China is playing a dangerous game of currency devaluation and manipulation. And like many other serious economic situations around the globe the U.S. media is totally ignoring it to focus on a spoiled, big-mouth, rat-headed, GOP buffoon who has zero understanding of government economics.
The Chinese Money Machine is Running on Empty
Despite Republican candidate Donald Trump’s persistently blaming Obama for China’s currency manipulation, there’s not one single thing ANY president could do about it, and even if Obama could and did do something about it, the GOP would then say he was abusing his power. Lack of demand, worldwide, is causing the economic upheavals across the globe, because politicians, like Trump, might understand business economics but they do NOT understand government economics.
The recent devaluation of the yuan is likely to lead to capital flight as investors withdraw their money from the country in expectation of further falls in the currency. China cut the yuan’s value against the dollar for the second consecutive day today, roiling global financial markets and driving expectations the currency could be set for further falls sparking fears of an outright currency war as other currencies, except the dollar of course, will follow in desperate attempts to boost their exports.
And the only reason the U.S. cannot follow suit is because the very moves that would protect the U.S. would be twisted and contorted by U.S. politicians, (and the media) into the very doomsday scenarios that will take place because of political gridlock.
And the falling yuan also adds to the debt pile of some of the most indebted companies in China as the devaluation makes interest payments on debt denominated in foreign currencies more expensive.
A country takes those kinds of risks only if it knows it’s in a precarious situation. And China qualifies for that description.
It is clear that the Chinese Communist government is trying to put everyone to work while also trying to stop widespread corruption in business and politics. It tried to fix the issue with exports, and foreign investments in poor countries like Ecuador, but then Europe fell apart by enforcing austerity at the exact wrong time followed by the U.S. and the UK doing likewise.
Then China tried financing unwanted infrastructure manipulation, but it appears obvious that everything needed has been built, no…make that over-built. A Trillion dollar unsellable steel inventory (and growing) and ghost towns having been built over the past decade with no one to live or work in them, is an unmistakable sign of failure for that strategy as confidence in China’s governmental ability to come up with the right strategy at the right time wanes within the general population.
That is precisely why so many stocks in U.S., including Apple and General Motors, were so weak on Tuesday (8/11); China clearly wants its consumers to buy goods of Chinese companies, evidenced by another devaluation of the yuan today.
China’s exports plunged 8.3% in July, far worse than expected, as China gets a taste of the other side of globalization – whereby a slowdown in one area of the world spreads to another, in a vicious cycle of decline.
For years, China was the largest beneficiary of globalization, riding a cycle of global growth (prior to the Bush real estate and bank crash in 2007) in China’s three largest export markets –European Union, the US, and Japan. But with the EU floundering in the swamp of wage and export stagnation, caused by ill-timed austerity; and with the US barely recovering despite massive quantitative easing; and with Japan trying to shake off two lost decades of economic growth, China’s export growth engine is running in reverse in all three regions.
|Country||GDP Growth (Year over Year)|
Source: Trading Economics
Exports to the European Union dropped by a staggering 12.3% in July while those to Japan dropped an astounding 13%(both YoY).
China’s export plunge is consistent with a host of other macroeconomic indicators (e.g., PMI), dashing hopes for a recovery in the world’s second largest economy anytime soon.
That’s certainly another batch of bad news for the commodities, including oil and gold, which have been bloodbaths lately. China’s imports dropped by 8.1%, following a 6.1% drop in June, reflecting already weaker commodity prices.
At stake is not just money — and there’s a lot of that — but something equally as cherished to the Communist Party: faith in the system. The party leaders’ monopoly on power is premised on a vision of national rejuvenation and opulence — what President Xi Jinping calls the “Chinese Dream.”
In China, contagion is the threat, and if a resentful and distressed population turns bearish in general on the future of China, and on the country’s leadership, the effect could be to push the country into a genuine economic slowdown — one that would inevitably put a drag on China’s principal trading partners, including the United States. Yet another precursor to global lack-of-demand driven depression-defining scenarios that is being ignored in the U.S.
With growth and foreign demand drying up, which may have induced the state-backed media to champion stock buying , they are, instead, predicting bull markets with the same forced optimism they used to predict the need for increased steel output or GDP growth.
“Prior to what happened last week, foreign investors might have believed that the Chinese government can make anything happen,” said Victor Shih, an associate professor at the University of California at San Diego’s School of Global Policy and Strategy.
