August 2009 Archives

Helmates.
Chinese banks gave out more than USD 1 billion during the first 6 months of 2009. This is equal to 25% of China's total GDP. The plan is to boost the economy by sponsoring viable projects that will create new jobs and increase productivity. However, even according to Chinese government sources, about 20% of these new loans already found their way to the stock exchange. Prof. Michael Pettis from Beijing University, estimates that 20-33% of these new loans go directly to the stock exchange, real estate market, or even the gaming tables in Macau. 

This means that a big chunk of the loans are not even going to the projects they are supposed to sponsor and are instead used to inflate prices in other parts of the economy. It is not surprising, then, that the Shanghai stock market went up about 70% since the beginning of the year, and that real estate prices in many Chinese cities are going up, despite declining occupancy rates. 

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Monetary Base .png

Above is a chart of the US Monetary Base - the total amount of currency in circulation and in central bank deposits. As you can see, the total amount of money in the America more than doubled since the end of 2008. This was achieved through the actions of Federal Reserve, in the service of the US Government. It was done in order to create money to pay for the government's bailouts, stimulus package, and other obligations. 

But, can money be created just like this? Yes. Can it maintain its original value? No. So... all the people who are saving in USD were essentially taxed by the US government (through diminishing the value of their savings). 
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Note: The views and observations expressed on this web site are published for the sake of public discussion and do not represent my personal opinion or the opinion of my companies, clients, and/or employers. If you would like to get my opinion on anything, ask me.

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