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Inside US and China's dodgy economies



One of the ironies of the intensifying tariff war between America and China is that that neither of the two giants seems to have a viable economic model. Both countries' systems are based on dodgy financial engineering and printing money, or just inventing new types of money out of thin air.

Figures representing US and China economies engage in an arm wrestle. While their upper bodies are bulky, their lower bodies are emaciated. Cartoon by Chris Johnston First, China's problems. There are two currencies in China: the yuan and the renminbi. The latter is the domestic currency, for internal use, and the former is the external currency, which is pegged (fixed) to the US dollar, and creates the 'hard' currency that allows China to trade with the rest of the world.

Since 2002 the internal supply of money, renminbi, in China (called M2) has increased from $US1 trillion to about $US30 trillion, in an economy of about $US12.5 trillion. That is an unprecedented printing of money, without parallel. It was mostly poured into investment, especially infrastructure. About 40 per cent of China's GDP is investment, compared with less than ten per cent in most developed economies.

It has led to an extreme level of debt. Loans in China are estimated to be a staggering 400 per cent of GDP, with about 45 per cent thought to be bad. China's banking system, in other words, is insolvent, at least in conventional capitalist terms.

The extraordinary printing of renminbi has been largely masked by China's stockpiling of yuan (US dollars) as it ran large trade and current account surpluses.  But that is beginning to dry up. China just recorded its first current account deficit for 17 years. This writer was surprised to hear at a recent webinar that China does not have the money to fund its much-publicised Belt and Road initiative, and will be turning to multilateral organisations for funding. China's stock of yuan, hard currency, could be drying up.

Ordinarily, the banking crisis would mean imminent economic collapse, and it may yet have that result. But China has one big advantage: the government owns most of the land. That has been crucial for China's strategy of de-industrialising the West, especially in heavy industry. In the West, businesses have to pay for the land, or pay rent (which is often more important than lower labour costs). In China, the land, and often the electricity, has come free, so it has been a no-contest.

China's public ownership of land is a once only, get out of jail free card for the ailing banks. The property can be sold and used to recapitalise the banks' balance sheets. But it can only be done once.


"The price of the China bargain is now clear and many will be rethinking their strategy, to the extent that they can."


America is just as dodgy. Money supply (M2) is more modest at $US14.87 trillion, but there has also been a ludicrous level of money printing. When the global financial crisis hit in 2007-2008 the balance sheet of the US Federal Reserve was $US779 billion; when President Trump took office it was $US4.5 trillion. That printing of money made anyone who owned assets rich, while wage earners became poorer: it destroyed America's middle class and has greatly weakened its economic resilience. There is also the absurd $US500 trillion in derivatives (gambles derived from conventional transactions like shares, currency trades and bonds), which continues to distort America's entire financial system. Wasting almost $US1 trillion on the military also does not help.

The future of capitalism, in other words, is looking pretty grim, especially when it is considered that Europe is moribund and Japan has been in recession for almost three decades.

At the heart of the problem is a trend that is yet to be dealt with, and which requires a new way of thinking about economics: the massive increases in efficiency of the production of goods because of technology and better management systems. It has resulted in massive oversupply in many primary and secondary industries. At the same time, the global fertility rate has halved, which means much fewer new consumers coming through.

It has changed the demand-supply balance globally. Companies have been desperately searching for new sources of consumption as their home markets age. That is why they were so keen to get into China, with its large consumer markets. China has used that, skilfully drawing Western companies in by enticing them with access to their customers and then stealing their intellectual property.

That game is over. Foreign companies in China cannot take profits out of the country; the capital account is completely closed. The price of the China bargain is now clear and many will be rethinking their strategy, to the extent that they can.

It is why the intensifying tariff war between America and China is not just about some taxes on traded goods, it is about turning global supply chains away from China. It represents the beginning of a split of the world into two spheres: the West (North America, Japan and Korea, Europe, Australia) and the East (China, Russia, Central Asia and Africa).

The problem is that neither of these 'sides' will have a way to deal with the imbalances between supply and demand; the dearth of new consumers. In the end, it has not been a competing alternative ideology that is bringing down capitalism, whose rationale is that supply and demand can always be mediated by the price system. It has been technological advances.



