The Great Malinvestment in China (and America), and the pleasure and pain of monetary tequila

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Cheap money feels good initially. Nearly everyone is happy when central banks open the floodgates (or helicopter doors) and cash spills into the economy. Hooray! Money! Why is it here now instead of yesterday? Who knows? Get while the getting’s good. Look, the stock market’s rising – whoopee! Monetary tequila. Bottoms up!

But the morning, the aching, head thumping morning always comes after such a binge.

“All I know is Ben Bernanke was tending bar. Goldman Sachs was buying me drinks. Everyone was having a great time. (Except those teetotalers the Austrian economists sitting in the back. They’re never any fun.) But everything after that is hazy. Where am I?”

“Son, you’re smack dab in the middle of an economic depression.”

“Oh man, really? Who are you?”

“I’m the Austrian economist who was sitting in the back of the bar. Get your hat. I’ll drive you home Mr. Keynes.”

“No, no. What I need – what we all need is more tequila.

“Suit yourself.” Said the Austrian economist as he walked out level headed and sober into the blinding summer sun.

(From The National Review)

I know myself well enough to predict that I’d do some jackass things with that $1 billion. And China has financed some jackass adventures, too. The ghost cities are the most famous, but Beijing has also underwritten the construction of a great many factories that don’t produce economically viable goods and has used cheap credit to prop up enterprises and industrial sectors that are not genuinely productive or competitive. The thinking here will be familiar to those of you who have followed the various stimulus-package debates in Washington over the years: Sure, that cheap money may be contributing to overbuilding, but it creates a lot of jobs in construction, and it jacks up demand throughout the economy by increasing the domestic appetite for steel, cement, construction supplies, machinery, etc. The guy at the cement factory gets a raise, his family gets more noodles or a new motorscooter, the multiplier effect kicks in and presto-change-o, you’ve made yourself wealthier by throwing money away. Which in fact works pretty well, until it doesn’t. Eventually the Chinese government, despite all its tanks and brutality and nuclear weapons and gulags, must bow before Stein’s Law: “If something cannot go on forever, it will stop.”

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