China – 10.7 trillion yuan of debt going bad.

With all eyes on Greece and Europe’s massively insolvent banking system and bankrupt political class I want to look at what is incubating in China. It may seem perverse but I don’t think it is, because if China suffers a debt and banking implosion of its own, then that will end the lingering hopes that ‘China is going to bail out Europe’. And I think China is heading straight for a rather massive implosion. How big an implosion? Well the headline is 10.7 Trillion Yuan of loans to local governments of which up to 80% may be failing. I have written about his for a while and think the evidence has only grown more ominous.

Back in April I wrote about how I was convinced the Chinese Local authorities, the Chinese banks and possibly also Western Banks in Hong Kong, were between them recreating almost every aspect of the  Sub Prime catastrophe. For those who want to read about the genesis of the problem see “Making the New Sub Prime – Backdoor to China” and“Making the New Sub Prime – What’s in Store”.  I now believe there is growing evidence to support those speculations.

China’s sub-prime is a hybrid of America’s and Europe’s. In America banks lent to individuals who were unlikely to be able to pay back what they were borrowing. But were lent to hand over fist anyway. In Europe the same banks who lent to America’s sub prime lent to Europe’s as well. In Europe the sub prime were whole nations that where unlikely to be able to pay back their loans. But here too the banks fell over each other to lend anyway.

In China the sub prime is local governments. These local governments depend on selling land to speculators for a very large part of their income. So they have every incentive to sell as much land as they can to developers. So much so that many have ‘helped’ the developers fund the developments. There is now undoubtedly  a web of indebtedness of epic proportions which now binds together the local governments and all of China’s big banks.

The questions now are how big is the debt, who is exposed and how unstable is it?

By the end of 2010 local governments in China were 10.7 trillion Yuan (well over 1 trillion Euros) in debt. That is a big number even for a country as huge as China. That was as of Dec 2010. It will be considerably more by now. So the answer is quite big enough to stop China being the saviour of Europe. China will have to divert a lot of attention and money to buying up and burying hundreds of billions of Euros worth of bad debt of its own. And remember the last bail out and the last lot of bad debts from the last bank bubble are still being dealt with. China will save Europe? I don’t think so.

Who is exposed?  All we can certain of is that China’s big banks will be drowning in this debt. A more interesting question is if any Western Banks or investors have been tempted to buy in to it as well. I think there is a good chance that western speculators (banks and funds) have, in their eagerness to chase high returns bought into this bubble as they bought in to every other bubble.

My reason I believe this is because of Hong Kong and the way Chinese banks, developers and Regional Government have used Hong Kong as a way of circumventing central government limits on lending. It was the genesis of this new ‘off shore’ funding for China that I described in the earlier articles. I will come back to this later.

So how stable or unstable is all this new lending? This is the crux of the problem.

Initially the money was lent in straight loans from China’s Development Bank (CDB) and china’s big ‘private’ big banks. But increasingly as China’s central authorities have tried to cut down on all bank lending, local governments have set up Special Investment Companies who have avoided lending and borrowing limits by going to Hong Kong. These SIVs were set up as the front end of construction projects. The SIV would ‘own’ the income from the proposed construction project and sell bonds/debt in Hong Kong which were backed by the income stream from the construction project.  So the Chinese central authorities found that as fast or faster than they put limits on bank lending and local government indebtedness, the banks and local authorities simply went to Hong Kong to lend and borrow.

And the amount of borrowing and indebtedness quickly ramped up till we have local governments owing the banks 10.7 trillion yuan. Question is will they pay or default?

In an article by Ambrose Evans-Pritchard at The Telegraph he quotes the rating agency Fitch on this point saying,

The agency fears that non-performing loans could rise from 2pc of GDP last year to up to 30pc.

30%! It’s not just teh 30% raw number its the jump up which is worrying. According to Reuters, Fitch will downgrade China’s debt if the banks get into trouble again and require another bail out. A bad loan rate heading up to 30% say s to me the banks will drown. And I am not alone in thinking this.

Head of Standard Charter Bank Greater China, Mr Stephen Green, was quoted in Caixin as saying that he thinks

 ”…up to 80 percent of local government loans won’t be able to cover the debt service….”

Meaning up to 80% of the local government financing vehicles, the SIVs, are insolvent. They cannot pay the interest on their loans and therefore have no hope of repaying the principle.  Of course, Mr Green, being a proper banker, say this is no problem and advocates the elegant solution of the central government setting up a fund to ‘absorb’ – put on public’s tab – all the bad loans. Brilliant! They are so clever these bankers aren’t they!

Elegant solutions aside the situation is as fimiliar as it is grim and stupid.

To see why Mr Green thinks 80% of the loans made to local government funding vehicles will fail, we have to look at the detail of how unstable this vast pile of debt has become.

Another very good article in Caixin, on investment in China’s vast road building projects   paints a very ugly picture.

