Nobody ever accused Chanticleer of being the sharpest tool in the shed.
But there is a difference between dull and outright stupid:
Money is pouring into China’s bond market, sending prices surging and yields falling (prices and yields move in opposite directions) as investors seek alternatives to the nation’s broken property market and volatile equity market. Yields on longer-dated 20-year and 30-year bonds are also hovering around record lows.
In an economy spluttering as much as China’s, lower borrowing costs would generally be welcomed. But the moves are worrying Chinese regulators, who have issued a string of warnings in the past four months about what they concede is a bubble. The government has even done something unprecedented: borrowing bonds to sell them, in a bid to push down prices.
Who cares what Chinese regulators think? They don’t have a clue.
Multiple economies have been through similar housing bubble and bust scenarios and we know what it takes to get them out of it.
You have two choices:
- beautiful deleveraging vis-a-vis US in which ZIRP accelerates deleveraging while protecting output, or
- ugly deleveraging vis-a-vis Japan in which deleveraging is delayed and output stalls more or less forever.
The former took roughly five years to turn around its debt deflation. The latter took thirty years.
The “depression economics” of debt deflation are not the same as regular economics, as Paul Krugman so eloquently put it about Japan in 1998:
The purpose of this paper is to show that the liquidity trap is a real issue – that in a model that dots its microeconomic i’s and crosses its intertemporal t’s something that is very much like the Hicksian liquidity trap can indeed arise. Moreover, the conditions under which that trap emerges correspond, in at least a rough way, to some features of the real Japanese economy. To preview the conclusions briefly: in a country with poor long-run growth prospects – for example, because of unfavorable demographic trends – the short-term real interest rate that would be needed to match saving and investment may well be negative; since nominal interest rates cannot be negative, the country therefore “needs” expected inflation. If prices were perfectly flexible, the economy would get the inflation it needs, regardless of monetary policy – if necessary by deflating now so that prices can rise in the future. But if current prices are not downwardly flexible, and the public expects price stability in the long run, the economy cannot get the expected inflation it needs; and in that situation the economy finds itself in a slump against which short-run monetary expansion, no matter how large, is ineffective.
If this stylized analysis bears any resemblance to the real problem facing Japan, the policy implications are radical. Structural reforms that raise the long-run growth rate (or relax non-price credit constraints) might alleviate the problem; so might deficit financed government spending. But the simplest way out of the slump is to give the economy the inflationary expectations it needs. This means that the central bank must make a credible commitment to engage in what would in other contexts be regarded as irresponsible monetary policy – that is, convince the private sector that it will not reverse its current monetary expansion when prices begin to rise!
The issue at hand is that Chinese real interest rates are making the debt burden more, not less onerous.
China and the grovelling AFR worrying about a bond bubble today is like Winston Churchill projecting himself through time to worry about the US becoming fascist.
China not only needs to let the ten-year bond yield collapse, it needs to embark on epic quantitative easing and to let CNY puke:
Sure, this will trigger protectionism elsewhere but that is coming anyway.
Not doing so will send China down the path of the endless Japanese bust, which I am quite happy with, but the AFR and its vested interest cronies should not be.
The paper is so dumb that it can’t even look after its billionaire interests.
