Originally published in Sept 2006 but updated in Oct 2016
Sure of their qualities and demanding praise, more go to ruined fortunes than are raised.
Alexander Pope 1688-1744, British Poet, and critic
Rise Of China Or Is It Just A Dream
250 billion dollars of China’s reserves are in U.S. Treasuries. Now you know who the true power really is; the one that holds the strings to the purse is usually the puppet master. If they even hinted that they were going to dump these treasuries watch interest rates skyrocket and the market crash. If they dumped them, the scenario would be utterly devastating and crippling for the majority. This means that the U.S. is only in a position to bark to try to fool the world that they have some say in China’s policy-making decisions. They lost the ability to bite China long time ago.
On a different note if China listened to the U.S. and unpegged the Yuan from the dollar the actual effects of inflation would be felt everywhere. All those dollar and 99 cents stores would have to change their names to maybe a dollar plus more or 2 or 3 dollar stores. An unpegged Yuan would appreciate approximately 30% that means all these prices would have to rise and the sad part is that we would have to pay these prices as we have lost almost our entire manufacturing base. So the U.S. should be careful what it wishes for.
The wealthiest 10% of Chinas population controls 45% of the China’s wealth
And the poorest 10% controls or holds only 1% of this wealth. Most Americans would be aghast by such numbers however the sad part is that the situation is much worse here in the U.S. The top 1% control 1/3 of the country’s wealth and the wealthiest 5% control over 50% of the wealth. If we go to the other end of the curve, the extreme poor in this country has little or no wealth at all. So if deflation ever hit the U.S. (which it will after a hyperinflationary phase), debt holders will be shredded to pieces. Since the U.S. has a negative savings rate we can safely assume that the majority (if we were to guess we would say at least 75% of the population falls into this category) will go through a phase one could safely call “the hell on Earth phase”. When this happens is something no one can predict but happen it will and as the inflationary forces keep rising the day of reckoning draws even closer.
China has achieved a spectacular level of growth for the last several years in a row
But a lot of that is based on malinvestment. Right now steel mills and aluminium foundries are producing and storing far more than they can ever hope to sell, and they continue to build even bigger and larger mills. If this excess aluminium, steel, iron, copper, etc. were ever dumped on the open market, the entire base metals market would take an extremely severe beating.
There is one more possibility. We have always stated that the Chinese are advanced chess players in the sense that they have an uncanny ability to plan for events in the future that most individuals or nations will miss.
What if China was building all these mills and buying up all these raw materials as a form of wealth diversification. They have billions of dollars in reserve; if they started to buy just Gold, or platinum, or palladium they would drive these markets to insane levels. They also cannot just dump the dollar for the Euro for they would hurt themselves in the process. Hence one way to do this subtly would be to buy every single commodity possible.
Coke (Raw Iron) producers produced so much last year that supply exceeded demand by over 100 million tonnes. Steel supplies exceeded demand by over 120 million tonnes last year and the list goes on. In 2005 investments in this sector grew by 25% and even though supplies are far exceeding demand it appears that this area will grow by another 20% plus this year. This will result in even larger surpluses this year. Now normally such an event would cause prices to tumble but note raw material prices continue to rise. In between yes, there are corrections, but the main uptrend line for most essential commodities is still intact. This means that the only logical conclusion one can draw is this excess supply not making its way to the markets but is being tucked away for maybe a rainy day.
China continues to rise and is now home to the most billionaires in the world. It is also number regarding the number of millionaires and it is creating new billionaires at a faster pace than any other nation on earth. The amount of US debt it owns has soared to over $1.2 trillion. According to Wikipedia the latest figure is $1.24 trillion
The Chinese do own a lot of U.S. debt — $1.24 trillion as of January 2015.
