A half century after the Cultural Revolution in China, Chairman Mao would have loved to see the swelling populist insurrection in the West, now blown into the open with Brexit, the continued rise of right-wing nationalists elsewhere in Europe, and of course the Donald Trump phenomenon.
That's because these all indicate that polarizing class and race warfare are alive and well in 2016. This renders the Marxist-Leninist and Maoist worldviews - and their right-wing fascist cousins - effectively still valid after a long period of apparent hiatus.
Much like the periods of intense populism in the last century, we have the spectacle of a mass uprising against the perceived abuse of a tiny elite that has concentrated too much wealth and influence in its own hands. While still in its early stages, its contours are very, very familiar for students of modern history.
For a society like the US or UK, the nasty shock is that the age-old demons of classist and racist envy and resentment have begun to break down all semblance of reason and logic. That's because it's far, far deeper and more primeval than any set of economic statistics or public opinion polls can possibly capture. This is fundamentally a matter of, "F**k you, it's time for you to suffer because you've had it too good for too long compared to the rest of us."
As of this juncture, the ruling establishment - with its well-paid surrogates in the corporate media - has scarcely a clue that the more it tries to reason with the mob, the more it agitates its lynching instincts and passions. Brexit has shown us that the very notion of "expertise" and "experience" in the political and economic status quo is becoming a lightning rod of deep populist hatred. And the fact that the defenders of this status quo are only doubling down further on their logical or scientific arguments and explanations as their main defense shows just how badly out of touch with reality they've become.
There comes a time in history when niceties and rationale go out the window and it's time for some real bloodletting, if not physical then at least economic and financial. The public wants the ruling class to feel and suffer real loss and pain. In this environment, the only thing that will satisfy it is surrender - to Hell with more negotiating and bargaining!
Alas, that's what the elites still completely misunderstand. This is no longer about relieving the suffering of the masses - this is about turning their victimizers into the victims.
Yes, Mao would've been very happy to see the world in 2016, indeed.
Wednesday, June 29, 2016
Monday, June 27, 2016
How Brexit helps China
The long-term repercussions of Brexit won't be known for at least a year or two, but for now, one thing's relatively certain: the era of ultra-easy monetary policy is going to be prolonged, possibly significantly.
Even better from China's perspective, Brexit has given it the excuse to devalue the yuan against the dollar by the biggest single cut since the notorious surprise of last August 11. With even the onshore RMB now likely to flirt with 6.7 (the offshore is already close), Chinese exporters are getting a shot in the arm that many of them desperately wanted - but which wasn't likely without a valid external pretext, since otherwise it would've created more doubt over the Chinese economy and spurred more large capital outflows.
That's good news, on balance, for China and the rest of emerging Asia: they will suffer from volatility and safety-seeking liquidations in the coming weeks, for sure, but the backdrop of a far more dovish Fed than before the Brexit vote - on top of the retraction of hawkishness in the week prior - will be a much-needed cushion and likely medium-term growth booster. With no rate hikes likely now until December at the earliest - and significant risk of a new need to cut back to zero - we may in fact have seen the end, for all practical purposes, of an all-but stillborn effort to normalize borrowing costs in the current rate cycle.
Even better from China's perspective, Brexit has given it the excuse to devalue the yuan against the dollar by the biggest single cut since the notorious surprise of last August 11. With even the onshore RMB now likely to flirt with 6.7 (the offshore is already close), Chinese exporters are getting a shot in the arm that many of them desperately wanted - but which wasn't likely without a valid external pretext, since otherwise it would've created more doubt over the Chinese economy and spurred more large capital outflows.
Of course, the permabears everywhere are back at their old habit of predicting a 2008-style global meltdown and/or Chinese crash/devaluation, but the logic against them is now glaringly obvious - as is the self-contradiction in their own rationale.
True, the EU authorities in Brussels and Frankfurt have every incentive to make the divorce as costly and painful as possible for London; but they also have every incentive to minimize collateral damage on their own intertwined financial sectors and by extension real economies. Britain, after all, is far more important than Greece: its leverage over the EU is commensurately greater, and once it comes down to it, the bloc's authorities have no choice but to collude with it to preserve what normalcy can in fact be salvaged. It would be one thing if Britain could be hung out to dry as it gets cut off from the rest of a flourishing European economy, thus deterring other would-be exiters; the reality is that to achieve this, the continental EU can only inflict potentially far greater economic harm and thereby political instability on itself.