Not anymore. The Chinese government has gone to huge lengths to support its volatile stock markets in Shanghai and Shenzhen, which climbed to dizzying heights but then immediately shed about a third of their value.
By early July, the Chinese government seemed to have halted the carnage by announcing a truly massive array of measures to support the market. It encouraged banks and other financial institutions to increase lending to investors, froze initial public offerings, cut interest rates, forced state-owned companies and funds to buy shares, and threatened to prosecute short-sellers. At one point, over half of the listed companies on the exchanges had suspended trading in their shares to stem further losses. The state-owned China Securities Finance Corp pledged to loan 21 securities firms about $42 billion to purchase shares.
And now an unprecedented stock market crash over the past month resulted in China’s government pleading with the Chinese middle-class to put equity in their homes into purchases of unquestionably over-valued stocks to avoid shareholder stampedes out of Chinese companies.
The reaction has left the Chinese government heavily invested in its own stock market. The China Securities Finance Corp had borrowed a stunning 1.22 trillion renminbi from commercial banks to buy stocks as of July 13, according to financial media Caixin, and is now one of the top 10 shareholders of many listed firms, Chinese media reported last week.
But last Monday’s precipitous drop shows that even these extreme measures haven’t been successful in restoring foreign investor confidence. “The lesson from China’s last equity bubble is that, once sentiment has soured, policy interventions aimed at shoring up prices have only a short-lived effect,” says a report from The People’s bank of China (PBOC).
“The Chinese government cannot just leave 80 or 90 million investors to die,” he said. “It’s not just the stock market that’s the problem. There’s also the problem of people, of social stability, and for the government, it’s also a question of credibility.” The devaluation is a sign that things are much worse in China than even the bears realize.
All of the above points to one unmistakable conclusion: Trade War.
Problems in the Europe
Germany, even though they have been the major beneficiary of Greece’s economic demise, continues to flounder under their own austerity failure. Deflation has been occurring in the common-currency bloc since last summer, and it appears that Greece will again get fleeced in order to stay afloat, while Spain, Italy, Portugal, and Ireland continue to experience pre-depression lack of growth and unemployment under the weight of ill-timed austerity. Unemployment in Spain and Italy are already bumping the Depression level of 25% with the rest of southern Europe close behind.
The Euro one-currency union experiment is flagging, with Germany being the only country that hasn’t fallen into abject disrepair, but it has left virtually every other member country struggling. With their own failed ill-timed austerity attempt, its member countries have no stomach for importing other countries’ goods or services. So demand will be slow in developing at any price.
Britain’s economy is actually doing relatively well at the moment, as is the U.S., but both are fragile.
Britain’s fortunes have been linked to the global economy for centuries and still is. The UK economy, being outward looking for a lot of its goods, isn’t out of this loop. UK industrial production declined 0.4% in June, surprising analysts who predicted a 0.1% increase. It was led lower by mining and quarrying, which fell a huge 3.8% month-on-month, according to the Office of National Statistics, as the commodities price rout worsened.
Banks that have strong links to China have suffered. Profit at Asia-focused lender Standard Chartered fell 44% in the first half of the year, while Douglas Flint, chairman of HSBC said that “falls in commodity prices led to a lower value of commodity related trade finance” in the bank’s interim results statement.
The toxic mix is also one of the reasons why the Bank of England is struggling to raise interest rates.
The BoE nor the Fed in the U.S. have been able to get needed inflation going (managed inflation across prices and wages is a boom to GDP and promotes healthy growth in both) with monetary policy alone because prices are falling with commodities. Meanwhile a rise in rates would also strengthen the dollar and the pound, but hurts exports where demand has been weakening since 2007. Governments and their currencies really only have four positions…..reasonable inflation, stagnation, stagflation, or deflation. Trust me, manageable inflation is where you want to be. Runaway inflation ha happened only a handful of times in the U.S. and has NEVER been the result of monetary policy….only foreign policy or a confluence of foreign economic events have ever caused runaway inflation in the U.S.
Then There’s Saudi Arabia’s mounting problems.
In the Mideast, as Saudi Arabia goes, so goes the region. News this week that the Saudi government is to raise more than $27 Billion from bond sales is a significant because it explicitly shows that the strain of getting involved in a spending battle with the world’s biggest economy is taking its toll. The oil vs. shale war is beginning to show the cracks in the Saudi’s foundation.
