For another, defining inflation as the rise in prices instead of the rise of the money supply hides the effects of what I’d call true inflation.

Agreed. I recently was involved in a heated discussion over at Fabius Maximus’ blog, making exactly the same point. An increase in prices is not inflationary if it reflects real increased costs.

“Certainly the excess of wealth in the current global system is a good problem to have! From historic high savings rates throughout Asia, to the federal reserve’s ability to combine low inflation with low interest rates, this is an economic environment we need to adjust to.”

High savings rates abroad and additional wealth creation / freer trade / freer markets are definitely pluses.

I don’t think the Federal Reserve has created low inflation – for one thing, measures of inflation are severely under-reported in comparison to the methods used by our own gov’t 20-30 years ago (see shadowstats.com).

For another, much of that inflation has been exported to other countries in the form of US dollar denominated debt – $5 trillion or so of which is floating around outside of the US.

When that paper is traded for real goods (which will happen just as soon as enough people realize that the US is choosing inflation as the solution to problems created by inflation and that it won’t work), prices will rise in dollars.

For another, defining inflation as the rise in prices instead of the rise of the money supply hides the effects of what I’d call true inflation. During the roaring 20s we also had almost zero price inflation, but it concealed a large monetary inflation (reflected largely in the stock and housing markets). That same monetary inflation is what caused the malinvestment which brought about the onset of the Great Depression (as _America’s Great Depression_ shows, it was much greater government intervention in all kinds of markets that deepened and prolonged the downturn, first under Hoover and then Roosevelt)

We have very different narratives of what is happening in the world today playing in our heads – you think that the Federal Reserve has within its power to create low interest rates combined with low inflation. I think that it is these same low interest rates that mask the underlying monetary inflation and setoff malinvestment on a large scale that must be corrected through recessions – and that we would be much better off without a central bank.

All I can say is that I used to think in the same terms as you did, but a bunch of reading changed my mind entirely – especially a book called Money, Bank Credit, and Economic Cyles by Jesus Huerta de Soto translated in 2006 – which is the most comprehensive work on Austrian business cycle theory and other monetary theories (in general and throughout thousands of years of history) I know of. I’d highly recommend it – you have nothing to lose by reading it and considering its arguments, except time.

I’m open to any suggestions as well – although I long ago read MF’s A Monetary History of The United States (I’m assuming many of your views are close to those of the Chicago schools from your blog & comments).

Thank you for your comment.

You’re not addressing America’s massive corruption, in plain sight with the $800+ billion bailout and $1 trillion in liquidity and smaller bailouts the Federal Reserve has provided over the past year.

The only reason the financial sector has not been destroyed in America is because of the massive government (and semi-private central bank) intervention taking place before our eyes.

Indeed, the Bush-Pelosi bail-out threatened to be a give-away to bankers, though it appears that our use of a the Swedish-British model may help prevent this.

It is notable that the degree of US interference in the financial markets (as both a regulator and a competitor across large swaths of the market) , during a once-in-a-century crisis, is comparable to how China’s financial market works on a daily basis.

So I’d say you’ve got you’re statement backwards – China saved their banking system by not allowing such lax lending standards and America destroyed theirs by allowing them. That’s not quite accurate in my mind (it wasn’t the elimination that is doing the financial sector in so much as the massive credit expansion by the Federal Reserve over the past 15 years), but is a good counter point.

Certainly the excess of wealth in the current global system is a good problem to have! From historic high savings rates throughout Asia, to the federal reserve’s ability to combine low inflation with low interest rates, this is an economic environment we need to adjust to.

That said, saying that China’s non-existant mortage market is a better model for mortage markets would be like, say, praising the podered milk industry in Zambia for avoiding the sort of problems China’s powdered milk industry has. Of course, the comparison is nonsensical: Zambia is too industrially underdeveloped to have the ability to meaningfully adjust their powdered milk factories, as China is too financially underdeveloped to have the ability meaningfully to adjust their mortage markets.

I was wrong about there being much credit available for Chinese borrowers who wanted to buy homes – the reason I wrote this response is to link to this article at the China Vortex which claims that even without the extension of lots of credit for home mortgages, China has a higher rate of homeownership:

http://www.chinavortex.com/2008/10/understanding-global-financial-crisis/

You’d have to ask him where he got this information about homeownership levels in China, though.

