I'm not sure that this post is appropriate for my audience who I am targeting as generally educated and capable of critical thinking. This economic blog's leadership and readership are economists who are fed up with conventional economic theory, and are exploring new ways to think about economic issues. Because it is designed for economics specialists, the blog uses a short-hand way of communication that cannot be easily understood by generally educated people (this includes myself). I don't regard them as having a radical perspective on their subject, but because they are seriously questioning traditional economic theory, they are making some progress in understanding why capitalism is so dysfunctional.
This author investigates the excessive use of debt in China to keep their economy going at its accustomed fast pace, and the recent crash that ensued. From this examination I think we can learn a primary reason how capitalist economies experience periodic crashes which have such a devastating impact mostly on working people.
My understanding of China's economy is that it is mostly capitalist but supervised and managed by China's Communist party. As such the Communist managers appear to have fallen for Western methods of pumping the economy by permitting their bankers to use debt issued to capitalists as a stimulus. Although I have seen some evidence that the Communist managers want to shift to a consumer economy, the prime motivation for owners of capitalist enterprises is to maximize profits which conflicts with Communist intended policies. Capitalist want to keep their labor costs as low as possible which makes it very difficult for worker-consumers to purchase the products they make. This is an excellent illustration of capitalism's direct conflict with societal goals because capitalism only serves capitalists not societies as you have likely been taught.
But I digress a bit because Keen's focus is narrowly on the issuance of debt to prop up China's economy. It must be kept in mind that only upper income people and capitalists in particular--he refers to all of these people as "speculators"-- take on debt, and they have been lapping up debt in huge amounts to gamble in their capitalist casinos.
What does this dramatic unwind of the over-levered Chinese stock market imply for the real economy? As I noted in last week’s post (“China Crash: You Can’t Keep Accelerating Forever”), the previous Shanghai stock market crash in 2007 didn’t qualify as a harbinger of crisis, because private debt had been both low (relative to the West) and relatively constant (at about 100% of GDP since 2000). It was a crash where speculators themselves were either overwhelmingly cash-financed, or got their debt from less volatile sources than margin debt.
This time is different....