China Bubble: No Money Down Housing Proliferates, Echoes US Subprime Loans

In desperation to sell an oversupply of properties, Chinese developers have evaded regulations to offer "no money down" housing loans which the Bloomberg associates with the risks of US subprime loans

China’s home buyers are being offered no-money-down purchases in an echo of the subprime lending that triggered a U.S. economic meltdown and the global financial crisis.

Deals skirting government requirements for minimum 30 percent down payments have emerged this year from Guangzhou and Shenzhen in the south to Beijing in the north as real-estate sales slump, according to state media and statements by government agencies and developers.

Loosening down-payment requirements could erode China’s financial stability by adding to risks for property companies, lenders and an economy already heading for the weakest growth in 24 years. Government warnings to consumers indicate that officials will strive to limit such arrangements, a sign of stress in a property market with a glut of homes.

Well, this has not just been an exclusive Chinese affair, Sovereign Man’s Simon Black points to the same financially destabilizing risks of NO money loans down in the Philippines.

Going back to China, the earlier stimulus of “additional spending on railways, upgraded housing for low-income households and tax relief for struggling small businesses” plus the central bank, the PBOC’s calls for “nation’s biggest lenders to accelerate the granting of mortgages” or the political way to solve debt problems with even more debt, appears to have delayed an economic meltdown as banking loans and money supply growth recovered in May.

From another Bloomberg article: (bold mine)

Local-currency loans were 870.8 billion yuan ($140 billion), the People’s Bank of China said on its website yesterday, higher than 42 out of 43 analyst estimates in a Bloomberg News survey. M2, the broadest measure of money supply, rose 13.4 percent, compared with a median projection for 13.1 percent…

Aggregate financing, China’s broadest measure of new credit was 1.4 trillion yuan in May, matching the median analyst estimate in a Bloomberg News survey. The figure, which includes bank lending, corporate bond issuance and shadow-banking products like entrusted loans, compared with 1.55 trillion yuan in April and 1.19 trillion yuan in May last year. 

New yuan loans accounted for 62.2 percent of aggregate financing in May, up from 50 percent in April and 56.1 percent a year earlier, central bank data show.

Chart of China’s M2 and New Loans can be seen here.

Despite the rhetoric to control the shadow banks, the Chinese government continues to flush the system with liquidity. In mid-May, the PBoC injected 44 billion yuan ($7.1 billion). Yesterday the central bank added 104 billion to the interbank system for the 5th consecutive net weekly injection. This is a sign of how worried authorities are with the financial-economic system

While favoring the formal banking system, growth in May loans reveals that credit activities in shadow banks continue to swell.

So obviously all these measures have been meant to buy time. 

Today, Chinese equity markets as represented by the Shanghai Composite Index had been jubilant—as they have been up by about 1% (specifically .93%) on reported economic improvements.

From Bloomberg:

China’s industrial output rose 8.8 percent in May from a year earlier and retail sales gained 12.5 percent, the National Bureau of Statistics said on its website today.

Fixed-asset investment excluding rural households increased 17.2 percent in the first five months of the year, the Beijing-based agency said.

What you see depends on where you stand.

Fixed Asset investment has still been declining but yielded better than expected ‘forecast’

Industrial Production remains stagnant 

It's only retail sales that has shown slight improvement

Except for retail sales which looks like a dead cat’s bounce, both industrial production and fixed investment hardly points to a ‘recovery’. Recovery has been more a wishful thinking.

Nonetheless, in today’s credit addicted world, governments aim to keep the unsustainable party going by spiking the punch bowl with even more toxic credit, China's political response has been no exception.

Watch Out, Surging Oil Prices will COMPOUND on Inflation Risks!

Low-flation eh?

From Reuters:

Oil prices jumped to nine-month highs on Thursday, as concerns mounted that escalating violence in Iraq could disrupt oil supplies from the second-largest OPEC producer.

Sunni Islamist militants, who took over Iraq's second-biggest city Mosul earlier this week, extended their advance south toward Baghdad and surrounded the country's largest refinery in the northern town of Baiji on Thursday.

Let us see these via charts.

The US crude benchmark the WTIC just had a breakout!

US gasoline likewise posted a seeming breakout, which will likely be confirmed or falsified during the coming sessions.

This will ADD to the growing inflation pressures in the US which will jeopardize the stock market bubble.

Even Europe's Brent Crude seems as testing a critical resistance level.

The question is will troubles in Iraq signify a temporary event or will these escalate?

The recent twist of events reveals how the US Bush-Obama war on Iraq has not only been a dramatic failure of US interventionist policies, but a blowback, as the so-called terrorists seemingly beating back the Americans at their own game.  Talk about Karma.

These also seem as the unintended consequence of the confused and self contradictory imperial policies by the US government in the region.

