Glad you raised that @Scoonie, Chinese trade protectionism has been a huge thing long before Trump.

I'd add the point that the biggest protectionist policy from the Chinese was FX manipulation

For decades, the PBOC kept the yuan artificially weak by buying U.S. dollars, ensuring Chinese exports remained ultra-competitive.

These purchases were made with yuan created out of thin air and used it to buy dollars from exporters and financial institutions which meant it entered the Chinese banking system. To prevent inflation (which is always and everywhere a monetary phenomenon) the PBOC sold "sterilization bonds", and forced banks to buy them.

In theory, this kept much of the extra liquidity out of the real economy, but the scale was so.massive it still led to explosive credit growth. This fueled a real estate bubble, excessive infrastructure projects, and a mountain of local government debt.

So while tariffs played a role in shielding domestic manufacturers, the real turbocharger for China’s rise as an export powerhouse was a highly managed currency, and a banking system engineered to absorb endless waves of liquidity. That strategy worked brilliantly for decades, but it also created a system addicted to credit expansion.

But..as exports slow and debt piles up, it's getting harder and harder to sustain. Which means it's harder and harder to suppress the yuan.

Btw, this is a big part of why the Chinese have strict credit controls (which limit the money that can be taken out of the country), although there are plenty of back doors for the politically connected. (To the delight of property investors in Australia, incidentally).

Anyway, I'm against tariffs, and trade protectionism in general, but it's worth acknowledging that China has been far more egregious in this regard.

Just when I think I learn something on a casual Sunday morning... I learn 10 more things. The ignorance curve is DEEEEEEP in this complicated economic world. The beauty of this platform is the ability to stand on the shoulders of others and follow, replicate and most of all, learn

All of this monetary mechanics stuff can be pretty wonkish, but it impacts us all in a very real way (albeit in a manner that is very hard to see).

It's a deep rabbit hole, but one I find endlessly fascinating (and frustrating, the more I understand it)

Here’s my mental model as best I can explain it…

Every activity in the economy is mediated through money (obviously) which fundamentally serves as a record of who has created value.

When money is borrowed, it results in fresh money creation (in a very literal sense). Essentially, pulling value creation forward, or at least, the promise of future value creation.

So banks offset their liability, the loan, against this future promise, the asset. The books balance.

Nothing wrong with that at all. Credit creation can play an important role in stimulating economic activity and value creation.

It's only a problem if the borrowed money (whether borrowed by individuals, companies or government) is used poorly (ie. In a manner which makes it hard to be repaid). And even then, it's only a problem for the person who borrowed the money and the entity that lent it to them.

That's just the risk of lending out money!

But for some reason we have come to prefer avoiding any reckoning for ill advised debt issuance. So instead of letting the consequences of malinvestments be borne by those who took the risk, we socialise it via some form of bailout (QE, artificially suppressed interest rates, capital controls and other forms of financial repression).

The tl;dr being that we see the monetary base expand faster than the aggregate productive capacity of the economy. And that causes inflation.

Worse still, all this artificial intervention keeps unproductive businesses alive (zombie companies) and funnels money into uneconomic investments, like overpriced real estate, speculative bubbles, and politically favored projects. Instead of funding real innovation and productivity, capital gets trapped in low-return assets and financial engineering.

Things like QE isnnt a constant feature of the system, but it doesn’t need to be. It only happens in “emergencies” --financial crises, recessions, pandemics -- whenever markets start to break.

But because these crises keep recurring (ironically, usually because of past interventions), central banks step in again and each round leaves lasting distortions. Even if QE stops temporarily, the new money never really gets removed (not at any meaningful level), and the distortion persists.

At first, the system "works" because debt is cheap, and inflation is contained. But over time, it dulls economic dynamism, leads to rising costs without rising prosperity, and forces central banks into a corner. If they raise rates to fight inflation, they risk a debt crisis. If they keep rates low to sustain growth, inflation spirals further.