David JamesDavid James is the managing editor of businessadvantagepng.com. He has a PhD in English literature and is author of the musical comedy The Bard Bites Back, which is about Shakespeare's ghost.

Topic tags: David James, China, US, global financial crisis, Donald Trump



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Existing comments

If neither China nor the USA have “a viable economic model” we might all be in trouble. Examples of capitalism first appeared in the great Christian monasteries. In “The Victory of Reason”, Rodney Stark wrote that Christianity led to freedom, capitalism and Western success: “capitalism is in essence the systematic and sustained application of reason to commerce.” Chinese scholars agree: “Christianity. That is why the West is so powerful. The Christian moral foundation of social and cultural life was what made possible the emergence of capitalism and then the successful transition to democratic politics.” But the falling “global fertility rate” is the elephant in the living room. In “How Civilizations Die” (2011) David Goldman wrote: “We know that the social life of most developed countries will break down within two generations. Two out of three Italians and three of four Japanese will be elderly dependents by 2050…No pension and health care system can support such an inverted population pyramid.” In 1978, Malcolm Muggeridge also predicted this: “The dissolution of our way of life, our Christian way of life and all that it has meant to the world, relates directly to the matter raised in Humanae Vitae.”

Ross Howard | 08 September 2019  

Many thanks for this enlightening article. I have always heard that the massive printing of money leads to economic disaster in the end, as in the Weimar Republic and Mugabe's Zimbabwe to name but two. I had no idea of the enormous scale of money printing in both the USA and China. Since these nations control so much internationally, what hope is there for the rest of us to stay afloat if they fall into a heap?

Rodney Wetherell | 09 September 2019  

Ross Howard gives us an unbelievably rosy view of Christianity. Maybe he should read the second article in today's Eureka Street. We have shown, and continue to show, great Christian capitalist concern for East Timor! And of course don't forget that the prosperity of Christian Europe is based on such things as the destruction of China through the opium wars and the free labour supply provided by African slaves.

Brian Finlayson | 09 September 2019  

The elephant in the room is the notion of unending growth being needed to keep economies growing. I still remember reading "Limits to Growth" as a university undergraduate in the late 70's early 80's. Now in my retirement I am seeing the pillaging of the earth's limited resources and the poisoning of the environment as the price we are paying for unfettered Capitalism and a failed Communist ideology .Actually the Protestant belief in Divine reward for frugal use of God's gifts to humankind based on Genesis fuelled much of the Industrial Revolution. Unless we change our approach to the concept of respect for the "Stewardship of God's Creation", our future and that of our children and grandchildren is very bleak.

Gavin O'Brien | 09 September 2019  

Yes David, China wants it all its own way and one wonders why the rest of the world has to suffer because of the trade war. Our economy in 2008 was irreparably harmed because of the US caused GFC. Australia has done its share of money printing too though not in the league of your comparisons. Ten years ago Australia's debt was 101.13 bn whereas today the debt is 629 bn.

francis Armstrong | 09 September 2019  

I strongly agree with David James as to the disgraceful and impoverishing explosion of government money. But as a matter of definition, what has government spending and printing of money have to do with "capitalism"? As David points out, communist and socialist countries go in for this form of mass theft as well. Capitalism, as I understand it, implies a free market, respect for private property and peaceful voluntary exchange, as well as the freedom not to exchange and to live as an economic hermit and even to set up voluntary “socialist” communes if the fancy takes. In that sense, since forging money violates these principles of capitalism, it matters not whether it is an individual or a coercive state engaging in the practice: it’s a deeply anti-capitalist activity. If we want a much purer example of capitalism that is in fact the only viable future, we should consider little, undemocratic Hong Kong, ruled by the UK till the mid 1990s. Actually “ruled” is the wrong term. Hong Kong was consciously *not* ruled to a very large degree by its unelected British overlords. And lo, it flourished against all the models and predictions of fashionable development economists. HK’s economic performance in lifting millions out of poverty over four decades is a feat arguably unparalleled in human history. Hong Kong is even in these dark times an incarnate proof of the errors of socialism, communism and that crony form of big governmnet mislabelled as “capitalism”.

HH | 10 September 2019