And that leads to the biggest help that Brexit offers China: it clearly demonstrates that the middle kingdom isn't the weak link in the global economy as so many had feared, since Europe is looking to be an even weaker link. In the short term, its turmoil will hit China via trade, but in the longer term its forced readjustment - most likely resulting in a permanently lower pound and euro - will merely reflect underlying economic fundamentals. European products and services will become cheaper for China, thus helping the latter's transition to consumption and services; Chinese investment in Europe will likewise increase as a strong yuan makes for more bargains, and even the more entrenched European resistance to greater Chinese ownership of choice domestic firms might soften at the prospect of boosting cheaper exports to a wealthier China.
The final piece of the puzzle is the role of Russia - the land bridge between China and Europe. It shouldn't be considered a coincidence that Brexit coincided with a state visit by Vladimir Putin to Beijing, where he conferred with Xi Jinping and other top Chinese leaders to deepen comprehensive strategic cooperation, notably (as always) in energy and arms, but also with more groundbreaking finance and infrastructure tracks. The long-term Chinese strategy is unmistakable: as Western Europe fragments and weakens, Russia grows relatively stronger. Now that Brexit has sped up the prospective timetable for the EU's relaxation of its Ukraine and Crimea sanctions on Moscow, the Kremlin is looking stronger than it has for some time: yes, the Russian economy remains down in the dumps, but the combination of partly recovered crude prices and an emerging competition between China and Europe to develop its vast internal market is bound to swing the geostrategic balance in Putin's favor - as even George Soros has admitted as he acknowledged Russia becoming a world power again on the back of Brexit and a decaying EU (just before last Thursday's vote).
So overall, Brexit is a big long-term gain for the Russo-Chinese authoritarian axis. Putin and Xi must adeptly (as ever) navigate the cluttered minefields that are their respective domestic political landscapes over the next 6-12 months, and should they succeed, by mid-2017 they will find themselves in a far stronger position than anyone in the West could have thought possible not too long ago.
The final piece of the puzzle is the role of Russia - the land bridge between China and Europe. It shouldn't be considered a coincidence that Brexit coincided with a state visit by Vladimir Putin to Beijing, where he conferred with Xi Jinping and other top Chinese leaders to deepen comprehensive strategic cooperation, notably (as always) in energy and arms, but also with more groundbreaking finance and infrastructure tracks. The long-term Chinese strategy is unmistakable: as Western Europe fragments and weakens, Russia grows relatively stronger. Now that Brexit has sped up the prospective timetable for the EU's relaxation of its Ukraine and Crimea sanctions on Moscow, the Kremlin is looking stronger than it has for some time: yes, the Russian economy remains down in the dumps, but the combination of partly recovered crude prices and an emerging competition between China and Europe to develop its vast internal market is bound to swing the geostrategic balance in Putin's favor - as even George Soros has admitted as he acknowledged Russia becoming a world power again on the back of Brexit and a decaying EU (just before last Thursday's vote).
So overall, Brexit is a big long-term gain for the Russo-Chinese authoritarian axis. Putin and Xi must adeptly (as ever) navigate the cluttered minefields that are their respective domestic political landscapes over the next 6-12 months, and should they succeed, by mid-2017 they will find themselves in a far stronger position than anyone in the West could have thought possible not too long ago.
Tuesday, June 21, 2016
West can't lecture China about "markets" anymore
Christopher Balding, a reputable expert on the Chinese economy, notes that the Chinese yuan has become increasingly localized in 2016 even as the IMF prepares to officially include it in its basket of international reserve currencies, the special drawing right (SDR) this fall.
Unfortunately, the piece gives the impression that Beijing is deliberately backsliding on its commitment to liberalize the yuan, where in reality it's taking prudent precautions before what it knows to be an inevitable opening of the capital account in the coming years.
It all boils down to a fundamental question: should important currencies whose valuations have global impact be left to a mythic "free market" that can always be trusted to price them fairly?
Events since China's surprise devaluation last August should be enough to give the answer as a resounding "not yet."
There are two gaping holes in Mr. Balding's thesis that China is making a mistake by going it slow on RMB internationalization.
First and foremost, China is hardly alone in manipulating its currency - it's probably not even the most egregious offender. For all the talk of the sacrosanct "free market", the Western financial system is arguably the most blatant ponzi scheme in the history of humanity - one from which Beijing's own worst excesses arguably merely take their cue. It's called a "free" system because it's built on private bank credit, yet in reality it has long since become a massive monetary cartel which has co-opted the government authorities of its host countries so thoroughly that its operations have for most intents and purposes become just as artificially controlled or manipulated as that of "socialist" or "planned" systems.
That's not to say this is inherently bad - quite the contrary, China owes its dramatic economic rise since the 1990s to precisely this extraordinary concentration of Western economic authority - and, by extension, political influence - into the hands of a tiny elite of cutthroat "financialists" driven by an insatiable appetite for endless profits. If any nation has benefited from the maxim that "greed is good", it would be post-Mao China.