By mid-2015, the total amount of official debt owed by the federal, state and local governments was more than $18.5 trillion. That figure is expected to reach $21.6 trillion by the start of 2016. Some experts add more than $120 trillion in unfunded future liabilities on the federal government balance sheet. Full Story
The outlook is only expected to worsen as the World is now in the midst of a massive currency war and the only real asset the US has is its ability to create money out of thin air due to the World Reserve status the US dollar enjoys. However, that is fast being challenged by both Russia and China so our days are numbered unless we start to act fast. The current economy recovery is nothing but an illusion that is supported by hot money; the Fed is directly intervening and propping the markets to give the impression all is well when in fact it is not. Actual unemployment is north of 20%, and companies in the S&P 500 are on course to report lower earnings for the 6th quarter in a row.
China Has Hit A Brick Wall?
Chinese academics recently delivered a stark warning to the country’s leaders: China is facing its most precipitous decline in population in decades, setting the stage for potential demographic, economic and even political crises in the near future.
For years China’s ruling Communist Party implemented a series of policies intended to slow the growth of the world’s most populous nation, including limiting the number of children couples could have to one. The long term effects of those policies mean the country will soon enter an era of “negative growth,” or a contraction in the size of the total population.
A decline in the birth rate and an increase in life expectancy means there will soon be too few workers able to support an enormous and aging population, the academy warned. The academy estimated the contraction would begin in 2027, though others believe it would come sooner or has already begun. NY Times
China is Declining and the US is Set to Rise?
China’s rise, one of the defining U.S. national security challenges of our time, has deservedly received attention in each of the last decades-worth of unclassified U.S. government strategies. Unfortunately, China’s pending decline — the one that is likely to occur soon after its rise — has received significantly shorter shrift, earning brief references to an aging population in Northern Asia in the 2015 and 2011 versions of the National Military Strategy. And yet, China’s rapid transition toward a downward trajectory will pose a unique set of national security challenges for the United States that could prove even more difficult than those posed by China’s rise. If this lack of high-level public discussion translates to lack of action, it will be to the detriment of U.S. national security. The time to prepare for China’s descent is now, while the challenges that come with it still sit at the edge of the discernible future, and not at the edge of American shores.
By the discernible future, we are not speaking of determinism or an inevitable consequence of events set in motion long ago. These are the wares of soothsayers and snake oil salesmen. Rather, we are speaking of long-term trends that can readily be forecast — trends such as shifting demographics, economic growth, and government spending — which can be persistent and generally follow long-standing patterns that have been common around the world and across time. Full Story
The Fall and Decline of China
Magnus covers this ground but in greater detail than most authors, and with some surprises. He shows, with hard data, that the most serious imbalance in the Chinese economy is no longer the trade surplus but the over-reliance on domestic investment and debt-financing, the marginal productivity of which has fallen. At the beginning of the 1980s, you could get an extra yuan of GDP from as little as two yuan of investment; in 2015, the same growth required nine yuan in investment. With figures such as these, rather than anecdotes about ghost cities, Magnus draws a picture of widespread malinvestment in an economy laboring under rising debt.
Now, China is at no risk of a meltdown such as traumatized the other countries of East Asia in 1997, since its debt is not owed to foreigners. Even after describing the highly leveraged and under-regulated shadow-banking sector, and weighing the risk of a banking crisis, Magnus suggests in the end that the debt problems, in and of themselves, are manageable. What makes them a threat to China’s stability is that they will place a drag on growth.
Dealing gracefully with a fall in growth, and a fortiori with a recession, is difficult in a country with severe income inequality. Adding to the danger is the CCP’s insistence on tightly controlling the exchange rate, which requires capital controls that are hard to maintain in times of falling confidence. The greater the quantity of domestic credit, the greater the reserves needed to “back” it in a regime of fixed exchange rates, and confidence in the currency becomes more fragile. Magnus has an excellent section on the missteps during 2014 and 2015, and the cascading panics that shook the stock market and put pressure on the Renminbi. It cost the State about $150 billion to stabilize the former, and almost $500 billion in currency reserves to support the latter. Lawliberty.org
The fly that does not want to be swatted is safest if it sits on the fly-swat.
Georg C. Lichtenberg 1742-1799