07/07/15 – Mark Thornton – The Scott Horton Show

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All right, you guys, welcome back.
I'm Scott Horton.
It's my show, The Scott Horton Show.
Next up is Mark Thornton from the Mises Institute.
He is a senior fellow there.
That's mises.org.
They got about 10 zillion pages worth of good economics for you to read for free there.
Just search around.
He is book review editor of the Quarterly Journal of Austrian Economics.
His publications include The Economics of Prohibition, Tariffs, Blockades, and Inflation, The Quotable Mises, The Bastiat Collection, An Essay on Economic Theory, and The Bastiat Reader.
And his bio goes on and on, but we don't have that much time.
Welcome back to the show.
Thanks, Mark.
Hey, Scott.
It's great to be back on your show here today.
Very happy to have you on.
And we need time because we got two big subjects to tackle here, China and Greece.
I think I'm more interested in the China thing.
So let's talk about that.
Is it the case, then, that their stock market is now in free fall?
And just how bad and how fast and what does it all mean, sir?
Well, Scott, I think you're absolutely right.
While the mainstream media is all focused in on Greece, and that's certainly important, nobody's talking about what's going on in China.
And their stock market, it's been an amazing ride.
Over the last year, their stock market went from a level of 2,000 to a level over 5,000, a 150% increase.
And then over the last 30 days, their stock market has gone from 5,023 down to 3,600 this morning, and it closed at 3,727.
So a huge, huge chunk of that Chinese stock market has just evaporated right in front of our eyes.
All right.
Now, so we're all Austrians here.
That was a necessary correction, then, or it wouldn't have happened, am I right?
Or was it a natural disaster or what?
Well, the Chinese economy has baffled people for many years.
It had been experiencing 10% economic growth year after year after year.
If you saw pictures of the Olympics, you saw these amazing modern cities with skyscrapers everywhere around you.
But the reality is that China is still partly communist, they still have central planning, and basically what they've been able to do is plan their economic growth.
The Chinese Central Committee issues its growth targets to the provinces, and the provinces, in order to meet their growth targets, borrow all the money they want from state-run banks, and then they can use that to build anything that they want, whether that's an international airport or a high-speed rail system or a skyscraper that's over 100 stories out in the middle of the countryside.
They can do anything that they want, so that that GDP number stacks up along the lines that the Communist Party has dictated.
And so what they've done is they've built all sorts of nonsensical projects.
They've built whole cities that could house millions of people that lay empty.
They're called the ghost cities of China.
And we don't even know how many there are, because, of course, they're still pretty secretive, and they still keep a wrap-on information.
But basically, they've artificially increased their GDP by government projects, public projects, infrastructure, all that kind of stuff, and they've increased the amount of debt in the Chinese economy from $2 trillion up to $28 trillion.
And so they have massive financial imbalances in the world's most, the greatest number of people of any country in the world.
And so that's what's been going on.
Do you say $28 trillion in debt?
Now that's when you, like you do with the U.S., when you count up all the local municipal bonds and the states that are in debt and everybody's credit card and mortgage debt too?
Yes.
Okay, so that's the total debt.
That's the total debt.
So we're not comparing to America's $18 trillion national debt.
That's the total debt.
So what's America's total debt in comparison to that, by the way?
Oh, it's much larger, and it's gone up significantly over time.
But China's has skyrocketed in a very short period of time, and that's where the financial imbalances come.
If you develop debt and capital and wealth over a long period of time, the number can be super high and not be a problem.
But if you do it all very quickly in the short run, and you're not really producing wealth, you're just creating public infrastructure and things like that, then it can be, the financial imbalances can be enormous, and the problems in the real economy can be significant.
And so, you know, China is reporting that they're missing their growth targets over the last couple years.
Those are those artificial growth targets.
So if you stripped away all of this public and nonprofit spending, the Chinese economy could be in serious difficulties.
But we don't know the truth, because GDP, in this case, is really a complete fabrication.
It's an imperfect calculation, to be sure, even under the best circumstances.
But with China, you know that it's been rigged by an enormous amount.
So their economy is already suffering, and the stock market has corrected by a significant amount.
The Chinese government has put stabilizers in place.
You've got the big banks to agree to buy stock today and yesterday, in order to stabilize the market situation, and possibly even allow those financial firms to leverage up their investments in the Chinese stock market, in order to stabilize.
And so today, it appears that the Chinese market is at least temporarily stabilized.
Now, when was the last time they had a crash, anything like this?
Well, actually, they've had this before.
They had a stock market crash around the year 2000.
But it's been since then.
And so do we.
