China learned too well from western crony capitalists

Today Mish gave a report of the Chinese economy which is well worth reading.  Since Greenspan told us long ago that a stable (crony capitalism, fractional reserve lending based) economy depends on stable housing prices, that is one area to keep an eye on in China.  Mish's summary on Chinese real estate: "China has the world's biggest property bubble and it will [eventually] bust".

China is now struggling with keeping the debt Ponzi spinning in its own country.  Crony communism is no better than crony capitalism it seems.  People are borrowing tons of money to build unproductive assets and it's now a big economic problem.  After acknowledging months ago that inflation was becoming a problem for its people, China began increasing capital reserve requirements for its banks (net effect is less lending) along with making token increases in its interest rates.  Although the changes were pretty small, China's economy slowed down faster than people expected.  China is now figuring out that there will never be a good time to tighten.  It is now in the same debt death spiral as the US.

The Keynesian lie is that government should stimulate the economy when the people themselves have decided to pull back their spending.  In other words, if people don't want to spend then government should spend in their names.  This has the dual effect of pushing money into the economy and punishing savers which government hopes will force them to spend (which they do, but on gold and silver instead of on overpriced housing).  The Keynesian con says that if government stimulates now then it can reverse the stimulation later when things get running properly again.  In other words it treats the economy like a bad heart that just stops beating once in a while.  If that were the case then the correct action would indeed be to defibrillate and get the heart running again.  Once the patient is revived he can go back to work to pay off the cost of calling the paramedics.  But the economy is not a heart that has stopped, it's a car that has run out of gas.  So injecting starter fluid into the carburetor is only going to make the engine roar wildly and over-rev for a short period of time and then die again.  You can't keep a car with an empty gas tank running for very long with starting fluid and only an idiot (or a used car salesman who is trying to sell you the car) continues to think that it is possible.

And so now China struggles between:

1. leaving stimulus in place which causes inflation which increases the price of food to the point where people threaten to riot. 
2. pulling back the stimulus which slows the economy causing people to lose their jobs and not have food money (causing them again to threaten to riot). 

It's pretty clear how this has to turn out at some point.  All roads appear to lead toward riots; China is likely to see significant social unrest at some point.  There is no telling how bad it will be but I think after the Tiananmen experience back in 1989 the people are not going to be pushed around by corrupt government this time.  They will be better prepared and more united.  They will have better communications and better organization.  No doubt they are getting word of what is happening in the Middle East and North Africa today (even though the Chinese government tries to censor that news).  They have seen what is possible when the masses organize and march on the relatively few in government.

All of this is just waiting for some catalyst to implode.  Nobody can predict if the catalyst will ever materialize or what it will be but the risk level that it will show up and kick off major social events in China is going to be code orange and higher for years to come.