Vortex’s claim is absurd, as China’s large peasant population do not own their own homes or land: they essentially live in ‘company housing.’ This is changing, and is part of China’s historic process of liberalization. Still, Vortex’s statement is nonsensical.

[1] http://www.nytimes.com/2008/10/11/world/asia/11china.html?ref=world

You’re not addressing America’s massive corruption, in plain sight with the $800+ billion bailout and $1 trillion in liquidity and smaller bailouts the Federal Reserve has provided over the past year.

The only reason the financial sector has not been destroyed in America is because of the massive government (and semi-private central bank) intervention taking place before our eyes.

So I’d say you’ve got you’re statement backwards – China saved their banking system by not allowing such lax lending standards and America destroyed theirs by allowing them. That’s not quite accurate in my mind (it wasn’t the elimination that is doing the financial sector in so much as the massive credit expansion by the Federal Reserve over the past 15 years), but is a good counter point.

I was wrong about there being much credit available for Chinese borrowers who wanted to buy homes – the reason I wrote this response is to link to this article at the China Vortex which claims that even without the extension of lots of credit for home mortgages, China has a higher rate of homeownership:

http://www.chinavortex.com/2008/10/understanding-global-financial-crisis/

You’d have to ask him where he got this information about homeownership levels in China, though.

Thanks for your comment.

I don’t endorse China’s control of the banking sector or determining what percentage should be made as a downpayment. However, when a central bank allows a massive expansion of credit (the cause of the US housing bubble, and China’s stock and housing bubbles), it is better to have regulation than not, in this case escalating mortgage requirements.

You’re lumping what amounts to the destruction fo the mortgage industry in China (removing most risk, by allowing only those who collateral in the investment is at least equal to the amount they are borrowing) to regulations, as they generally occur in developed countries. I don’t know if this is a good move for China or nto — the country has a primitive and barely functioning personal savings sector, so it may be wise.

Your assertion that China’s mortgage system is non-existant has no basis in reality, at least from my experience. Anyone with a downpayment and a decent paying job can apply for a mortgage in China. And before the bubble downpayments were low – 10%. That can hardly be called a non-existant mortgage system.

You say it exists, and then assert that it used to exist. This is hardly a defense.

One might as well imagine a country that bans loans in excess of the savings someone puts in a bank, and then argue that such a country has a functioning personal credit industry.

Your point on government collusion in the running of financial institutiosn is important. It overlooks the financial firewalls that China have built up to prevent its financial sector from having to face discipline from the world financial market. Again, such coddling may be wise in a country with a developing and primitive structure based on low-wage labor and low-quality manufacturing.

The recent credit bubble in US home values is definitely something to deal with. The US is fortunate that it does not have to destroy a sector of its financial sector to deal with such a bubble, as China had to. The creative destruction such bubbles creates is an important method for modernizing an economy, at least in countries that can handle the flow.

You didn’t address either China’s massive corruption or the strange phenomenon of regulators who are competitors in the marketplace.

I don’t endorse China’s control of the banking sector or determining what percentage should be made as a downpayment. However, when a central bank allows a massive expansion of credit (the cause of the US housing bubble, and China’s stock and housing bubbles), it is better to have regulation than not, in this case escalating mortgage requirements.

Your assertion that China’s mortgage system is non-existant has no basis in reality, at least from my experience. Anyone with a downpayment and a decent paying job can apply for a mortgage in China. And before the bubble downpayments were low – 10%. That can hardly be called a non-existant mortgage system.

Yes, China’s banks are controlled by the government – but now the difference between the two systems (referring only to mortgages here) has become nonexistant – Fannie & Freddie originated 80% of mortgages in 2007, now they are being nationalized, and after they pursued policies that will result in massive losses to taxpayers (either through taxes or inflation). You could argue that such a system is worse than China’s, as the ‘gains’ were privatized and now the losses are being nationalized.

If you mean that there is no mortgage securitization process in China, you’re probably right (I don’t know) – but given the experience in America, it seems that it’s better for those that create the mortgages be directly responsible for any profits or losses they incur.

Again, the US is suffering the consequences of a massive credit bubble – the only reason that housing problems have been much more serious among lower income housing thus far is because of the type of mortgages said housing was bought with (Subprime), resets of which are peaking now. The problems will be just as severe across all income levels as Alt-A mortgages (toxic mortgages taken by people with higher incomes and higher credit scores) begin to reset en masse from 2009-2012. (see this chart, though I don’t agree that the Fed’s actions ‘reduced’ subprime problems, they merely passed them from the financial sector to everyone)

You’re absolutely right that your linked lending programs only aggravated the bubble, I just want to point out that the problems are far from concentrated in borrowers who took out subprime mortgages.