Of the 10.7 trillion Yuan of local government debt, 1.12 trillion yuan of it is tied to road building projects and the article gives us a pretty good picture of the loan structures. There  is absolutely no reason to suppose that lending for the road projects is in any way better or worse that the rest of the lending that has been done for other construction so I will take this as a good first approximation of the larger problem.

So how bad is the problem in road building? Well according to the article these loans were audited by the Central government and

The auditors also found that more than 54 percent of all new borrowing by government financing vehicles was being used to pay old debt.

Taking on new loans just to pay old off old ones is never a good sign, but it gets worse. It turns out that the old loans were from the China Development bank who at some point declined to lend further either because the government had told it to close off the taps on lending a bit, or because the bank itself came to recognize the project was unwise, unfinished and un-likely to ever make the return on its money that the local government bureaucrats and their friends the developers had said it would. The article suggests all three in various combinations.

So what did the local government and developers do?  They turned to ‘alternative’ sources of funding often as not in Hong Kong.

At which point a unwise, failing project began its morph in to a successfully, fully armed financial time bomb. Where the government controlled development bank had belatedly said no. The private banks said – sure. Here we are talking of private banks in china and in Hong Kong. In both places, in place of longish term loans from the development banks, in the private banks and in Hong Kong the local governments were told of the soft caresses of short term liquidity in the private market. As the article says,

They [the local government financing vehicles] won loans, but with short-term payback agreements, because they apparently never expected liquidity risks and a nationwide credit crunch.

They never expected there could be a nation wide credit crunch?! Obviously news from the outside world really doesn’t get much play in rural China. And the private banks didn’t feel it necessary to enlighten them.

 For example, short-term borrowing from banks rose from 1.5 billion yuan in 2006 to 5.7 billion yuan the next year and 11.4 billion yuan in 2008 at Hunan Expressway, a provincial construction financing platform.

So now we have a runaway train of debt rolling over and over on shorter and shorter time scales. Sound familiar? Time goes by debt increases, projects get further and further in to the red. But the banks kept lending from the short term wholesale funding markets (the same ones that used to fund such success stories as Northern Rock, Depfa and Lehmans) and at rates which undercut what government development loans were set at. The banks of course told the local government rubes that there were no risks, that in a global market money was always available, that someone will always want to pick up new business.

And the locals believed them. They turned their backs on the restrictions of government controlled loans and embraced the free market of issuing bonds which banks and investors would buy. Debt by another more modern name. But of course once you are hooked on short term debt you cannot easily get off it. Not only that but as credit conditions globally have deteriorated – as everyone outside the global elite knew it was doing – we have all watched it happen – the local government financing vehicles (SIVs) have been caught with high debts, low or no income, unfinished projects and short term loans\bonds from banks who are themselves often fighting for their own short term financing. Stop me when you think you’ve heard this before.

So now the pile of debt has become unstable as payback times become the enemy.

The Chongqing group could issue bonds to cover short-term liquidity needs. It’s already issued 2.8 billion yuan in corporate bonds and plans to issue about 1 billion yuan in medium-term notes.

“We told them commercial banks had erred, and that there were liquidity risks. They did not believe us then, but they do now: Commercial banks are chasing their debts.”

Few expected “that the present maturing of short-terms loans would arrive with the credit crunch,” said a source at a major bank. “Without a subsequent release of funds, liquidity risks emerged.”

And here we are caught up to today.

Since mid-June, nearly 10 provincial-level transportation platform companies have issued debt to repay bank loans, mainly short-term financing bills, mid-term notes and corporate bonds. Five highway platforms have issued short-term financing bills.

If even 50% rather than Mr Greens 80% of  a trillion euros worth of unstable debt defaults then this is bigger than Americas sub prime. Of course the Chinese will buy it and bury it. And of course they can do it. But as I said I think this will somewhat eat in to their appetite for dodgy European bank debt.

And one more thing. Will the losses be confined to Chinese banks and Chinese investors? I don;t think it will.  All the data out of Hong Kong is that Chinese bond issuance there has grown massively and it is not just Chinese banks and investors in Hong Kong. The number of Western banks continues to grow. Those banks are not just helping Chinese investors buy Chinese bonds. They are helping western money buy the returns on Chinese bonds.  Risk assets!

In a world where banks want high returns and where risk is good (a variation on Greed is good) Chinese bonds might well have been marketed as a lucrative opportunity.

Which brings me to a final question and piece of speculation. What is up with Morgan Stanley?

What does some one in the market suspect about Morgan Stanley that the cost of insuring its debt has equally the cost of insuring Italian bank debt? That’s the question.

My speculation is I wonder if Morgan Stanley has been playing in in this Chinese bond/debt market? This article from ZeroHedge notes that the rapid ramp up in the cost of Morgan Stanley CDS (debt insurance) does not correlate with the rise in the cost of insuring French bank debt as it would if Morgan Stanley was exposed to them. But it does correlate with the huge increase in insuring Asian and Chinese debt which has happened on the Asian markets.

