The Glade 4.0

(Fortune Magazine) -- In a world still awash in economic worry, China has stood apart as the one country that has come through the global slump with only the briefest of hiccups.

Last quarter the nation grew at a brisk 8.9% rate, and many economists expect it to expand even faster over the remainder of the year. Profits at large, state-owned companies that have benefited from Beijing's aggressive stimulus program are up sharply.

Li Xiaochao, spokesman for the National Bureau of Statistics, summed up the zeitgeist in China these days: "The overall situation of the economy is good."

A lot of global CEOs, of course, are on the thank-God-for-China bandwagon, and it might seem a little churlish to question one of the world's few good-news economic stories. Yet a growing number of observers believe that China is creating its own bubble economy. And they have a case to make.

The U.S. fueled its housing and consumption bubbles by providing easy credit. China seems headed in the same direction, although the victims would be different this time.

In the first nine months of the year, Beijing has shoveled $1.27 trillion in new loans into the economy, up 136% from the same period last year. That money has gone to three main areas: infrastructure, manufacturing, and real estate.

According to a recent analysis by Monaco-based hedge fund Pivot Capital Management, China's total lending reached 140% of GDP at midyear. That kind of lending makes China an "outlier" compared with other BRIC (Brazil, Russia, India, and China) countries -- and is already well beyond the levels that "have led to sharp and brief credit crises in the past," the Pivot Capital report contends.

Moreover, an increasing number of Chinese loans are being funneled into projects unlikely to generate an attractive economic return. From 2000 to 2008 it took just $1.50 in new credit to generate $1 of GDP growth. Now that ratio is 7 to 1. (In the U.S., just before the financial crisis hit, the ratio was only 4 to 1.)

That's because the loans are creating huge amounts of manufacturing capacity -- which is unneeded in the bears' view. China's spare capacity in the cement industry, for example, equals the total annual consumption in the U.S., Japan, and India combined.

So where will the growth come from? China's export markets are tapped out. Its domestic consumption, stalled at around a third of GDP, hasn't yet started to rise significantly. Additional manufacturing investment would be crazy, leading arguably to a global deflationary bust of epic proportions.

Over the past decade China has spent massively on roads, bridges, and other infrastructure. Some economists believe China's infrastructure, already superior to that of many other developing economies, has now passed the point where more investment can contribute much to growth. China, in other words -- despite the rosy, headline GDP numbers -- might be stuck.

Those bullish on China say the government will keep spending no matter what to keep the economy humming, given its relatively healthy domestic balance sheet compared with that of the U.S. Skeptics reply that if the debt taken on by provincial governments is taken into account, China's fiscal health begins to look questionable.

The good news is that the authorities are well aware of the problems. Behind the scenes, Chinese officials are engaged in an increasingly rancorous debate about whether and how quickly to take away the credit-filled punch bowl. Lending has slowed a bit from the red-hot levels in the first half, and recently China's National Development and Reform Commission, a key government policymaking body, said it would begin to deal with excess capacity in key sectors of the economy by forcing mergers and in some cases ordering factories to close.

So, yes, Beijing may be working hard to keep its economy vibrant, but danger lurks out there. Avoiding an American-style meltdown is the economic test that's coming.

Facism is not a school of thought, it is a racial slur.

The answer to that, right now, is Russia and a few non-EU states. That said, China borrowing 140% of their GDP is not as worrisome as the U.S. borrowing 400% of its GDP.

China does. Why do they need the US consumer? What have we used to pay for their exports? Unsecured debt sold to them to repurchase their own goods, that's what.

Secondly, look at where their investments are going. I never have once said the Government controlling the flow of capital is a bad thing inherently. But it is nearly always a bad thing in reality because they cannot allocate resources as effeciently or accurately as the market.

Also, remember, they are structured around producing tangible, manufactured products. What happens when American's fold because the recycled debt scenario leads to a currency crisis and they don't want to sell us their real, physical goods for our worthless bonds anymore? How are they worse off? If you are a store that offers financing (and to be a correctly analogy, let's say you aren't securing the debt like the 0% credit card type promotions that are common) and people are buying your stores inventory but not paying their bill, and they suddenly stop, are you worse off? Yea, you have less "customers" but you aren't worse off.

The answer to that, right now, is Russia and a few non-EU states. That said, China borrowing 140% of their GDP is not as worrisome as the U.S. borrowing 400% of its GDP.

This argument never made sense to me. You are essentially arguing that we are giving them worthless paper in exchange for tangible products that have value, and this is somehow bad for us? It's the epitome of something for nothing and it's bad? Eventually the crash has to hit, sure, but if the US dollar is truly worthless then we should strive to take on as much debt as possible and make the trade deficit as large as possible, since it's essentially buying all that stuff for free. It doesn't make the crash worse, hell it makes it better since we got loads of free **** for years. Being the reserve currency is great, we can wipe all our foreign debt instantly whenever we want, no other nation can claim this right.

