China – ad nauseam

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The chart on Chinese markets and similarity to the U.S. Black Tuesday is doing the rounds with commentators around the world.

Yes the Chinese government is worried and have intervened in the markets. The simple logic is to placate a billion domestic investors.

Bear in mind that the rise and rise of any stock market is not sustainable.

Something has to give – it is a matter of timing, the crash is necessary to wipe out investors savings. Part of an economic cycle which leads to a depression – unavoidable for China.

Yes China has to re-jig their economy from an export based economy to a consumer based economy – their depression I hope will be short lived.

The Chinese government’s involvement is more to do with the chilling reality that they do not want civil unrest to follow a collapse in the consumers wealth. So their interventions are to appease the masses.

The biggest difference between the U.S. Great Depression and what will happen to China is simple – politicians.

China can implement policies that can overcome their domestic problems far easier due to no political grandstanding from the politically aligned left, right or centre.

Yes read history, the U.S. voters switched political parties during the Great Depression and this extended the length and severity. Whilst the ‘new deal’ from Keynes was introduced by the socialists in the U.S. – incoming politicians changed the rules throughout their terms and in so doing – extended the depression beyond what was necessary.

Simple explanation is it not – politicians meddled in economic matters and increased and lengthened the severity. I have included a timeline of the Great Depression events in the notes below, which demonstrates the stupidity of economic madness by politicians.

China has the ability to implement change without interruption – one suspects that they are fully aware of what is coming by their investment in the ‘silk road’ and the change to renewable resources in the energy sector.

Further and what is omitted by commentators is that China has two more weapons at its disposal – first is that their internal interest rate, which is at 4 percent and second their currency is pegged to the USD.

I call these the capital reserves – a move to reduce interest rates or de-peg the currency will create international problems – in particular from the U.S. government – as China then will be entering the currency wars. On this score China will win.

Undertaking either task (reduce interest rates or de-peg) will deflate their currency and the knock on effect is a transfer of capital from savings through to the stock markets or other hard assets.

One has to bear in mind though that the Chinese government needs the stock market to stabilize first – reach the bottom – the plateau of reality on value.

This economic domestic juggling act is a tough ask off anyone – a hard landing is in the making, but the length of the problem will be short. Just depends how the billion Chinese investors take the fall – will their be civil unrest?

Notes – Timelines of the Great Depression in the U.S.

1920s (Decade)

During World War I, federal spending grows three times larger than tax collections.
When the government cuts back spending to balance the budget in 1920, a severe recession results. However, the war economy invested heavily in the manufacturing sector, and the next decade will see an explosion of productivity… although only for certain sectors of the economy.

An average of 600 banks fail each year.

Organized labor declines throughout the decade. The United Mine Workers Union will see its membership fall from 500,000 in 1920 to 75,000 in 1928. The American Federation of Labor would fall from 5.1 million in 1920 to 3.4 million in 1929.

Over the decade, about 1,200 mergers will swallow up more than 6,000 previously independent companies; by 1929, only 200 corporations will control over half of all American industry.
By the end of the decade, the bottom 80 percent of all income-earners will be removed from the tax rolls completely.

Taxes on the rich will fall throughout the decade.

By 1929, the richest 1 percent will own 40 percent of the nation’s wealth. The bottom 93 percent will have experienced a 4 percent drop in real disposable per-capita income between 1923 and 1929.

Individual worker productivity rises an astonishing 43 percent from 1919 to 1929. But the rewards are being funneled to the top: the number of people reporting half-million dollar incomes grows from 156 to 1,489 between 1920 and 1929, a phenomenal rise compared to other decades. But that is still less than 1 percent of all income-earners.

1922
The conservative Supreme Court strikes down federal child labor legislation.

1923
President Warren Harding dies in office. Calvin Coolidge, becomes president. Coolidge is no less committed to laissez-faire and a non-interventionist government.
Supreme Court nullifies minimum wage for women in District of Columbia.

1924
The stock market begins its spectacular rise. Bears little relation to the rest of the economy.

1925
The top tax rate is lowered to 25 percent – the lowest top rate in the eight decades since World War I.

1928
Between May 1928 and September 1929, the average prices of stocks will rise 40 percent. The boom is largely artificial.

1929
Herbert Hoover becomes President. (Read Herbert Hoover’s Memoirs for a history lesson on what is happening today)

Annual per-capita income is $750. More than half of all Americans are living below a minimum subsistence level.

Backlog of business inventories grows three times larger than the year before.

Recession begins in August, two months before the stock market crash. During this two month period, production will decline at an annual rate of 20 percent, wholesale prices at 7.5 percent, and personal income at 5 percent.

Stock market crash begins October 24. Investors call October 29 Black Tuesday. Losses for the month will total $16 billion, an astronomical sum in those days.

1930
By February, the Federal Reserve has cut the prime interest rate from 6 to 4 percent. Treasury Secretary Andrew Mellon announces that the Fed will stand by as the market works itself out: ‘Liquidate labor, liquidate real estate… values will be adjusted, and enterprising people will pick up the wreck from less-competent people’.

The Smoot-Hawley Tariff passes on June 17. With imports forming only 6 percent of the GNP, the 40 percent tariffs work out to an effective tax of only 2.4 percent per citizen. Even this is compensated for by the fact that American businesses are no longer investing in Europe, but keeping their money stateside. The consensus of modern economists is that the tariff made only a minor contribution to the Great Depression in the U.S., but a major one in Europe.

Supreme Court rules that the monopoly U.S. Steel does not violate anti-trust laws as long as competition exists, no matter how negligible.