But that leads us to the second big hole in the China-bashing argument over the yuan's temporary seal-off: as of mid-2016, this post-Bretton Woods (i.e. post-gold standard) global monetary system is, on the whole, clearly at an inflection point where something is about to give - and perhaps give "bigly", as Donald Trump would say. The hyper-financialism of the 1990s and 2000s - facilitated largely by the rise of China, before then being extended further beyond its natural lifespan in the wake of the 2008-09 crisis on back of even greater reliance on the middle kingdom (in collusion with ultra-loose monetary policy by rich-world central banks) - has reached its logical conclusion of a global debt deflation crisis. In this unprecedented circumstance, all traditional or conventional argument or debate pertaining to "markets" is out the window: you have to be a blind ideologue these days to continue insisting that the Western "neoliberal" model of "free trade" and "deregulation" underpinned by a 45-year-old cult of fluid fiat credit is still anything like the classic laissez-faire regimes described by Adam Smith or Friedrich Hayek.
August 11, 2015 will go down in history as the day that post-Bretton Woods came apart at the seams with the Chinese central bank, PBOC, shocking global markets and policymakers by devaluing the yuan by nearly 1.9 percent. In the ensuing weeks, the world got a taste of just how much this seemingly minor reset could upset "markets" from Tokyo to New York to London: in the face of a less than 4 percent decline in the RMB against the dollar starting with PBOC's move, stocks were crashing to price in the illiquidity that a possible larger Chinese devaluation of 10-20 percent would introduce to US dollar-denominated global trade and finance flows. The carnage effectively sealed the Fed's dependence on China for its long-awaited interest rate hike timetable: so much for the "free market"!
Almost a year later, Beijing's prudent caution - and its continued collusion with Washington - are the unspoken reasons that the global financial turmoil of last August and September and this January and February haven't translated into a new 2008-style meltdown, the prospect of which sent numerous hedge funds chomping at the bit to pocket an even "Bigger Short" whether in Asian currencies, crude futures, or European banks. But don't expect Western talking heads to adapt easily to this brave new world of shamelessly transparent manipulation of "markets" and propping up of asset values by central bankers and their "commercial" or "investment" banking surrogates: it's a given in the Judeo-Christian heritage (the character of which even a secular postmodern West still retains) that ideology is effectively the basis of rational analysis, even as that very analysis can only point to the gutting of its a priori foundation.
Back in the real world of late, the yuan's quasi-peg against a basket of trade-weighted currencies is gaining credibility, as even the re-widening of the offshore-onshore spread in recent weeks hasn't yet triggered runaway devaluation fears.
While the offshore (Hong Kong) RMB has in fact flirted with 6.60+ to the dollar for the first time since the February global market doldrums, it likely has a "safety zone" of perhaps 500 pips (5 yuan-cents) between 6.60 and 6.65: below this floor against the greenback, PBOC can only expect an acceleration of capital outflows, which picked up again in May after being tamed in March and April. Hence, as of late June, the central bank appears to be in relatively firm control of the currency's movements - and that's the kind of stability and predictability that the "market" clearly wants.
Mr. Balding's critique that this propping up of the currency will only lead to more malinvestment in China is a valid concern: for this reason, it's in Beijing's best interest to let the yuan gradually slide to a level more appropriate with the actual balance of payments. This doesn't change the fact that, for now at least, such a sensitive shift can't be left to "market" forces.
For that matter, that's the broader conclusion for the entire global economy: whatever "market" truly does exist is as much the creature of its "market makers" - ultimately the constellation of central banks - as it is of truly independent private participants. It would make perfect sense to talk of the merits of a "free" system if that's indeed what the West itself has practiced; it borders on absurdity if in fact it hasn't. Believe it or not, China isn't necessarily behind the West anymore when it comes to some common macroeconomic sense: perhaps only socialists truly understand the downside of socialist money.
Unfortunately, the piece gives the impression that Beijing is deliberately backsliding on its commitment to liberalize the yuan, where in reality it's taking prudent precautions before what it knows to be an inevitable opening of the capital account in the coming years.
It all boils down to a fundamental question: should important currencies whose valuations have global impact be left to a mythic "free market" that can always be trusted to price them fairly?
Events since China's surprise devaluation last August should be enough to give the answer as a resounding "not yet."
There are two gaping holes in Mr. Balding's thesis that China is making a mistake by going it slow on RMB internationalization.
