When $3 Trillion is Small Time

Six years.

That’s how long the Federal Reserve has been using money creation to prop up the U.S. economy.

It’s given several reasons for its actions, including…

  1. Saving us all from financial Armageddon.
  2. Pursuing its mandate of maximum employment.
  3. And generally performing its duty of overseeing the currency.

We might not like it. Some of us might downright hate it. But the Fed gets to make these decisions, not us.

Through its actions, the Fed has created over $3 trillion out of thin air. This number is so large, I can’t really imagine it.

If the Fed were a country, its $3 trillion of money printing would be more than the GDP of all but four other countries — the U.S., China, Japan, and Germany. That’s pretty big.

But there is one measure by which the Fed is still small time…

That is, in overall money creation.

While the Fed has created $3 trillion, U.S. deposits and loans growth has been mild. That’s because, as the Fed created money by printing, consumers spent their time deleveraging by cutting their debt.

Extending credit — making loans — is the other form of money creation. While the Fed was busy pouring money into the bucket of the U.S. economy, consumers were busy draining it out by paying off debts or having them written down and forgiven.

When credit creation is factored in, the Fed money-printing doesn’t look so big…

When we bring the Chinese into the picture, the Fed’s activities look almost paltry by comparison!

Since 2008, the Chinese have expanded credit by 89 trillion yuan, which is roughly $14 trillion. This is more than four times the amount of money the Fed created. In fact, it’s the same amount as all deposits that commercial banks in the U.S. held at the end of the third quarter of 2013.

Think about that for a second.

Over the last six years, the Chinese have expanded their loan base by an amount equivalent to all deposits in U.S. commercial banks!

They’ve used a lot of this credit to chase real estate and invest in dubious trusts that buy stock in coal companies. The only thing holding up the value of such assets is the next crop of investors taking out even more loans to buy real estate and invest in trusts.

But something interesting happened on the way to Chinese borrowing nirvana… the Chinese government got nervous.

Recently, it announced that it would like to see lending curbed. This sent shockwaves through the Chinese financial system.

Overnight borrowing has become harder, with lending rates spiking as borrowers try to figure out their next move.

This is part of what’s causing investor anxiety in China. As the country tries to wean itself off of excess lending, it’s a sure thing that someone’s going to get hurt.

As less credit flows, the most obvious candidates for loss are developers and property investors (who make up a significant chunk of the Chinese population, as Harry will talk about more tomorrow).

If a rash of bankruptcies begin to sweep across the country, it could ripple throughout the world as China adjusts to a lower level of economic activity. In doing so, it would slow down its purchasing of raw materials and goods from other nations, leading to smaller orders and therefore lower earnings in those countries.

This is why businessmen and political leaders around the world are so interested in the Chinese central bank keeping credit flowing. They don’t want the bad outcomes in the Middle Kingdom to wash up on their shores.

So the next time you read that everything is fine in China, make sure that you have one hand on your wallet and an eye on the “sell” button. As things begin to unwind in the economic miracle, markets around the world could sell off very quickly.

Rodney

P.S. Recently, Harry spoke more about the Chinese bubble — and the global effects we’ll endure when it bursts — in an interview. You can listen to that here.

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Categories: Foreign Markets

About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.