posted on 04 February 2016
by David Stockman
Last Wednesday we noted there is something rotten in the state of Denmark, meaning that the world's great potemkin village of Bubble Finance is unraveling. The evidence piles up by the day.
To wit, now comes still another story about the Red Paddy Wagons rolling out in China. This time they are rounding-up the proprietors of a $7.6 billion peer-to-peer (P2P) lending Ponzi called Ezubao Ltd.
Ezubo investors lined up outside a government office in Beijing last month; having shut down the online peer-to-peer investing.
The particulars of this story are worth more than a week of bloviating by the Wall Street economists, strategists and other shills who visit bubblevision the whole day long. That's because it exposes the rotten foundation on which the entire Red Ponzi and the related world central bank regime of Bubble Finance is based.
Needless to say, these dangerous, unstable and incendiary deformations are not even visible to the Keynesian commentariat and policy apparatchiks. They blithely assume that what makes modern economies go is the deft monetary, fiscal and regulatory interventions of the state. By their lights, not much else matters - - and most certainly not the condition of household, business and public balance sheets or the level of speculation and leveraged gambling prevalent in financial markets and corporate C-suites.
As that pompous fool and #2 apparatchik at the Fed, Stanley Fischer, is wont to say - - such putative bubbles are just second order foot faults. These prosaic nuisances are not the fault of monetary policy in any event, and can be readily minimized through a risible scheme called "macro-prudential" regulation.
After all, if the Keynesians had any inkling that debt was a problem they wouldn't have attempted to radically subsidize it with 84 straight months of ZIRP. In that respect, they might especially have noted that US credit outstanding has soared from $54 trillion to $63 trillion or 17% since the eve of the financial crisis. That is, since the nation's mountain of debt blew-up the first time around.
So here's what happened with Ezubao. It's parent (Yucheng Group) was an equipment leasing operation, having gotten started way back near the dawn of the Red Ponzi. That is, it apparently started about 2012 in the business of supplying rentable equipment and factoring services via the shadow banking system during China's fixed asset boom.
Yucheng Group was definitely not China's equivalent of General Electric; it was apparently organized by a gang of military buccaneers who have occupied a certain Chinese speaking province of northern Myanmar.
But by July 2014 the infrastructure boom and leasing demand were cooling so it opened up a new operation in P2P lending. Quicker than a flash it became China's #2 player in that suddenly flourishing sector, or as the company described it:
Well, not exactly. Ezubao was shutdown on December 8th by Chinese authorities, meaning that in just 18 months it had bilked 900,000 investors of nearly $8 billion in a fraud that was so blatant that it now appears upwards of 95% of investor deposits never were invested at all. Some of the money was just send back to earlier investors, upwards $1 billion apparently went to fund the company's military adventures in Myanmar and the rest to fund the chairman's lavish lifestyle.
The company's leader was perhaps appropriately named Ding Ning, and according to a recent Wall Street Journal,
Charles Ponzi himself might have been impressed, but apparently not its gullible P2P lenders. As one smaller investor told a Caixin reporter,
No, Ezubao wasn't a one-off outlier. It reflects the sum and substance of the craziest credit and construction boom in human history. As I noted last week:
Or as Jim Kunstler put it earlier this week,
Accordingly, China has become such a den of speculative madness that one giant scam after another literally springs up over night. During about 60 trading days between March and mid-June of 2015, for instance, China's stock market soared by $4 trillion and margin loans and other speculative capital poured into its 379 million trading accounts literally like lemmings surging toward the sea. At the peak, margin debt accounted for 18% of the entire market cap of traded stocks.
Most of that $4 trillion disappeared in less than 20 trading days through the June/early July crash last year. And not withstanding the subsequent massive stock buying by the authorities and the police state dragnet thrown up against stock sellers, more than $8 trillion has now completely evaporated after January's wipeout on the Shanghai market.