First and foremost, China is hardly alone in manipulating its currency - it's probably not even the most egregious offender. For all the talk of the sacrosanct "free market", the Western financial system is arguably the most blatant ponzi scheme in the history of humanity - one from which Beijing's own worst excesses arguably merely take their cue. It's called a "free" system because it's built on private bank credit, yet in reality it has long since become a massive monetary cartel which has co-opted the government authorities of its host countries so thoroughly that its operations have for most intents and purposes become just as artificially controlled or manipulated as that of "socialist" or "planned" systems.
That's not to say this is inherently bad - quite the contrary, China owes its dramatic economic rise since the 1990s to precisely this extraordinary concentration of Western economic authority - and, by extension, political influence - into the hands of a tiny elite of cutthroat "financialists" driven by an insatiable appetite for endless profits. If any nation has benefited from the maxim that "greed is good", it would be post-Mao China.
But that leads us to the second big hole in the China-bashing argument over the yuan's temporary seal-off: as of mid-2016, this post-Bretton Woods (i.e. post-gold standard) global monetary system is, on the whole, clearly at an inflection point where something is about to give - and perhaps give "bigly", as Donald Trump would say. The hyper-financialism of the 1990s and 2000s - facilitated largely by the rise of China, before then being extended further beyond its natural lifespan in the wake of the 2008-09 crisis on back of even greater reliance on the middle kingdom (in collusion with ultra-loose monetary policy by rich-world central banks) - has reached its logical conclusion of a global debt deflation crisis. In this unprecedented circumstance, all traditional or conventional argument or debate pertaining to "markets" is out the window: you have to be a blind ideologue these days to continue insisting that the Western "neoliberal" model of "free trade" and "deregulation" underpinned by a 45-year-old cult of fluid fiat credit is still anything like the classic laissez-faire regimes described by Adam Smith or Friedrich Hayek.
August 11, 2015 will go down in history as the day that post-Bretton Woods came apart at the seams with the Chinese central bank, PBOC, shocking global markets and policymakers by devaluing the yuan by nearly 1.9 percent. In the ensuing weeks, the world got a taste of just how much this seemingly minor reset could upset "markets" from Tokyo to New York to London: in the face of a less than 4 percent decline in the RMB against the dollar starting with PBOC's move, stocks were crashing to price in the illiquidity that a possible larger Chinese devaluation of 10-20 percent would introduce to US dollar-denominated global trade and finance flows. The carnage effectively sealed the Fed's dependence on China for its long-awaited interest rate hike timetable: so much for the "free market"!
Almost a year later, Beijing's prudent caution - and its continued collusion with Washington - are the unspoken reasons that the global financial turmoil of last August and September and this January and February haven't translated into a new 2008-style meltdown, the prospect of which sent numerous hedge funds chomping at the bit to pocket an even "Bigger Short" whether in Asian currencies, crude futures, or European banks. But don't expect Western talking heads to adapt easily to this brave new world of shamelessly transparent manipulation of "markets" and propping up of asset values by central bankers and their "commercial" or "investment" banking surrogates: it's a given in the Judeo-Christian heritage (the character of which even a secular postmodern West still retains) that ideology is effectively the basis of rational analysis, even as that very analysis can only point to the gutting of its a priori foundation.
Back in the real world of late, the yuan's quasi-peg against a basket of trade-weighted currencies is gaining credibility, as even the re-widening of the offshore-onshore spread in recent weeks hasn't yet triggered runaway devaluation fears.
While the offshore (Hong Kong) RMB has in fact flirted with 6.60+ to the dollar for the first time since the February global market doldrums, it likely has a "safety zone" of perhaps 500 pips (5 yuan-cents) between 6.60 and 6.65: below this floor against the greenback, PBOC can only expect an acceleration of capital outflows, which picked up again in May after being tamed in March and April. Hence, as of late June, the central bank appears to be in relatively firm control of the currency's movements - and that's the kind of stability and predictability that the "market" clearly wants.
Mr. Balding's critique that this propping up of the currency will only lead to more malinvestment in China is a valid concern: for this reason, it's in Beijing's best interest to let the yuan gradually slide to a level more appropriate with the actual balance of payments. This doesn't change the fact that, for now at least, such a sensitive shift can't be left to "market" forces.
For that matter, that's the broader conclusion for the entire global economy: whatever "market" truly does exist is as much the creature of its "market makers" - ultimately the constellation of central banks - as it is of truly independent private participants. It would make perfect sense to talk of the merits of a "free" system if that's indeed what the West itself has practiced; it borders on absurdity if in fact it hasn't. Believe it or not, China isn't necessarily behind the West anymore when it comes to some common macroeconomic sense: perhaps only socialists truly understand the downside of socialist money.
Wednesday, June 8, 2016
US and China share blame for global funk
In the wake of an awful jobs report last Friday, Federal Reserve chairwoman Janet Yellen obviously put on a brave face on what's harder and harder to deny as a crummy US economy that feels uncomfortably flirtatious with recession.