Of course it just a correlation. But perhaps it’s worth remembering that Morgan Stanley used to have large investments in Chinese property on which it lost very heavily. But I wonder if the bank decided to tap into its network of knowledge and connections in China to ride the last two years of bubble growth. If it did then it would now find itself horribly exposed to all these loans going bad and bonds not being repaid.

Just speculation.

…Sorry I forgot to add this..

IF and it is a big IF I am anywhere near correct on this and MS is badly exposed to the Chinese Sub Prime and IF it does get crushed …then I wonder if we might have the entertaining question of who would rescue it. Obvioulsy the US would be expected to. But with debt ceiling as it is would they…could they? If there was any doubt is it possible – I konw this is specualtion upon specualtion but it is so entertaining I can’t resist – might we see China suggesting it might rescue MS from its exposure to Chinese debt with direct recapitalization/new preferred shares? Giving us the wonderful notion of one of the BIG American Banks, one of the Primary Dealers no less, being owned by the Chinese state?

Utterly ridiculous? Certainly almost unthinkable. But you have to admit it’s entertaining just to think of the hyperventilating on Wall Street and in DC.

 

 

 

 

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40 Responses to China – 10.7 trillion yuan of debt going bad.

  1. bill40 October 3, 2011 at 10:49 pm #

    Hi Golem.

    As I sit here in sunny Nanning, having been rudely awoken by my daughter, it’s good to know you are thinking of us back in blighty. I have often discussed China’s finances with middle professionals here which leads me to think you, and some others are missing an angle here.

    10.7 triilion yuan is I suppose a lot of money, but you must look at what they got for their money. At least half was never expected back, some think none of it was. It is the price the party was prepared to pay to keep the country united and the countryside producing vital food.

    The twist came with Hong Kong and hot inflows of unwelcome money. When Bejing says no, trust me on this, it means no. Hong Kong bascically put two fingers up to bejing and trusted the international finance boys. Bad move.

    There is no impending disaster, the Chinese banks won’t lose money. (OK they will but, as you say, it will be buried). Right alongside everyone who was daft enough to think that cental control would fail.

    Bejing is crashing the whole shebang on purpose to teach HK a lesson and any international “victims” are but an added bonus. Not only can China withstand this mess it can, if it chooses, bail out Europe too.

    But for what pay off?

  2. Golem XIV October 3, 2011 at 11:08 pm #

    Hello Bill,

    Thanks for your reply. Maybe you are right and the central gov. can bail out the banks and Europe if it so wishes. And maybe you’re right that they were willing to make these sort of losses from the start. It sounds as if you would know far better than I

    But does that alter the dramatic effect such a crash would have on foreign firms that were foolish enough to buy the bonds in Hong Kong. It sounds as if you agree the foreign firms would get clobbered.

    I take it you generally agree with my assessment of Hong Kong as China’s off-shore?

    I had not thought of China crashing Hong Kong on purpose. Of course it is possible. Great food for thought. But I have to say I am not wholly convinced. I still see the Chinese central authorites wanting Hong Kong as intact as possible as their portal to off-shore.

    but maybe you;re right that there is a trial of strength going on.

    Thank you for the thoughts!

    • socialistMike October 4, 2011 at 1:33 pm #

      China’s strategy is to industrialise and develop its productive capacity and infrastructure.

      It needed new power stations, factories, ports, homes, roads, hospitals, railways etc and has used international capital markets as a means to this end, not as an end in themselves.

      The thing about China is that its economic ministries will be full of very clever people who understand capitalism better than the capitalists themselves and who will have understood that this is the quickest way to kick-start a large-scale and modern economy : the alternatives had already failed ; using labour as capital and depending on fairweather friends.

      The Chinese govt has a big advantage over every other major economy – its govt still controls the economic levers and hasn’t let the markets rule.

  3. StevieFinn October 4, 2011 at 12:54 am #

    @Golem

    They are saying something similar in this article, & outlining the added woes of falls in manufacturing, growth predictions falling & worries of unrest.

    http://www.wsws.org/articles/2011/oct2011/chin-o03.shtml

    I also read somewhere that in order to get an idea of how many office blocks in a Chinese city were empty, a couple of fellas had to wait for an eclipse that started at 10 am in the morning. The logic being that people if they were working in these buildings would have to turn the lights on, not many lights came on.

  4. 24K October 4, 2011 at 1:03 am #

    Not always but sometimes when it’s late like now and I read your posts it’s like I’m tucked up in bed and your reading a really interesting fable. Not that I mean I don’t believe you.

    It’s just like WTF?

    Here we go again. The same thought processes of members of our mankey troupe are screwing stuff up. The dude that got nailed to a cross apparently said “Forgive them, for they know not what they do”.

    Now maybe they did but if they really really really knew they wouldn’t do it would they?