Paradoxically, the client state or the US sponsored Iraq government has been fighting off insurgents whom has relations with US backed rebels in Syria!

From the PBS Frontline (May 2014): The interviews are the latest evidence that after more than three years of warfare, the United States has stepped up the provision of lethal aid to the rebels. In recent months, at least five rebel units have posted videos showing their members firing U.S.-made TOW anti-tank missiles at Syrian positions…many both inside and out of government fear U.S.-provided weapons could make their way into extremist hands, particularly in a place like Syria, where alliances and foes change with breakneck fluidity. Moderate rebel groups have worked closely with the al Qaida-aligned Nusra Front and the Islamic Front, one of whose factions, Ahrar al Sham, includes al Qaida members among its founders."

Now Iraq’s rebels could be using some of the US provided weapons in their war to take control of Iraq via Baghdad. 

Al Qaida-inspired militants from ISIS, the Islamic State of Iraq and al-Sham, have reportedly seized US Black Hawk helicopters, looted 500 billion Iraqi dinars - the equivalent of $429m (£256m) - from Mosul's central bank, has now laid siege or surrounded Iraq's largest refinery in Baiji, and may have unleashed a sectarian war.

Reports the Zero Hedge: As the WSJ reports, after hard core Al Qaeda spin off ISIS (no relation to Sterling Archer) took over Saddam's home town of Tikrit yesterday, Iraq edged closer to all-out sectarian conflict on Thursday as Kurdish forces took control of a provincial capital in the oil-rich north and Sunni militants vowed to march on two cities revered by Shiite Muslims.  Kurdish militia known as peshmerga said they had taken up positions in key government installations in Kirkuk, as forces of the Shiite-dominated government of Prime Minister Nouri al-Maliki abandoned their posts and fled in fear of advancing Sunni militants, an official in the office of the provincial governor said.

Cumulative years of US interventions seem to have triggered a regional conflagration.

Yet the US government will continue to intervene as wars signifies as good business for the politically influential military industrial complex. President Obama has pledged to support the incumbent Iraq government, but did not offer ground troops.

Aside from the renewed outbreak violence in Iraq, one ramification of the US –Russia proxy civil war in Ukraine has been a test of mettle between two major military powers: The US government acknowledged that they have scrambled jet fighters to intercept 4 Russian bombers who flew nearly 50 miles off the California Coast. Wow! Russians frontally testing the US.

As geopolitical risks have been simmering, the effects of which has been to disrupt supply chains (as oil), thereby compounding on pressures to global consumer price inflation.

But for the don’t worry be happy crowd, whether in the Philippines or the US or elsewhere, various additional risks aside from inflation, such as protectionism or war should be dismissed because stocks are bound to rise forever, based on the kooky idea of "don't fight the FED" or central banks! Maybe they think that central banks can print oil too.

Mark Thornton: How Smugglers Made America

I’ve been saying here that smuggling represents “the unintended consequence of economic and financial repression that constitutes part of the informal economy”. 

And because such collation of repressive legislation “protects the financial and economic interests of the entrenched politically connected few”, smuggling signifies a pushback against these highly oppressive arbitrary policies. 

When seen from the purview of economics, smuggling benefits the the overall economy through the provision of additional supply of goods and services to the consumers, thereby increasing real purchasing power (via lower prices)

Yet not only consumers have been benefiting from smuggling; in the case of rice smuggling in the Philippines, the highly politicized rice economy that has led to massive distortions, ironically has even accounted for as “veiled subsidy to politicians in terms of prolonging their tenure through the attainment of temporary social stability”. Without smuggling there could have  already been a rice/food crisis.

Smuggling has been played a very important role in contributing to the history of wealth accumulation in the US economy. Austrian Economist and Professor Mark Thornton in a book review of Peter Andreas’ Smuggler Nation: How Illicit Trade Made America share elaborates on this.

Here is a slice: (bold mine)

Whenever I receive a book to review that is written by some hotshot ivy leaguer, I brace myself for all the deception and tomfoolery that I will have to endure. Peter Andreas’s Smuggler Nation, however, turned out to be a very pleasant surprise. Indeed, I can recommend this book to anyone interested in a true history.

Reading Andreas’s account we can note first of all that smuggling in America has been around since colonial days and will continue into the foreseeable future. Moreover, smuggling has played a very prominent role — not just a subsidiary one — through our history. Indeed it has often played a pivotal role in important events and historical episodes. And finally, Andreas’s account illustrates how smuggling is the result of prohibitions and protective tariffs. The cumulative impact of these policies has been the driving force for the establishment of big government and the police state in America.