Meanwhile, Treasury Secretary Jack Lew's demand at the opening of this year's US-China Strategic and Economic Dialogue that the latter crack down on excess capacity in steel, aluminum, and other commodity industries underscores what Washington perceives to be the crux of the global economic funk.
US: Since you've invested like crazy in your industrial capacity, you're killing prices and threatening asset values all over the world.
China: We wouldn't even be talking about this if you hadn't urged us to chase growth and profits quarter by quarter instead of pursuing a more thoughtful long-term strategy.
The plain reality is that the US and China share the blame for the sorry state of the global economy in mid-2016. Nearly eight years after the onset of the global financial crisis, both countries remain fundamentally unbalanced - and badly in need of political leadership to rebalance faster.
The US "financialist" growth model was exposed as being broken in 2008, but it hasn't been replaced or even meaningfully reformed. Rather than end our reliance on debt-fueled asset inflation in the stock and housing markets to drive real economic growth, we simply let the federal government (with its trillion-dollar deficits) and Federal Reserve (zero interest rates and multi-trillion dollar QE over several iterations) pick up the slack that cash-strapped consumers left. It fueled a great recovery and bull run in housing, stocks, and bonds, but at the expense of even further financialization and decoupling of asset valuations from real economic growth and activity (i.e. employment and wages). The result: Donald Trump and Bernie Sanders.
For a while, in 2009-12, China offered some tangible pep to this even deeper retrenchment by Wall Street: its crisis-busting infrastructure and construction stimulus drove a global commodities boom that buoyed resource exporters on every continent and helped fuel the shale-fracking revolution in North America, even as it filled the coffers of established petro-states. The resultant financial and trade flows in turn lifted resource-poor emerging markets, as well; it also made a rising Chinese middle class the darling of Western multinationals.
But there was a fatal flaw to the Chinese rescue: it remained heavily dependent on exporting massive volumes of manufactured goods to the rich world. Before long, Chinese firms had captured such a large share of these lucrative markets that they had to engage in cutthroat price warfare both domestically and abroad, and their margins collapsed.
2012 thus marked a turning point for the "Chimerican" engine of the global economy: the slowdown in the first half of that year was effectively the end of the post-crisis recovery, which the eurozone periphery debt conundrum since late 2010 had exposed as running on thin ice.
Unhappily, however, 2012 was also a year of power transition in both Beijing and Washington, and both capitals chose one more bout of stimulus to promote stability - QE3 by the US followed by another infrastructure and real estate stimulus by China. This forestalled another global growth crash, but at the price of an irrevocable downward trajectory of global growth rates, as both east and west Chimerica were essentially papering over their structural distortions with more superficial expansion instead of actually attempting to fix them.
In the spring of 2013, as Xi Jinping took power and Obama began his second term, it was clear that the Fed's QE3 had introduced the unwelcome prospect of overheating and overspeculation in financial markets; thus did US monetary authorities announce a shift to a new tightening and "normalizing" policy stance - triggering the infamous "taper tantrum" of May and June - even though employment and inflation were still well below target.
But it was too late for China. The country had literally doubled down on its artificial stimulant recipe to goose GDP growth: in 2013, per one unofficial estimate, nearly half the country's entire fixed capital formation was wasted. Largely funded by "shadow" banks and financial institutions, a huge number of secondary market players had crowded into an already oversupplied and cash-tight economic environment with steadily building deflationary pressures (PPI had slipped into negative territory the previous March). In late June 2013, in reaction to the Fed's taper threat, an interbank bond default signaled a dramatic escalation of real (deflation-adjusted) borrowing costs which has been an unmistakable indicator of chronic industrial overcapacity and overproduction that only continued to worsen until the first quarter of this year.
A Stratfor assessment of the Chinese steel sector demonstrates the severity of the problem: in 2012, China's top five steelmakers accounted for 45 percent of nationwide output; in 2015, this was down to 34 percent. This points to a glut of steel firms and not merely steel plants: the 2012 stimulus clearly kickstarted capacity expansions at numerous smaller and less efficient concerns run by local governments or private individuals hoping to compete on land, subsidy, or labor cost advantages. Being as they were mostly in hinterland or otherwise domestically oriented economic zones, they still had plenty of short-term infrastructure and real estate construction business to feed, but in the process they brought online additional capacity that could only have been justified by the spillover of a resounding global recovery.
