CHINA'S GREAT DEPRESSION
by Krassimir Petrov, Ph.D.
September 2, 2004

Having recently completed Rothbard’s “America’s Great Depression”, I couldn’t help draw the parallels between America’s roaring 20’s and China’s roaring economy today, and I couldn’t help conclude that China will inevitably fall in a depression just like America did during the 1930s. The objective of this article is to present an Austrian argument as to why this must happen; to substantiate my arguments, I will be quoting Rothbard’s Fifth Edition where relevant.

Before proceeding any further, I would urge all readers who haven’t read Rothbard’s “America’s Great Depression”, to pick up a copy and read it. First, it is a real pleasant read, and Rothbard’s witty style of writing makes reading it fun. Second, the first part of the book develops the Austrian Business Cycle Theory, which is indispensable for understanding credit booms and their inevitable busts. Finally, the second part of the book elaborates the development and the causes of the Inflationary Boom of the 1920s and provides a basis for comparison with the economic policies of modern-day China.

In order to establish our parallel, we need some historical perspective of the relationship between a world superpower and a rising economic giant. In the 1920s, Great Britain was the superpower of the world, and the United States was the rising giant. As such, Great Britain ran its economic policies independently, and the U.S. adapted its own policies in a somewhat subordinated manner. Today, The United States is the hegemonic superpower of the world, and China is the rising economic giant. Not surprisingly, the U.S. runs its policy independently, while China adjusts its own accordingly.

Continuing our parallel analysis, during the 1920s the British Empire was already in decline, was militarily overextended, and in order to pay for its imperial adventures, resorted to debasing its own currency and running continuous foreign trade and budget deficits. In other words, Britain was savings-short, a net-debtor nation, and the rest of the world was financing her. Meanwhile, America was running trade surpluses and was a net creditor nation. Importantly from a historical point of view, the British Empire collapsed when the rest of the world pulled the plug on their credit and began capital repatriation. Today, the American Empire is in decline, is militarily overextended, and is financing her overextended empire with the “tried-and-true” methods of currency debasement and never-ending foreign trade and budget deficits. In other words, America is savings-starved, a net-debtor nation, and the rest of the world is financing her. At the same time, today China runs trade surpluses and is a net-creditor nation. When the rest of the world finally pulls the plug on American credit, will the American Empire also collapse?

The cause of the Depression, as Rothbard explains, was a credit expansion that fuelled the boom. According to Rothbard, “[o]ver the entire period of the boom, we find that the money supply increased by $28.0 billion, a 61.8 percent increase over the eight year period [of 1921-1929]. This was an average annual increase of 7.7 percent, a very sizable degree of inflation (p.93)…The entire monetary expansion took place in money substitutes, which are products of credit creation… The prime factor in generating the inflation of the 1920s was the increase in total bank reserves” (p.102). In other words, during the 1920s, the United States experienced an inflationary credit boom. This was most evident in the booming stock and the booming real estate markets. Furthermore, there was a “spectacular boom in foreign bonds… It was a direct reflection of American credit expansion, and particularly of the low interest rates generated by that expansion” (p.130). To stem the boom, the Fed attempted in vain to use moral suasion on the markets and restrain credit expansion only for “legitimate business. Importantly, consumer “prices generally remained stable and even fell slightly over the period” (p. 86). No doubt the stable consumer prices contributed to the overall sense of economic stability, and the majority of professional economists then did not realize that the economy was not fundamentally sound. To them the bust came as a surprise.

Today, in a similar fashion, the seeds of Depression are sown in China.  Economists hail the growth of China, many not realizing that China is undergoing an inflationary credit boom that dwarfs that American one during the roaring ‘20s. According to official government statistics, 2002 Chinese GDP growth was 8%, and 2003 growth was 8.5%, and some analysts believe these numbers to be conservative. According to the People’s Bank of China own web site (http://www.pbc.gov.cn/english/baogaoyutongjishuju/), “Money & Quasi Money Supply” for 2001/01 was 11.89 trillion, for 2002/01 was 15.96 trillion, for 2003/01 was 19.05 trillion, and for 2004/01 was 22.51 trillion yuan. In other words, money supply for 2001, 2002, and 2003 grew respectively 34.2%, 19.3%, and 18.1%. Thus, during the last three years, money supply in China grew approximately three times faster than money supply in the U.S. during the 1920s.

No wonder the Chinese stock market has been booming and the Chinese real estate market is on fire. Just like the U.S. in the 20s, China finances today foreign countries, mostly the U.S., by buying U.S. government bonds with their trade surplus dollars. Just like the Fed’s failed attempts of moral suasion during the 20s, the Chinese government today similarly attempts in vain to curtail growth of credit by providing it only to those industries that need it, that is, only to industries that the government endorses for usually political reasons. Also, for most of the current boom, Chinese consumer prices have been mostly tame and even falling, while prices for raw commodities have been skyrocketing, which perfectly fits the Austrian view that prices of higher-order goods, such as raw materials, should rise relative to prices of lower-order goods, such as consumer goods. This indeed confirms that credit expansion has already been in progress for a considerable time, and that inflation now is in an advanced stage, although it has not yet reached a runaway mode. Thus, economic conditions in China today are strikingly similar to those in America during the 1920s, and the multi-year credit expansion implies that a bust is inevitable.