Saudi Arabia is an expensive country to run for the House of Saud. Fearful of Iran, it has imported the latest military kit to show that it is the Middle East’s regional superpower. Higher defense spending has also been needed to fund action in Yemen and to counter the threat from Islamic State. In addition, Saudi Arabia has an unemployment problem that it fears may become a social unrest problem. Two-thirds of the population is under 30 and the unemployment rate for the 16-29 age group is 29%.
As the CIA puts it in its World Factbook: “Over 6 million foreign workers play an important role in the Saudi economy, particularly in the oil and service sectors, while Riyadh is struggling to reduce unemployment among its own nationals. Saudi officials are particularly focused on employing its large youth population, which generally lacks the education and technical skills the private sector needs.”
The Saudi royal family decided the way to ensure that it was not toppled by the Arab spring was to throw money at millions of potentially angry young men. That, too, is expensive for a country where there is no income tax and gasoline costs less than $1.46 per gallon
All this was affordable while oil prices were well above $100 a barrel. The sums don’t add up when a barrel of Brent crude is changing hands for less than $50, and this explains why the International Monetary Fund estimates that Saudi Arabia is on course to run a budget deficit of 20% of national income this year. To put that figure into perspective, at its worst following the deep recession of 2008-09, Britain was running a budget deficit of 11% of GDP.
Like many oil-producing countries, Saudi had gotten used to an era of high oil prices. Kuwait and Abu Dhabi can live with crude at its current level: Saudi Arabia cannot. It requires an oil price of $106 a barrel to balance the books.
But the chances of high oil prices were decimated by the rapid development of the US shale industry, which expanded the supply of cheaper oil. Hence the decision by Saudi Arabia to drive the American producers out of business by pushing the cost of crude down to levels that made the new US fields unviable has failed miserably.
Because oil accounts for almost 90% of Saudi Arabia’s revenues, a black hole quickly opened up in the budget. That was filled initially by running down the country’s reserves but this cannot go on indefinitely.
But the need to resort to the financial markets demonstrates the resilience of the US shale sector, and being a one-horse show, the bond sale means Saudi Arabia could be seeing the sand storm on the horizon.
The US is producing more oil than it has done for more than four decades, a fact recognized by Saudi Arabia’s central bank, which noted in a recent report that “it is becoming apparent that non-Opec producers are not as responsive to low oil prices as had been thought, at least in the short run.” Judging by the price of oil in futures markets, this could take some time.
So Saudi demand for imports, at any price, has been disappearing from the global stage as well.
Given the above, a much-rumored raising of interest rates, after combating the struggling Bush-presidency real estate/bank crash of 2007 with numerous runs of quantitative easing, is a clear possibility. And it could also be the frosting on the cake that has been a mirroring of the run up to the Great Depression since Ronald Reagan started the ball rolling.
It is entirely possible that a Fed tightening in September could cause serious repercussions for all U.S.-based international companies. In fact, a raise in rates could throw the U.S. right back into a recession if the Fed isn’t mindful of the trade war being declared on the United States.
Quantitative easing, the U.S. equivalent of de-valuing its currency to make exports more attractive, has done all it can to revive the economy, but fiscal policy changes are needed to spur growth (i.e. infrastructure repair), and spur confidence enough to get US consumers buying what they want as opposed to only what they need.
Thus, if the Fed does not take what is happening in China seriously, a rate hike could cause real damage. It’s time for the Fed to be data dependent, and realize that the rest of the world is uniformly awful.
If we’re not careful, we could reprise the 1937 recession within a Great Depression scenario caused by a Fed that also felt it just had to raise the rates, because, well, the worst was over.
It wasn’t back then and it may not be now, and the big picture is that there is nowhere to hide. The global lack of demand is like a python squeezing the life out of economies worldwide. If a Republican wins the upcoming presidential race in the U.S. and continues the austerity that has been the only thing keeping the U.S. economy from taking off, the writing on the wall becomes clearer.
With the U.S., China, UK, the Eurozone and the Mideast all suffering from falling exports and everyone except the U.S. de-valuing their currency in hope of someone, anyone to buy their goods and services, all countries will be hoping that their own domestic economies will see them through this deepening economic downturn.
But with the U.S. experiencing severe wage stagnation and China suffering with the vanishing demand for their wares, no matter how low the price, it doesn’t take a genius to see that the python is getting stronger.
Death may well be slow, but the python has time. With the number one and number two economies in the world caught in a death loop, and the U.S. media completely focused on the train wreck GOP political race, it’s looking more and more like the python is going to win the match.
Harvey A. Gold