Here's something else that I've been watching and these videos are short, and pretty good. When we purchase all of our products from China, they get a huge influx of cash, US Dollars. Well, they have to trade their Yuan for our Dollars anyhow. Now, the entire world has been buying Chinese products for years. Normally, the Chinese currency would appreciate in this scenario versus all other currencies (i.e. they would be able to purchase more with their Yuan vs. our Dollar, Euro, etc as the Yuan would become stronger). But a strange thing has happened, they decide to print more Yuan to maintain an equal exchange rate (mostly due to pressure from the buying countries as they don't want to spend more to purchase the items). When they do this, they are printing money to give out, as loans, government programs, whatever they want really.
What would you think they would use all of this new money for, the same things we used the money for from 2001-2007, building new houses of course. I mean, real estate is the ever appreciating asset right? Yes and no. It depends on what causes the appreciation.
In China, it's inflation from a stronger currency being purposely weakened to maintain a target exchange rate.
Well, this is the kind of thing that happens when you have too much supply and not enough demand, but people choose to build anyway, it's nearly free money. Then this happens, just like in the U.S. housing prices start to plummet, and quickly.
But here's the interesting thing. Most countries and governments use GDP (Gross Domestic Product) as their measuring stick of economic activity. Well, cheap or free money gets converted into loans to build, build and build some more. Always increasing the GDP of China with these new construction projects and jobs, jobs and more jobs. But if there's nobody there to purchase these at the inflated prices, prices have to go down drastically until there is buyers. If there isn't buyers, it stays as a ghost town, all of the loans and capital used to build the towns and housing goes to waste. This is what is called Economic Prosperity by the government and on the news. Many economists may even talk about how great China is and all of it's glory of state planning and the communist system. But none of that matters. If a government is going to give away cheap and/or free money by printing it, whether it's the U.S., China, England, Germany, where ever, you will see "investments" in bubbles like these homes in China, Dot Com companies, Education (College and higher), Sovereign Debt, anything that will get a great return, even if it's only a return long enough to make a quick buck and leave someone else holding the bag. All the while the news is that the country is growing, we're doing great and just like the guy in the video thinks, prosperity will never end.
These are the dangers of inflation. These are the dangers of government intervention in the marketplace. And you absolutely don't want to be holding the bag when the bubble disappears. This kind of prosperity does end. It ends terribly because it shouldn't have started in the first place (i.e. there is no demand for it). The result is "bad deflation" or monetary deflation. It's as unnecessary as these Chinese Ghost Towns.
No comments:
Post a Comment