The Dollar-Driven Cage Match: Xi Vs Li In China With Nowhere Else To

China’s growing troubles go way back long before trade wars ever showed up. It was Euro$ #2 that set this course in motion, and then Euro$ #3 which proved the country’s helplessness. It proved it not just to anyone willing to honestly evaluate the situation, it also established the danger to one key faction of Chinese officials.

The entire world slowed in 2012 following #2, but until the bottom of #3 it wasn’t really clear what that might mean. For a very long time, especially with Western officials and Economists, it was believed that full global recovery was just a matter of time.

That’s all “stimulus” aims to accomplish. Its stated purpose is to buy enough time by softening the blow from downward cyclical forces. That way those negative pressures never become anything more than the usual nature of the business cycle. So a contraction doesn’t get transformed into a permanent change in condition and potential.

It’s just what the Chinese had done starting in late 2008 once it became clear that the rest of the world wouldn’t actually decouple from the US subprime mortgage mess. The only reason anyone thought that it might was because they misidentified the spreading, contagious global dollar shortage as entirely to do with greedy Wall Street bankers fudging mortgage paperwork – itself a symptom of the rapid monetary growth preceding the crisis.

The textbook Keynesian approach is government spending coupled with central bank easing. The bigger the contraction, the more government spending in order to fill in the deepening trough of “aggregate demand.” Beijing has more than enough copies of Dr. Keynes’ textbooks lying around to describe the orthodox approach.

Initially, it seemed effective. Authorities really ramped up fiscal spending via State-owned entities. Regardless of profit or waste, Fixed Asset Investment skyrocketed through this channel. The economy initially recovered, or it appeared to.

After the second half of 2011, though, Euro$ #2, it became more of a running battle to try and keep China from going too far off track and really to understand why. The stakes were not just economic opportunity, as I wrote elsewhere Friday. Everything in China is at stake here, top to bottom.

Rapid, sustained growth had always been the payoff, the people’s part of the deal going all the way back to Jiang Zemin and even before. Jiang’s Three Represents combined economic growth with hardened Chinese cultural characteristics in order to reach a future where “the fundamental interests of the majority” would be reflected in all things, including, one might imagine, the politburo.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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