Andreas makes it clear that the policies that create incentives to smuggle are irrational, ineffective, and often counterproductive. He also makes it clear that Americans have been duped into supporting various prohibitions to suppress vice by self-promoting politicians, self-interested bureaucrats, moralistic crusaders, and a compliant press. It is also interesting to note that smugglers were often considered heroes, if not by the majority, then certainly by consumers they served. It is also important to point out that readers will find that many of the wealthy and prominent families in American history, including several of our founding fathers, first grew rich on the profits from smuggling.

Pls read the rest here

Bottom line: The solution to smuggling is to emancipate the marketplace from politicization. In short, embrace economic freedom. 

Quote of the Day: Why GDP is an Enron-Style Accounting Fiction

First up, it’s worth it to address the number’s origins. Though attempts to measure country economic growth go back to at least the 17th century, Coyle writes that what we know as GDP today “is one of the many inventions of World War II.” War is the health of the state as Randolph Bourne correctly uttered long before WWII, so it wouldn’t surprise him that a number explicitly designed to increase the size of government reached full flower during the last global war.

Where it gets interesting is that prewar measures of economic growth explicitly showed “the economy shrinking if private output available for consumption declined, even if government spending required for the war effort was expanding output elsewhere in the economy.” Of course those numbers did. Though it would be folly on the best day for number crunchers to divine economic growth, there was at least some honesty in the numbers: government spending correctly subtracted from growth. 

If the reason why government spending reduced growth isn’t apparent, it’s important to remind readers that governments have no resources. This is true no matter one’s ideology. They’re only able to spend what they tax or borrow from the private economy first. In that case, for government spending to be counted as economic growth would be for those attempting to measure economic activity to engage in fraudulent double counting. The growth already took place; that’s why there were resources for government to consume in the first place. Thinking about this further, while WWII will be discussed in greater detail in a little bit, readers ought to think about the popular view inside the economics profession about WWII “ending” the Great Depression with all of this in mind.

For now, what’s important here is Coyle’s acknowledgment that for the longest time “’the economy’ was the private sector.” (my emphasis). Government couldn’t add to economic growth through spending simply because government spending very definitely was the process whereby government shrank the real economy through political consumption of capital extracted from the private sector. The money that politicians spend must come from somewhere, so for every dollar spent by politicians, that’s one less dollar for the private sector to allocate toward consumption, investment, or both.

To state the obvious, GDP was and is perfect for the political class simply because the false accounting that has defined it from day one promotes the obvious fiction that government spending adds to economic growth. Coyle is clear about the latter, that there was substantial resistance to what GDP became precisely because it was so blatantly false in its accounting, but she’s also clear about what informs its modern definition: “GDP was constructed around Keynes’s model of how the economy works,” and the Keynes model was one that said government could use “both fiscal policy (the level of tax and spending) and monetary policy (the level of interest rates and availability of credit) to target a higher and less volatile rate of growth for the economy.”

In short, Keynesianism is the ultimate economic fantasy, which helps explain why it’s so popular with the deluded types who enter politics, not to mention academic economists shielded from the real-world implications of their droolings. Wouldn’t it be nice if government spending could boost growth during troubled times, but by definition it can only reduce it. If readers feel otherwise, they must explain how it is that Barack Obama, Mitch McConnell, Harry Reid, Nancy Pelosi, and John Boehner can allocate capital better than you, Amazon’s Jeff Bezos, FedEx founder Fred Smith, Paul Tudor Jones, Warren Buffett, and Ken Fisher. This isn’t about ideology. Politicians simply can’t allocate capital more skillfully first because they’re arguably not suited to it, but most important because they lack the market signals that happily starve the bad ideas of Bezos, Smith, Jones, Buffett and Fisher.

Some will reply that government must consume when the citizenry is not consuming, but this form of thinking is every bit as silly as the thought process that says political allocation of capital is the path to future Microsofts, Intels and Cisco Systems. Lest we forget, short of stuffing money under a mattress, money saved does not lay idle. Banks don’t take in deposits in order to stare lovingly at the cash; rather they pay for deposits (liabilities) by immediately turning those liabilities into assets. Money saved is immediately lent to those with near-term consumptive needs, or it’s lent to entrepreneurs and businesses eager to grow. Keynesianism presumes a world that has never existed in which banks warehouse deposits, and that is defined by politicians who are more expert than the private sector at investing funds extracted from the private sector.

That’s what’s so interesting about Coyle’s faux evenhandedness about whether or not the comical notion of a “fiscal multiplier” is real. She writes as though sometimes it multiplies growth and sometimes it doesn’t, but whatever government spending does to the false measure that is GDP, it can’t boost real economic growth. It can’t unless Coyle and her fellow astrologers really can say with a straight face that Sens. Ted Cruz and Chuck Schumer are better allocators of capital than are Cliff Asness and Tom Steyer. Not very likely. And if they believe it, it’s time for this debate to take place.

