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China's Creditworthiness In A Death Spiral



The Great Depression of 1929 had struck America hard but it also affected Germany. 1931 was the turning point from an economic crisis to a currency crisis in Germany. According to the book “Made in Germany: the German currency crisis of July 1931”, it was not caused by a banking crisis, even though there had been a run in some banks before, and it was primarily domestic in origin, that is, in a period of turmoil, the politicians make things worse.
Like so many other countries, the German government's budget went into deficit as the recession progressed.
The financial community worried constantly about the creditworthiness of German bonds.
Reserves of foreign currency is a measure of the creditworthiness of a country and its bonds.
The accumulation of foreign reserves can be seen as collateral, which is being used for attracting foreign investment.
Therefore, foreign exchange reserves add to financial security.
There are three ways to accumulate foreign reserves:

  1. Capital inflows
  2. Foreign borrowing,
  3. Inflows based on the proceeds of export of goods and services.

Germany chose the second. The government did not believe Germany could survive without access to international capital markets.
The government aimed to keep the budget for 1931 in balance.
They meant what they said about cutting the budget, consolidating public finances, and retaining access to international credit markets.
The government inserted a special provision in the budget allowing it to make additional expenditure cuts if revenues continued to fall. This won widespread applause from the financial community, and the government succeeded in rolling over some 53.5 million RM worth of Treasury bills and selling an additional 71.5 million RM of new T-bills. But the government's efforts to place a longer term loan were unavailing.

The pace of German deflation soon made it clear that the task was impossible to complete. Some cities were near default or actually in arrears, forcing the government to step in several prominent instances. Since municipal loans in particular comprised a major share of the portfolios of many smaller municipal savings banks, this stirred additional fears of local defaults and put additional pressures on Reich finances.
Closure of the international loan market would put the government into a stalemate.
For all the big budget cuts, the deficit kept swelling so they had to tighten their belts yet again aiming to appease foreign creditors in an effort to line up international support for a loan and maintain Germany's international credit.
The newspapers increasingly published alarmed articles on the growing budget shortfall.
The depths of the budgetary crisis only emerged on June 9, when it became clear that tax revenues for April and May had run far below projections.
The announcement that Germany could pay no more Reparations (WWI compensation) generated a run on the mark in which banks failed and currency transactions were controlled.
The conclusion is that it was a crisis motivated by budgetary indiscipline, accompanied by lack of collateral (foreign exchange reserves) to back up the German currency.

The solutions imposed to Germany in July 1931 were (source: Money Museum in Bundesbank's complex, Frankfurt):
  • To levy import duties.
  • Bank notes shall be backed by gold and foreign exchange reserves. This provoked letting the money supply fall which made prices fall.

CHINA AND JAPAN, June 2017.
Let’s see if Germany’s 1931 crisis has taught some lessons to the current politicians.
All these terms are similar:
  • Forex Reserve accumulation.
  • Insurance against shocks.
  • Financial security.
  • Safe and sound condition
  • Collateral.
  • Creditworthiness.
  • Solvency.
Beginning with China, this is its Creditworthiness ratio, measured: Foreign exchange reserves divided by Money Supply M2. I haven’t added the Gold reserves to the numerator because it’s an insignificant amount compared to the Forex reserves ($74b.)
 *Own calculation based on data from Trading Economics website.

Where is the collateral? Just 12.7% collateral in June 2017.
Money Supply M2 has been growing at an annual pace of 14% the last 10 years. 
But since mid 2014 we’ve seen not only a suspension in the accumulation of foreign exchange reserves, but a steady fall.
This has caused the Creditworthiness ratio to turn into a death spiral since mid 2014, but the worse is that the expectation is a further deterioration at a similar strong pace, due to the continuation of the policy of massive printing money: the official target is Money Supply M2 growth of 12% in 2017.
 