There are also important parallels regarding currency and export policy. During the 1920s, the British Pound was overvalued and was used by smaller countries as a reserve currency. While Britain ran its inflationary policies during the 1920’s, it was losing gold to other countries, mainly the United States. Therefore, “if the United States government were to inflate American money, Great Britain would no longer lose gold to the United States” (p. 143). Exacerbating the problem further, the Americans artificially stimulated foreign lending, which further strengthened American farm exports, aggravated the net-export problem, and accelerated the gold flow imbalances. “It [foreign lending] also established American trade, not on a solid foundation of reciprocal and productive exchange, but on a feverish promotion of loans later revealed to be unsound” (p. 139). “[President] Hoover was so enthusiastic about subsidizing foreign loans that he commented later that even bad loans helped American exports and thus provided a cheap form of relief and employment—a cheap form that later brought expensive defaults and financial distress” (p.141) Thus, the preceding discussion makes it clear, that the fundamental reasons behind the American inflationary policy were (1) to check Great Britain’s drains of gold to the United States, (2) to stimulate foreign lending, and (3) to stimulate agricultural exports.

Similarly, today the dollar is overvalued and used as the reserve currency of the world. The U.S. runs its inflationary policy and is losing dollars to the rest of the world, mainly China (and Japan). Today, the currency and export policy of China is anchored around its peg to the dollar. The main reason for this is that by artificially undervaluing its own currency, and therefore overvaluing the dollar, China artificially stimulates its manufacturing exports. The second reason is that by buying the excess U.S. dollars and reinvesting them in U.S. government bonds, it acts as a foreign lender to the United States. The third reason is that this foreign lending stimulates American demand for Chinese manufacturing exports and allows the Chinese government to relieve its current unemployment problems. In other words, the motives behind the Chinese currency and export policy today are identical to the American ones during the 1920s: (1) to support the overvalued U.S. dollar, (2) to stimulate foreign lending, and (3) to stimulate its manufacturing exports. Just like America in the 1920s, China establishes its trade today not on the solid foundation of reciprocal and productive exchange, but on the basis of foreign loans. No doubt, most of these loans will turn out to be very expensive because they will be repaid with greatly depreciated dollars, which in turn will exacerbate down the road the growing financial distress of the banking sector in China.

Therefore, it is clear that China travels today the road to Depression. How severe this depression will be, will critically depend on two developments. First, how much longer the Chinese government will pursue the inflationary policy, and second how doggedly it will fight the bust. The longer it expands and the more its fights the bust, the more likely it is that the Chinese Depression will turn into a Great Depression. Also, it is important to realize that just like America’s Great Depression in the 1930s triggered a worldwide Depression, similarly a Chinese Depression will trigger a bust in the U.S., and therefore a recession in the rest of the world.

Unless there is an unforeseen banking, currency, or a derivative crisis spreading throughout the world, it is my belief that the Chinese bust will occur sometime in 2008-2009, since the Chinese government will surely pursue expansionary policies until the 2008 Summer Olympic Games in China. By then, inflation will be most likely out of control, probably already in runaway mode, and the government will have no choice but to slam the brakes and induce contraction. In 1929 the expansion stopped in July, the stock market broke in October, and the economy collapsed in early 1930. Thus, providing for a latency period of approximately half a year between credit contraction and economic collapse, based on my Olympic Games timing, I would pinpoint the bust for 2009. Admittedly, this is a pure speculation on my part; naturally, the bust could occur sooner or later.

While I base my timing of bust on the 2008 Olympic Games, Marc Faber, the foremost Austrian authority in the world on Chinese economic development, believes that the bust will occur sooner. According to him, the U.S. is due for a meaningful recession relatively soon, which in turn will exacerbate already existing manufacturing overcapacities in China. This, coupled with growing credit problems, makes him believe that China will tip into recession sooner than the Olympic Games. In other words, Dr. Faber believes that a U.S. recession will trigger the Depression in China. Indeed, that very well may be the trigger, but if so, it still remains to be seen whether the Chinese government will let the bust run its course or choose the route of a “crack-up” boom, come hell or high water.

We should also consider another possible trigger for a bust, namely trade surpluses turning into trade deficits due to the accelerated rise of prices for resources, such as commodities, which China must import. Faced with trade deficits, China may decide to dishoard surpluses by selling U.S. government bonds, or it may decide to abandon its peg to the dollar. In either case, this will exacerbate the problems of the ailing U.S. economy, which in turn will boomerang back to China.

