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Chinerica and Stimulus Packages

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It appears that the tide of exceptional economic growth in China is finally slowing.  Today, China announced a two-year stimulus package totaling an estimated $586 billion.  In comparative terms, this represents roughly 16% of China’s annual GDP, as compared to U.S’s stimulus package last summer estimated to be about 1% of annual GDP.

I think it is fair to say that we have entered a new global financial paradigm of government intervention.  As market malinvestments continue to evaporate into the abyss of the markets, governments around the world have decided to play market god by pumping out credit in hopes of cushioning the fall. 

This then begs the question:  How will all these top-down government cash infusions affect the purchasing power of the world’s leading currencies?  John Williams’s Shadow Stats provides a broad measure of the American money supply in terms of year over year growth.   Interestingly enough, 2008 has witnessed a sharp decline in the dollar supply, suggesting a deflationary period. However, eventually some malinvestments will be purged from the markets and a culture of bailouts and stimulus packages may then act to dabase the world’s currencies.  Giving governments and central bankers increased authority and necessity to manipulate the money supply and to regulate free markets is an oxy-moron and a potential recipe of inflationary disaster over the long-run.
Around the world, where everything goes from here deserves debate.  It is hard to imagine Asian and European countries not intervening more to cushion the fall of a slowing economy.  China will likely see its archaic manufacturing sector in a free fall as global demand tightens.  Unless China can absorb this demand internally by expanding their own consumption habits, they may find millions of unemployed factory workers.  Social unrest anyone? Whether or not the Chinese stimulus package will help bring about these conditions is yet to be seen.


Written by eastwood24

November 10, 2008 at 4:53 pm

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