells them to the fed at the cost of production. That's why they say "Federal Reserve Note", they are representative of a debt of the Federal Reserve, but enough with the technicalities.

Your biggest problem in understanding money's effect on prices is that you think that one dollar of newly created money is spread throughout the population evenly and thus raises prices evenly. This is not the case. If it is created by the banking system it goes into new bank loans, and since banks prefer to lend against collateral, it raises the prices of the assets that those banks lend against thus resulting in asset bubbles and inflated real estate, and stock prices.

If the government spends it on transfer payments, then it's going to go in to less productive uses and thus have a greater impact on prices of consumer goods. If however, the Chinese government is channeling it into loans for highly effective infrastructure projects such as railways, aqueducts, etc. then it is going to have less impact on prices and may even lower them in directly affected areas such as the cost of transporting goods because the new capital will lower the cost of production and increase supplies of raw materials and other factors of production.

>they are representative of a debt of the Federal Reserve

NO! NO! They represent the debt of the Government. Just this misunderstanding invalidates the rest of your argument.

>If however, the Chinese government is channeling it into loans for highly effective infrastructure projects such as railways, aqueducts, etc.

You're asking the government to run a more-deficit budget. 10 times more, from your previous comments. What will this money be used for? Labour and raw materials. Since there is only finite amount of these in their country, The government will essentially be paying more salaries to get the same job done, more money for the same resources. If you haven't figured it out yet, THIS IS INFLATION.

Treasury bills and notes are debts of the government. They pay interest. Federal Reserve Notes(FRN) are debt of the Federal Reserve and they pay no interest. Do you want me to go dig out the Federal Reserve Act and quote line and verse? Debts of the government are payable in FRNs. FRNs are debts. One FRN can be redeemed for exactly one FRN.

Why do people build a road or a factory? When Elon Musk builds a factory for batteries in Nevada he is doing it to lower the per unit cost of battery production due to increased efficiency. When someone paves a road to their house they are doing so to lower the cost in vehicle maintenance and time to traverse that road. Capital is created to lower costs.

You fall for the Keynesian fallacy that capital investment is just "spending"; that creating capital is economically equivalent to paying people to take a whole bunch of raw materials and burn them in a bonfire. Thus, you cannot distinguish between productive capital investment ,which lowers prices, and unproductive uses of resources, which raises prices. You probably think that war is good for the economy because it increases "spending".

>One FRN can be redeemed for exactly one FRN.

Seriously? Read your comment again to understand it's absurdity.

I don't wish to sound belligerent, but You simply don't understand money at all.

You're suggesting increased government spending on infrastructure. But you somehow think the government can do that without borrowing money either from the Central Bank or the people. If this were possible, wouldn't all governments be doing this already?

If the Central Bank asks the Treasury to print more money than the amount of assets it holds, (assets = Treasury bonds), it will either be (a) no longer capable of fulfilling it's obligations or (b) effectively devaluating the currency and thereby increasing the inflation.

Also, Bank notes are not "debt". They're transferable IOUs.

I don't fall in any economic-theory-based fallacies as you're suggesting. You think government can make money out of thin air and I am telling you that it cannot.

>You probably think that war is good for the economy because it increases "spending".

Unlike you, I do not ideologically believe in some economic theory.

> In China, banking is basically partially privatized central planning.

Isn't the US Federal Reserve an organisation made up of and governed by the private sector (banks).

Difference is in China the central bank is wholly under the thumb of the communist party.

Also: When you read the word 'Ponzi' in the context of macro-economics, as opposed to criminal prosecution, you should stop reading right then an there because the author is spouting drivel.

> Difference is in China the central bank is wholly under the thumb of the communist party.

Is that supposed to be worse? Is it better if it were under the thumb of a handful of powerful private banking corporations whose primary goal is the pursuit of profit?

At least within the communist party you might find an idealist or two who cares about the role of the banking system in raising the standard of living of the poor.

It's better, what we've seen with the politically independent central banks in the US and Europe is policies during the crisis to protect the banking systems balance sheets at the expense of the real economy. That's pretty much backwards, since a banks balance sheets can be easily fudged as needed and there is no physical limits in play. Vs the real economy where you can do real damage.

My gut feeling is you can compare the United States 1929-1935 with China 2009 to 2015 and here we are. Notable China has managed to totally avoid a depression via the very policies bloomberg article rails against. They'll be sorry!!! Real soon now the chickens will come home to roost. And it'll be curtains for China!!!

After six years of this, spare me please.

"Also: When you read the word 'Ponzi' in the context of macro-economics, as opposed to criminal prosecution, you should stop reading right then an there because the author is spouting drivel."

You know ... metaphor is a fairly powerful and useful tool ... I feel like maybe, it might be possible for someone, somewhere, to usefully and accurately draw a comparison between a macro-econ concept and a ponzi scheme ...

Call me crazy...

I have to agree that calling it a Ponzi scheme is inaccurate and tendentious.

China lacks transparency, and that's why they can get into a bad loan situation that US companies and banks can't. But it isn't a Ponzi scheme.

Also, $1.2 trillion Yuan is about $200billion. N.B. the headline uses a dollar sign but the article denominates that number in Yuan.

No, it says right in the second paragraph: 7.6 trillion yuan ($1.2 trillion) as being the amount of new debt forecast to have been issued in 2015. Later on it gives 1.2 trillion yuan as the amount of bad debt -- loans that are already non-performing.

I keep thinking that Bloomberg is trying to scare the readers with big numbers. 1.2 Trillion Yuan is about $188 billion. China's population is about 1.35 billion, China GDP is about $9.25 trillion.

So non-performing loans are $188b/9240b = 0.0203 or 2% of GDP. This isn't anything the Central Banks can't deal with.

The article is drivel.

>> Also: When you read the word 'Ponzi' in the context of macro-economics, as opposed to criminal prosecution, you should stop reading right then an there because the author is spouting drivel.

Ponzi borrowing is actually a concept in macro-economics, first explained by the economist Hyman Minsky. From Wikipedia: The "Ponzi borrower" (named for Charles Ponzi, see also Ponzi scheme) borrows based on the belief that the appreciation of the value of the asset will be sufficient to refinance the debt but could not make sufficient payments on interest or principal with the cash flow from investments;

Ponzi borrowing could be restated in terms of borrowing when your model does not take into account the possibility of asset stagnation/depreciation. This phenomenon became a popular topic in 2008, because the housing market had began behaving as though returns on real estate never dropped below 0.

> Isn't the US Federal Reserve an organisation made up of and governed by the private sector (banks).

In short, no: http://www.federalreserve.gov/faqs/about_14986.htm

Not exactly an unbiased source there.

http://www.factcheck.org/2008/03/federal-reserve-bank-owners...

The stockholders of the US Fed Reserve are private banks. The majority of the board of governors are appointed by the president of the United States. He of course appoints the leading experts in the field... the bosses of those very same private banks.

The Fed exists because Congress created it, but it doesn’t enact policy measures with any Congressional or Presidential approval.

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