Climbing Off China’s Paper Money Tiger
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You and I are riding China’s economic tiger. The whole Western world is. It has been a pleasant rise so far. We have the electronic gadgets and cheap toys to prove it. “Made in China” is everywhere. But this tiger is a paper tiger - paper money.
All right, it’s really a digital tiger. But we still
refer to central banks as “cranking up the printing
presses” when we really mean “increasing the money supply.”
The old image of fiat paper money is with us still, so I
refer to China as a paper money tiger.
Mao referred to America as a paper tiger. America
wasn’t at the time. China is today: not weak, but highly
vulnerable. China’s central bank, the People’s Bank of
China, has been pursuing a policy of monetary inflation as
no large modern country ever has in peacetime. Year after
year, M-1 increases at about 20%. This has fueled an
economic boom of unprecedented proportions. This boom has
been a particular kind of economic growth, one weighted
heavily toward exports.
Now this inflation-fueled boom is facing its day of
reckoning: rising domestic prices, especially of rice.
Most of the 400 million residents the booming cities can
afford to buy rice. The poor 900 million of the
countryside are finding it difficult to buy rice. It is
being exported to the cities, where residents can afford to
pay for it.
The response of the government to rising prices has
been to impose price controls on key products. This has
created shortages, as price controls always do whenever a
government’s central bank is inflating.
There is a simple solution. The People’s Bank of
China should cease inflating. It should cease buying U.S.
Treasury debt, Chinese government debt, or any other kind
of debt. But that would produce China’s first post-
Communist recession. The real estate boom would turn into
a bust that would dwarf the recent downturn in the United
States. The flow of millions of people into the cities
would slow. The unemployment rate in the cities would
soar.
Then the riots would begin.
When you think “riots in China,” think “geriatric
Communist oligarchy.” Think “Tibet.”
The oligarchs are riding the paper money tiger. So
are you. So am I.
How should we get off? That is not our decision. How
will we get off? That is the #1 investment question of the
next five years, all over the world.
FOUR THEORIES OF NATIONAL WEALTH
To understand what China has accomplished since 1978,
we must understand the history of modern economic thought.
There have been four main streams of economic thought:
mercantilism, capitalism, socialism, and Keynesianism.
Mercantilism was the dominant economic outlook prior
to Adam Smith’s book, “The Wealth of Nations” (1776).
Mercantilists believed that national wealth is based on
gold. A nation’s wealth increases by means of foreign
trade, but always government-controlled trade. The sign of
increasing national wealth is an increase in the supply of
gold in the national government’s treasury.
The mercantilists believed that a nation increases its
wealth by exporting more than it imports, with gold
imported rather than consumer goods. Goods flow out; gold
flows in. This makes the nation richer.
Smith disproved this theory. Actually, David Hume had
disproved it three decades earlier. He pointed out that
the inflow of gold increases prices in the exporting
nation. Meanwhile, the outflow of gold reduces prices in
the importing nation. As domestic prices rise, a nation’s
exports become more expensive to foreigners. So, it is
able to export less. The system balances itself without
government intervention. Hume’s brief essay was short and
to the point, but it was not widely known or believed
inside elite circles. Smith changed elite opinion over
time: 1776 to about 1846 in England.
Free market capitalism teaches that wealth is based on
consumer-satisfying production, not gold. Wealth is
achieved by free trade, stable money, and open markets.
Socialism is an alternative to both mercantilism and
free market capitalism. It arose in the nineteenth century
and was widely believed by a minority of Western
intellectuals until August 19-21, 1991, when the Soviet
Union’s leaders officially abandoned Communism, confiscated
the Party’s funds, and distributed the money to themselves,
who then sent it to Western banks. (This is not the story
in the textbooks, which steadfastly refuse to follow the
money.)
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Tags: , Bank Of China, china, Economic Boom, food crisis, Global Crisis, gold, inflation, Monetary Inflation, oil, real estate boom, resources, us treasuryAbout the Author
Gary North, at the age of 25, was the youngest elected member of the Economists' National Committee on Monetary Policy. He has served as a senior staff member of the Foundation for Economic Education and as a research assistant to U.S. Congressman Ron Paul.
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