The only problem is that said global recovery didn't materialize. The Fed's flirtation with ending QE in 2013 turned out to be 18 months premature: it was expected at the time that US growth, which had averaged around a measly 2 percent since Q2 2009 to produce the weakest recovery on record, would somehow finally hit its potential of sustained 3 or even 4 percent expansion. Instead, the Fed discovered conclusively that 3+ percent annualized quarterly growth was unsustainable, but that it apparently wasn't necessary anyway, because even the prospect of ending QE and normalizing interest rates was enough to send hundreds of billions of offshore dollars - which had chased yields in emerging markets ever since US rates hit rock bottom in end-2008 - pouring back into US asset markets and taking stocks to new highs.
So in the latter half of 2013 and through 2014, American policymakers effectively convinced themselves that all that really mattered was their flagship market indices such as the S&P 500: it was still going up, so what could that possibly mean other than that the long-awaited true recovery was just around the corner? Unfortunately, their confidence rubbed off through virtual osmosis on their peers worldwide, leading financial institutions and firms everywhere to buy into not just the imminent recovery narrative, but more generally the supposed omnipotence of central bankers. Despite all the talk about eventually unwinding QE, the Fed gave the unmistakable impression that its extraordinary accommodative stance wouldn't in effect end until frothy asset valuations had demonstrated they could do without it: it was a seemingly unbeatable formula of sustaining the hope of global recovery as if that alone would eventually actualize it, and it was such a no-brainer that the whole rich world was now following the Fed's lead and actually diving deeper into the kool-aid of this hyper-financialism even as the Fed itself was seeking to sober up again, however long this would take.
In fact, the whole grand experiment of ultra-easy monetarism was now producing increasingly pronounced imbalances and distortions. In the US, as the rush of returning offshore dollars hit the wall of prolonged zero rates and low revenue growth, the sure way for firms to keep their stocks elevated was to issue historically cheap bonds and recycle the proceeds to buy back their own shares. Tellingly, US yields were now so low that the junk-rated debt of small to mid-size shale frackers now cost them as little as 4 to 5 percent to issue; with oil prices still in the low-$100s, the renewed black gold rush was on - with devastating implications for crude prices in due course. Even so, things were getting even more out of whack in Europe and Japan: in the former, collapsing growth and returns coupled with the ECB's reluctance to emulate the Fed's QE meant that negative interest rates had to be introduced in mid-2014 (QE had to be launched anyway the following March); in the latter, the much-vaunted "Abenomics" inaugurated at the end of 2012, reliant on the BOJ's wholesale buying of government bonds, had persistently failed to restoke the flame of inflation. And of course, even these OECD travails were nothing compared to the virtual price Armageddon that was about to hit commodities and oil exporters in late 2014.
In this environment, China with its slowdown to 7.7 percent official growth in 2013 and 7.3 percent in 2014 - where close to 10 percent had been projected before the 2012 downturn - still appeared to be a great investment. But this only fed further into the fixed-asset bubble driven by the white-hot real estate market: even as that market leveled off and began to decline, through 2014 Chinese firms were able to gorge on even more cheap dollar-denominated debt from yield-starved international investors.
By the time the Fed finally wound down its QE purchases in November 2014, it was clear that interest rate normalization would have to wait: pressures which had been building in emerging markets over the past 18 months were now truly coming to a head, and before long, even China couldn't escape the nasty effects of the drastic constriction of global dollar-denominated finance and trade flows.
The catalyst was oil, which in H2 2014 plunged from nearly $120 a barrel to little above $40; initially hailed as a boon for Western consumers and Asian manufacturers, by early 2015 signs were unmistakable that this crash, along with a much broader general bust in commodities, was quite the contrary sending a major deflationary wave across the global economy. It was at this juncture that China suddenly came to the forefront as the vortex of a disinflationary, growth-draining whirlpool from which the entire world would struggle to escape.
With US QE's end and the tightening of dollar trade triggered by plunging commodities, the Chinese central bank (PBOC) had to embark on a series of interest rate and reserve requirement ratio (RRR) cuts for the banking system simply to keep growth from falling off a cliff; but as the dollar strengthened dramatically against other currencies, the dollar-pegged yuan shot up with it. As China's oil and commodity suppliers slid into outright recession in early 2015, they were creamed by this double whammy of an ultra-strong dollar-yuan pair, but China was itself now hardly immune to the greenback's shrinkage: the yuan's appreciation against the euro and yen crimped the dollar value of exports to Europe and Japan so badly that new record exports to the US couldn't compensate. Through all of this, Chinese firms kept churning out ever cheaper goods in ever greater quantities, hammering industrial commodity prices worldwide and putting even more pressure on manufacturers across the spectrum in both developed and emerging markets; but by April and May of 2015 they were downright struggling with dollar funding and cash flow shortages to keep up with the dollar liabilities they had racked up, and PBOC now had to start draining its once nearly $4 trillion-strong chest of foreign exchange reserves to plug the gaps lest a run on the yuan force a devaluation.