This is why we end up with either runaway inflation (if they keep pumping money) or stagflation (if inflation lingers but growth slows due to all the distortions).

(It's also why we end up with mega corps, and less competitive dynamism, because they enjoy better and cheaper access to credit, as well as regulatory protections and political favour. Just look at what happens with Qantas in CoVid, as one of a million examples. But this is a whole other story..)

It's all done with the best of intentions (we'll just do it this one time and find discipline again once the situation is fixed..), and due to the incentives at play

Politicians don’t want recessions on their watch, central banks don’t want financial instability, and no one in power wants to take the short-term pain needed for real reform. So the interventions continue, the distortions pile up, and the hole gets deeper.

To be clear it's not the debt that is the problem per se, but rather the fact that it is used unproductively.

You can trace much of our problems all the way back to the GFC and even earlier. And the dynamics at play is why I think we're going to continue to face persistent inflation and sluggish or stagnant real growth.

Btw, because this system also inflates asset values, owning shares is still one of the best ways to preserve wealth (at least, that is, shares in companies that can still deliver some actual real value )

Anyway, if I were Emperor, I'd stop all this messing with the money and remove the moral hazard it leads to. If any kind of bailout is warranted, I'd limit it strictly to depositors.

As Charlie Munger said, capitalism without failure is like Christianity without hell.

Sorry for the long winded, rambling rant.. maybe I have it wrong so, as always, I'd appreciate any push back.

Hey @Strawman, no need to apologise. Enjoyed your rant into the monetary rabbit hole—it’s a refreshing take (which is often difficult to articulate). Can feel your mix of fascination and frustration dripping of the post :)

Am with you on unproductive debt and bailouts screwing up the economy—zombie firms, asset bubbles, and big corps getting handouts like Qantas (just read Joe Aston’s book… holy #@$*!) are glaring proof.

Loose monetary policy surely distorts things, but I reckon the RBA’s rate cuts—and that big stimulus (…and of course China)—helped softened the GFC blow. We dodged a nastier hit than plenty of others.

Yep about inflation but not just money supply; supply chain snarls can crank it up too…

Enjoy your Sunday, cheers!

There's always an emergency to justify it @SayWhatAgain :)

Not that I think authorities should have done nothing in response to the GFC or COVID, but it should have been far more targeted, and wound back far sooner.

Also, I hear you on supply shocks, but I just think prices rising in response to reduced supply is EXACTLY what we should expect, and even want. That's what incentivises a supply side response. And why, when left to itself, supply shocks always resolve themselves.

What doesn't help is adding artificial demand to a system that has supply constraints...

I haven't seen Aston's book on Qantas but it is obvious that here is a conflict interest somewhere between the airline and the government when the government holds some shares in Qantas. Pretty obvious the government wants to keep the share price from falling so I think it is a pretty "safe" investment from that point of view. However there will be others that won't be comfortable with this as the day could come when Qantas becomes fully privatised. This is something which I thought about now and why I think it was a mistake listening to those on twitter stating it is an easy short from the news of Alan Joyce resigning. Then again, some will say they are right even if the share price has gone up 100% from those levels.

The short thesis would be in play if the government is forced to privatise Qantas, not when Alan Joyce resigned.

I agree governments overdo crisis response and seem to splash our $ way too easily.

I  think response to the GFC was somewhat targeted; they hit households and borrowing costs fast, and GDP never dipped negative. COVID was messier— JobKeeper kept jobs, but yeah, it lingered too long. Fair point on the need to wind back sooner.

Yep, I am mostly with you, but my point is that it’s not always that straightforward—eg when the shock is so big that the market can’t quickly snap back. Take the energy crisis in EU after the Ukraine invasion. Supply crept up but not fast enough and they’re still hurting. Point is that unprecedented shocks can be so brutal that price signal alone don’t cut it, esp. when there’s issues w infrastructure or when geopolitics is involved.

100% with you that artificial demand when supply is constrained is disastrous.