But we had another one in 08, was our correction.
They haven't had a correction since then?
That's correct.
Their stock market languished for a long time.
But at the end of 2007, their stock market was around 6,000.
And then just a year later, it was down below 2,000.
So that's an enormous crash.
And then basically, their market has been, after a brief recovery in 2009, their market has basically been flat and languishing until about a year ago, when their stock market took off from around 2,000.
And then in less than, well, in about a year's time, it maxed out last month at over 5,000.
And then we've seen this, at least a mini crash.
Might expect a little bit of stabilization here.
But in the longer run, we've probably seen lower levels in the Chinese stock market, because the types of investments that they've been making are long-term investments.
And you know that I follow the skyscraper index and the skyscraper curse.
And China is just about ready.
There's no news announcement yet.
But this summer, they're going to open the Shanghai Tower, which will be the tallest building in China.
And it will be the second tallest building in the world.
So it's not an actual skyscraper curse alert.
But it's about as close as you can come.
And as you know, many of the world's largest skyscrapers have opened during a time when their economy was in recession or depression and their stock markets had crashed or were crashing at that time.
Because they were all built at the height of whatever real estate bubble they were in.
But it takes that long to open up for business, right?
Yeah.
And this one is taking a long time.
I mean, this skyscraper was started around 2008.
It's taking an enormous amount of time.
All right.
Now, hold it right there.
We've got to go to break.
We're talking with Mark Thornton about China.
The good news is they've gone from Marks to Keynes.
The bad news is they've gone from Marks to Keynes.
Keynes.
I never say it right.
You know what I mean.
Anyway, Mark Thornton, he's a brilliant genius.
And when we get back, we're going to talk all about the crisis in Greece, too.
So hang tight.
Mises.org for Mark Thornton.
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All right, y'all.
Welcome back to the show.
I'm Scott.
I'm here with Dr. Mark Thornton from the Ludwig von Mises Institute, Mises.org.
They are more free market than your free market guys, man, I'm telling you.
And yeah, so we're talking about China and Greece.
We're going to switch to Greece in just a second, but I just wanted to mention, and you can elaborate this on you want, Mark, but I wanted to mention I've read a few different things about these ghost cities in China, and I just wanted to emphasize to people how easy it is to search ghost cities, China, and go find some articles to read about this, and it'll blow your mind.
And I mean, it's just, anything you ever heard about what the Austrians were trying to get you to understand about what causes the business cycle and the boom and the bust and the seeming good times followed by the inevitable massive crash and correction and bankruptcy of so many.
It's like they did this in China as an experiment just to, as like the control or some whatever, just to prove how right Mark Thornton is about everything.
And I mean, go and look at, there is no private investor in the whole wide world without a government backer who's going to build a city the size of downtown Houston with nobody in it for nobody who wants it.
I mean, this is just unprecedented probably in the history of the world, what they've done over there with this funny money.
And keep that in mind too, when everybody's scaremongering about how China's going to conquer the whole world, not as long as they have an American style monetary policy, they're not.
Well, you know, Scott, total debt in China, which is national, municipal, and private, has gone from $7 trillion in 2007 to almost $30 trillion now.
So that's been an enormous expansion in debt in a very few number of years.
In contrast, you know, we, the United States has racked up tons of debt too, but it's taken us about 40 years to go from almost no debt in total in the economy, just a few trillion dollars to almost $60 trillion, but that's over a 40 year period.
Even though a lot of it is more recent, it pales into comparison to the financial leveraging which has taken place in China since the economic crisis began in 2008.
Well, you know, it's an interesting story too.
I forget if we've ever spoken about this before, but Lou Rockwell had this great article a few years back called From Death Camp to Civilization.
It was when there was all the controversy over tainted toothpaste and children's toys with lead paint and that kind of stuff, and Lou was saying, hey, cut them some slack, and explaining how communism in China, it didn't just, you know, kill 40 million people, which yeah, it killed 40 million people, but it basically just reduced their entire culture right back down to the dirt.
They had to start all over again.
Only the weird quirk of it is they're starting all over again with late 20th century and now 21st century technology.
And so you have this rapid increase in real wealth taking place there when the government finally got, you know, to a great degree, out of the way.
As you said, you know, Shanghai went from nothing to a megalopolis in 10 years.
And you know, I guess a lot of that is phony credit, but a lot of that is just the Chinese people finally being set relatively free to pursue their own ends.
And so, I mean, I guess there's got to be some kind of weird distortions here and there, but you're emphasizing that the government intervention in the distortions makes them that much worse.
Is that it?
