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Generational Dynamics Web Log for 11-Nov-2008
Panicked China announces gargantuan stimulus package, as AIG bailout is almost doubled

Web Log - November, 2008

Panicked China announces gargantuan stimulus package, as AIG bailout is almost doubled

This was another hugely historic day, though few people paid attention.

China announced a 4 trillion yuan stimulus package on Sunday.

This equals around $570 billion, and it's absolutely enormous, representing 18% of the country's annual GDP of $3.3 trillion.

By contrast, America's $700 billion bailout represents 5% of the country's $14 trillion GDP.

Here's China's announcement:

"China said on Sunday it will loosen credit conditions, cut taxes and embark on a massive infrastructure spending program in a wide-ranging effort to offset adverse global economic conditions by boosting domestic demand.

A stimulus package estimated at 4 trillion yuan (about 570 billion U.S. dollars) will be spent over the next two years to finance programs in 10 major areas, such as low-income housing, rural infrastructure, water, electricity, transportation, the environment, technological innovation and rebuilding from several disasters, most notably the May 12 earthquake."

This is a desperate move, in response to an economy that's increasingly in serious trouble.

But there were many more signs of desperation on Monday.

Putting all of these together, it probably amounts to $1 trillion in bailouts -- all in one day! That's truly historic!

And yet, it's hardly being noticed in the news. If there are any news reports at all, they're at the level of the latest crop reports.

Once upon a time, long, long ago, any loosening in the Fed Funds rate would be big news. But now, the world has become so blasť that a $1 trillion bailout hardly brings a nod.

Two things are obvious:

As I've explained numerous times, the collapsing credit bubble is removing a few trillion dollars from the world every day, and there's no possibility that any number of bailouts will work at all.

I'd like to explain why I believe that the Chinese bailout in particular cannot possible work as intended. This is a very general argument at a "system level," rather than focusing on specific details of the Chinese economy.

Suppose you have an old desktop computer, and you want to speed it up. So you buy a new, faster hard disk, and a new CPU that runs twice as fast, you plug them into the system board, and away you go. Unfortunately, the computer is barely faster at all. Why? Because you have to speed up the whole system -- the data buses, the memory, and so forth. It can almost be said that the system will be as fast as its slowest component. Even worse, a speed mismatch between different components may actually cause the system to run slower!

That's the problem with China's bailout. It targets certain "components" of China's economy, but it creates mismatches that will prevent the economy as a whole from benefiting. In fact, the mismatches may cause a great deal of waste, making the situation worse.

It's mind-boggling how long this process has gone on. Absolutely nothing has worked, but each failure has only brought on a bigger bailout and more failures. The dreaded massive failure -- a huge collapse of the entire financial system -- has been avoided so far, by targeting each bailout to a specific point of failure. But as in China, the bailouts have made the entire financial system diseased and distorted, guaranteeing that the massive failure will be worse than it would have been if all the bailouts hadn't been tried.

(Comments: For reader comments, questions and discussion, as well as more frequent updates on this subject, see the Financial Topics thread of the Generational Dynamics forum. Read the entire thread for discussions on how to protect your money.) (11-Nov-2008) Permanent Link
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