My letter to the NY Times re: China’s Bubble Economy from Monetary Stimulus

BalloonRe: China Again Is Growing, More Slowly Than in Past

Dear Sirs: Your recent report that China’s economy is growing, but more slowly than in the past, contained this shocking statement:

“China is awash in cash, since the government has expanded the broadly measured money supply over the past five years much more rapidly than the United States, even though the Federal Reserve’s moves have attracted considerably more international attention. China’s money supply is now larger than that of the United States, even though China’s economy is half as large.”

China’s slow growth despite greater injection of monetary stimulus is a warning sign that its growth is a transitory bubble about to burst.  Austrian economic theory explains that monetary stimulus will indeed cause a temporary expansion of GDP but that monetary expansion must accelerate to prevent a bust.  There is no preventing the bursting of the bubble once the monetary expansion has begun.  The earlier the monetary expansion stops the less damage to the real economy.  Trying to prevent the bursting of the bubble, which appears to be China’s policy, would require greater and greater monetary injections until the monetary system crashes per Germany in 1923 and Zimbabwe in more recent times.

Patrick Barron

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