FW: China Needs to Engineer a Beautiful Deleveraging
date_saved: 2023-08-17 12:31:36
Full Content:
China Needs to Engineer a Beautiful Deleveraging
Those who study China’s past dynasties can see that what is now happening has happened repeatedly in China’s history, and they can see the different ways these circumstances were handled and which ways worked well and which didn’t. The Chinese leadership has conducted these studies and has that perspective. As President Xi has made clear, circumstances are creating “a once-in-100-year storm” that is on the horizon. Like such storms in the past, this will pose a threat to the leadership’s “Mandate of Heaven.” That, as in past times, is leading to “legalist” (i.e., the dominant leader’s strict controls with strict punishments) policies, including the need to control the elites and take care of the masses. As for the debt and the economy, there is an obvious need for a big debt restructuring of the sort that Zhu Rongji engineered in the late 1990s, just much bigger.
How these big debt restructurings work should be clear to anyone who has studied them throughout history, because for as long as there is recorded history there are records of how countries have gotten themselves into too much debt and then gotten themselves out of it. There isn’t a country I know of that hasn’t done this, typically several times. In my lifetime, the United States has had three. How they work is described in my book_Principles for Navigating Big Debt Crises_, which you can get as a free PDFhere. In it, I examined all of the biggest debt crises over the last 100 years and created an easy-to-follow template that is laid out in the brief first chapter.
So, how do those who reduce the debt burdens do it? It primarily depends on whether the debt is in one’s own currency or a foreign currency (if it’s in one’s own currency like China’s debt is, it’s easier to manage) and whether it is held by one’s own citizens or foreigners (if it’s held by one’s own citizens like China’s debt is, it’s easier to manage)—though it is never easy. Given these circumstances, it also depends on how the restructuring is done. A well-done restructuring happens in a balanced way. I call that a “beautiful deleveraging.” It balances deflationary defaults/restructurings with inflationary printing of money/debt monetization to spread out the burden. The mechanics of this process are explained in the first chapter of the book linked above, so I won’t try to squeeze them in here.
China is overdue in doing this, so in my opinion, it needs to follow this beautiful deleveraging process now because the debt-burdened balance sheets and burdensome debt service payments are freezing the economy, especially at the provincial level and most especially in some of the poorest provinces. One day the United States, Europe, and Japan will probably have to do their own deleveragings, which I expect to follow this process. Because the stabilities of orders (also known as “Mandates of Heaven”) in all countries are driven by the interrelated forces of 1) the credit/debt/economic dynamic, 2) the internal political dynamic, 3) the external geopolitical dynamic, 4) acts of nature (i.e., droughts, floods, and pandemics), and 5) human inventiveness (especially of new technologies), and because how this deleveraging process is handled has a big effect on the overall order or disorder of the system, it’s worth keeping in mind how this deleveraging dynamic works, which is why I’m passing along Principles for Navigating Big Debt Crises to you now. I hope it’s of some help.
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Highlights
As President Xi has made clear, circumstances are creating “a once-in-100-year storm” that is on the horizon. Like such storms in the past, this will pose a threat to the leadership’s “Mandate of Heaven.” That, as in past times, is leading to “legalist” (i.e., the dominant leader’s strict controls with strict punishments) policies, including the need to control the elites and take care of the masses. As for the debt and the economy, there is an obvious need for a big debt restructuring of the sort that Zhu Rongji engineered in the late 1990s, just much bigger. ⤴️
So, how do those who reduce the debt burdens do it? It primarily depends on whether the debt is in one’s own currency or a foreign currency (if it’s in one’s own currency like China’s debt is, it’s easier to manage) and whether it is held by one’s own citizens or foreigners (if it’s held by one’s own citizens like China’s debt is, it’s easier to manage)—though it is never easy. ⤴️
China is overdue in doing this, so in my opinion, it needs to follow this beautiful deleveraging process now because the debt-burdened balance sheets and burdensome debt service payments are freezing the economy, especially at the provincial level and most especially in some of the poorest provinces. ⤴️
One day the United States, Europe, and Japan will probably have to do their own deleveragings, which I expect to follow this process. Because the stabilities of orders (also known as “Mandates of Heaven”) in all countries are driven by the interrelated forces of 1) the credit/debt/economic dynamic, 2) the internal political dynamic, 3) the external geopolitical dynamic, 4) acts of nature (i.e., droughts, floods, and pandemics), and 5) human inventiveness (especially of new technologies), and because how this deleveraging process is handled has a big effect on the overall order or disorder of the system ⤴️