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Money, China, Consumers, and Cash Cycles.

March 24, 2016

Money, China, Consumers, and Cash Cycles.

by Lushfun


There seem to be a strange dissonance between purchasing power available for consumers and it being embedded in the monetary system globally. As division of available free cash was pledged to more and more long term ‘capital’ in the form of loans, bonds, and other forms there formed an idea that further and further division in favor of capital would occur indefinitely and at higher exponential rates, FOREVER. Alas, we live in a finite system. Every country that attempts to industrialize rapidly runs the risk of going into an adverse cycle both in the industrial sense and cash conversion sense. Ergo it will begin to deploy factories and capacity into a rapidly declining purchasing power environment from the consumer front, as was the point of entry for China.


What would be the fix for an environment such as this? Division of cash flows between capital and labor to re-balance participation rates in the cash cycle. Giving people ability to participate more broadly in the economy would require jacking up rates to implode asset prices and give more churn in the transactional sphere. This will not happen of course.


Devaluation games such as the one China is attempting do not work. They do not work for several reasons. Competitiveness for export products through devaluation does not rise, since generally products that are embedded in the export product have to be brought from the outside at real world prices, which have their own variations in price. Devaluation is an attempt to sequester purchasing power in the capital sector at the expense of the labor sector and the consumer at large. Ergo, it attempts to create an environment where capital that was spent on excess capacity can be profitable at the expense of the environment in which it operates, because its’ destruction is feared more than the consequences of externalities emanating from these actions.


Long term and short term these costs that appear to be inconsequential, but they destroy not just the capital in question but the overall ability of the economy to function and compete in said industry. The reason is that excess capital will be competing with depreciating capital that will gain from technological progress through the cash cycle and become more cost efficient and far more dynamic. It is tantamount to a surrounded army getting more and more reinforcements as it is getting slowly annihilated while the equipment is uses is going back in time and the adversary is slowly getting newer and newer stock.


Participation in financial markets in allowing the Yuan to float will not make it enticing for those buying it as an instrument. The reasons for these are many but the most common are it maintaining purchasing power long term, ability to have instruments that provide you with yield that is over and above inflation in said currency, and ability to use it as an asset purchasing mechanism globally. Expecting others to share in the depreciation in order to grow out the monetary base and fill it with purchasing power is a folly. It is very erroneous to think that nomination of a denomination gives it convertibility or acceptability, a market does this but it has to have ease of entry and exit.


We shall see what happens.



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