Finally, the bust may be triggered by a worldwide crisis in crude oil supplies. Peak oil supply is around the corner, if not already behind us, and Middle East or Caspian instability could sharply cut oil supplies. Historically, oil shortages and their concomitant rise of oil prices have always induced a recession. China’s growing dependence on oil ensures that should an oil crisis occur, it will slip into recession.

To summarize, the likely candidates for a trigger to the Chinese depression are (1) a worldwide currency, banking, or derivatives crisis, (2) a U.S. recession, (3) the containment of runaway inflation, (4) the disappearance of Chinese trade surpluses, and (5) an oil supply crisis.

Whatever the trigger of the bust in China, there is little doubt that this will provide the onset of a worldwide depression. Just like the U.S. emerged from the Great Depression as the unrivalled superpower of the world, so it is likely that China will emerge as the next.

不错！8月份的文，现在看来正在变成现实阿

奥地利学派对于经济危机的预言向来精准。此有据可查。我也曾转贴过佩佐夫的该篇文章，如要了解其分析，需对奥派之商业循环理论有所认识。我以下几篇贴子应不无助益：

重读佩佐夫：中国的大萧条，中国会免于萧条吗？
https://bbs.pinggu.org/thread-351911-1-1.html

奥地利学派和马克思学派的非凡前瞻性
https://bbs.pinggu.org/thread-255706-1-1.html

奥地利学派的工商业循环理论：
https://bbs.pinggu.org/thread-331266-1-1.html

文章还是不错的，但是感觉和佩佐夫的观点没有太多相关之处啊？

况且佩佐夫的“预言”，并未准确描述中国的危机发生的真正原因、链式反应和变化流程。

按他的意思，似乎明年到后年（外来冲击之后），中国经济会和地产、股市投资泡沫一起崩溃，

而股市泡沫已经接近挤出完成，而地产在今后一段时间有可能开始放量销售（与国家的救市一起）。

嘿嘿，好象是04年的吧，而且“变成现实”的可能性已经不大了。

以下是引用猫爪在2008-10-17 18:55:00的发言：

文章还是不错的，但是感觉和佩佐夫的观点没有太多相关之处啊？

况且佩佐夫的“预言”，并未准确描述中国的危机发生的真正原因、链式反应和变化流程。

按他的意思，似乎明年到后年（外来冲击之后），中国经济会和地产、股市投资泡沫一起崩溃，

而股市泡沫已经接近挤出完成，而地产在今后一段时间有可能开始放量销售（与国家的救市一起）。

其一，很有相关之处。严格来讲，奥派对经济的各个预言，不能称之为“预言”，而更是一种“推论”。而推论的依据，便是其商业循环理论。佩佐夫也是运用该理论，作出合理的推论而已。危机发生的原因十分清楚且简单，而结果也无法避免。但由于政府会为避免这一无法避免的结果采取所谓“合理而必要”的干预措施，从而可能延缓危机的发生，当然会已更大的危机为代价。因此，危机发生的准确时间是很难预测的。但就佩佐夫之文章，比较及当下世界所正在发生的，即使有些许时间的误差，不可不谓足够精确的。

其二，股市的崩盘领先于实体经济，这是显然和正常的事。而并非说股市崩盘与经济同时发生。至于地产，恐怕也已是显然的事了，否则国家干嘛准备要“救市”呢？在此，我提出与斑竹完全不同的观点，即股市还会继续下跌，“股市泡沫”绝非“已经接近挤出完成”，而且，地产不仅不会回暖，而会进一步下挫，政府的“干预”不会起到明显之效果。让我们拭目以待吧。

可能有点误会。

其一，我不是说佩佐夫说的时间不准，而是他认为“美国的衰退引起中国的萧条”的判断就是错的，

现在的情况是“美国的萧条引起了中国的可能的经济动荡”。

其二，现在的市盈率和换手速度，已经逐步向理性的资本市场交易方向前进，而且必须认识到，

中国工业生产对金融市场的依赖，远不像西方发达国家那样严重。

考虑到诸多因素，我认为现在世界经济形势，对中国来说具有两面性：风险和机遇并存。

可以探讨啊。

这种预言就像预言人有生老病死一样，没多少意义

[此贴子已经被作者于2008-10-17 20:35:15编辑过]

看看，谢谢

佩佐夫该文最大的问题是进行历史的简单类比与生搬硬套奥派工商业循环理论于中国.  他忘了中国从来就不是一个完全的市场经济.  中国经济进一步减慢(slowdown)是不争的趋势,  但说中国经济进入"大萧条" 无可避免则于理不通.  希望周末有时间展开讨论.

好文章，赞一个

多谢 支持

是真的吗？

长见识啊 有些说法似乎还是站在西方学者的视角看中国...