Stock Buybacks and the Wisdom of Presidents

Steven Pearlstein of the Washington Post published an article that draws a parallel between the mortgage bubble of the Bush years and the current corporate stock buyback bubble, which to be fair began under Obama but continues under Trump. Pearlstein omits the biggest bubble of all:  the Obama bailout that sustained years of malinvestment in derivatives and real estate.  Also to be fair, the Obama bailout began under Bush but was ramped up.  At one point economists at the Jerome Levy Center at Bard College identified $29 trillion in subsidies to Wall Street; hence, Obama oversaw the largest subsidization of any industry in the history of the world.

Here is the wisdom of presidents, reflecting the democratic, Progressive genius of the American people:

Bush:  Have the Fed print lots of money and sell houses to people who can't figure out how to find a job. 

Obama: Have the Fed print lots of money and give it to Wall Street investors who can't figure out how to invest. 

Trump: Have the Fed print lots of money and give it to corporate executives who can't figure out how to innovate.

China Crash?

John Derbyshire of National Review.com has an interesting post (h/t Larwyn) concerning the possibility of a China crash. Derbyshire notes that two previous times in modern history have nations run up large foreign reserve balances:

>"The first time occurred in the late 1920s when, after a decade of record-beating trade and capital account surpluses, the United States had accumulated what John Maynard Keynes worriedly described as "all the bullion in the world." . . . The second time occurred in the late 1980s, when it was Japan’s turn to combine huge trade surpluses, along with more moderate surpluses on the capital account, to accumulate a stockpile of foreign reserves only a little less than the equivalent of 5-6% of global GDP"

In May 2008 I noted that a Chinese tragedy is in the making despite the major strides that the Chinese economy has made. Like the political leadership of all managed economies, the Chinese government is subject to massive errors and missteps that are far worse than would occur under laissez-faire. I wrote then:

"Tragically, the Chinese perceived the spectacular image of large-scale development and have attempted to emulate Robert Moses's approach with large construction projects, continuing to limit the intellectual and economic freedom on which economic development depends. Equally sadly, Americans lost sight of the reason for their success, and passed laws and regulations, and imposed punitive taxes, that have inhibited entrepreneurship, slowing American economic progress, even as they have increasingly provided welfare payments to incompetent bankers, real estate developers, academics and Wall Street stock jobbers who do not produce wealth.

"This country and China have squandered resources in stupid ways. The bubble will burst as all credit bubbles do. America may have enough resources to reassess its errors. The Chinese likely do not, and many there will be hurt."

Coming Chinese Instability

This is a tale of three nines: 1989, the year of Tiananmen Square; 1999, the year of the tech bubble; and 2009, the year of Chinese support of and complaints about the dollar.

The current global monetary regime seems to parallel the 1999 tech bubble. During the tech bubble investors believed that the stock of Drugstore.com and Cisco Systems would indefinitely escalate. Like all asset bubbles, the tech bubble came to an unhappy end. Ten years later, in 2009, the Chinese seem to think that if they keep buying dollars with yuan and threatening to withdraw the investments then in the end the investments will hold their value.

The Chinese have subsidized the dollar at the expense of their already low-wage workforce. If they keep holding up the dollar, then the Chinese people will become poorer. But if they pull out of the dollar, then their substantial dollar holdings will diminish in value, the Chinese workers will be thrown out of work and the Chinese people will become poorer because of the losses due to the dollar holdings.

Shall we conclude that the Chinese economy is headed for a rough ride?

What do we know about the stability of Chinese society? In 1989 the Tiananmen Square Protests led to hundreds of communist killings. Anyone who was conscious that year will remember the young man standing in front of the tank (see above). Since then, the Chinese have enjoyed a vibrant bubble economy based on fast money growth. But crashes inevitably follow monetarily induced bubbles.

When the Chinese economy tanks there will be alot of unhappy Wal-Mart-supplying factory workers. Perhaps the power of the Chinese state will prevent social unrest. Perhaps not.