CHINA'S GREAT DEPRESSION by Krassimir Petrov, Ph.D. September 2, 2004 (Some extrats, read the link for full story.) http://www.financialsense.com/editorials/petrov/2004/0902.html Having recently completed Rothbardâs âAmericaâs Great Depressionâ, I couldnât help draw the parallels between Americaâs roaring 20âs and Chinaâs roaring economy today, and I couldnât 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 Rothbardâs Fifth Edition where relevant. The cause of the Depression, as Rothbard explains, was a credit expansion that fuelled the boom. According to Rothbard, â[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)â¦The entire monetary expansion took place in money substitutes, which are products of credit creationâ¦ The prime factor in generating the inflation of the 1920s was the increase in total bank reservesâ (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 âspectacular boom in foreign bondsâ¦ It was a direct reflection of American credit expansion, and particularly of the low interest rates generated by that expansionâ (p.130). To stem the boom, the Fed attempted in vain to use moral suasion on the markets and restrain credit expansion only for âlegitimate business. Importantly, consumer âprices generally remained stable and even fell slightly over the periodâ (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 â20s. 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 Peopleâs Bank of China own web site (http://www.pbc.gov.cn/english/baogaoyutongjishuju/), âMoney & Quasi Money Supplyâ 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 Americaâs 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? Cheers.