Considering the calculation of GDP, expenditure is the most common approach; and it’s one that reveals the Enron-fiction that is GDP in living color. Once again, government spending adds to growth despite it plainly subtracting from it, and then if we import more than we export, GDP actually declines. In short, that which reduces the size of the private sector boosts economic growth in the deluded GDP sense, while that which plainly reveals a growing private sector (imports which reflect increased production stateside, and increased foreign investment in the U.S.) actually reduces the economy’s size per GDP.

(bold mine)

This is from a critical review by John Tammy at the Forbes.com on Diana Doyle’s new book GDP: A Brief But Affectionate History. 

The whole article is a recommended read

Beware the New Government Money Grab via Banks: Dormant Accounts

Governments are also very innovative. Since they have all been so desperate to corral people’s money, they find new ways and means to do so. So here is the latest government money grab enforced through banks: Dormant accounts.

Writes Sovereign Man’s Simon Black

And over the last few years, one of the most creative ways that bankrupt governments have come up with is to confiscate what they consider “dormant” bank accounts—this would be an account without any transactions over a specified period of time.

The UK was the first on the scene with this idea with the 2008 Dormant Bank and Building Society Act. It was passed just in the knick of time right as the entire financial system was collapsing.

Within two years, the British Banker’s Association estimated that the law could raise as much as $600 million for the government… no small sum in the UK.

Earlier this year, Japan launched a similar initiative aimed at grabbing dormant bank accounts; they expect the move will raise approximately $500 million annually.

Both at least Japan and the UK have long-term thresholds. In Japan, they’ll seize an account if it has been dormant for more than 10 years. In the UK, it’s 15 years.

But there are a number of things wrong with this approach.

First, it calls into question the fundamental principle of private property. How can something be yours if the state can legislate its authority to seize it?

And even if the account holder has long since passed, shouldn’t the funds, by default, be awarded to the survivors nominated in accordance with the instructions in his/her last will and testament?

It is a rather ignoble act indeed to set aside the wishes of the dead so that the state can have yet another resource to plunder.

More concerning, though, is that if the state can simply legislate its authority to seize dormant bank accounts, then they can just as easily lower the bar.

Australia (which actually has a well-capitalized banking system and is not even a bankrupt government) passed legislation last year to reduce the threshold on seizing dormant accounts from seven years down to just THREE.

And in the last 12-months since the legislation was passed, the Australian government has seized a whopping 80,000 accounts totaling A$360 million… more than has been seized in the previous five decades COMBINED.

In case you’re wondering, yes of course, the Land of the Free has similar rules.

Read the rest here

Oh expect these dynamic to be adapted globally. 

World Millionaires Parties on Central Bank Policies

I am not a fan of the political correct issue called “inequality”, whereby populist politics calls for political solution to redistribute wealth in order to make economic standings “equal”. 

This inequality issue for me is really nonsense. Simple reasons, there is no such thing as “equal” (e.g. even public schools’ rating of students have ranks). Second, political ways of solving inequality extrapolates to a shift in inequality from the markets to politics or from market inequality to political inequality. Wealth (or resource distribution) will be skewed towards those whom political patrons anoint as beneficiaries. So when you hear "it is not what you know but who you know", those are signs of politically based inequality.

For instance when Ben Bernanke, yet as a university professor wrote a “smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse”, which became a social policy, popularly known as the Bernanke/Greenspan PUT, this translates to an implicit subsidy to equity market owners, financed by the ordinary citizens. 

And since global central banks have embraced and assimilated US Federal Reserves’ policies of ZIRP and QEs that has inflated asset markets, these has increased “wealth” of mainly of equity (as well as other asset) owners around the world.

From the Wall Street Journal Real Time Economic Blog

Overall, the world’s wealth grew by 15% to $152 trillion, led by a 31% jump among countries in the Asia-Pacific region (excluding Japan) to $37 trillion. In North America, the world’s richest region, wealth grew by 16% to $50.3 trillion, thanks largely to strong returns in the stock market.

Globally, the number of millionaire households hit 16.3 million in 2013, a 19% rise from the previous year.

Millionaires in China have reportedly eclipsed Japan to place second behind the US.

The difference has been that growth in the millionaires of Chinese, instead of coming from equity markets, has been mostly a product of shadow banking.

The Chinese saw their portfolios swell as wealth in the country grew by a whopping 49% to $22 trillion last year. The report’s authors attributed that explosive rise to specialized financial products such as trusts — the amount of wealth in trusts rose 82% in 2013 — “reflecting the country’s rapidly expanding shadow-banking sector.”

While booming stock markets fueled wealth growth in many other countries, including the U.S., China’s investors experienced the opposite: Wealth in equities actually fell 6.8% on the year among Chinese.

Notice that inflated assets markets have been the basis of “wealth” which means they are artificial and depends on sustained central bank subsidies. This includes China’s shadow banking system.

