From Barron’s, Chinese Puzzle by Thomas Donlan:
Worldly wise investors and sophisticated geopoliticians sometimes forget that Chinese markets reflect the power of the country’s government more than its economy. The price of stocks in state-owned and state-funded corporations has too little to do with their profits and too much to do with their political connections.
Just as admirers of Maoist communism ignored murder and starvation on a scale that overwhelmed the evils of Hitler and Stalin, admirers of Chinese economic reform have often ignored the chain-mail authoritarian fist inside the velvet economic glove.
In a famous comment in 2009, Thomas Friedman of the New York Times acknowledged the fist and ignored it: “One-party autocracy certainly has its drawbacks,” he said. “But when it is led by a reasonably enlightened group of people, as China is today, it can also have great advantages.”
Growth and prosperity in China have been handed down from governmental heaven through the diktats of central planners, and financed through manipulation of money and exchange rates.
Central planning that is intended to eliminate chaos eventually creates it. As Friedrich Hayek wrote in The Road to Serfdom, state economic planning is unavoidably arbitrary: “The more the state plans, the more difficult planning becomes for the individual.”
Among many examples of this principle: If a government tweaks money supply to hit targets for interest rates and exchange rates, it will provide stability in those things, but the economy will fluctuate. Or, if the government tries to guarantee general economic growth, as measured by employment, gross domestic product, consumer confidence, business investment, or all of them, rates of interest and exchange will fluctuate. Either way, the economy will be under control of an unstable, unpredictable thing that seeks order instead of liberty, and so can deliver neither.
All over the world, there are people who imagine themselves to be masters of the material universe. They are the greatest threat to liberty and prosperity.
Read the entire Donlan link.
Historian Paul Johnson laments the history of trying political solutions to economic problems. (I would add the poor record of trying political and economic solutions to cultural deficiencies.)
In today’s Wall Street Journal, Ben Bernanke reviews the success of the Fed in managing the 2008 collapse. How The Fed Saved the Economy. I agree that he deserves much credit, but managing a crisis is distinct from managing an economy. The problem with the use of many Keynesian concepts lies in making that distinction. Bernanke also notes the limits of Fed policy; at some point fiscal policy clearly matters.
For years the Fed has bailed out poor fiscal policy. Faced with zero interest rates they are out of ammo. It makes one shudder when one of the justifications for raising rates is being able to cut them again in case we lapse back into a recession.