The Chinese banks are in serious trouble. They have papered over losses. The bank books in China aren’t giving an accurate picture of their true financial position. In the US this is fraud. In China, it’s supported by the government.
The Chinese government has a lot of competing interests to control. It is virtually impossible to have a long term successful centrally planned economy in a country as large and diverse as China.
I have heard stories of how the Chinese simply take huge tracts of land and develop it . The concept of property rights and individual rights are non-existent. It’s impressive to see how they have built amazingly gargantuan cities practically overnight. Underneath all of that, the foundation is unsteady.
Another accounting scandal was reported today in Japan. Olympus hid losses for years. In the US, MF Global’s scandal was a gigantic failure of ethics that crafty accounting hid for a short period of time. Poor accounting practices are not confined to cultures or simply private industry. Governments have shoddy accounting all the time.
Today, everyone will wonder about Italy, and perhaps France. Both nations have a gigantic social safety net that they have not paid for. Instead of focusing on growing their economies, and cutting spending the remedy for both seems to be some austerity on the spending and an increase in taxes.
There is only one guarantee in that last statement-taxes will go up. I doubt seriously if spending will fall that much because bureaucrats and politicians cannot cut spending. Bureaucrats because more budget money means more power. Politicians because they can’t afford to tick off a disenfranchised constituent. Politicians in this day and age only exist to get re-elected.
Increasing taxes will cause their economies to slow. That is an economic fact. Liberals will point to the Clinton years in the US when we increased taxes by a little and had economic growth. It’s the wrong conclusion. The productivity gains of the internet were just inserting themselves into business. That more than made up for the small tax increase. The internet productivity also lead to the “jobless recovery” we had during the Bush administration and is still with us today as we automate and streamline processes that were once done by humans.
Human nature from continent to continent is practically the same. The Chinese government has managed to keep a lid on it for years, but the injection of some capitalism brings different emotions to the front that haven’t existed for a long time there. Combine that with the Asian cultural norm of “face”, and a very proud Chinese government cannot risk a public failure.
However, accounting has a way of bubbling up from the depths to strike you at inopportune times. If Europe goes into a severe economic downturn, the US and the Chinese are going to feel it. Government accounting tends to go awry when economies sputter.