China's fall

The Telegraph has published an unsettling analysis of the China crisis...

The parallels with 1929 are, on the face of it, uncanny. After more than a decade of frantic growth, extraordinary wealth creation and excess, both economies – America in 1929 and China today – are at roughly similar stages of economic development. Both these booms, moreover, are in part explained by extremely rapid credit growth. Indeed, China’s credit boom dwarfs that of even the “roaring Twenties”. Borrowed money, or margin investing, played a major role in both these outbreaks of speculative excess.

As I understand it, a lot of China's investment in itself has been financed by "magic money," created by the government out of thin air. Relatively modest towns have been given fabulous makeovers -- grand public buildings, stadiums and so forth. For years, this mad construction has been the fuel that kept the great economic engine churning.

Already, there are warning signs of a slowdown, similar to those that front-ran the 1929 crash – depressed commodity prices and a virtual hiatus in global trade growth. The Chinese economy is like one of those cartoon characters who manages to keep running long after leaving the edge of the cliff, only belatedly to look down and plunge into the abyss.

Paul Krugman loves that "Wile E. Coyote" image as well.

Naturally, there are many dissimilarities too, not least that China is still essentially a planned and centrally-controlled economy which has so far managed to defy the usual rules of economics. The consensus is that this time will be no different, that even if the stock market does continue to crash, the impact will be no worse than 2007-08, when the Shanghai Composite fell by two-thirds.

That was when the Chinese government decided to combat the crisis by embarking on a full-speed-ahead "build, baby, build" program. And now everyone is hoping that the trick will work again.

It's cute to see the world's capitalists place their hopes on the ability of a (nominally) communist government to fix things.

Whether any of this turns into a calamitous economic meltdown obviously depends on the rest of the response. Policymakers have learned a thing or two since 1929; we now know that the real damage in financial crises is done not by the crash itself, but by a collapsing banking sector. Stock markets are only a signal of credit contraction to come. Even so, I doubt China has as much of a handle on its banks, and more particularly its shadow banking sector, as it pretends.

I'm not sure if I agree with this. From what I've heard, China is a country in which the government still has power over the banks. In the United States, the reverse is true.

The Chinese stock market slide has evinced remarkably divergent reactions. In the Guardian, Greg Jericho argues that China's slide could create an Aussie apocalypse, because Australia exports a lot of stuff to China. (I did not know that.)

By contrast, in The Week, Jeff Spross labels this event a "big nothingburger." His argument: Stock markets are not The Economy Itself.

Stock markets don't technically need to exist. Lots of companies get by just fine without offering up ownership shares to be bought and traded by the public.

Although a stock collapse preceded the Great Depression, things were rather different when the Great Recession hit. Thus, even a wrenching stock market correction in China does not necessarily mean capital-D Doom.

The Chinese government has been encouraging its citizens to invest more in the stock market as of late. But shareholders are mostly confined to the country's upper class, which is better positioned to take the hit. As Nomura's analysts pointed out, by way of the Financial Times, Chinese households also save a lot more than people in other countries, and stocks represent less than 15 percent of their financial assets. So that should cushion the blow from any wealth loss.

Here's the cute part again...

Finally, a fair amount of the equity that's at risk is also held by the central Chinese government, local governments, or state-run corporations. The government still has plenty of room to borrow — yields on Chinese debt have ticked up, but are still below the underwhelming threshold of 2 percent — and of course it controls the currency. China boasts a safety net with unemployment insurance, near-universal public health insurance, and tens and even hundreds of millions of Chinese citizens enjoy public pensions and some sort of minimum income guarantee. So those institutions are better positioned to absorb those shocks.

In other words, capitalists everywhere are saying "Thank god for socialism. The Chinese government will save the day!"

Meanwhile, a few of us (such as yours truly) who usually do not view socialism as The Great Bogeyman are starting to worry about the Chinese government's ability to keep propping up its economy with imaginary money.

In short: Everything is backwards. All the cops are criminals, and all the sinners are saints. The Acolytes of Ayn are starting to think like Olof Palme, and vice versa. 

Krugman loves that "Wile E. Coyote in mid-air" image. I prefer another Warner Brothers cartoon -- the one in which two mice demand to be eaten by the cat who wants to be murdered by the bulldog. That story is a parable for the absurdity of modern life.