And as I pointed out here, in the US booming stocks mostly benefit the elites.

The sad part is that while inflationary boom supports a few, when the bust comes most will get hurt.

In short, central bank policies have both serious externality and inequality issues.

Harvard’s Martin Feldstein warns US Inflation Is Running Above 2%

Inflation is a process which represents political actions that comes with economic consequences. And because money and credit creation operates in stages, this impacts relative sectors (first recipient of money) with relative price changes that eventually spreads through the system. In other words, since inflation is a process, they don’t just happen as the mainstream sees them. And they are hardly about just supply side problems.

In the US, inflationary pressures seen via the consumer price index has been inching higher. Some experts have seen this as approaching danger zone.

At the Wall Street Journal Harvard professor and former chairman of the Council of Economic Advisers under President Ronald Reagan Martin Feldstein warns of a possible surge in US inflation (bold mine)

Inflation is rising in the United States and could become a serious problem sooner than the Federal Reserve and many others now recognize. There are three basic reasons why the Fed is too optimistic in its current forecast that inflation will remain below its 2% target until after 2016.

First, data indicate that prices are already rising faster than 2% and have accelerated in recent months. Second, the low rate of short-term unemployment may be creating pressure for faster inflation despite the large total number of unemployed and underemployed individuals. And third, the rhetoric of Fed officials indicates that the central bank may not react quickly and aggressively enough if inflation continues to rise above 2%

This is the current conditions of US inflation as seen via PCE and CPI, charts from Doug Short

For the possible lagging effects on employment, let us tune back to Professor Feldstein

Will unemployment limit wage inflation? The unemployment rate is still a relatively high 6.3%, but an unusually large one-third of those who are counted as unemployed have been out of work for more than six months. Because the long-term unemployed are less connected with the active job market, they may provide less downward pressure on wage inflation. Recent research by Princeton's Alan Krueger and two of his colleagues indicates that wages respond to the number of short-term unemployed rather than to the total unemployment rate.

More specifically, the Brookings Institution study written with Mr. Krueger's Princeton colleagues Judd Cramer and David Cho implies that the unemployed who have been out of work for six months or more do not affect wage inflation. In contrast, wages begin to rise more rapidly when the unemployment rate among those out for less than six months declines to between 4% and 4.5%. Since the unemployment rate of those out for less than six months was only 4.1% in May, wages may soon begin to rise more rapidly.

Not everyone is convinced by this research. A more recent study by a Federal Reserve staff member suggests that the difference between the inflation effects of the long-term and short-term unemployed may only reflect recent experience and not be a good guide to the future. And William Dudley, president of the New York Fed, argues that the distinction between the effects of short-term and long-term unemployment depends on whether the long-term unemployment is cyclical or reflects structural and demographic changes that will limit their return to work even as markets tighten.

Is the Krueger research an accurate warning that labor markets are now closer to the threshold at which inflation begins to rise despite the substantial total number of people who aren't working? By the time we do know if he's right, it may be much more difficult to contain inflationary pressures.

I would add that wage inflation can already be seen via increases in minimum wages in several states.

 

From the National Conference of State Legislatures:

-38 states have considered minimum wage bills during the 2014 session; 34 states are considering increases to the state minimum wage.

-Connecticut, Delaware, Hawaii, Maryland, Michigan, Minnesota,  Vermont, West Virginia and D.C. have enacted increases so far in 2014.

What do all these imply? Well this should mean higher interest rates.

Yields of 10 year US notes appear to have partly been reflecting this.

The other implication is that since current US stock market record boom has been financed by deepening leverage, then higher rates will jeopardize the boom.

But don’t worry be happy, the ECB recently joined the bandwagon to produce inflation. So while this may in transient boost stocks, this will also COMPOUND on the growing inflation risks

And not only the ECB, a  newly published working paper by the IMF recommends more inflation to partly solve the debt problem

This paper investigates the impact of low or high inflation on the public debt-to-GDP ratio in the G-7 countries. Our simulations suggest that if inflation were to fall to zero for five years, the average net debt-to-GDP ratio would increase by about 5 percentage points over the next five years. In contrast, raising inflation to 6 percent for the next five years would reduce the  average net debt-to-GDP ratio by about 11 percentage points under the full Fisher effect and about 14 percentage points under the partial Fisher effect. Thus higher inflation could help reduce the public debt-to-GDP ratio somewhat in advanced economies. However, it could hardly solve the debt problem on its own and would raise significant challenges and risks. First of all, it may be difficult to create higher inflation, as evidenced by Japan’s experience  in the last few decades. In addition, un-anchoring of inflation expectations could increase long-term real interest rates, distort resource allocation, reduce economic growth, and hurt the lower–income households.

Inflation has always been seen as a magic wand by the government and by statists. 

They hardly consider the real socio-economic problems associated and or brought about by inflation. Venezuela should be a wonderful example.