    And then I think about the $16 Trillion secretly given to whoever, $850 Billion to Barclays and I think “£$!s.

    I really do.

    I’m watching the #OWS with hope but then catch glimmers of the fact they have no idea of anything else to put forward.. Rekon we can chip in to get Mike over there?

    But then I think it doesn’t matter if they have no clear idea of another way. The spiritual awakening is the key. Everything is CONTRACT

    If people awaken to say NO, without knowing they are not contracting and that is the end of it.

    If you live in the UK or Canada or Australia you must watch this video

    http://www.youtube.com/watch?v=9sWy4C9vGLQ&feature=player_embedded

    Do you know the Crown that takes you to court is the legal fiction of the corporation of London? That square mile the Queen has to ask to enter because it’s separate to the rest of the UK. Here is their crest, plaque, whatever.

    http://2.bp.blogspot.com/-_d_xatLQpEk/ToigZfGVkTI/AAAAAAAAAS0/ZvV_BXwCKYw/s1600/Corporation+of+London.jpg

    It’s that corporation that tries to contract with you in magistrates court that is really an internal tribunal for the corporation of London. If you don’t work for them it doesn’t apply.

    Cheecky scamming £$%£$ers. The whole thing is a scam.

    If this dissent which is just people not wanting to contract with government anymore can continue and people can realise that the law is on our side we have won. Yet we don’t do our bit.

    It’s our planet and our system and if we don’t like it we don’t contract. A contract is two willing parties. We aint willing anymore but unless we vocalise that we are doomed to let the clowns blow balloons.

    Our rights are ours if we claim them. Like sending government a NOTICE.

    If they don’t reply their silence is acceptance.

    Let me repeat that one.

    Silence is acceptance.

    One more time because that is the biggy, there is nothing more important than that.

    Silence is acceptance.

    Yours and mine silence is acceptance. We need to start telling them we are not happy with the sevice of our public servants via notarized afferdavits, legal documents.

    We need to nail them to the “£$£$%£ wall on SERVICE because they are public servants. Every last scummy one of them is below us all and we need to stop the LEGAL silence.

    My mind is really starting to like this. There is much to learn, definitions, terminology.

    But like Dean says, my presumtion is that they are full of shit.

    Prove me wrong. Show me the law that says otherwise or “£$% OFF.

    It is a simple as that.

    The realisation that that is all in your soul? To shed the lies and that fear? That is the tricky part.

  5. Patrick Donnelly October 4, 2011 at 2:46 am #

    I think the Party are aware of what may happen and will view the cheapening of foreign assets by another round of losses as an opportunity to invest in strategic assets! You see, PRC is still growing and has unstoppable momentum. Whether they choose to allow others to share is another issue! The revaluation of their currency will occur eventually, and more investments will then be made.

    As they are one in six of the worlds population, having determined, unlike India, to westernize their economy, they need strategic control over recurring resource requirements. Selling goods to the west and elsewhere at that ridiculous exchange rate is only good business while they can curtail domestic demand!!! Otherwise it is a source of currency for purchase of commodity sources.

    Periodic reappraisal of borrowing and pricing is an excellent way of slowing demand. As they are growing,m they have the full panoply of capitalistic tricks to employ and you may have forgotten this, given that you are steeped in the western crisis mode of ZIRP?

    Their property is very over valued, at current exchange rates. As manufacturing world wide succumbs to their FX piracy and low wages, they will gradually increase the temperature in the saucepan, until the frogs are cooked! They take a long view and their banks are controlled to the extent that they are not banks in the sense we know them, at all.

  6. Mike Hall October 4, 2011 at 3:31 am #

    @ bill40

    Very interesting. Seems to corroborate what I was saying about the Chinese gov monetary policy a while ago when we were discussing their banks’ (state) ‘lending’.

    That is to say that the Chinese gov fully understands, and is prepared to use, their ability to effectively create Yuan as required for their desired projects & purposes. To a large extent they very quickly insulated themselves from our recessions of much of the last 3 years.

    The purpose was to keep people employed & spending. What they actually produced was secondary, but presumably they would hope all those buildings etc. will come into use eventually, if not fully needed now. Ideally, their strategy would be to maintain aggregate demand & perhaps shift the balance more toward domestic consumption rather than export whilst we continue with our recessions.

    The issue is less (or not at all) how much they spend (in their own currency) but over time creating an appropriate balance of goods produced & managing inflation risk.

    Could be, if they are pulling back from construction projects they are realising this. Could be also, they estimate the ‘stimulus’ spending has done its job & domestic demand in other sectors can pick up workers moving off the (state sponsored) construction sector.

    All a bit rough around the edges, but definitely looks like some reasonably succsessful elements of MMT principles at work. They probably could have implemented things better & I’d hope that if EU countries or the US were applying MMT policies they’d be better designed.

    All speculation of course as to whether China were deliberately applying such MMT & ‘functional finance’ ideas, but, well, if it quacks like a duck…..

