Everyone’s
Freaked Out That China’s ‘Minsky Moment’ Has Arrived
After
years of booming credit expansion, we’re now seeing slower
economic growth in China and a rising number of domestic
bond defaults.
This has prompted many to ask has China’s
‘Minsky moment’ arrived?
The phenomenon is named after economist Hyman
Minsky who articulated that periods of speculation and credit growth
inflate assets, only to end in crisis.
Societe
Generale’s Wei
Yao was one of the first to write this up a year ago.
Morgan
Stanley’s Cyril Moulle-Berteaux and Sergei Parmenov, argue
that China
is approaching its ‘Minsky moment’ (via Zerohedge).
“In recent weeks, a trip to the region and
further research into China’s shadow banking system have convinced
us that China is approaching its “Minsky Moment,” (Display 1)
which increases the chances of a disorderly unwind of China’s
excesses. The efficiency with which credit generates economic
activity is already deteriorating, as more investments are made in
non-productive projects and more debt is being used to repay old
debts.”
A
Chinese Shadow Bank Bailout May Mean A Crash In U.S. Treasury Bonds
China’s economy in 2014 is remarkably similar
to America’s in 2008: Both were fueled by real estate speculation,
both speculative bubbles a product of cheap-and-cheerful shadow-bank
financing.
And just like the U.S. in 2008, China in 2014
is looking down the barrel of a Minsky Moment: The point at which
servicing debt levels becomes unsustainable, and there are no reserve
cushions large enough to absorb the losses.
Lots
of people are pointing this out; Mish Shedlock had a
piece about it this morning, and he and others are right to
worry that a shadow banking collapse will be bad for China.
But it will be even worse for the U.S.: Because
after all—unlike the United States in 2008—China in 2014 has the
reserves to buy its way out of the hole it’s in.
In 2008, the U.S. shadow banking sector began
its collapse when real-estate backed bonds turned out to be a lot
dodgier than originally thought. This set off a systemic domino
effect. We all know how the Global Financial Crisis of 2008 (GFC)
played out.
Now, what did the U.S. Treasury and Federal
Reserve do when the GFC hit? In other words, what did the American
government do in the face of a collapsing financial sector?
Why simple: It threw money at the problem. But
it was money that the U.S. government and Federal Reserve didn’t
actually have . . .
Read more:
Petrodollar
Alert: Putin Prepares To Announce “Holy Grail” Gas Deal With
China
If it was the intent of the West to bring
Russia and China together – one a natural resource (if “somewhat”
corrupt) superpower and the other a fixed capital / labor output (if
“somewhat” capital misallocating and credit bubbleicious)
powerhouse – in the process marginalizing the dollar and
encouraging Ruble and Renminbi bilateral trade, then things are
surely “going according to plan.”
For now there have been no major developments
as a result of the shift in the geopolitical axis that has seen
global US influence, away from the Group of 7 (most insolvent
nations) of course, decline precipitously in the aftermath of the
bungled Syrian intervention attempt and the bloodless Russian
annexation of Crimea, but that will soon change. Because while the
west is focused on day to day developments in Ukraine, and how to
halt Russian expansion through appeasement (hardly a winning tactic
as events in the 1930s demonstrated), Russia is once again thinking 3
steps ahead… and quite a few steps east.
While
Europe is furiously scrambling to find alternative sources of energy
should Gazprom pull the plug on natgas exports to Germany and Europe
(the imminent surge in Ukraine gas prices by 40% is probably the best
indication of what the outcome would be), Russia
is preparing the announcement of the “Holy Grail” energy deal
with none other than China, a move which would send geopolitical
shockwaves around the world and bind the two nations in a
commodity-backed axis.
One which, as some especially on these pages, have suggested would
lay the groundwork for a new joint, commodity-backed reserve currency
that bypasses the dollar, something which Russia implied moments ago
when its finance minister Siluanov said that Russia may refrain from
foreign borrowing this year. Translated: bypass western purchases of
Russian debt, funded by Chinese purchases of US Treasurys, and go
straight to the source.
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