Fifteen years ago this month, amidst the unholy darkness some daylight had emerged; at least according to the official version. The fact it had shown through with Chinese characteristics was actually an invited development. Even President Bush, the latter, would come close enough to saying they were all socialists now.
Long before other governments could get their Keynesians together, China uncorked the fiscal equivalent of a nuclear bomb. Early in November 2008, while the “financial” crisis continued to defy everything the Fed and feds threw at it, Hu Jintao’s technocrats knew just what to do and how to do it.
After all, every single one of them had trained in all the right Western schools.
On November 10, 2008, Beijing announced a massive spending “stimulus” package. It was roughly equivalent to $586 billion, about 7% of GDP to be spread over two years. At the time, these were unthinkably huge numbers, though that was as much the purpose.
Technocrats anywhere spend a great deal of time talking up “confidence.” Hu Jintao decided on the advice of his Economists to take no chances. After all, China was supposed to have been insulated from all that subprime mortgage mess, thereby saving the world in a different way, allowing anyone not in American or Europe to “decouple” from that Wall Street mess.
The idea hatched earlier in the Spring around Bear Stearns was dead as a doornail as Lehman and AIG were running short of good financial collateral. No one would be spared.
In that shocking realization, everyone quickly turned some flavor of statist. It was weird, in a sense, to witness. Some did so out of expedience, others, as Rahm-bo would later put it, didn’t want to waste a perfectly good crisis for their own purposes. George W. Bush was hardly someone to stand in the way.
There were two major changes occurring in November 2008 that could not have taken place earlier. To start with, finally having seen firsthand just how serious a global monetary crisis could get to be, not that any one of them knew it for what it really was, suddenly facing a possible abyss meant no further legal or moral need to justify anything and everything to keep it from happening.
Bush came right out and said so:
“Those of you who have followed my career know that I'm a free market person- until you're told that if you don't take decisive measures then it's conceivable that our country could go into a depression greater than the Great Depression’s. So my administration has taken significant measures to deal with a credit crisis. And then we worked with Congress to deal with the credit crisis, as well.”
If the government doesn’t go deeply into debt, authorize unlimited purchases of financial assets, and generally disregard every prudent limit common sense had kept firmly in place for generations the world would end. Got it. Orwell could not have written it better.
Worse, though, the second drastic shift, how absent any intervention full and complete destruction was inevitable. They just kept repeating this over and over as if that was the only possible outcome. This is the assumption the Federal Reserve in one of its absolute worst hours (which is saying something given how many times the central bank in name only has performed to disastrous results) would adopt thereby escaping all accountability.
If we didn’t act, it would’ve been worse. Therefore, everything we did was legit and must’ve been effective. TAF, TARP, coming QEs, ARRA, all of it. There is scant evidence they created positive impacts, but Economists are certain each saved a whole bunch of jobs.
One reason why Bush brought up his supposedly newfound appreciation for government powers is how much of the government didn’t want to go along using them in such indiscriminate and unfettered fashion. TARP was famously voted down the first time it was introduced. But then, Congress, after having displayed a spine for the first time in living memory, suddenly lost it once the S&P nosedived and the circling sharks all started chanting “October 1929” in unison.
“Worse than the Great Depression” was cunningly effective. So much so, it was employed by the incoming Obama administration, too, as US Economists struggled to keep up with China; even then it wasn’t nearly enough for the Paul Krugman types.
Just a few weeks after the Chinese had pushed the fiscal envelope, a summit was convened in Washington. The world’s top political class was growing concerned, becoming fearful, it wasn’t actually enough. As I mentioned already, nothing authorities had done (or would do) appeared to stem the crisis.
Worse, it was no longer purely financial. By the final few months of 2008, it had become very clear and obvious the global economy – even China – was going to take a massive hit. An equity meltdown is one thing, waves of millions even tens of millions thrown out of work quite another.
Hu Jintao’s office even put out the following statement about it:
“On November 15, 2008, the G20 Summit on Financial Markets and the World Economy was held in Washington D.C., the United States. Chinese President Hu Jintao attended the meeting and delivered an important speech… The international financial crisis has spread from parts of the world to the entire globe, from the developed countries to the emerging markets, and from the financial sector to the real economy, which has exerted a big impact on the economic development and people’s life worldwide, he pointed out.”