    As regards investments made by private Hong Kong finance, why would China care if they go bust?

    And if those investments were not made by companies involved/interlinked in high street banking operations, but rather private investment funds, then how serious would those ‘busts’ be for EU/US institutions?

    The planet is awash with cash looking for a fast & dodgy (unproductive, unearned) buck. If some of that gets burned, without ‘contagion’, I’d be delighted.

  7. bill40 October 4, 2011 at 8:34 am #

    Hi Mike.

    It is very difficult to know China, steeped as we are in our western thought mode, which is very different. I honestly don’t know if what I’m told is “face saving”, fear of the party or the simple truth.

    This is not a defence of China’s diabolical one party rule but I’ll give them one thing. They are terrified of their people, the fear works both ways. I believe that if it were necessary China would knock down whole cities and rebuild them, if that’s what it took to keep people working.

    As for the empty building syndrome I am not sure that is a sign lack of demand as their property system seems to work like our car market. As soon as a building is used it falls in value just like a car. The Chinese seem to put the same premium on brand new as we do on antiques.

    The final thought is this. Maybe things are not so different after all. I still get the feeling that both east and west haven’t got the first clue what doing as long as it’s something.

    • Mike Hall October 4, 2011 at 1:07 pm #

      “Fear works (working?) both ways” seems highly plausible to me, recalling both the dissident arbitrary arrests etc. on the one hand & some quite serious pockets of rioting over local official corruption, land theft etc. in recent years, on the other.

      When most of the population has little to lose I guess they don’t want 600 million or more finding common cause against the central authority. (Bit of form there.)

      As regards differences then between China & US/EU etc., I think their ability to ‘make up the rules as they go along’ conveys a certain ability to be pragmatic & intellectually dextrous among the political leadership. A leadership which is most definitely in control of their banks, & pretty much every other area of Chinese society. (Not to say that other aspects of such central control are any way desireable.)

      Whereas, in US/EU etc. the real power lies with the banks’ elite (with some Corporate alliances) & our political leaders are merely ‘useful idiots’, selectively bred, over decades at least, to perform a well rewarded ‘sales’ (PR) function. Intellectual curiosity & any real ‘thiniking’ outside the paradigm is eliminated or neutralised. A similar breeding program has largely removed contra-paradigm curiosity from public servants, economists & media. Perhaps with a few ‘token’ (but not too adept) dissenters allowed for appearances’ sake. I’m minded here of the rare, if not fully explored, peeks behind the veil like the Guardian’s Nick Davies’ book “Flat Earth News”, regarding the subtle, but highly effective & hidden control over the MSM. (See http://www.medialens.org for a wealth of incisive commentary on this.)

      So what’s happening with the eurozone crisis?

      Well, I’m going to raise the ‘useful idiot’ meme again here. The taught paradigm did not include for the present situation. They have of course been following the neo liberal rule book, but, as we see, the ‘normal’ operational guidelines don’t work in this situation – indeed actually make things worse. To avoid inciting any unwarranted intellectual curiosity, the ‘how to momentarily step outside the paradigm in an emergency’ section of the manual was not included. So neither politicians (not in charge anyway) nor the economics ‘advisers’ have the remotest clue what to do. Of course the eurozone structure itself was designed to function only under the normal operational rules of the paradigm (hardly surprising & further evidence of the level of ‘capture’), so that’s further hampering matters.

      Witness the ‘invisible’ hand of the paradigm architects’ darting across the atlantic, well, becoming more visible, in the form of Tim Geithner to try & instruct the ‘useful idiots’ to do what they were trained not to figure out for themselves. The fact that it didn’t go too well just demonstrates how complete the ‘breeding’ & brain washing process has been!

      Even with all the smoke & mirrors contortions to disguise any notion that the ECB/Euro authority is not actually financially constrained in employing every last idle worker to restore growth & solve the problem instantly. Albeit with a large, but then sustainable, if not citizen desireable, debt service bill out to the horizon.

      So, all we’re left with is ‘can kicking’ as each of the inevitable bursting points rises to the surface. They will still conjure up Trillions to throw at the problem on each occasion, rather than allow partial or full collapse of the euro imo. However, I think the ‘invisible hand’ would rather the ‘useful idiots’ of the eurozone set up a mechanism whereby they do this quietly with the minimum of fuss. There is some danger, amidst all the noise & anguish of every public can kicking, that the brainwashing will incur some damage & be less effective. Every crisis is our window of opportunity to offer others the ‘red’ pill & unplug the ‘matrix’. Isn’t that how we came to be here?

      • Charles Wheeler October 4, 2011 at 4:36 pm #

        The blue pill’s been pretty effective for 30 years because debt has papered over the deep fissures caused by the startling polarization of wealth and economic power – most starkly in the US (http://goo.gl/SY5ZY) and UK. It’s enabled a majority to cling on in the housing market, finance tuition fees and hospital and school building programmes and retain the remnants of a safety net for those mired at the bottom.