The GNP falls 9.4 percent from the year before. The unemployment rate climbs from 3.2 to 8.7 percent.

1931
No major legislation is passed addressing the Depression.

The GNP falls another 8.5 percent; unemployment rises to 15.9 percent.

1932
This and the next year are the worst years of the Great Depression. For 1932, GNP falls a record 13.4 percent; unemployment rises to 23.6 percent.

Industrial stocks have lost 80 percent of their value since 1930.

10,000 banks have failed since 1929, or 40 percent of the 1929 total.

GNP has also fallen 31 percent since 1929.

Over 13 million Americans have lost their jobs since 1929.

International trade has fallen by two-thirds since 1929.

Congress passes the Federal Home Loan Bank Act and the Glass-Steagall Act of 1932.
Top tax rate is raised from 25 to 63 percent.

Popular opinion considers Hoover’s measures too little too late. Franklin Roosevelt easily defeats Hoover in the fall election. Democrats win control of Congress.

1933
Roosevelt inaugurated; begins ‘First 100 Days’; of intensive legislative activity.

A third banking panic occurs in March. Roosevelt declares a Bank Holiday; closes financial institutions to stop a run on banks.

Alarmed by Roosevelt’s plan to redistribute wealth from the rich to the poor, a group of millionaire businessmen, led by the Du Pont and J.P. Morgan empires, plans to overthrow Roosevelt with a military coup and install a fascist government modelled after Mussolini’s regime in Italy. The businessmen try to recruit General Smedley Butler, promising him an army of 500,000, unlimited financial backing and generous media spin control. The plot is foiled when Butler reports it to Congress.

Congress authorizes creation of the Agricultural Adjustment Administration, the Civilian Conservation Corps, the Farm Credit Administration, the Federal Deposit Insurance Corporation, the Federal Emergency Relief Administration, the National Recovery Administration, the Public Works Administration and the Tennessee Valley Authority.

Congress passes the Emergency Banking Bill, the Glass-Steagall Act of 1933, the Farm Credit Act, the National Industrial Recovery Act and the Truth-in-Securities Act.

Roosevelt does much to redistribute wealth from the rich to the poor, but is concerned with a balanced budget. He later rejects Keynes’ advice to begin heavy deficit spending.
The free fall of the GNP is significantly slowed; it dips only 2.1 percent this year. Unemployment rises slightly, to 24.9 percent.

1934
Congress authorizes creation of the Federal Communications Commission, the National Mediation Board and the Securities and Exchange Commission.

The economy turns around: GNP rises 7.7 percent, and unemployment falls to 21.7 percent. A long road to recovery begins.

Sweden becomes the first nation to recover fully from the Great Depression. It has followed a policy of Keynesian deficit spending.

1935
The Supreme Court declares the National Recovery Administration to be unconstitutional.
Congress authorizes creation of the Works Progress Administration, the National Labor Relations Board and the Rural Electrification Administration.

Congress passes the Banking Act of 1935, the Emergency Relief Appropriation Act, the National Labor Relations Act, and the Social Security Act.

Economic recovery continues: the GNP grows another 8.1 percent, and unemployment falls to 20.1 percent.

1936
Top tax rate raised to 79 percent.

Economic recovery continues: GNP grows a record 14.1 percent; unemployment falls to 16.9 percent.

1937
The Supreme Court declares the National Labor Relations Board to be unconstitutional.
Roosevelt seeks to enlarge and therefore liberalize the Supreme Court. This attempt not only fails, but outrages the public.

Economists attribute economic growth so far to heavy government spending that is somewhat deficit. Roosevelt, however, fears an unbalanced budget and cuts spending for 1937. That summer, the nation plunges into another recession. Despite this, the yearly GNP rises 5.0 percent, and unemployment falls to 14.3 percent.

1938
No major New Deal legislation is passed after this date, due to Roosevelt’s weakened political power.

The year-long recession makes itself felt: the GNP falls 4.5 percent, and unemployment rises to 19.0 percent.

1939
The United States will begin emerging from the Depression as it borrows and spends $1 billion to build its armed forces. From 1939 to 1941, when the Japanese attack Pearl Harbor, U.S. manufacturing will have shot up a phenomenal 50 percent!

The Depression is ending worldwide as nations prepare for the coming hostilities.

Roosevelt began relatively modest deficit spending that arrested the slide of the economy and resulted in some astonishing growth numbers. (Roosevelt’s average growth of 5.2 percent during the Great Depression is even higher than Reagan’s 3.7 percent growth during his so-called ‘Seven Fat Years!’) When 1936 saw a phenomenal record of 14 percent growth, Roosevelt eased back on the deficit spending, worried about balancing the budget. But this only caused the economy to slip back into a recession in 1938.

World War II starts with Hitler’s invasion of Poland.

1945
Although the war is the largest tragedy in human history, the United States emerges as the world’s only economic superpower. Deficit spending has resulted in a national debt 123 percent the size of the GDP. By contrast, in 1994, the $4.7 trillion national debt will be only 70 percent of the GDP!

The top tax rate is 91 percent. It will stay at least 88 percent until 1963, when it is lowered to 70 percent. During this time, America will experience the greatest economic boom it had ever known until that time.

Credit: The above timeline has been complied by Steve Kangas from the Resurgence Magazine.

Now you have an inkling of history – when reading this I was astounded as to the stupidity of the politicians throughout the crisis.

Then again history always repeats – politicians are not economists – in the main they are lawyers who do not think outside of the box – they are just concerned about their next term in Government.

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