China: The End of an Economic Miracle

Shanghai, China. Photo via Unsplash

China is no longer the economic miracle it used to be. Although still growing, something is fundamentally wrong with their model, which has much more in common with western capitalist economies than what most people are comfortable to admit. As opposed to what the mainstream media tries to sell the western public these days, China is not a communist country. Not by a long shot. And while it does differ in many subtle ways from its American counterpart, the Chinese economy suffers from the same ills of capitalism: exploitation of labor, ballooning debt levels, slowing economic growth, falling birth rates, saturated markets, environmental degradation, resource depletion—just to name a few of the most burning issues. Despite the prodigious rise out of poverty, and the enormous increase in prosperity they achieved, the Chinese economic model is neither the future, nor the saver of human civilization.

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Fundamentals

Comparing the Chinese and the American economies is like comparing a young adult to a frail old man. Same person, different age. Yes, there are many individual differences but those are related to approach, rather than the end result, in the grand scheme of things. In the red corner we see state owned and developed infrastructure (banking, energy, transportation) and central economic planning, with a strong focus on industrialization and exports. In the blue corner we find financialization and a services-led, privatized market economy focusing on consumption. Then why do I say, they’re just two sides of the same coin? Why can’t the Chinese economy be a role model for other countries to emulate, and why can’t it be sustained for much longer than it’s American counterpart?

Let’s start with the most fundamental, basic function of every economy. And here I mean real economic fundamentals, not made up numbers on a spreadsheet. That is, using energy to convert raw materials and information into products and services. Turning rocks into metals, then metals into machines. Using concentrated sources of energy (fossil fuels) to grow, harvest and deliver food, mine more minerals, make chips, build data centers, solar panels, cars, trains, trucks, ships, planes, buildings, bridges, roads and much more. Contrary to modern myths, there is no such thing as a post-industrial economy: you either make these things to sustain and expand civilization in your country, or have another nation to do it for you. The difference lies in approach, not the end goal itself.

The general issue here is that there are still no real alternatives to coal, oil and gas to maintain civilization—neither in China, nor in the U.S.. Ours remains a global, diesel powered civilization. (Watch this brilliant demonstration as to why is that so.) “Renewables” are clever add-ons to this system, courtesy of the high heat, high energy density and stable 24/7 power provided by fossil fuels. Everything we do from solar farms to electric vehicles (or from nuclear power plants to hydro dams for that matter) are thus optimization efforts to use our finite reserves of easy-to-access fossil fuels more efficiently, but not more wisely. Think: burning coal in a smelter to make metallurgical grade silicon (or in a power plant to feed a constant flow of electricity into aluminum production)—instead of powering millions of hair dryers, TVs and microwave ovens directly through the grid. The role of solar panels—built from these materials and placed on rooftops—is thus to help us channel more energy into the system, not to replace fossil fuels in their own production. Neither in America, nor in China—and certainly not in space, let alone on Mars. Fairy tales and expensive experiments aside, we still cannot make “renewables” with “renewables,” let alone maintain the six continent supply chain necessary to continue with civilization as it is.

Both the Chinese and the American capitalist economies are built on the extraction of the same set of finite, non-renewable minerals—from coal to copper, or oil to lithium. And while China does seem to be making a “genuine” effort to wean itself off of fossil fuels, it is still the number one importer of oil and the biggest consumer of coal to this day. Again, all they do is trying to optimize their use of fossil fuels, by supporting their electricity consumption growth with “renewables”—instead of burning even more coal—as replacing carbon based fuels beyond certain easy-to-electrify areas is still a theoretical option rather than a reality. What we have, as a result, is an intensifying competition for fossil fuels and critical minerals to support economic growth as long as their reserves lasts.

This is not a battle between civilizations, but global industrial civilization fighting itself.

Mordor Economy. Image via Unsplash

Finances

“Then what about the financial plumbing of these two nations? You’re not going to compare the FED to the Bank of China, right!?” Yes, I will. What’s worse, I’m going to say: they both run on the same faulty idea which has failed so many times in history, that it’s a wonder on its own that it’s still in use. Of course, from a bio-physical perspective we did (and continue to do) tons of stupid stuff, but our current banking and monetary system—conveniently left out of all economic textbooks—is, probably, the most foolishly shortsighted and ignorant of all. (After all, if you can win a Nobel prize in economics by proving that catastrophic levels of climate change won’t hurt the economy that much, or by failing to understand the role of energy in the economy, there is not much left to wonder.)

