Daily Archives: 24 April 2012

More Big Government

Posted on by
Reply

Now we have a big government feedback loop between the EU and the EU wanna-bes.  The Wall Street Journal reported over the weekend that our Treasury Secretary is urging the EU and its European Central Bank to “take stronger action” to get control over Europe’s potentially deteriorating debt crisis.

The success of the next phase of the crisis response will hinge on Europe’s willingness and ability, together with the European Central Bank, to apply its tools and processes creatively, flexibly and aggressively to support countries as they implement reforms and stay ahead of markets[.]

Not, apply themselves to get out of the way of the markets and give them room to right themselves.  No, the big government policies that created the economic disasters of the PIIGS and of the EU generally need to be applied even more so to stem the tide.

Hmm….

Indeed, as the WSJ went on,

Washington has long pressed Europe to bolster its emergency bailout funds and use them to backstop government debt. It has also urged the ECB to use all the weapons in its arsenal to calm financial markets.

How’s that working out for us, exactly?

The IMF is in on this tragicomedy, also.  Its steering committee Issued a Communiqué with this sage advice for the euro zone:

[C]ontinued progress on ensuring debt sustainability, securing financial stability, and undertaking bold structural reforms will be crucial to boosting confidence and productivity, facilitating rebalancing within the monetary union, and promoting strong and balanced growth.

Most of this is pap, intended solely to give the impression of advisement.  However, with apologies to Inigo Montoya, you keep using that phrase “undertaking bold structural reforms.”  I do not think it means what you think it means.

Another Object Lesson

Posted on by
Reply

…if we’re only willing to listen to it.  The Wall Street Journal‘s sub-headline says it all:

Borrowing Fueled Chongqing’s Infrastructure Projects, Highlighting National Problem of Reliance on Government Spending

“…10 major investment vehicles the city used to fuel its growth accumulated more than 346 billion yuan ($54 billion) in liabilities,” the WSJ reports.  Moreover, this is just the publicly acknowledged debts of the city.  The various national government-owned enterprises in Chongqing likely have their own debts, and these are not obligated to discuss them.  Northwestern University Associate Professor of Political Science and an expert on local government debt in the People’s Republic of China, Victor Shih, adds

I don’t think it would be a stretch to say that Chongqing local government, state-owned enterprises and state-owned developers collectively owed 1 trillion yuan [$156 billion] at the end of 2011[.]

What has Chongqing to show for this?  High risk, for one: a significant per centage of that debt is secured by land the city owns or controls.  To pick on Chongqing Yufu Assets Management Co., a city-owned investment vehicle established in 2004 as an example: the city loaded Yufu with land that then was used as collateral.  Now its 63% debt-to-asset ratio makes it one of the most heavily indebted financing vehicles sponsored by the Chongqing government.  Its 2010 profit of 1 billion yuan sounds good, however, asset sales now are likely to be necessary in order to service that debt—but Yufu’s assets are that land that’s bound up as collateral.  Moreover, that 2010 profit is down, sharply, from the prior year’s profit of 1.7 billion yuan, due to just as sharply falling revenue from its land holdings.

What happened the last time vast debt was secured by a land or housing market in a country near you and I?  At least in the US, our government can just print up all the money it needs….