Why does the International Community allow this to happen? We can assure there has been a turning point in mid 2014 and the odds is that it was politically motivated by the International Community.
Based on the three ways to accumulate foreign exchange reserves mentioned above, China isn’t utilizing foreign borrowing, and Capital inflows not only are non-existent but there is Capital Flight since long time ago. China’s military government  has imposed capital flow restrictions that is leading to trapped cash and it’s hampering the economic activity. They are utilizing the number three, accumulation of foreign reserves based on the proceeds of export of goods and services. 
But why has the International Community decided that China will continue printing money at a 12% annual rate and suspend the accumulation of forex reserves? It has to do with the use of the currency exchange rate to grant subsidies: if you want to manufacture goods in China, the military government gives you tones of yuans (Money Supply M2 increasing). In exchange for the manufacturing jobs, the International Community has demanded China to put its forex reserves up to work by subsidizing its citizens that travel abroad. That’s why you can easily see entire cities and towns centers invaded by Chinese tourists all across Europe, Los Angeles, etc… that buy everything with anxiety. As tourists you will see also many school trips, but when I was 10 years old, the school trips were to a green zone in the same city. If we add the official forex rate, there are 3 different exchange rates, scheme now in place in Venezuela, governed also by a military-political regime (you can follow the 3 daily quotes here)

Japan’s Creditworthiness ratio stands at 14,2% on June 2017 and it  has plummeted since its 10 year peak at 17,8% on December 2011, when it suspended the accumulation of Forex reserves policy. Japan’s Money Supply M2 is growing at a 3% annual rate in the last 10 years, so we will see further deterioration of the Creditworthiness ratio looking forward, but at a slower pace than China.

The absence of creditworthiness or collateral is not new around the world, but a concerted movement by the political-class that seeks the gains of leverage without requiring any collateral, because the collateral is put up to work as well so that they achieve a multiplier effect of an already multiplier factor with leverage.
For example. In the U.S., Congressional-chartered banks called FHLBanks have the statutory mission of providing loans to the Community Banks (Municipal Savings banks) in exchange for two types of collateral: a mortgage deposited in a FHLB which is being used, in turn, as collateral for its debt, and an obligation with the pledge to pay the loan back. It turns out that, according to the Regulator, the collateral is deposited in the Community Banks and not in the FHLBs, which is a big lie, because a FHLBank can’t verify if that’s true, also it can’t be used as collateral for the FHLBank’s debt and, the most important proof, the Community Banks are the best customers of Fannie Mae and Freddie Mac (known as FnF), whose business is to buy mortgages. Therefore, the Community Banks are selling off all the mortgages to FnF instead of depositing them as collateral for the loan granted, in order to raise cash again to finance the Municipalities and, subsequently, the FHLBs’ statutory requirement of collateral is non-existent, which puts them in a very fragile position (lack of creditworthiness or not sound condition).

BOTTOM LINE

Basically, the International Community allows several countries to embark in a campaign of mass-cheating, printing money to attract manufacturing jobs or to pay the cost of servicing their debt, in exchange for a cut on their benefit in the form of subsidizing their citizens when travel abroad (typical business of the Italian mafia: they allow you to operate as long as you pay a cut of your profits)
This scheme of the Worldwide Cheaters that comprise the G20 is about to collapse.
Just watch the Creditworthiness ratio as a tell-tale sign.

The International Community, or at least, those who share Western values, shall mandate the countries that increase the Money Supply M2, to back up their currencies with forex reserves 100%, as happened to Germany in 1931, which means China's Money Supply M2 would have to shrink 87%, the same rate as Japan.
Otherwise, China is a zombie country without creditworthiness, vulnerable to any sudden event, for example:
  • The United States levies import duties all across the board, which would limit the ability of China to collect foreign currency amid a slow growth economic environment. Something feasible if it applies reciprocity, as the American goods are taxed at a VAT of 23% in Europe, while Americans tax just at 7.5%.
  • A sudden collapse in commodity prices. China has spent the last 10 years buying stock piles of commodities everywhere in the world. The odds are that China has partially invested its forex reserves into hard assets.


Comments

  1. EURO ZONE
    According to the same website, the Euro Zone's Money Supply M2 has been growing at an annual pace of 6% in the last 10 years.
    The Creditworthiness ratio stands now at 3.8%.
    Was the Euro Zone an union of losers aiming to create a strong currency in order to avoid the mandate of holding collateral (forex reserves) as occurs with strong economies like the US and UK?
    This way, they are printing money like mad, without collateral.

    ReplyDelete
    Replies
    1. Euro Zone's Gold reserves stand at €17.4 billion, an extremely low level.

      Delete
  2. This post continues with another one in Blogger: "Germany Says Money Is Created Out Of Thin Air"
    http://vignote.blogspot.de/2017/08/germany-says-money-is-created-out-of.html?spref=tw&m=1

    ReplyDelete

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