Ever notice how almost all the people who should know better don’t ever seem to, at least publicly?
You really have to wonder about who’s paying the people who talk about the problems of upcoming inflation etc. in China while treating it as a stand-alone or a one-off and blissfully ignoring both the fact that the same pressures exist in the USA and that China and the USA are now effectively mutually dependent.
The Chinese Government recently publicly professed to want its economy to now be led by consumers (as trade seems to be heading into the dumpster thanks to the Trumpster) but, officially in any case, has ignored the fact that, for the most part, these same middle-class consumer people are now financially tapped out just after taking care of housing, schooling and parents – there’s nothing left in their pants and purses. And let’s face it – any economic system that tacitly accepts personal nude pictures as collateral is a system with huge flaws (that unfortunately being far from the only one).
Now consider further that the US economy is already led by consumption and has been for years – and that these same consumers are now stretched tight, having maxed out their credit cards and other personal lines of credit (and let’s not talk about what the effect is going to be on them as the Fed adds on increases to the interest rate). Effectively, what’s kept the US economy going is mainly the appetite by foreign buyers for US dad – dollars, assets, and debt – and, just like dad at home, it gets tapped out too. Oh, and let’s not forget that a lot of that appetite for US dad was (and is still) Chinese. Inextricably interlinked to all this is the fact that, as US house ‘values’ rose in the last 6 years or so, people ‘cashed out’ in whole or in part in the form of home equity loans – it’s not a pretty picture when interest rates go up, inflation goes up, and values go down; and, when it becomes all too real, it’s going to be downright ugly.
And, while economists and government spokespeople cheerfully talk about the seeming financial benefits of geopolitical interdependence, these same people shrug off the fact that every coin has a face and a back, and the backside of benefits has to be negative by definition – that old saw about sinking or swimming together has yet to be disproven.
Already the cracks are starting to appear – recent buyers of small Hong Kong condominiums have undergone severe reversals in prices even more recently – in the last few weeks by as much as 20% (with no end in sight) and many are now faced with their mortgages being underwater (or, in modern honeyed terminology, “negative equity” – who the hell dreams this stuff up anyway?). In West Shanghai, a developer was recently selling its remaining units in a development at a discount of 30%!According to Bloomberg Opinion of October 22nd/18, “(US) Homebuilding Isn’t What It Used to Be” – so, if construction and values are down (and that they are, almost everywhere) significantly, then the multiplier effect of construction is going to be down….less jobs, less loans (mortgages, home improvement), less purchases; and that translates to less construction materials and less home furnishings; and that translates to less demand for those things from where they are made (eg: China); and that translates to less transport, less stores etc. & etc. – effectively, what I have just enumerated is called the ripple effect and, if other industries are affected (eg: automobiles – sales in September were down 10% in the USA), call it a tsunami effect.
And then you see this already harsh and unrelenting trendline exacerbated by slight increases in the interest rate (when you are maxed out, every increase is significant) coupled with a huge rise in prices not caused mainly by inflation, but by an inflationary ‘punitive’ tariff implemented by a President who has publicly stated that, “trade wars are easy to win”. The President has forgotten (if he ever knew) that, in this age of instantaneous news, people in Viet Nam or Sri Lanka or India or South Africa are well aware of what items are affected and what that new 25% cushion does for them. Could they meet Chinese pricing pre-tariff? Maybe so, but why should they? In the short run, they can bring up their prices 10-15 points and just pocket the cash. Just as an example, ever since the US imposed countervailing duty on most Chinese pencils, the cost of competing pencils in Viet Nam skyrocketed. The same effect occurred with notebooks and loose-leaf paper. But Chinese industry will suffer (and, indeed, is already suffering) and that will cause closures, unemployment, and unrest. When a place experiencing significant unrest has about 20% of the world’s population, how is that going to end well for any of us?
We may be living in bubble economies, but for sure we are not living in bubbles – every fact and factor will always have an effect, frequently far-reaching and, even more frequently, totally (at least officially) unanticipated. Misinformation has its own playlist – Larry Kudlow (who has a helluva big mouth), as reported in the Financial Times a little over a week ago, accused China of “doing nothing to defuse trade tensions” – yet, on October 1st (just to name one), The President stated that it was “too early” to resume trade talks. So, while not even the Chinese would whitewash all previous Chinese attitudes and approaches, it’s pretty hard to reproach someone for picking up their marbles and staying home when the game is totally rigged against resolution.
The Donald has an inflated view of himself and his abilities and a simplistic world-view – while he may think of himself as a Greek god, he has undoubtedly been lured by the Greek sirens; my question is, “What does he propose to grab them by?”