        But the arithmetic is changing. Pretty soon most young people will find themselves shut out of the housing market and denied social housing – doomed to serve up an increasing share of income to the rentier class; many more will find the prospect of student debts of £50k too much of a disincentive (particularly those who’ve already drawn the short straw of substandard ‘sink-school’ education and low expectations – leaving the field open to their less able but wealthier peers, exacerbating the divide between the Herberts and the Henrys). The elderly are already finding that the crippling costs of ageing are being transferred to the individual and the family. Disability benefits are effectively being abolished even for most of the most severely disabled, again pushing the financial, physical and psychological burden onto those least able to bear it.

        As a result, confidence in the future is plummeting and the next generation are growing up with the realisation that they will be expected to worker harder and longer for less than their parents.

        And this is before the effect of the cuts has fed through.

        In the nineteenth century, as the ‘residuum’ grew liberals like Charles Booth set out to prove that the scale of the problems of the underclass had been exaggerated by socialists – only to find it was much worse than imagined. He then sought to scapegoat the casual labourer as the cause of society’s ills in much the same way that today’s economic liberals pin the blame on those at the bottom of the pile (the poorest of the 50% that share just 5% of the nation’s wealth). But it wasn’t just the poor that suffered insecurity, the drop for even the relatively comfortably off had become so precipitous that only a tiny proportion were unaffected by the psychological effect of the gravitational pull of poverty.

        For the post-war generation life without a welfare state is just a distant memory. It’s a while since the majority have had to live with the concern that a chronic illness might bankrupt us; that a disability would leave us totally dependent on family, charity or face life in an institution; that any kind of incapacity in old age would wipe out our life savings in a few months (so much for the incentive to save!); that being born into poverty wouldn’t be an insurmountable obstacle to advancement or bar to opportunity. But, with the collapse of social care, the time-limiting of disability benefits and the slow death of the NHS, and the ‘marketisation’ of higher education, all those fears that plagued our Victorian forebears are coming back to haunt us.

        In a sense, social democracy was a victim of its own success – the fact that most of us grew up expecting to be educated, receive healthcare and some help should we suffer a disability or live long enough to need some assistance in old age, as a right has led us to take these benefits for granted, or even to assume such guarantees are no longer necessary. But Polanyi’s announcement of the death of laissez-faire has proved premature. Beveridge’s ‘Giant Evils’ of squalor, ignorance, want, idleness and disease are being uncaged.

        As more and more income has been taken by the top 10%, the tax burden on top earners fallen, and ‘trickle down’ morphed into ‘hose up’, only rising levels of debt have kept the boats afloat. Where, in 1980 a manual worker could finance a mortgage, run a car, take a holiday and see his children through university on a single wage – it now takes a couple working full-time to keep up with the rent and the car loan (see: http://goo.gl/xAO0 on decline of the middle income worker in the US). This is the root cause of the financial crisis, as ever more exotic financial instruments have been created to mask the growth of inequality. Instead of taking a share of growth in higher wages as happened in the immediate post-war period, this has been substituted with rising debt + compound interest (and even now the orthodox continue to chant the mantra from page 1 of the neoliberal playbook: wages are too high at £6 an hour!) – an ultimately unsustainable combination in a slow-growth economy. As a result even those back-stops we may have thought inviolable are being removed: universal healthcare, decent education, adequate pensions, the right to a life of more than mere subsistence for disabled people, the attenuation of child poverty.

        Perhaps, under this assault, the effect of that blue pill is going to start to wear off.

  8. keekster October 4, 2011 at 9:24 am #

    Not sure where things are heading in China. At a stroke the ruling party could simply change the rules of the game, and option that democratic countries dont have. Although not that relevant to this post I note on the Keiser Report today the reference to Germany printing up Deutchmarks, which comes from this source http://www.pippamalmgren.com/77.html. If this is the case then what are the implications? Obviously the euro will tank if Germany leaves. But what of France, Belguin and Holland? I’m pretty convinced the Germans will look after themselves first. I’m also convinced that they will not support a leveraged EFSF (having learnt the lessons of money printing). So I think the can kicking is coming to an end (an unleveraged EFSF wont last long) and therefore the return of the Deutchmark is highy probable. A new post on this matter would be useful to allow discussion.

    • lautturi October 4, 2011 at 10:24 am #

      Pippa is a joke.
      If German exits EMU then its export driven economy slams into a wall. Furthermore, if German exits Belgium, Austria, Finland would exit, too (nobody wants to pay the whole bill).
      On the other hand, if Greece exits then what’s to keep Ireland and Portugal in Eurozone? Next would be Spain and Italy exits – and euro should stabilize but that again kills exports for “well-to-do” German.
      I believe Germans want to keep euro afloat and export themselves to prosperity – like that was going to happen with world wide depression… (sarcasm off)
      What a mess (>_<)

      • Hawkeye October 4, 2011 at 12:06 pm #

        I saw Pippa Malmgren earlier this year as she chaired a talk at the LSE.

