The ever impressive Evans-Pritchard from the Telegraph is a monetarist, but not unwilling to let the evidence speak. Case in point, China did much better with the fiscal stimulus compared to the monetary ones in the US and UK. But, China wasn't exactly without monetary stimulus either..
Fed goes Keynesian, praises China’s fiscal blitz, abjures QE West (technical)
I’ll eat my hat. The St Louis Federal Reserve – the last bastion of monetary orthodoxy in the Fed family – has just published a paper that basically deems quantitative easing to be useless. John Maynard Keynes was right all along.
The working paper by Yi Wen and Jing Wu cites China as the world’s resounding success story post-Lehman – a “dream outcome” no less – while the West and other Brics have deployed the wrong instruments, forgotten the lessons of the 1930s, and failed to recover fully from the slump. It could have been written by Paul Krugman (well, almost).
It makes the point – often forgotten in the West – that China suffered a 45pc collapse in exports when the storm hit, “one of the largest trade collapses in world history since the Great Depression.”
This threatened China with devastation. It had an export/ GDP ratio of 38pc at the time. The shock could have easily pushed China into a full depression and social upheaval.
China averted the worst with a four trillion yuan ($640bn) package of fiscal stimulus (and let rip with credit). It copied Franklin Roosevelt's New Deal and later his military spending, the difference being that the money went into infrastructure rather than weapons.
The Politburo was able to do it by pulling levers in the vast state entities (SOEs), the same dinosaur companies that we usually decry as the country’s curse, but the authors make a bigger point:
We argue that a key difference between China’s stimulus package and the Western stimulus packages is that the Chinese package is fiscal in nature whereas those in industrial countries are monetary in nature.
China may be lucky to have had a large enough SOE sector available at the onset of the financial crisis to help defend its economy from a crushing slowdown.
The crucial lesson learned from China is not that SOEs per se are desirable, but rather that credible fiscal policies matter in eliminating a co-ordination-failure crisis, whereas purely monetary (or half-hearted fiscal) policies do not.
We believe that the inability to implement aggressive and decisive fiscal policies in Western countries explains the stubborn persistence of the Great Recession and jobless recoveries in the United States and Europe, in contrast to the recent rapid economic recovery in China and the Great Recovery in the United States (in the 1930s-40s) following the Great Depression.
Worth a read for those who like this sort of stuff. Time will tell whether this is delusional. My own view is that a rise in the credit-to-GDP ratio from 120pc to 220pc (including off-books games in Hong Kong, and all forms of shadow banking) accounts for much China’s uber-growth over the last five years. Credit has jumped from $9 trillion to $24 trillion. It dwarfs the fiscal stimulus.
As Charlene Chu (ex-Fitch) has repeatedly warned, this is unprecedented in any major country in modern times – twice the bubble build-ups in the US 2002-2007, or Japan 1985-1990 on a pro-rata basis – and will be extremely difficult to deflate gently.
As for the merits of China’s SOEs, which gobble up most of the credit for poor return, I defer to premier Li Keqianq. He is surely right to argue that this vast outdated edifice is itself the biggest threat to China's long-term health as it exhausts the low-hanging-fruit of industrial catch-up growth. Mr Li says the middle income trap lies in wait for China if it does not jettison all this clutter, and embrace the free market (and free thought) instead.
It is in any case too early to write off the radical monetary experiment under Abenomics in Japan, or indeed the QE-driven recovery in the US.
Britain’s alleged recovery is another matter. It looks increasingly like a sham, pre-electoral flummery driven by consumer and mortgage credit. The current account deficit of 5.4pc of GDP announced this morning is shocking, evidence of a hopelessly deformed economy, one encouraged in its vices by a complicit government.
Yet those of us loosely in the monetarist camp have a lot of questions to answer about the events of the last five years across the world. The experience has certainly caused me to think long and hard about the brilliant insights of Lord Keynes.
But lest we forget, Keynes was also a very great monetarist.