Four Trillion Yuan of Keynesian Stimulus Spending provided an Economic Recovery in China that lasted about 2 Years

Posted by PITHOCRATES - September 22nd, 2012

Week in Review

Before the early 20th century we looked at economics differently.  We looked at it correctly.  We understand the importance of savings to capital formation.  And we understood the stages of production.  How economic recovery didn’t happen until it reached the higher stages.  Those stages the farthest away from retail sales.  The raw material industry.  The manufacturing industry.  Who make the components the assembly plants use to build consumer goods.  When these higher stages businesses recover then there is an economic recovery.  Because it takes time for those higher stages goods to make it down to the retail level.  So they don’t invest until they know there is a real economic recovery.

This is why Keynesian stimulus spending doesn’t work.  When central banks increase the monetary base it can create a surge of economic activity.  But it also depreciates the currency.  And raises prices.  Higher prices lead to an economic slowdown.  It’s just a matter of time.  Which is why the higher stages of production don’t respond to economic stimulus because by the time their new goods reach the retail level the higher prices will already be slowing down economic activity.  Meaning there will be no demand for their expanded production.  So they will have to lay off employees and shutter facilities.  Resulting in another recession.  Or just a resumption of the previous one.  Only worse.  Because the depreciated currency leaves consumers with less purchasing power.  So they can’t buy as much as they once did.  Creating further excess capacity.  Further layoffs.  And a worsening of the recession they tried to end with that Keynesian stimulus spending.

The Chinese are all Keynesians when it comes to economic policy.  So when their economic activity slowed they went to the go-to Keynesian solution.  Expand the monetary base (see China Slowdown Seen Longer Than 2009 by Government Researcher by Bloomberg News posted 9/20/2012 on Bloomberg).

With the 2008 crisis, China enacted a 4 trillion yuan ($586 billion at the time) stimulus and opened up bank lending to revive expansion. Year-over-year growth, after decelerating for seven quarters, bottomed at 6.2 percent in the first quarter of 2009 and accelerated to 11.9 percent a year later…

Chinese Premier Wen Jiabao, who pledged last week to employ monetary and fiscal policies to spur growth, has accelerated infrastructure-project approvals while refraining from introducing a stimulus package on the scale of the one during the financial crisis.

There was a burst of economic activity following the stimulus.  Something all Keynesians in the United States point to.  Saying the reason why the American stimulus didn’t work was because it wasn’t big enough.  Like it was in China.  (They say this even though the Chinese spent less than the Americans.)  Where it worked so well that they need to spur growth with new monetary and fiscal policies this year.  After the new economic growth that began about 2 years ago fizzled out.  Which was far better than the American stimulus that provided no economic growth.  Even though they spent more.  Proving that Keynesian stimulus policies don’t end recessions.  They just offer false hope.

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