The P2P lending story is the same. As investors sought alternatives to the sagging real-estate market and volatile stocks, they poured into online peer-to-peer lending platforms with alacrity.
According to the WSJ, there were 2,600 platforms operating at the end of 2015 compared to only 800 twenty-four months earlier. More significantly, the outstanding volume of loans soared from $5 billion to $67billion during the same period.
That's right. Another 14X eruption in no time flat - - so not surprisingly P2P lending has become one steaming pile of financial crap:
Nor is this the only scam that came to light over the weekend with respect to the Red Ponzi. It turns out that a certain kind of shadow banking system instrument called Directional Asset Management Plans (DAMPs) or Trust Beneficiary Rights (TBRs) have soared from $300 billion in 2012 to $1.8 trillion at present.
Yes, this is another 6X eruption in record time, but it doesn't take much investigation to see what is going on. Bad loans are literally being vacuumed off bank balance sheets into phony SIV-like entities of Citigroup circa 2007 vintage, and then carried not as loans but "investment receivables".
And then, presto, the challenges of NPLs, capital support and bad debt charges to the income statements disappear entirely. As explained by one journalistic account,
Needless to say, there is an endless amount of financial madness where Ezubao, DAMPs and TBRs came from. Yet China is only the tip of the iceberg. If China's buccaneers and gamblers are slightly more crude, what they are doing is essentially no different than the outpouring of OTC structured finance deals manufactured day in and day out by Goldman Sachs and the rest of the world's financial market banksters.
And they don't even compare to the financial scam that is at the very heart of present day central banking.
No one with a passing acquaintance with history and logic could believe that any Ponzi can be sustained for very long; nor is it possible to believe that massive debt monetization via printing press credit and a sustained regime of negative real, and now nominal, interest rates will not eventually end in catastrophe - - most especially in a world where governments positively cannot stop accruing unrepayable and soon unserviceable debt.
Yet after last Friday's lunatic move to negative interest rates by the BOJ, the Japanese 10-year bond is now trading at just 6 basis points; and it will be in negative territory along with all of the government's shorter maturities any day now. So why would Mr. Ding Ning not have a go at the blatant Ponzi reflected in Ezubao?
Japan's work force and population is disappearing into a colossal demographic bust; its fiscal deficit is still upwards of 40% of its annual budget outlays; and its national debt is off the charts. So as its retirees liquidate their savings at an accelerating rate, Japan will desperately need to borrow from the rest of the world to support its old age colony.
What it has elected to do, however, is trash its currency and ensure that in a few short years its monetary system will collapse. There can be no other result because negative interest rates will cause capital to flee, even as its massive bond purchase programs swallows up most of the public debt, along with an increasing quotient of corporate bonds and even ETFs and stock.
In a word, the utter fools running Japan Inc. have become so befuddled by Keynesian groupthink that they are self-inflicting a monetary Hiroshima on their entire economy and society.
Likewise, the madness of NIRP is probably no longer containable since it already infects the eurozone, Sweden, Switzerland, Denmark, Japan - - -and, after last night's shocking trade report for January, South Korea can't be far behind. Its exports are now down 18.5% year over year, and have plunged to levels not seen since the bottom of the Great Recession.
Literally speaking, world trade is being asphyxiated by the deflationary burden of the $225 trillion credit bubble created by the Fed and its fellow-traveling convoy of global central banks over the last two decades. And now they are aggressively making matters worse by doubling down on a monumentally failed experiment in crank economics.
Already they have driven nearly $6 trillion of sovereign debt below the zero bound. Even a decade ago every student of economics 101 knew that is a recipe for calamity.
Yet now just a few dozen monetary apparatchiks in the world's major central banks and their shills in the world's financial casinos are driving the system straight toward the monetary dark side.
What will be uncovered when it finally blows will cause the depredations of Charles Ponzi and Mr. Ding Ning to be reduced to mere footnotes in the annals of monetary infamy.
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