The fundamental problem lies in how money is created, and how our monetary system, as a result, began to decouple itself from bio-physical reality. You see, all the products you purchase, from food to consumer goods and services, or from a haircut to legal advice, take energy and raw materials to make from and machines to do with. Even raw materials themselves take energy to get — mines use diesel fuel and electricity to dig up the ores, smelters burn coal and natural gas to produce metals, while factories do the same to make concrete or glass. Simply put: energy is the economy. Money, therefore, is nothing but a claim on future energy use: a transferable “right” to trigger a cascade of energy and raw material consumption on your behalf. Want a latte? Sure! The coffee machine heats up, grinds coffee and pours hot water over it, then mixes in some frothed milk. A microcosm of material and energy transformations, and we haven’t even talked about how coffee gets harvested, roasted and delivered, nor how the coffee machine itself was made, from mining metal ores to assembling parts in a factory… Should any of these steps suffer a blow from energy or raw material shortages, or should input costs go up significantly anywhere along this elaborate chain, your currency suddenly starts to worth less and less. It buys less lattes, less gadgets, less services. Both in China, and in America.

This is where money creation comes into the picture. Contrary to how the story is told by mainstream economists, money is not lent out from deposits, but loaned into existence from thin air by commercial banks all around the world. As the Bank of England explains: “if you borrow £100 from the bank, and it credits your account with the amount, ‘new money’ has been created. It didn’t exist until it was credited to your account. This also means as you pay off the loan, the electronic money your bank created is ‘deleted’ — it no longer exists.” Sounds neat and tidy, right? Well, unless you consider that there are a number of major issues with this idea. First, as soon as you take out a loan, fresh currency enters the economy and—presuming you spend it immediately—it begins to chase the same amount of goods and services which existed just a moment ago. (Just think of buying your latte with a credit card.) Second, even though this new money eventually gets deleted from the system as soon as you pay back the principal, the interest you have to pay on top does not disappear. Instead, it’s spent on salaries of bank employees, private jets, trips to the Bahamas and buying political power (among other things, such as operating the bank itself and paying back loans the bank took out). We are talking no small amounts here: sometimes as much as twice or thrice the principal itself. That is a huge sum of currency added to the economy day after day, happily making its rounds as people spend it and circulate it around the globe.

World domestic credit to private sector (% of GDP). Source: World Bank

This brings us to a third major issue: namely, that the pile of debt must keep growing—else the system crumbles. And while our money supply could keep on growing exponentially forever (at least in theory), the amount of raw materials and food harvested every year cannot. Thus, as a result of all this lending and borrowing, there is increasingly more debt in the world than money to repay it with interest—let alone real products to buy with—hence the steady rise of consumer prices. In order to “fix” this “minor inconvenience” newer and newer loans and investment became a must to keep the economy growing, forcing it to keep up with monetary expansion and to avoid recessions and debt defaults… This is how the ever increasing pile of private debt has now reached 150% of GDP worldwide. As economist Steve Keen, Honorary Professor UCL and Distinguished Research Fellow at the Institute for Strategy Resilience & Security, University College London summed it up:

“Banks aren’t “mere intermediaries” who enable Savers to lend to borrowers. They are creators of both debt and money. Lending is not a “pure redistribution”, but a creation of new money and spending power. When lending turns negative — which happens when debtors are repaying debt, or going bankrupt and being unable to repay it — the economy crashes. This is what happened in both The Great Depression and The Great Recession.”

Figure 4 from prof. Steve Keen’s work: “Economists and politicians obsess about government debt, when it’s private debt that matters.”

