Malinvestment is a term I cannot recall hearing in our industry, but US author James Rickards refers to it frequently in his new book, the dramatically titled, The Death of Money – the coming collapse of the international monetary system.
The book sketches out apocalyptic scenarios around further bank collapses, the failure of QE, the failure of the US dollar and a resulting rush for gold. It concludes with a tipsters’ doomsday investment portfolio of 30 per cent cash, 20 per cent each in gold, undeveloped or underdeveloped land, alternative funds and 10 per cent in fine art.
Some of Rickards’ scenarios stretch credulity, but what does ring true are his forthright assessments of QE and China.
He describes quantitative easing as increasing the role of governments in the global economy to the levels of Soviet central planners. The results, evoking the warnings of libertarian economist Friedrich Hayek, can only ever be an abysmal misallocation of capital, as the Fed is now relying on signals from manipulated markets to make its decisions. Rickards says: “The more these institutions intervene in markets, the less they know about real economic conditions, and the greater the need to intervene.”
In his chapter on China, Rickards delivers the bleakest ever assessment of the second biggest economy in the world. The corruption within state-owned enterprises, particularly financial institutions is leading to low rates of interest, which penalises savers, but helps these institutions fund increasingly unproductive investments – particularly the notorious ghost cities of empty flats and shops. This is leading to malinvestment on a grand scale.
“If GDP were reduced by the amount of malinvestment,” says Rickards, “the Chinese growth miracle would already be in a state of collapse.”