Oh yes, please be reminded of the evils of inflation, again from chief inflation proponent John Maynard Keynes

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some.

The unintended consequences of all these quasi permanent boom policies will emerge in due time...soon.

China’s Central Bank Launches Targeted Easing

Earlier today, I pointed to the plummeting real estate activities and to the spreading commodity rehypothecation financing woes. Here I mentioned: 

So how will the Chinese government deal with hissing credit bubble? Well, in the same way almost every government deals with the addiction problem: give them more of the substance which they have been addicted to: credit

From CCTV.com

The Chinese government’s central bank, the PBOC officially announced ‘targeted’ easing directed at institutions lending to the rural economy

China’s central bank is easing monetary policy for lenders focused on small firms and the farming economy. The PBOC is cutting the reserve requirement ratio by 50 basis points for some lenders, effective from June 16th.

The triple R cut applies to banks whose new loans to the farm sector last year exceeded 50 percent of total new lending. An additional requirement says that outstanding loans to the farming sector must be more than 30 percent of total outstanding loans.

This means the targeted RRR cut covers around two thirds of city commercial banks, 80% of rural commercial banks and 90% of rural credit cooperatives. The RRR cut will also apply to financial services companies like leasing firms and auto financing firms to lift domestic consumption.

The problem with so-called targeted easing is that once money has been released into the system no one can know or control where it flows. This has been the reason why China’s shadow banking has ballooned. Government controls on local government lending produced offspring called Local government financing vehicles (LGFV) and eventually to illicit loans by State Owned Enterprises in behalf of local governments.

Shadow banks really signifies a regulatory arbitrage response to the highly regulated banking and finance system dominated by the state or State Owned Enterprises and most importantly to the credit boom initiated by the PBOC and from the Chinese government’s 2008 stimulus program ($586 billion). 

The likely scenario from this rural based loans will be that credit issued by accredited banks will end up again in the shadow banking sector. Such will most likely signify attempts to prop up zombie companies. 

So more resources will likely end up with non-productive activities that will persist to drain on the economy’s real savings.

Because of this China’s Shanghai index jumped 1.08% today

Oh by the way, despite tumbling property markets, China’s official inflation rates jumped in May.

From CTV.news.ca

Higher food prices have pushed China's inflation to a five-month high of 2.5 per cent.

Data released Tuesday showed consumer inflation in May picked up from the previous month's 1.8 per cent. The increase was driven by a 4.1 per cent rise in food prices.

Inflation still is well below the ruling Communist Party's 3.5 per cent target for the year, leaving room for interest rate cuts or other measures to stimulate the slowing economy if needed.

The above chart shows that May’s inflation increase has been a four month high.

This also reveals of the developing deadly cocktail mix of stagflation and bubble bust at work.

Today’s rescue also shows how the Chinese government will try to resist a collapse (kick the can) which exposes on the government’s priority which is that of political convenience first and social welfare last. Thus, goodbye reforms.

And this also shows how stock markets have been addicted to stimulus

Note to email subscribers. If I am not mistaken this blog’s Feed Burner services delivers only a maximum 3 blog post per day. Since I made six posting for today you are likely to receive only the latest three. Anyway here are the links for today’s post

Graphic of the Day: The Militarization of the US Local Police

Venezuelan Hyperinflation: Prostitutes as Currency Traders

China Bubble Bust: Land sales in a free fall, Rehypothecation Woes Spread

Quote of the Day: The IMF Gets It Wrong (again)

CNN Money: Market Emotion Now Registers EXTREME GREED

Graphic of the Day: The Militarization of the US Local Police

From the New York Times: (bold mine)

During the Obama administration, according to Pentagon data, police departments have received tens of thousands of machine guns; nearly 200,000 ammunition magazines; thousands of pieces of camouflage and night-vision equipment; and hundreds of silencers, armored cars and aircraft.

The equipment has been added to the armories of police departments that already look and act like military units. Police SWAT teams are now deployed tens of thousands of times each year, increasingly for routine jobs.Masked, heavily armed police officers in Louisiana raided a nightclub in 2006 as part of a liquor inspection. In Florida in 2010, officers in SWAT gear and with guns drawn carried out raids on barbershops that mostly led only to charges of “barbering without a license.”

(from Mark Perry)

Why are the local police massively arming?

Congress created the military-transfer program in the early 1990s, when violent crime plagued America’s cities and the police felt outgunned by drug gangs. Today, crime has fallen to its lowest levels in a generation, the wars have wound down, and despite current fears, the number of domestic terrorist attacks has declined sharply from the 1960s and 1970s. 

