You should be getting the Newsletter or at least reading the blog but if not this is nice piece in the Wall Street Journal on China. China is an amazing case study in so many ways but one of the most important is the way the Chinese goosed investment growth by decreasing the net rate of return on to households.

The Chinese growth model transfers income from households to the corporate sector, mainly in the form of artificially low interest rates. These sharply reduce borrowing costs for the state-owned companies that funnel this easy money into mega-investments. The easy financing also gooses banks’ profit margins and allows them to resolve bad loans with ease.

This cheap borrowing comes at the expense of depositors. Low yields on deposits force them to sacrifice consumption, to save more.

There is such a strong presumption in the US political-policy circles that increasing the rate of return to households will increase investment, and that this can be accomplished by lower the capital gains tax etc. Yet, our biggest investment story ever is one of household suppression.

Likewise in the US collapsing savings was associated with huge bull markets and rising home prices. In short enormous returns to households.

This is not to say we should emulate this, I just want to put cracks in common assumptions about the way households and the corporate sector work.

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