Tuesday, June 7, 2011

China Learns from the Fed

It sounds as if the Chinese government is taking a page out of the Bernanke play book. Reuters reports that 2 to 3 Trillion yaun (308-463 billion dollars) worth of local debt will be even more socialized by taking it off municipalities' books and shifting it to state banks and newly created companies. I see this as more evidence that China's economy is on less than secure footing. Unless the Chinese government halts the credit expansion machine, China could be in for a Great Recession of its own. As it stands, slowing inflationary credit expansion will result in a necessary recession, but the longer the Chinese government puts it off, the worse it will be when the inevitable bust comes.

A government simply cannot will economic expansion into existence by government spending and monetary inflation. It is a classic Keynesian mistake for the state to confuse GDP growth for economic prosperity.

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