Brilliant article from 2004 about the future of the Chinese economy

Discussion in 'Economics' started by Debaser82, Mar 13, 2009.


    by Krassimir Petrov, Ph.D.
    September 2, 2004

    (Some extrats, read the link for full story.)

    Having recently completed Rothbard’s “America’s Great Depression”, I couldn’t help draw the parallels between America’s roaring 20’s and China’s roaring economy today, and I couldn’t help conclude that China will inevitably fall in a depression just like America did during the 1930s. The objective of this article is to present an Austrian argument as to why this must happen; to substantiate my arguments, I will be quoting Rothbard’s Fifth Edition where relevant.

    The cause of the Depression, as Rothbard explains, was a credit expansion that fuelled the boom. According to Rothbard, “[o]ver the entire period of the boom, we find that the money supply increased by $28.0 billion, a 61.8 percent increase over the eight year period [of 1921-1929]. This was an average annual increase of 7.7 percent, a very sizable degree of inflation (p.93)…The entire monetary expansion took place in money substitutes, which are products of credit creation… The prime factor in generating the inflation of the 1920s was the increase in total bank reserves” (p.102). In other words, during the 1920s, the United States experienced an inflationary credit boom. This was most evident in the booming stock and the booming real estate markets. Furthermore, there was a “spectacular boom in foreign bonds… It was a direct reflection of American credit expansion, and particularly of the low interest rates generated by that expansion” (p.130). To stem the boom, the Fed attempted in vain to use moral suasion on the markets and restrain credit expansion only for “legitimate business. Importantly, consumer “prices generally remained stable and even fell slightly over the period” (p. 86). No doubt the stable consumer prices contributed to the overall sense of economic stability, and the majority of professional economists then did not realize that the economy was not fundamentally sound. To them the bust came as a surprise.

    Today, in a similar fashion, the seeds of Depression are sown in China. Economists hail the growth of China, many not realizing that China is undergoing an inflationary credit boom that dwarfs that American one during the roaring ‘20s. According to official government statistics, 2002 Chinese GDP growth was 8%, and 2003 growth was 8.5%, and some analysts believe these numbers to be conservative. According to the People’s Bank of China own web site (, “Money & Quasi Money Supply” for 2001/01 was 11.89 trillion, for 2002/01 was 15.96 trillion, for 2003/01 was 19.05 trillion, and for 2004/01 was 22.51 trillion yuan. In other words, money supply for 2001, 2002, and 2003 grew respectively 34.2%, 19.3%, and 18.1%. Thus, during the last three years, money supply in China grew approximately three times faster than money supply in the U.S. during the 1920s.

    Therefore, it is clear that China travels today the road to Depression.
    How severe this depression will be, will critically depend on two developments. First, how much longer the Chinese government will pursue the inflationary policy, and second how doggedly it will fight the bust. The longer it expands and the more its fights the bust, the more likely it is that the Chinese Depression will turn into a Great Depression.
    Also, it is important to realize that just like America’s Great Depression in the 1930s triggered a worldwide Depression, similarly a Chinese Depression will trigger a bust in the U.S., and therefore a recession in the rest of the world.

    Unless there is an unforeseen banking, currency, or a derivative crisis spreading throughout the world, it is my belief that the Chinese bust will occur sometime in 2008-2009, since the Chinese government will surely pursue expansionary policies until the 2008 Summer Olympic Games in China. By then, inflation will be most likely out of control, probably already in runaway mode, and the government will have no choice but to slam the brakes and induce contraction. In 1929 the expansion stopped in July, the stock market broke in October, and the economy collapsed in early 1930. Thus, providing for a latency period of approximately half a year between credit contraction and economic collapse, based on my Olympic Games timing, I would pinpoint the bust for 2009. Admittedly, this is a pure speculation on my part; naturally, the bust could occur sooner or later.

    Pretty acurate right?

    I heard on the news today China was preparing for as many new "stimulus" programs as needed.

    I remember reading this article some time ago and I tought it put it up here to hear peoples toughts about it.

    He really nailed it even back then in 2004 didnt he?

  2. Wow. That can't be luck, given the specifics he speaks of.

    Outstanding. Thanks for posting that.
  3. Illum


    Krassimir Petrov, Ph.D

    Great article, will read him more for sure.
  4. Good read, thanks for posting!
  5. morganist

    morganist Guest

    i have suspected this for a while china is rich from manufacturing and selling to america so when demand falls from america it is inevitable. people went on in the late nineties that china would be the next super power but i knew or know it would not or will not. my money is on russia it has natural resources, nuclear power, military power, manufacturing capabilities, a subdued population, lots of rich people who can fund businesses in the free market.

    what do you think?

    also the chinese economy had deep problems with its rural areas. the workers left to go to the cities so now the jobs in manufacturing have been declining the workers are moving back to the rural areas where the living standards and political situation is constrained. if the economy gets worse it will any thought of democracy and a free market will go out of the window.
  6. The problem China had for a long time is that it had a lot of unproductive resources: people. Money in the form of credit allows these previously unproductive people to be productive. As long as the money is helping to make these people more productive than they previously were, it is a net gain for China. The real question that will test the wisdom of the setup is whether the jobs that Chinese are now involved in are really "productive" or is the productivity an illusion.

    So many people here focus on money but miss the point that the fundamental source of wealth are the goods and services produced by people.

    That's why half the arguments of the Austrian School offered here are specious. It treats money as an end and not the means. Increasing the amount of food ingested is unhealthy if all your dietary needs are met but is called for if you are famished and undernourished. Austrian thinking is fixated on the overeating aspect.