That devaluation turned out to be unavoidable. In the wake of the Chinese stock market crash in late June and early July (and Beijing's botched rescue effort) against the backdrop of continued growth and trade deterioration, Chinese corporates ramped up their redemptions of yuan for precious scarce dollars so much that PBOC had no choice but to break the currency peg on August 11 with a nearly 2 percent cut of the yuan's daily fixing against the dollar. That's when hell broke loose. Capital outflows grew from a leak to a flood, forcing Beijing to run down its reserves to stop a tanking yuan sliding even faster and further, especially in the open offshore market (Hong Kong). This sudden, unanticipated nearly 4 percent decline in the tender of the world's factory floor proved too much for the global financial system to handle: beginning with an eye-popping 1,000-point intraday selloff in the Dow on August 24, US stocks suffered a massive correction over the following 3-4 weeks, which ended up liquidating over $5 trillion in market capitalization worldwide; in August and September alone, Chinese forex reserves fell by about $200 billion as PBOC scrambled to prop up the yuan.
The final nail in the coffin of the US-China global growth engine was the Fed's long-awaited first rate hike in nearly a decade in mid-December. China's woes over the summer were a rude wake-up call that the middle kingdom had indeed caught the deflationary contagion that had already devastated its commodity suppliers, and this was enough to delay a hike in September. By then, financial markets had begun in earnest to reprice risk, rate, and growth expectations: yield premiums ballooned and yield curves flattened. Despite these red flags, the Fed wouldn't waver in its commitment to get the rate normalization ball rolling at long last: its very credibility was on the line, and the most widely followed headline metrics - Chinese GDP growth along with US jobs and stock indices - seemed resilient and buoyant enough for liftoff even if they weren't exactly stellar.
The rest is history. In January and early February, global markets vociferously disagreed with the Fed's hawkishness of planning four more hikes during 2016 on top of the 25-basis point bump on December 16. The new year started with Chinese stocks crashing again, and Beijing had to introduce draconian capital controls to stem a run on the RMB trumpeted by George Soros, starting off with an all-out sweep of the offshore market on January 12 which catapulted the overnight interbank rate in Hong Kong to over 66 percent. As China struggled to keep its financial system from getting away from it, turmoil now engulfed oil and commodities afresh, and this is where Uncle Sam finally got the message: with crude plunging to barely $26 a barrel in early February (towards what some were forecasting to be as little as $10), even flagship Western investment banks were coming under threat from the prospect of massive defaults of their big plays in the oil patch. In collusion with the BOE and ECB, the Fed bailed Deutsche Bank out of a complete meltdown on February 11. That was the day Washington effectively slammed the breaks on its rate normalization schedule. It also marked the start of a provisional global collusion to stabilize the yuan against the dollar by weakening the latter against the euro and yen, which some suspect was fleshed out secretly at the G-20 meeting in Shanghai on February 26-27.
And so, here we are: China and the US have been forced into an uneasy cooperation to keep the global economy they jointly lead from falling apart. The discomfort and inconvenience of the arrangement for both sides is palpable - akin to a husband and wife who literally can't bear one another but must still share a roof for the sake of the kids.
While American pleas over Chinese overcapacity don't quite amount to the absurdity of asking China to make the world poorer by raising the cost of basic materials and components which are the building blocks of the real economy, that's because an even more sardonic twist is approaching completion. America's "free market", having succeeded so thoroughly over the past generation in enlisting the very archetype of socialist command-and-control (China) to enrich its ruling caste, now finds itself begging those communists to forestall that very "free market" from playing out globally - lest it naturally correct its gross imbalances and distortions too efficiently for said caste's psychological tolerance for losses.
Indeed, Chimerica's turning out to be even more chimerical on the downside than on the upside. The real world may not be such a horrible place for it - that is, its masses of ordinary inhabitants. But it's become downright FUBAR for the ideological fundamentalists who long ago cheerfully reduced capitalism to just one thing: a black bottom line.
Meanwhile, Treasury Secretary Jack Lew's demand at the opening of this year's US-China Strategic and Economic Dialogue that the latter crack down on excess capacity in steel, aluminum, and other commodity industries underscores what Washington perceives to be the crux of the global economic funk.
"Excess capacity has a distorting and damaging effect on global markets," Lew said in a statement at the start of the two-day meeting. "And implementing policies to substantially reduce production in a range of sectors suffering from overcapacity, including steel and aluminum, is critical to the function and stability of international markets."But later in the day, Mr. Lew's counterpart, finance minister Lou Jiwei, decried such "hype" on overcapacity, firing back that it was fueled largely by Beijing's massive post-crisis stimulus that was initially hailed everywhere as a boon for global recovery.