Police departments, though, are adding more firepower and military gear than ever. Some, especially in larger cities, have used federal grant money to buy armored cars and other tactical gear. And the free surplus program remains a favorite of many police chiefs who say they could otherwise not afford such equipment. Chief Wilkinson said he expects the police to use the new truck rarely, when the department’s SWAT team faces an armed standoff or serves a warrant on someone believed to be dangerous…

Pentagon data suggest how the police are arming themselves for such worst-case scenarios. Since 2006, the police in six states have received magazines that carry 100 rounds of M-16 ammunition, allowing officers to fire continuously for three times longer than normal. Twenty-two states obtained equipment to detect buried land mines.

Worst case scenarios? Hmmm. If incidences of crime and terrorist attack has been falling, then what possible worst scenarios can there be?   

Has the US local police been preparing for a real life RED DAWN (pick your version 2012 or 1984)? 

Or could they be expecting an invasion from Martians ala Mars Attacks (1996) or from other aliens like the War of the Worlds (2005)? 

Or has the US government merely embraced Paul Krugman's prescription to fix the economy through fiscal spending based on an imaginary "alien invasion"?

Or has local police authorities been preparing for war against the citizenry? 

Or could all these be part of a gradualist scheme to impose a police state?

Don’t worry be happy, stock markets are at record highs!

Interesting…

Venezuelan Hyperinflation: Prostitutes as Currency Traders

Implied inflation rates in Venezuela has been about 153% as against official rates of 59.34% (as of March 2014). This is based on estimates by CATO’s troubled currency project. 

So how are Venezuelans coping with such scenario? Well, aside from the government, prostitutes have been the biggest beneficiary. How? Because they are being paid in foreign currency!

From Bloomberg: (bold mine)

The arrival of a Liberian-flagged freighter with Ukrainian, Arab and Filipino sailors spells one thing for Elena -- dollars. And greenbacks are king in Venezuela, the 32-year-old prostitute says.

Within hours of hearing of the ship’s imminent arrival, she has packed her bags and is heading to the crumbling city of Puerto Cabello. It is a 450-kilometer (280-mile) journey from her home in the Western state of Zulia that Elena finds herself doing more often now as Venezuela’s economy contracts, the bolivar slumps and prices soar. 

Prostitutes more than double their earnings by moonlighting as currency traders in Puerto Cabello. They are the foreign exchange counter for sailors in a country where buying and selling dollars in the streets is a crime -- and prostitution isn’t. Greenbacks in the black market are worth 11 times more than the official rate as dollars become more scarce in an economy that imports 70 percent of the goods it consumes…

More…

The bolivar has fallen to 71 to the dollar from 23 on the black market since President Nicolas Maduro succeeded his mentor Hugo Chavez in April 2013. The government tightened currency handouts to stem the outflow of foreign reserves, which are near a decade low. The official exchange rate, reserved for imports of food and medicine, is 6.3 bolivars per dollar.

The dollar shortage is turning Venezuela into a two-tier society similar to the Soviet Union and Cuba, said Steve Hanke, professor of applied economics at Johns Hopkins University in Baltimore. Those with access to dollars such as prostitutes, tour agents, airport taxi drivers and expatriates are able to shield themselves from inflation by trading their greenbacks at ever higher rates. Those who can’t are seeing their living standards decline.

As the government smothers financial and economic activities the natural result has been a boom on the prostitution industry:

Officials have tried jailing traders, shutting down brokerages and setting up four parallel exchange systems to stem the rise of the unofficial rate in the 11 years since Chavez began controlling the bolivar’s price.

Prostitution has become the only boom industry in Venezuela’s biggest port. The Blue House brothel is clean and well-kept, with a patio and kitchen where women get three meals a day. Outside, the squares and cobbled streets of the colonial center stand in ruins, with the smell of sewage pervading the piles of garbage.

See what a policy of inflation does? It does not only destroy the people’s standard of living, they degrade humanity’s moral fiber.

This is a real time example of chief inflation exponent John Maynard Keynes’ observation of how inflationism annihilates society:

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.

But neighboring Columbia has also been benefiting from the senseless hyperinflation policies by the Venezuelan government. Many of the Venezuelan government’s subsidized goods has found their way across the borders.

From the Wall Street Journal (old mine)

Venezuelan President Nicolás Maduro's sliding popularity amid persistent street protests can be partly blamed on the humming smuggling market on this border, which shows how Colombia's unbridled free-market capitalism is eclipsing Venezuela's socialism and hurting ordinary Venezuelans.

When Norbis Berrocal, a homemaker on the Colombian side, buys baby formula in a bustling street market here in Cúcuta for a fraction of the usual retail price, Venezuela indirectly pays the rest.

"We're lucky to have Venezuela so close by," said Ms. Berrocal, as she bought a case of infant formula for shipment to relatives in Colombia's interior.