Every time private debt stopped expanding, the economy crashed—government spending come only after that happened to prop up the system. Cue: The Panic of 1837, The Great Depression in the 1930’s, and the Great Financial Crisis in 2008-2009. And this brings us to the role central banks play in this system—both in China and in America (or anywhere else in the world, for that matter). As you might’ve guessed already, their real job has very little to do with “pursuing the economic goals of maximum employment and price stability.” That’s for economic textbooks and media communiques. A more honest version would sound something like this: to keep credit expanding at an exponential rate, without causing too much inflation. Problem is, that this unstated policy inevitably leads to asset bubbles and debt saturation: when people and corporations go so deep in debt that they become unable to take on more. Unlike governments, who can run deficits for decades, individuals, households and companies cannot. If they persistently spend more than what they earn, they go broke and their assets (houses, factories etc.) are sold to pay back creditors. And if this happens all at once (as it did in 2008/2009) asset bubbles, such as the one on the housing market, burst, sending a ton of money into heaven.

Now let’s take a look at the present situation on both sides of the Pacific. The first warning sign is that household debt in China, as a percent of GDP¹, has abruptly stopped growing in 2020, then began to shrink in 2024. All domestic credit to the private sector by banks, however, did not stop growing and now its close to 200% of GDP (and perhaps even more). In the United States we see a similar trend, although in a different flavor. Domestic credit to private sector by banks seems to be falling, even as the total liability level of domestic nonfinancial sectors keep rising… Which is now surpassing $80 trillion (or 258% of U.S. GDP), thanks to an exponential increase in the use of debt securities. In plain English: banks in China still keep lending more and more to private firms to prop up investment, despite people’s unwillingness to go deeper into debt and to buy more goods. A similar pattern can be observed in the U.S. with the main difference being that new credit comes in the form of issuing bonds and relying increasingly on private (non-bank) lending. Different approach, same result: rapidly rising debt levels; threatening to completely topple the apple cart once they become impossible to repay... Which they eventually will, as history repeatedly demonstrated, time after time.

Broke. Image via Unsplash

The Deflationary And Demographic Trap

Exponentially rising debt levels are the prime reason why deflation in China might soon lead to disastrous consequences, and why a slow (but accelerating) population decline will seal the fate of not only the Chinese, but that of all other economies as well… And no, it has nothing to do with pensions, but a multitude of economic and demographic reasons. First, falling consumer prices in China urges would be customers to postpone their purchases, in hopes that prices will continue to fall further still in the future. Second, older people have already got the goods they need and use them longer than fashion conscious younger cohorts—and since the population is ageing, this trend is not going to turn around anytime soon. Third, because birth rates are also falling at the same time, there are less and less kids and young people who need new stuff from diapers to cars. Last but not least, the completely inhuman—and borderline insane—East Asian work ethic makes both having kids and buying more stuff impossible. Working in a 996 schedule (from 9 AM to 9 PM, 6 days a week) leaves little room and mental energy for social life or shopping. This comes on top of the overcrowded nature of large cities (often resulting in five or more individuals renting and sharing a flat)—depriving youngsters the private space needed to start a family. As if the whole system was set up to destroy itself from the bottom up, just like it’s already doing in Japan and South Korea for decades now.

The resulting deflation is thus structural: coming from decades of over-investment in production capacity, coupled with an accelerating collapse in demographics² and quality of life. These trends are the real causes behind what the Chinese call “ruinous competition,” leaving manufacturers with an ever growing overcapacity and a rising debt burden—especially in key sectors, such as electric vehicles and solar panels. Many companies feel they have no choice but to lower prices to unload inventory, eating into profits, even as retail sales growth grinds down to 1%—and below. Struggling to make money, businesses are already limiting wage growth, pausing hiring and forcing employees to work longer hours… Reinforcing the vicious, self-destructing economic cycle described above. Until something breaks, and companies begin to default on their debts and lay off their staff en masse. Needless to say, should we get to this point, people will have even less to spend, sending sales of remaining companies into a tailspin, further deepening the crisis.

So while Chinese economic growth around 5% seems to be robust for the time being (at least compared to Western countries), the situation remains totally unsustainable. Is it any wonder then that much of this growth came from investments with questionable returns and increased exports—not from internal consumption growth? I guess not. The resulting export surplus, reaching almost $1.2trn in 2025, will thus likely to grow even larger, unless tariffs from all across the world put an end to its rise. Construction volume has already peaked in early 2017, and is falling ever since, due to the collapse of the Chinese housing bubble—I don’t think we have to wait much too long to see a similar trend in manufacturing output as well. Especially when considering the widening gap between silver and copper production and use—two pillars of electrification and electronics—and an impending peak in coal production (needed to make iron, steel, cement and many chemicals). Without at least 2-3% real, meaningful economic growth, however, debts will slowly become impossible to repay, as interest will accrue faster than what businesses could find the money to cover. At its current trajectory, China is headed for a debt-trap of its own making.

