Perverse Incentives, China And You


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    Detroit Publishing Co. “Loop the Loop at Coney Island, New York” 1903 Since I wrote “The Taper And The China Credit Power Struggle Squeeze” on Dec 29,
    [See the full post at: Perverse Incentives, China And You]


    The number of imponderables is big but don’t forget the Army and the state owned enterprises, which to complicate things overlap. Don’t forget single party states succumb to corruptions quickly and Chinese culture has never shown a particular ability to avoid corruption. Don’t forget that certainly some very wealthy Chinese are surely working overtime to move their assets out, which is where the JPM’s of the world might be playing a part.

    Don’t forget that when domestic political problems become acute political leaders find military threats if not actions a seductive way to deflect the pressure. China hardly being the only place where war and rumors of war are a possible strategy. I am not predicting super power war but such does offer a possible way the the financial and monetary systems could dislocate. Presumably with current leaders thinking it would be a way to avoid blame for economic failure and so be able to retain power and even get more. That does not even have to be a conscious strategy on their part. It’s easy enough for leaders to mistake what’s good for them as being good for the nation.

    Viscount St. Albans

    As Rapier noted:
    “Don’t forget that certainly some very wealthy Chinese are surely working overtime to move their assets out, which is where the JPM’s of the world might be playing a part. ”

    This plays into Martin Armstrong themes. There is nothing surprising about the equity markets’ disconnect from economic fundamentals. It is what’s expected at this stage in a cycle. Martin’s research suggests the migration to equity type assets is common to all bubbles at this stage. Trying to understand why the S&P reaches new highs while the common man gets poorer is useless. The two have nothing to do with one another. If you want to understand, look to the real estate developer in Hunan province and the rail road builder in Xinjiang. Ask the 5th generation cement maker in Provence and a 6th generation ferry operator in Heraklion. Old money and new money looks for a place to roost during the coming storm. The S&P 500 is deep and the breakwater is firm. Here is where you park your grandfather’s savings.


    By Charles Hugh Smith:

    “The first thing to understand about China is there is always a front door and a back door to everything. The front door is what’s presented to the outside world; the back door is for everything that doesn’t fit the PR image created by the front door.

    The front door presents positive “face,” the back door is for everything that would “lose face,” so it’s hidden and never discussed, except in private, and only with trusted family or friends.

    A friend who once worked for the Chinese government recently returned home after several years absence, and found that all her bosses had moved to the West: Australia, Canada, etc. These were typical officials: their base salary was low but they managed to buy multiple homes, support mistresses, have upscale autos, and so on.

    In a word, ill-gotten wealth. There are tens of thousands of these beneficiaries of China’s boom in credit and corruption, and they have all either fled (with their ill-gotten wealth) to the West or “safe-haven” East (Singapore, for example). Those who haven’t fled yet have passports to a safe haven, and cash and homes overseas awaiting their arrival.

    It is common knowledge that the offspring of top officials all have passports and homes awaiting them in the West.

    That every one of your political bosses has left China is an astounding revelation into the mindset of those who have benefited most from China’s boom: they obviously fear that some upheaval could strip away their ill-gotten wealth, otherwise, why not simply move to some wealthy enclave in China?

    The front door is covered with official pronouncements of the China Dream and blustery demands of hegemony, but the back door is choked with members of the financial/political Elite fleeing China and taking their wealth with them. All of this is well-known, yet it is spoken of in hushed tones, lest China lose face from this wholesale exodus of those who stripmined the nation with credit and corruption.

    If the Elites had any faith in China’s future, and in the security of their wealth, why would they be fleeing China in perhaps the greatest peacetime exodus of wealth the world has ever seen? Estimates of the money flowing out of China are merely guesses, of course, but the numbers run into the tens or even hundreds of billions of dollars.

    Those in the political/financial Elites have the best information about conditions in China. What speaks louder, actions, or empty words? Actions, without a doubt. It’s difficult to see how China can be as stable as advertised when its monied Elites all have back doors out of the country and homes awaiting them in the West. The most fearful (or guilty) aren’t waiting around to risk the future in China; they’re already long gone. What does that say about the front door pronouncements of hegemony and dreams? The inconvenient truth is the Chinese Dream is to live in Palo Alto…”


    The real questions for the rest of us are (1) how long will this Chinese financial juggling show stay on the road, and (2) are China’s recent bellicose statements involving islands indicative of a real danger of war with the USA?

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