She is one of many Colombian consumers who benefit from a massive smuggling trade involving subsidized and price-controlled goods from oil-rich Venezuela—including near-free gasoline, car parts, corn flour and deodorant, all bought cheap in Venezuela and marked up before being sold here.

With its heavy intervention in the economy, Venezuela now imports three-quarters of what it consumes but loses a third of its goods to illegal cross-border trade, its government estimates. Some economists say Caracas exaggerates the smuggling problem to mask its own inability to keep supermarkets stocked.

The scarcity has eroded Mr. Maduro's popularity to a low of 37%, as recent polls show food shortages surpass rampant crime as citizens' top concern.

The informal economy pushes back against repressive regimes. This is real life economics in action.

China Bubble Bust: Land sales in a free fall, Rehypothecation Woes Spread

China’s bursting bubble appears to be intensifying

From Marketwatch.com (bold mine)

Amid ongoing central government curbs, China’s property market is cooling off dramatically despite the onset of the sector’s traditionally “hot season,” as both land sales and transaction values plunged in May across 300 major Chinese cities.

Total land sales fell to 1,767 transactions in May in 300 Chinese cities, down 45% from a year ago and 19% lower than in the previous month, according to a survey published Friday on China’s leading real estate website Soufun.com.

In the same month, the total transaction value for land sales dropped 38% year-on-year, marking a 30% drop from April, to 13.75 billion yuan ($2.2 billion).

The above 'earlier' housing data comes from the World Bank. The cascading rate of property transactions should percolate into housing prices too. 

Here is another example of the diminishing returns on debt relative to output or what is technically known as ‘credit intensity’. 

Chinese economic growth has become largely dependent on credit. Said differently, debt drives growth rather than growth drives debt. This means that the ongoing bubble bust will weigh heavily on real economic activities as there will be a feedback loop between credit problems and the economy--via loan delinquencies, insolvencies, liquidations and access to credit.

And because Chinese debt levels seems to have reached a saturation or tipping point, whose inflection point has been prompted by earlier accounts of of a pick up in inflation that led to rising yields or interest rates, credit growth has pulled back (chart from Wray-Mauldin at goldseek.com). 

Also shown in the above is how China's credit boom generates excess capacity, which becomes apparent during the bust.

One ongoing ramification from the reversal of the credit expansion has been for creditors to examine the quality of their loan portfolios. 

Many are discovering, in horror (!), that commodities (such as aluminum and copper) which have been used collateral have been “rehypothecated” –-"reused" collateral or the same collateral used in many loans.

From Reuters: (bold mine)

Global trading houses and banks are scrambling to check on their exposure to a probe into metal financing at China's Qingdao port, as concerns intensify that a crackdown on commodity financing could hit trade in the world's top metal buyer.

The investigation at the world's seventh-largest port is looking into whether single cargoes of metal were used multiple times to obtain financing, according to industry sources.

This means different banks and trading houses were holding separate titles for the same metal, they said.

The inquiry has revived worries about the impact of China's deepening credit crunch on its metal imports, many of which pile up in warehouses to be used as collateral.

In short, as trading partners and as finance counterparties, many parts of the world have been exposed to China’s credit woes. So China's ongoing bursting bubble (asset deflation) will be “exported” globally.

Part of this has become apparent in the former one way trade the USD-yuan, which has been crumbling.

So how will the Chinese government deal with hissing credit bubble? Well, in the same way almost every government deals with the addiction problem: give them more of the substance which they have been addicted to: credit

From the Wall Street Journal: (bold mine)

In the latest battle, the country's top banking regulator on Friday said it would ease rules to make it easier for banks to lend only to small companies. That followed a decision a week earlier by the State Council, the government's top decision-making body, to target more bank funding for small businesses and farms.

It's a world dominated by Keynesian dogma gone berserk.

Don’t worry, be happy. Stocks are bound to rise forever!

Quote of the Day: The IMF Gets It Wrong (again)

Christine Lagarde admits that the International Monetary Fund “got it wrong” when it chastised the British government’s austerity plans. One year ago the IMF’s chief economist Oliver Blanchard claimed the U.K. was “playing with fire” by cutting its budget.

With the benefit of hindsight, the IMF has changed its stance. The U.K. economy is set to grow 2.9% this year, the fastest among the G7 nations. Furthermore, the growth is being driven by investment spending, not consumption as the IMF had long thought necessary.

Though she stopped short of apologizing for the Fund’s poor recommendations in the past, Lagarde allude to begging for forgiveness. Rather than seeking forgiveness after the IMF makes a mistake, why doesn’t it stop giving out bad advice so that it doesn’t find itself in these embarrassing situations in the future.

This is from Professor David Howden at the Ludwig von Mises Canada.

CNN Money: Market Emotion Now Registers EXTREME GREED

CNN Money declares that current market conditions indicate EXTREME GREED

The basis of this index…

Even some in the mainstream have come to notice.