Moving A Mountain With A Spoon

China’s economic model, it seems, is approaching its own limits to growth. It was built on the same principles, and thus produced the same results as its western counterparts, although in a starkly different flavor. Who would’ve thought? After lifting hundreds of millions out of abject poverty and producing one of the fastest sustained economic growth over the past half a century, the Chinese economy now faces the same set of structural predicaments as most developed nations: population decline, ballooning debt levels, ecological degradation, resource depletion and economic stagnation. And while we could debate endlessly what factors led precisely to this situation, there is no denying of the fact that infinite growth on a finite planet is beyond the bounds of possibility. Setting up an industrial ecosystem based on extracting finite reserves of minerals and fossil fuels, coupled with labor exploitation and unlimited debt and money issuance, could not possibly led to any other outcome than what we have on hand: a complete divergence of the financial and the bio-physical world.

The conclusion of this analysis is thus pretty straightforward: the world economy (both its Western and Eastern hemispheres) is facing a major reset. Both demographics and increases in private debt are on an unsustainable path: vast amounts of people can no longer afford to increase consumption, with many young adults opting out of starting a family, let alone buying a home. Consumption of goods and services are thus unlikely to increase in the near future, even as production capacity (financed from debt) is still being added. This will eventually lead to a deflationary crisis and a series of debt defaults, not only in China (where ruinous competition is already present for years now) but, I suspect, all across the Western world as well.

This unfolding crisis is already being accelerated by falling mineral ore grades and worsening fossil fuel energy returns on investment: as both of these factors increase input costs greatly (often reinforcing each other). The resulting rise in raw material, commodity, and energy costs (copper, electricity, diesel fuel etc.) further erodes profitability, bringing the day of reckoning ever closer. And since neither population, nor the annual rate of resource extraction can grow forever on a finite planet, the gap between our biophysical reality and financial claims will continue to widen, increasing the pressure on the financial system with each year passing… And you know what comes next: that which cannot be sustained, will eventually stop.

Stranded. Image via Unsplash

It is, I argue, already to late to inflate debt away or to reform the system in any way—a major economic crash is just a matter of time. The coming great financial reset will not be the end of the world, however. We will not run out of oil, copper, arable land etc. overnight. Those will be still there, albeit in a slowly decreasing amount, as resource depletion, climate change, water shortages etc. will slowly chip away at our capacity to grow as much food, extract as much minerals and energy as we used to be able to do before. The financial system will suffer mightily, though, as even remaining loans will become impossible to repay on falling revenues and material flows, and as a huge chunk of debt accumulated will have to be written off. Once the rubble stops bouncing, reorganizing both the Chinese and American economies away from capitalism and growth, and towards a managed decline dictated by rising temperatures, falling mineral reserves and a shrinking population will still prove to be an enormous quest—a challenge, our current crop of deeply corrupted leaders seem increasingly unable to rise to. The coming crisis will thus not only put an end to our financial system, but also call the legitimacy of our entire political economy into question—no wonder everything is being done to delay its arrival.

Until next time,

B

Thank you for reading The Honest Sorcerer. If you value this article or any others please share and consider a subscription, or perhaps buying a virtual coffee. At the same time allow me to express my eternal gratitude to those who already support my work — without you this site could not exist.

1. GDP is a deeply flawed economic metric. It measures outright harmful activities with little to no real economic benefit as growth, disregards growing wealth and income inequality, and counts financial rent extraction as productive (among many other things). Viewed from a banking perspective, however, it’s extremely useful to measure up an economy’s ability to pay back its loans—hence the use of debt to GDP ratios.

2. Seeing these negative demographic trends one might be tempted to say that humanoid robots will then surely save the day… But then I have to ask: how that supposed to happen? Should robotics prove to be a success story—and not another economic bubble inflated by over-investment and ruined by excess competition—then lay-offs would likely accelerate, leading to the same dynamic explained above. With people having much less to spend, and companies ending up having an even greater excess capacity and debt burden (now worsened by the massive financial investment in robotics), how could the end result be any different from the base case described above?