[Ghost City of Kunming, China]
Here and there you may see arguments that China will be dissuaded from invading Taiwan because of Putin’s mire in Ukraine. History provides a counter argument. The Meiji Restoration of 1868 brought the era of feudal shogunates of Japan to an end and ushered in the rise of commerce and the imperial state. But the Law of Diminishing Marginal Returns inexorably takes hold, and by 1941, Japan’s autocrats knew that they would need to take wealth from other lands to continue prospering.
Throughout history, all empires have reached a zenith in productivity necessitating conquering other lands to jumpstart the economy. The question is: Has China reached its zenith?
In 1978, Deng Xiaoping had a dream: China can have capitalism without giving up power. But under capitalism, you must give something of value to get something of value. So, the Chinese needed to build factories to produce export goods and housing for the workers. The Production Function has three variables: capital, labor, and technology. China needed to attract labor, so the government gave apartments to anyone who would leave the farm and come to a city to work in a factory. This policy continued until 1998. In 1990, one-third of Chinese lived in cities; today, more Chinese live in cities than in the countryside.
In 1997, Evergrande joined hundreds of other property developers to build apartments for the millions of migrants to the cities. Evergrande was the most successful at getting the cheap credit that was sloshing about, but Evergrande “now stands on the brink of collapse” (see documentary from the Financial Times). From Evergrande’s beginning to now, Chinese developers have built enough “ghost cities” to house 90 million people. Has productivity reached its zenith?
It takes about 15 years to buy an apartment in London; 50 years in Beijing. By August 2020, Beijing introduced the Three Red Lines, limiting the rampant leveraging that had been taking place for the last two decades. The vast majority of developers could not meet the Three Red Lines. Besides, banks were instructed to slow down lending.
Following the Sub-Prime Mortgage Crash (Oct. 2007 to Mar. 2009), the CCP took steps to shut down excessive leverage.
Wealth creation under capitalism takes place in the private sector, only. Wealth is created as soon as someone creates something of value to be exchanged for something of value. And the value of both creations is set at the moment of exchange (in a monetary economy, at the moment of purchase). Under the Deng Xiaoping Model, there is never an evaluation as all of the activity and leveraging is designed to keep money flowing, without regard to establishing the worth of anything.
In September 2021, Evergrande, et al., missed payments on “wealth management” products, where ordinary people were keeping their savings. Riots ensued. Chinese banks withheld credit. Worst of all, offshore bondholders reversed course, not wanting to lend even at “junk” rates. The belief among lenders had been that China “would never let its construction sector fail”. But it never was up to the CCP. If you are not a capitalist, you cannot create wealth (because the value of the wealth is never established). All the CCP has ever been is reactive. Capitalists are proactive.
Evergrande has borrowed $300bn—2% of China’s GDP. Evergrande is expected to fail in some way, but the damage has already been done, as many companies are now in financial difficulty. And investors “from BlackRock to Goldman Sachs to HSBC” invested billions of dollars in Evergrande, so they will take a hit.
The question is: Does the leadership in Beijing believe it has reached a point at which productivity has peaked?
Analogues
“For decades the property sector has essentially anchored China’s economy” [Financial Times, 1:25]. Here is the money-flow model. Real estate developers buy land from local governments. In turn, local governments use that money to run their cities. The real estate developers build apartments on the land, but they sell the apartments before the apartments are even built. Thus, homebuyers need to make payments in advance of seeing what they are buying. Evergrande uses this money as advance payment on projects on the drawing board, stalling the projects for which the money was intended. Charles Ponzi would be proud.
Have you noticed that the Federal Government always needs more money? The only source of wealth is the private sector. No matter how many “projects on the drawing board” are presented to taxpayers, there seems never to be enough. To the rescue comes Modern Monetary Theory.
MMT offers a novel theoretical justification for permanent deficit financing—the state controls money as the unit of account and so there is no limit on government spending and rising public debt is nothin to worry about. [1]
Now, all the Progressives need do is address a crisis—the Great Depression, COVID, “Climate Change”—and MMT can do the rest. Ponzi would be busting his buttons.
The light at the end of the tunnel is…
The only way out of our $30trn-and-counting debt is to stop spending. The Constitution has given us the answer, if only we have the will to take it.
All Bills for raising Revenue shall originate in the House of Representatives…
—U.S. Constitution, Article I, section 7, clause 1
No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law…
—U.S. Constitution, Article I, section 9, clause 7
[1] Roberts, M. “Modern Monetary Theory: A Marxist Critique.” Class, Race and Corporate Power 7, no. 1 (2019).