        She seemed quite pally with Thomas Hoenig of the Kansas City Fed who gave a stoic (and a bit dull) talk.

        She was more candid though. She seemed to get the major debt hole that everyone is in. She kept talking about the underlying strategy of policy makers as “inflating” the debt problem away.

      • StevieFinn October 4, 2011 at 2:11 pm #

        Perhaps the bill for bailing out their banks exposure to the piggies would be greater than the losses of export income from a bunch of countries who are up austerity creek. I’m sure Germany’s export markets are more substantial than just the piigs. What will they choose ? The rock or the hard place.

        The euro could devalue by 50%,if the Germans left, would this mean the DM would stay at the level of the euro ? Could they devalue the DM to make themselves more competitive & be able to print cash through their own Fed ? Someone better throw me a rubber ring, as I am out of my depth.

    • Wirplit October 4, 2011 at 8:20 pm #

      Read the article ( thanks for the link keester) I certainly thought Pippa has a well argued and well evidenced case for the idea that Germany would prefer to leave the Euro than go on bailing it out. It is hard to see how it does it but so are all kinds of things hard to imagine …until they happen. People outside may fail to understand just how things play within Germany. It is still a democracy and it cant afford to ride roughshod over its people and it doesnt have enough smoke and mirrors to get away with what the US pushed.
      ( a brilliant series by way showing the first round of the Crisis in all its grisy detail showing on Al Jazeera called Meltdown with Hank looking like a ruddy faced bespectacled ghoul)

      So I think her thesis has to be considered as a real possibility. I think it sheds some light too on the relation of Trichet and the ECB with the IMF, Lagarde and the Germans who all seem more willing to face the music head on of bank insolvency than Trichet does.

      Certainly Germany would have a serious problem in its export industries as I imagine the new DMark would rise fast but it will have problems whatever it does. Right from the start it has seemed like the old unstoppable force hitting the immoveable object drama. Meanwhile the markets took a battering yesterday and today on it all as they wait for the bang…

  9. Neil October 4, 2011 at 9:55 am #

    Malmgren’s piece is speculation, but informed speculation. She’s a senior advisor to UBS, for starters – see her bio here: http://www.pippamalmgren.com/biography.html .

    Tucked away in the piece is this:

    “The UK will be asked whether it is going to support the Irish banks. I suspect the UK will say yes but they may not be ready to answer the question when it comes. Any delay will force the UK government to reveal that the UK banks are cash rich. This will raise questions about their lack of lending. Bank failures will probably occur. Small institutions may bring significant consequences.”

    Meanwhile Zerohedge rounded off yesterday thus:

    “We round out the evening with this simple SAT-type exercise:

    Oct 3, 2008: SPX=1099.23 [S&P index]; VIX=45.14 [the so-called Fear Index] is to Oct 3, 2011: SPX=1099.23; VIX=45.45

    as

    Oct. 10, 2008: SPX=899.22; VIX = 69.95 is to ….”

  10. StevieFinn October 4, 2011 at 10:48 am #

    Might take them a while to fill these buildings :-

    http://www.dailymail.co.uk/news/article-1391868/This-city-built-million-people–lives-here.html

    • bill40 October 4, 2011 at 1:43 pm #

      StevieFinn.

      I am afraid your source gives away its’ credibility. Not such a ghost town after all just the way things work in China. The buildings are sold but it’s a slow process getting evryone to move from the old town.

      What’s really going on is here in the WSJ of all places. http://blogs.wsj.com/chinarealtime/2010/05/12/revisiting-chinas-empty-city-of-ordos/

      • Goonermayo October 4, 2011 at 3:19 pm #

        Hi bill40 and steviefinn,

        here’s a Dateline Australia piece on China’s property market.

        http://www.sbs.com.au/dateline/story/watch/id/601007/n/China-s-Ghost-Cities

        Don’t know how much the report is filmed to make things look bad but it still gives an insight into the market

        • bill40 October 4, 2011 at 4:07 pm #

          goonermayo.

          Go to the town of, or more strictly speaking district of, Kangbashi and yes you will see a ghost town. Have you ever walked in the City of London at a weekend? Also a ghost town, nobody there, everything shut.

          That’s Kangbashi and remember this is but one district. The term ghost city is an urban myth.

          • Goonermayo October 4, 2011 at 5:51 pm #

            Hi bill40, take your point about city of London, however, the video was purportedly filmed on a Thursday and unless the shop keepers decide to pack away all they’re stock on a friday evening, the shops looked deserted.
            I also bow to the fact that you are living in China and I am on the other side of the world but I have experienced a property bubble where everybody denied what was actually going on (again, I’m not saying that this is the case in your situation).

      • StevieFinn October 4, 2011 at 6:32 pm #

        I bow to your local knowledge, perhaps it is because I am so used to seeing potential disaster, everywhere. Some good news would be nice.