China might make tangible products, but what good are they when you make more than the entire world can use? They've got a bunch of real, physical goods that nobody wants.

China might make tangible products, but what good are they when you make more than the entire world can use? They've got a bunch of real, physical goods that nobody wants.

Are you including Medicare and Social Security when you make this statement. As I've said before, those aren't debts, we can end these entitlement programs at any time and not pay a dime.

Facism is not a school of thought, it is a racial slur.

It's not bad in the short term, but it certainly leads to bad things. For one, it creates artificial demand and inflated value for a service sector economy (i.e. a grand malinvestment) so that when the economy needs to restructure (when demand for our currency collapses) we're in a very bad position to do so.

And ,wow, what an ignorant thing to suggest. You do realize that the majority of IRA's in this country are denominated in US Dollars right? And that the composition of many of those assets are strictly cash or near cash type assets (i.e. bonds)? And that blowing the dollar to oblivion means that any wealth therein is destroyed.

Basically, your argument makes no sense. You are telling a drunk man that eventually he has to sober up and suffer through the hangover so he might as well snort a few lines of coke, cheat on his wife and get STD's from a prostitute, gamble through his savings at the Casino and save a little bit of cash so he can buy a balloon of black-tar heroin and shoot up.

No, we can't, since they are the fastest growing portion of Federal Government Revenue, and they look to surpass Individual Income Taxes before the end of Obama's Administration.

Ok, first of all I really question the common assertion that "services" are either worthless or actually worse than worthless and the only economic activity that has any real value is manufacturing. That's just absurd in the extreme.

Second, your analogy doesn't apply because doing all that stuff will make the eventual crash worse. If the US dollar is already truly worthless right now, then it's not possible for any additional borrowing to decrease the value further. It can only make it better as having a bunch of free **** when the dollar falls apart is better than not having it.

Are you including Medicare and Social Security when you make this statement. As I've said before, those aren't debts, we can end these entitlement programs at any time and not pay a dime.

So what?

They're entitlement programs, not contracts, you don't have a right to the money any more than you have a right to food stamps. Sure, it sucks that the tax money collected was effectively stolen but that's no different from any other misuse of public funds.

Facism is not a school of thought, it is a racial slur.

What indeed. The Federal Government is currently financially incapable of eliminating Medicare and Social Security because of the discretionary income it provides to the system. When Bill Clinton balanced the books using some loopholes provided by the elder President Bush and his Democratic Congress, he opened a can of worms that made current Federal Revenues absolutely dependent upon the entitlement programs. It's not as simple as you suggest. Medicare and Social Security payroll taxes account for 36% of Federal Revenues, while they're trusts contribute 2%. Indeed, the only reason those taxes are allowed to exist is the entitlement programs attached to them: double taxation is illegal in the United States. So, your solution that we "Just pass a law that says SS benefits and Medicare benefits won't be paid, eliminate the programs and the associated taxes" is not only ludicrous; it's financially impossible.

So what you're saying here is that Social Security and Medicare taxes are being diverted to pay for the general budget and aren't even being used on SS and Medicare anymore? That's honestly new to me, I've never heard anyone make this accusation before this.

Trust fund
Main article: Social Security Trust Fund

Social Security taxes are paid into the Social Security Trust Fund maintained by the U.S. Treasury (technically, the "Federal Old-Age and Survivors Insurance Trust Fund", as established by 42 U.S.C. § 401(a)). Current year expenses are paid from current Social Security tax revenues. When revenues exceed expenditures, as they have in most years, the excess is invested in special series, non-marketable U.S. Government bonds, thus the Social Security Trust Fund indirectly finances the federal government's general purpose deficit spending. In 2007, the cumulative excess of Social Security taxes and interest received over benefits paid out stood at $2.2 trillion.[76] The Trust Fund is regarded by some as an accounting trick which holds no economic significance. Others argue that it has specific legal significance because the Treasury securities it holds are backed by the "full faith and credit" of the U.S. government, which has an obligation to repay its debt. It is important to note, however, that while the Treasury guarantees the interest and principal payments it makes to the Social Security Trust Fund, the benefit payments made from the Social Security Trust Fund to American retirees have no guarantee at all.

The Social Security Administration's authority to make benefit payments as granted by Congress extends only to its current revenues and existing Trust Fund balance, i.e., redemption of its holdings of Treasury securities. Therefore, Social Security's ability to make full payments once annual benefits exceed revenues depends in part on the federal government's ability to make good on the bonds that it has issued to the Social Security trust funds. The federal government's ability to repay Social Security, in turn, is contingent on fiscal policies taken today (which have tended to increase deficits and the percent of the budget spent on interest and principal payments) and in the future.