Juggling Dynamite

Time-worn lesson for the history books: trillions in ‘free’ money (courtesy of debt) is a recipe for epic waste and mal-investment. A new Chinese study confirms our assessment of what has been going on in China and the global economy for the past several years. It also helps explain why commodity prices are now mean reverting, and global growth is slumping amid staggering debt and stockpiles of everything. See: China has ‘wasted’ 6.8 trillion in investment, warns Bejing researchers.

It’s long past time to take the keys off ‘add debt and stir’ central planners. They are dangerous to say the least.

“Ghost cities” lined with empty apartment blocks, abandoned highways and mothballed steel mills sprawl across China’s landscape – the outcome of government stimulus measures and hyperactive construction that have generated $6.8 trillion in wasted investment since 2009, according to a report by government researchers.

In 2009 and 2013 alone, “ineffective investment” came to nearly half the total invested in the Chinese economy in those years, according to research by Xu Ce of the National Development and Reform Commission, the state planning agency, and Wang Yuan from the Academy of Macroeconomic Research, a former arm of the NDRC.

China is this year on track to grow at its slowest annual pace since 1990, and the report highlights growing concern in the Chinese leadership about the potential economic and social consequences if wasteful investment leaves projects abandoned and bad loans overloading the financial system.”

Danielle was a guest today on Talk Digital Network with Jim Goddard, talking about recent developments in the world economy and markets.  You can listen to an audio clip of the segment here.

Oil futures are back at a 4-year low this morning, as the many cash-strapped OPEC members opted to keep gushing supply into swamped reserves.  Oil shocks are highly disruptive to global capital flows, and the rapid decline since June is reminiscent of the 2007 plunge before the 2008 recession.

Oil producing countries have enjoyed a 15 year boom in prices off the $10.79 lows in 1999, with a full decade above $40 a barrel. The cash flow has been epic to say the least. But financial discipline does not follow from periods of lush cash flow and rather than prepare for the inevitable slow down, the past decade has been one of the greatest periods of waste and mal-investment ever in human history.   This has left the majority under-saved, highly indebted and utterly unprepared for the reality of mean reverting oil prices.  Venezuela and Russian prospects look more impossible by the hour.  The Russian ruble has plunged more than 45% against the greenback in just 6 months.  Currency and credit crisis loom likely.

It also means more deflation in the global economy, a force that central banks have been ineptly trying to counter with wave after wave of ‘stimulus’.  Falling oil now adds its weight to the other deflationary forces of excess supply, toxic debts and aging demographics. Free market forces are once more exerting their power, much to the surprise of all those so foolishly enamored of central planners.

A world with less cash and less access to credit, needs lower asset prices to restore equilibrium.  This process is an essential part of re-balancing the global economy.  It will also be incredibly destabilizing for those trying to ignore it.