Thank you for your comment.

While China’s rise to a relatively transparent society is impressive (a bit above Georgia, a bit below Ghana), it still suffers compared to more developed American, European, and Asian nations [1]. Reporting of the often theoretical difference between organized crime and industrial tycoons, not to between mention regulators and competitors, are well established. [2]

Your point on Chinese mortgages is important. While the US is currently suffering the consequences of attempting to extend historic home ownership rates [3], China’s mortgage system is basically non-existent. That is, the worst possible outcomes that could theoretically strike the US mortage system is the status quo in China.

Your construction of the Milton Friedman sentence is odd. Your point seems to be defend what passes for welfare policies in China against a nonexistent strawman of radical libertarianism. This seems both clumsy and pointless.

[1] http://www.transparency.org/policy_research/surveys_indices/cpi/2007
[2] http://www.amazon.com/One-Billion-Customers-Lessons-Business/dp/0743258398
[3] http://www.takimag.com/site/article/the_diversity_recession_or_how_affirmative_action_helped_cause_the_housing/

The level of corruption / guanxi / police power & independent courts varies tremendously depending on where in China you are talking about – the areas leading the country in growth are much less corrupt, guanxi driven, and have fairer courts than elsewhere.

I’d be careful claiming that the US economy is structurally superior to China’s economy as the results of 30 years of credit expansion / increasing debt show its true color.

The major factors driving the unravelling of the US economy – insane mortgages and banking practices and government bailing out of huge financial insititutions, did not exist and does not exist (though the banking system is still mostly nationalized, China’s central bank has not had to pump tons of money into the system as far as I can tell) – as the housing market went up here, the downpayment requirement went up to 50% and lending was curtailed before a downturn had set in.

If you think these are temporary problems that will soon pass, you may be unaware of the Alt-A resets from ‘09-’12 (a problem bigger in scope than Subprime, resets of which are just now peaking) or how serious the consequences will be for bailing out Fannie & Freddie (and to a much lesser extent Bear Stearns and now AIG, with more financial institutions to likely follow given the extent of unrealized and unaccounted for future losses sitting on the books of almost every major US financial insitution)

Hi Mark – Milton Friedman would agree about the oil subsidies and food subsidies, but he is no libertarian laissez faire economist, not when he believes in quasi-government control and manipulation of money through the Federal Reserve.

Personally I see the US as moving toward fascism and China slowly moving away from it, but that’s just the view here. Not sure when they will cross paths.

I don’t call the government of China communist because they subsidize gasoline but because 1) they call themselves communists 2) the current government traces its origins back to the communists party that originated early in the 20th century, fought the KMT, made the long march, won control of China in 1949 3) they encourage their school children to sing songs like “Mei you Gongchangdang, mei you xin Zhongguo”. If you prefer, you can refer to the Chinese government as fascist, since I think that is a better description of their current policies, but I was being polite in referring to the Chinese by the name they prefer.

If it were up to the Chinese people, they would probably spend most of the dollar reserves and buy consumer goods for themselves. However in communist and fascist countries, those decisions are made by an elite who are unaccountable to the Chinese people, although they apparently wish to avoid any more unpleasantness like the Tienanmen Square demonstrations of 1989. The people in charge of China are not interested in democracy but on maintaining their own positions and (in the best traditions of the Confucian mandrins) giving the Chinese people what they need rather than what they want.

Why is there speculation over the method and timing of the Freddy and Fanny takeover? Why did Andrew Sullivan keep speculating that Bristol Palin was the actual mother of four month old Trig Palin even after it was revealed that Bristol Palin was five months pregnant? Writers under deadline pressure have to write something. What they write doesn’t have to be true.

You, Henry Hazlitt and Milton Friedman might agree that it is not in the interest of China’s people to subsidize oil and food products but the people running China do not seem to agree. Although they are no longer devoted to Marxist or Maoist economics, they are not quite ready for libertarian laissez faire economics either.

I think all those who love China hope that the Central Committee does not look at reality with the same rose-colored glasses. Real problems deserve real solutions — not baseless comparison to a structurally different (and superior) economy.

[1] http://www.thechinaexpat.com/is-china-freer-than-america/