  11. johnm33 October 4, 2011 at 1:21 pm #

    My grandad spent the war+ 1914-22 in shanghai [15-23yrs] and was full of admiration for the chinese, he tried to teach me ‘go’ and the importance of ‘hand’ which means controlling the initiative and having the patience to wait for the folly of your opponent to become apparent even to them, looks like the party may be ready to make a few devastating placements surrounding and eliminating numerous opposing forces. Lets just hope no heads roll.

  12. richard in norway October 4, 2011 at 5:02 pm #

    Is bank of America going down. ZH reports that their online banking is down for a third day. Is this just gloomy spin from the hedgers or is it really dexiaed(someone should work on that adjective) does anyone have collaborating evidence

    • richard in norway October 4, 2011 at 5:05 pm #

      Before I get told off, here is the link

      http://www.zerohedge.com/news/bank-america-site-down-third-day-row

      • Neil October 4, 2011 at 5:39 pm #

        Bank Of America Charts The Four “Crash Landing” Systemic Endgames For China:

        http://www.zerohedge.com/news/bank-america-charts-four-crash-landing-systemic-endgames-china .

        Ironic that…

        • bill40 October 4, 2011 at 10:32 pm #

          Neil.

          i am still getting used to the siesta sleeping patterns so I won’t point out in detail that this ZH article is so crap in detail.

          Just trust me that it is.

          • Neil October 4, 2011 at 11:49 pm #

            You may well be right, but the reason I posted it was not because I thought it was any good (how would I know?), but because Richard posted to ask whether Bank of America was going down, so I thought it ironic that someone from Bank of America was talking about endgames and crash landings for China.

            Any road up, the real news tonight is Moody’s two-notch downgrade of Italy’s credit rating from Aa2 to A2

  13. Mike Hall October 4, 2011 at 5:25 pm #

    A little off the topic of China, rather economics, sustainability & some insight into the (lack of) transparency in EU policy making, with some reference to Irish renewable energy. Hope you don’t mind my putting this up, I make a lengthy comment below the article which I hope would be of some interest here too.

    http://www.irisheconomy.ie/index.php/2011/10/04/transparency-in-public-energy-policy/

    @ Charles 4th Oct 4-36 pm

    + 1 :)

  14. Wirplit October 4, 2011 at 8:32 pm #

    Off topic …Here is a link to an article in the Daily Mail…No Dont all howl! I picked up a discarded Mail on the train honest…
    Its by Robert Harris the writer and well worth a glance and follows what he learnt doing research on a new book. He explains how so many high level physics experts ended up working for the Man in Wall Street. The onset of computer trading may be making normal market stabilities a thing of the past…

    http://www.dailymail.co.uk/debate/article-2043943/How-supercomputers-preying-human-fear-t

    • Hawkeye October 5, 2011 at 8:51 am #

      Wirplit

      This film called “Quants – the alchemists of Wall St” covers a similar theme:

      http://www.youtube.com/watch?v=ed2FWNWwE3I

      Paul Wilmott is very good, in this.

      Incidentally, I saw a lecture by Steve Keen last night at University College, London. He was asked about the “maths PhDs” doing all this stuff in finance and economics. His take was that the maths was fine, just the underlying assumptions that were wrong (well he used the term “bullshit”).

      His new book has a chapter on this called “Don’t shoot me, I’m only the piano”.

  15. Wirplit October 4, 2011 at 8:38 pm #

    I hope you have seen this as the protests grow http://www.zerohedge.com/contributed/presenting-occupied-wall-street-journal

    and by the way Meltdown is on Al J tonight at 9pm

  16. bill40 October 4, 2011 at 10:07 pm #

    goonermayo and stevefinn.

    I have no local knowledge of Mongolia , not only did it used to be a foreign country, it still is in a lot of ways it’s a fair plane ride from me. I can only hope you read the link I provided which could describe several Chinese cities.Like I said trying to get your head round the way things work here is complicated.

    • StevieFinn October 5, 2011 at 12:44 am #

      That’s always been the case for China, good to have your insider knowledge. My interest in China was previously confined to wondering when they are going to get around to excavating the pyramid at the centre of the 1st Emperors tomb, now there’s a guy who would have fit in well, running a major bank.

  17. Neil October 5, 2011 at 8:26 am #

    “Moody’s two-notch downgrade of Italy’s credit rating from Aa2 to A2″

    Make that three notches.

  18. Hawkeye October 5, 2011 at 10:42 am #

    Slightly off-topic, but an interesting piece on how the original Tea Party movement was co-opted by big-business, and how the Occupy Wall St protests could suffer from the same inflitration:

    http://www.reddit.com/r/occupywallstreet/comments/kyjo2/an_open_letter_and_warning_from_a_former_tea/

    It’s a well known tactic called Entryism:

    http://en.wikipedia.org/wiki/Entryism

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