Fellow finance blogger and surfer John Hempton has been investigating and exposing Chinese frauds for some time now, but his latest post raises the bar quite substantially:
The Macroeconomics of Chinese kleptocracy
Were it not for his impressive record of finding fraud, his recent post would be easily dismissed, but That Retired Guy (TRG) thinks he may actually be on to something.
The real surprise is that he is willing to come out with something so inflammatory in the first place. China is a pretty nationalistic place, and if he is right in his post, it is also the largest, richest mafia organization in history. He is hitting at the core of what is likely to be seen as THE most sensitive issue for the nation. At very least, Hempton can probably expect his computers to be hacked, and at worst, you can't eliminate the possibility of becoming personally hacked-up or otherwise coming to a violent end! So, TRG says 'hat's off' for speaking truth to power, and if not actual truth, then 'hat's off' for having the guts to say it anyway.
His main premise is that China works because the captive population is forced to save an negative rates, and this gives the thieves in power room to steal and still look like a successful economy. It's true enough, although TRG suspects that most Chinese bureaucrats and SOE employees (at least the low level ones) probably have a firm conviction that they are doing the right thing for their country. Not that their conviction matters per-se, in fact, that may be the reason the the whole fraud works.
The problem with macroeconomics is that there is generally little, or no predictive value to it. Knowing that China will blow up someday does not tell me what to do tomorrow. Furthermore, when China does blow up, the macroeconomic story will still be a background issue, and the thing that really gets the ball rolling will be some sort of event.
Macroeconomics are a bit like the stage design in a theater production. The theme of the stage certainly contributes to the feeling of the play, but it does not direct the plot in the way that the dialog, or action does. Even if China is the biggest fraud ever, it can still get much bigger. It could even grow to become the first world empire before things collapse.
TRG doubts Hempton would refute this, for example, it's unlikely that he has found a way to make a financial wager on the macroeconomic story. Of course, that doesn't make the macroeconomic story any less interesting.