Oh, yeah.
I mean, I'm so happy for what's happened to China and the amount of freedom that they have.
That's a great thing.
And hundreds of millions of people have been lifted out of poverty by resorting more to markets and market-like institutions.
But you're right, Scott.
I mean, they're starting from scratch.
And so the norms of behavior, commercial law, property law, all of that is still in its infancy and they have a different perspective, the Confucius perspective, but they don't have the long history of developing norms of behavior in business relations and customer relations and the importance of goodwill and safety and all of those things are just starting to come around in China.
So I think, you know, longer term perspective, I'm very hopeful that the Chinese miracle will continue.
But in the short run, we have to be extremely concerned about the instability and the financial imbalances in that massive country.
Yeah, it's funny.
I just got a tweet from someone today saying, no, it's just American propaganda that millions of people died under communism.
And I'm just shaking my head, you know, I don't know what all propaganda he's reading, but I well, I just came across some kind of propaganda was saying Mao Zedong is the second most violent force in all of human history after World War Two, which included Stalin and Hitler and Mao and Chiang Kai-shek and Japan and America and us all.
But Mao's rule was second place to that.
Yeah, Mao killed people directly.
He starved regions.
So millions and millions of people died and suffered under that regime.
And their standard of living for the vast majority of the public was a subsistence wage type existence where people barely had enough to survive.
And when they were even when they were thinking about, you know, coming to terms with the West and meeting with us and making agreements with us, the first group that came over to the United States, they didn't have enough foreign currency reserves in their central bank to pay for the plane tickets from China to the United States.
So they were literally a dirt poor country.
And so you've got millions of people being outright murdered and killed and others being starved to death.
And then the rest of the population suffering enormously with periodic famines and disease that was running rampant because of a very poorly structured medical sector in their economy.
So there's been enormous improvements in the standard of living over there.
And again, we just have to keep our fingers crossed and hope that the progress over there continues.
And we have to hope that that the military balances will stay in check and the United States, Japan and India and Vietnam can maintain a balance where nobody wants to go to war.
Nobody wants to get into conflict because everybody is going to lose as a result.
I think the Chinese understand that.
I think the Vietnamese understand that the the Indians and the Japanese understand that.
And so that's my hope for the long run future of that region.
Can you talk to me a little bit about what's, you know, a couple of most important points what we need to understand about Greece and the EU?
Well, Greece and the EU, I mean, they Greece borrowed enormous amount of money after they joined the euro and they were given the seal of approval and the IMF encouraged them to borrow tons of money.
They invested a huge amount of money in solar power with the idea to provide electricity and carbon credits.
Those carbon credits turned out to be worthless or nearly worthless.
And so Greece is not in a position to pay off the debt.
They can't pay off the debt.
They won't pay off the debt.
And so we're going to have to move forward with the idea that Greece is bankrupt.
Sure, they have a lot of internal problems that they that need addressing.
But the IMF and the European Central Bank are just saying, OK, just continue to borrow more money.
We'll give you more money so that you can pay our banks for loans that the IMF and the European Central Bank can, you know, condoned in the first place.
And so this is going to be a really messy result, whether or not Greece continues to pay and stays in or whether they drop out and have to find a new currency, something to back their banking system.
Either way, it's going to be bad news.
But it's really the first inning, the first starting point of the disintegration of the European monetary system, the euro and even the political alliance of the European community.
So this is just the beginning of a lot of trouble going forward.
And it's impossible to tell exactly how, you know, this is going to work itself out because all these daily negotiations are just twists and turns in what otherwise is a long run play of disintegration from the European experiment.
Well, let's just make the Americans bail everybody out, right?
Well, they would like that.
And that's the whole idea.
Germany has been basically bailing out Greece and the European monetary system.
They're the only ones that have a positive balance on their account or of any significance where everybody else has a negative balance.
And so Germany has been subsidizing this whole system with the promise that they're going to get their loans to their banks paid back now that they're not going to be paid back.
One of the things that will eventually happen will be Germany leaving the euro or maybe reconstituting the euro with financially sane partners from the northern European area.
But the euro looks to be based on its constitution, something that will eventually disintegrate.
And Scott, I just can't tell you if that's going to be in a matter of months or a matter of decades, but it's inevitable.
All right.
I'm sorry we got to stop here, but thanks so much for your time again on the show, Mark.
Great to talk to you.
Hey, Scott, it's been great being on here and everybody come visit me at Mises.org and follow me at Dr.
Mark Thornton on Twitter.
Right on.
Yeah, you do that, everybody.
Mises.org.
Thanks, Mark.
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