Asian stock markets have all fallen in recent days. There is a growing fear that the People’s Bank of China, the nation’s central bank, will continue to tighten money. This has driven short-term interest rates higher in China. This is a classic sign of the beginning of a recession.
China’s statistics are sufficiently rigged, so that any discussion of what the West would call a recession is not visible in the statistics. There will be a slowdown, and this is reflected in the fact that the Chinese stock market has declined noticeably. Even the international value of the yuan has fallen against the dollar.
This is simply an inevitable consequence of a reversal of central bank monetary policy. When a central bank inflates the currency, and then it slows the rate of inflation, the boom which the prior inflation had produced comes to an end. Ludwig von Mises taught this over a century ago, and it is still true. You can download my book, Mises on Money, for free. Read chapter 4.
Around the world, central banks have inflated their currencies. They have done this in an attempt to restore economic growth since 2009. Of course, the recession of 2008 and 2009 was a consequence of prior monetary expansion by these same central banks. Their own policies have created the volatility.
It is interesting to note that the Bank for International Settlements, which is the clearinghouse organization for all of the central banks, has released its annual report. In this report, the BIS criticizes central banks for over inflating, and calls on them to stop. The problem is, according to Mises, if the banks do this, the world economy will go back into another recession. The central banks have created conditions in which they cannot reverse their policies without imposing enormous economic pain on their respective economies.
For those of us who have warned against the substitution of central bank inflation for the gold coin standard, all this is amusing. But it is not amusing for unemployed workers and the owners of unemployed resources. For them, an economic recession will come at a terrible time. Unemployment in Europe is already at historically high levels since the end of World War II.
We find once again the government intervention has created conditions that are worse than those that would have prevailed, had there been no government intervention in the first place. Each round of interventions makes conditions worse. This leads to another round of interventions. Mises described this back in 1950 in his article, “Middle-of-the-Road Policy Leads to Socialism,” and this has not changed. You can download it here: http://mises.org/daily/2370.