Though the crisis and global contraction raged for more than a half-year after all that, governments and central bankers immediately took credit for 2009 having turned out differently than 1930. It was simply accepted following that first poisonous assertion all the debt and “stimulus” must’ve accomplished that feat. Correlation is not causation, nor is “October 1929” the only possible downside to every serious monetary meltdown.
All these cult leader types out there have it backward. Rather than claiming the world is going to end and gathering a flock of the faithful on that premise only to be unable to deliver on it when the sun does shine the day after, they should instead mimic Bush by still predicting the End Times only to then take credit for why they inevitably won’t happen. As we’ve seen from Economics, from those on the inside they can’t tell the difference.
Who can prove the counterfactual?
The Chinese, that’s who.
Back then, the world went begging to Beijing to bail it out of serious trouble. Fifteen years later, Hu’s successor Xi Jinping would come begging for the same if only he had the political stability to do so. Worse than that, the rest of the world is in no shape to do much about anything.
China’s economy had been built on globalization, meeting the ever-growing demand of Western consumers and businesses. The whole point of Keynesian stimulus was to buy time until the presumed-temporary if deep recession ran its course and everyone got right back on track. That was supposed to have been the measure of success.
Instead, the “new normal” which was anything but normal set in immediately afterward implicating the very crisis itself for the change in trend. Economists have done everything they possibly can to deny the most obvious and clear link in almost a century of economic and monetary history.
The danger from 2008 wasn’t in 2009 becoming 1930, the real threat was 2009 being the first year for a permanent change in global economic character. And eventually political order.
One need only look at the economic statistics from China to see it clear enough. Keynes may have seen the Chinese through the worst of the so-called GFC, straight away in 2010 and 2011 the numbers all show how it was different, and not in a good way. By 2012, there was no going back.
More than anywhere, China came to create monstrous levels of debt, not just public, on the promise for a successful return to pre-2008 global conditions.
Hardly unique, deficits have been running almost nonstop pretty much everywhere. Countries that began with low official debt levels are now well beyond critical thresholds. The US may not have been in the former category though long ago passed beyond common sense limits. Deficits this year are almost New Deal-like already, and for what?
The problem isn’t really debt, though, at least not how most people look at it. They naturally worry governments will run out of capacity to borrow, that there will come a day probably soon bond markets will go belly up the way Wachovia once did.
No. The real danger is quite the opposite. Perversely, the more Big Government fails to add anything outside the shortest run, the more demand there is for its increasingly shoddy paper. That’s because by “shoddy” I mean credit profile. That isn’t what determines demand.
What we’ve instead seen is the public sector getting larger and larger at the expense of the private sector which cannot flourish in the post-2009 environment. There are simply too many constant “headwinds” starting with a monetary system and credit capacity that was never fixed from “subprime mortgages.”
The government takes on a larger share of economic activity and greater responsibility for redistribution. Both of those only make things worse. The poorest and those most negatively affected by the disastrous economy get hooked and can never come off. They often vote accordingly.
It is actually the same in China, too. As the Chinese economy continues to dwindle, economic circumstances worsening all the time, Beijing takes it upon itself often forcing local authorities to shoulder more of the marginal load. An already-overbearing central system becomes more centralized.
Washington is really no different. Since Bush, it’s only a matter of degree.
Because none of it actually works in the economic sense – it sure does in a political one – appetite for government debt in the market remains as stout as ever; at the expense of the private economy, of course. Worsening economy feeds more demand for safe and liquid. Central governments can borrow however much they wish, while hardly anyone else outside giant companies can.
They used to call this “crowding out.” I haven’t heard that term thrown around in years, maybe decades. If there is a Chinese equivalent, it probably hasn’t been uttered since Mao. The real downside of all this government spending isn’t finance, it has always been the economy.
November 2008 was a watershed. It was supposed to have been when governments collectively rescued us all from another 1930s. There is no evidence, real proof, that was ever a possibility. On the contrary, there are mountains of evidence that we did and continue to suffer a depression. Does it really matter if it wasn’t Great?
To any rational observer aware of all the facts, we ended up pretty darn close to a worst case anyway. What do we really have to show for it? All the debt, none of the recovery, a centralized spiral of bad ideas, predictably ineffective results, and, above all, no way out.
The future continues to be one of more government and its debts, not less. They'll sell you on the Great Depression that didn't happen so you won't notice the silent one that did.
