The National Review’s Explanation of the Chinese Stock Market Decline

Thomas Nugent claims:

Few politicians, especially those enamored with higher tax rates for the rich, focused on the real reason for the big market decline: the prospect of an increase in the capital-gains tax rate in China.

You don’t say? I didn’t even know that there was a “prospect of an increase in the capital-gains tax rate in China”. Of course, Nugent offers nothing to back up this idle speculation. But the real reason for the latest nonsense from Nugent is that he can join in on some good old Clinton bashing. You see, the Senator does not share Nugent’s advanced views of credit markets:

So let’s dispel some of the mythology surrounding U.S. global debt. Politicians in this country would have us believe that Americans are out there, hat-in-hand, asking for money from foreigners – money that is going to have to be repaid someday. Fortunately this is a false assumption (although it still can lead to flawed economic policies). Americans buy enormous amounts of goods from abroad (assets) and pay for these goods in dollars (liabilities). Hence, world trade is a zero sum game! An example will help explain the financial dynamics. Assume you want to buy a car built in Japan. To finance this purchase, you go to your U.S. bank to take out a loan – a loan that will create the deposit that you will use to buy the car. Soon enough, the loan is approved: The bank has issued a new loan, Japan has its name on the deposit, and you own a new car. But something else has occurred: Technically speaking, domestic credit has funded foreign savings. Notice there is no “imported capital” involved. In fact, there is no such thing with today’s floating exchange-rate policies. Additionally, all three parties in the transaction are happy: Japan now has dollars rather than the car, something it wanted in the first place since it put the car up for sale in the U.S.; the bank, in the business of expanding loans, has done just that; and you’re on the road in your vehicle of choice. There is no imbalance in any of this.

Of course if you decide to keep on borrowing to buy an expensive house, several nice vacations, and expensive restaurant meals – one day your debts might overwhelm you. Which was the Senator’s point. Alas, Nugent was too busy listening to words the Senator never said:

Beware politicians like Hillary Clinton who promote capital controls and protectionist measures to insure our sovereignty and stability.

The Senator was not calling for capital controls. She was calling for fiscal responsibility – a topic that Nugent has never grasp. Well at least Nugent did not say the Senator was xenophobic.

Update: PGL Smackdown by the AB readers who pointed out this article:

A speech to the People’s National Congress by Chinese Premier Wen Jiabao announcing his government’s intention to seek a rate of economic growth of 8 percent this year down from 10.7 per cent in 2006 also had a negative impact. Experts fear that investors might panic and sell off to reduce potential losses … Rumours that China might impose a capital gains tax on stock market earning have fuelled the sell-off. Chinese tax authorities denied speculation that it is planning such a tax but many expect China to take steps to reduce money supply for fear of inflation.

I will say a couple of things in my defense. This article attributes the primary cause of the stock market decline to be the announcement of the premier that the government was about to adopt a tighter monetary policy. Now anytime a stock market crashes, all sorts of rumors as to the cause come out of the woodwork. So yea – there may have been rumors about an increase in capital gains taxation, but that’s not exactly hard evidence of a cause and effect relationship.