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Friday, December 12, 2014

by Michael McCune - The Rant - China's Place As Economic Leader Short-lived -

China's Place As Economic Leader Short-lived
I have a personal love/hate relationship with reporters and economists who toss around percentage numbers like confetti at the New Year's Day parade but never give a solid number to relate to the percentages they use.

Case in point today is the questionable fact China supplanted the U.S. as the world's top economy. The old commercial used to ask: Is it live or is it Memorex? Applied to today's report the statement would be: Is China's economic ascent real or a complete sham?

Within a week of the report about China climbing to the world's top spot based on actual GDP without service charges tossed in, the Chinese market recorded its biggest loss in five years while the yuan recorded its biggest decline against the American dollar in any two-day stretch since at least 1950. That's a pretty poor record for the world's alleged No. 1 national economy.

What caused the largest portion of the drop was China regulators actually clamped down on the common market practice of allowing the use of low grade corporate debt bonds as collateral to borrow cash to obtain more corporate stock shares from the market to prop up the 'value'. Ah! if only American regulators would squash the practice here we would see the Wall Street rally for the sham it really is.

The second part was China's open admission the entire economic surge has been reliant upon government spending with only a minor assist in consumption spending. The reliance on government spending has boosted GDP to demonstrable sham levels. The country's short-term growth outlook would possibly go into the red if policies aimed at cutting government debt are approved. Construction industries like cement and steel manufacturers among many such in the country have widely recognized over-blown capacities which have been fueled by the government's purchase of any excess production over the years. The extra purchased material was usually destroyed, not used as intended, so the population paid for something that never got into service.

But the government has to do something to reduce debt. Americans are stunned when the national debt here climbs past annual GDP and recently hit $18 trillion. In China there are estimates the government debt is as much as 250% MORE than GDP. If America had the same standard our national debt clock would be slightly more than $40 trillion.

The move to address the debt is not expected to last. China needs to keep its economic fa├žade in place even more than the U.S. Saving face is a time-honored tradition in the Oriental mindset. The slightest hint of indecision by the government could lead to a collapse. But how does one address the debt problem without cutting?

That question has hindered American politics for decades as well.

The debt problem has to be ignored if China is to come anywhere close to keeping a positive 7 to 7.5% growth factor in the economy. The problem is, without addressing the debt issue the GDP growth rate is already expected to slip to that range when the November numbers are analyzed and the target for 2015 GDP growth is already being revised downward.

The Chinese quandary is caused by the dropping value of the yuan. In less than a month the yuan has lost more than 14% of its value to the dollar. Fiat is fiat but some fiat is better than others.

The Shanghai market had been the world's top performer this year. But, like the DJIA, the S&P and NASDAQ in America, it was fueled mostly by borrowed cash and not a broad-based belief in the value of the stocks of the companies registered.

How can one determine this? Look at the yields of corporate bonds compared to government bonds. In China the corporate bond yield is approaching the 7.5% rate--almost exactly what the economy is purportedly growing at. That kind of math doesn't work--anywhere.

The only thing keeping our government afloat right now is the Fed's Operation Twist has skewed the interest rates to such a degree the financial sector can actually make money by borrowing fiat and putting it into the market where the rise in share values more than pays the interest on the fiat borrowed.

But it isn't a Chinese or American phenomena, this is going on in every fiat across the globe. It has created a system that is doomed to collapse. However, China had been so deceptive in its practices the latest revelations about the problems it has encountered and now must come to grips with makes it newsworthy.

Here's how you know the fiat collapse point has to be near. The top economy is the U.S. (still) and our Fed has taken drastic actions to keep the makeup on the ill patient. China is no longer a good alternative investment site and the makeup is definitely smeared. Japan, sitting at No. 3, is already back into recession with two straight quarters of economic contraction verified. The Euro Union has no legs and, suddenly it seems, the problems in Italy, Greece and Spain are re-emerging with a vicious bite to an already jittery alliance.

Once again we can clearly see the fallacy of wealth based solely on a relationship with the fiat of choice. That kind of wealth is illusionary and transient at best. It only has value if the fiat growth is hindered by a direct tie to something more substantial than public perception.

"I have sworn on the altar of God eternal hostility to every form of tyranny over the mind of man."--Thomas Jefferson 

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