“At that time, the whole world applauded and thanked China,” Mr. Lou told a news briefing near the end of a day of annual meetings in Beijing between senior Chinese and American officials. “Now they’re saying that China has a production glut that is a drag upon the world. But what did they say at the time?”The world's pivotal bilateral relationship has reached a new, awkward juncture. 2016 has exposed the two biggest economies as being just as intertwined on the downside as on the upside, as the Lew-Lou exchange is essentially the following spat:
US: Since you've invested like crazy in your industrial capacity, you're killing prices and threatening asset values all over the world.
China: We wouldn't even be talking about this if you hadn't urged us to chase growth and profits quarter by quarter instead of pursuing a more thoughtful long-term strategy.
The plain reality is that the US and China share the blame for the sorry state of the global economy in mid-2016. Nearly eight years after the onset of the global financial crisis, both countries remain fundamentally unbalanced - and badly in need of political leadership to rebalance faster.
The US "financialist" growth model was exposed as being broken in 2008, but it hasn't been replaced or even meaningfully reformed. Rather than end our reliance on debt-fueled asset inflation in the stock and housing markets to drive real economic growth, we simply let the federal government (with its trillion-dollar deficits) and Federal Reserve (zero interest rates and multi-trillion dollar QE over several iterations) pick up the slack that cash-strapped consumers left. It fueled a great recovery and bull run in housing, stocks, and bonds, but at the expense of even further financialization and decoupling of asset valuations from real economic growth and activity (i.e. employment and wages). The result: Donald Trump and Bernie Sanders.
For a while, in 2009-12, China offered some tangible pep to this even deeper retrenchment by Wall Street: its crisis-busting infrastructure and construction stimulus drove a global commodities boom that buoyed resource exporters on every continent and helped fuel the shale-fracking revolution in North America, even as it filled the coffers of established petro-states. The resultant financial and trade flows in turn lifted resource-poor emerging markets, as well; it also made a rising Chinese middle class the darling of Western multinationals.
But there was a fatal flaw to the Chinese rescue: it remained heavily dependent on exporting massive volumes of manufactured goods to the rich world. Before long, Chinese firms had captured such a large share of these lucrative markets that they had to engage in cutthroat price warfare both domestically and abroad, and their margins collapsed.
2012 thus marked a turning point for the "Chimerican" engine of the global economy: the slowdown in the first half of that year was effectively the end of the post-crisis recovery, which the eurozone periphery debt conundrum since late 2010 had exposed as running on thin ice.
Unhappily, however, 2012 was also a year of power transition in both Beijing and Washington, and both capitals chose one more bout of stimulus to promote stability - QE3 by the US followed by another infrastructure and real estate stimulus by China. This forestalled another global growth crash, but at the price of an irrevocable downward trajectory of global growth rates, as both east and west Chimerica were essentially papering over their structural distortions with more superficial expansion instead of actually attempting to fix them.
In the spring of 2013, as Xi Jinping took power and Obama began his second term, it was clear that the Fed's QE3 had introduced the unwelcome prospect of overheating and overspeculation in financial markets; thus did US monetary authorities announce a shift to a new tightening and "normalizing" policy stance - triggering the infamous "taper tantrum" of May and June - even though employment and inflation were still well below target.
But it was too late for China. The country had literally doubled down on its artificial stimulant recipe to goose GDP growth: in 2013, per one unofficial estimate, nearly half the country's entire fixed capital formation was wasted. Largely funded by "shadow" banks and financial institutions, a huge number of secondary market players had crowded into an already oversupplied and cash-tight economic environment with steadily building deflationary pressures (PPI had slipped into negative territory the previous March). In late June 2013, in reaction to the Fed's taper threat, an interbank bond default signaled a dramatic escalation of real (deflation-adjusted) borrowing costs which has been an unmistakable indicator of chronic industrial overcapacity and overproduction that only continued to worsen until the first quarter of this year.
A Stratfor assessment of the Chinese steel sector demonstrates the severity of the problem: in 2012, China's top five steelmakers accounted for 45 percent of nationwide output; in 2015, this was down to 34 percent. This points to a glut of steel firms and not merely steel plants: the 2012 stimulus clearly kickstarted capacity expansions at numerous smaller and less efficient concerns run by local governments or private individuals hoping to compete on land, subsidy, or labor cost advantages. Being as they were mostly in hinterland or otherwise domestically oriented economic zones, they still had plenty of short-term infrastructure and real estate construction business to feed, but in the process they brought online additional capacity that could only have been justified by the spillover of a resounding global recovery.
The only problem is that said global recovery didn't materialize. The Fed's flirtation with ending QE in 2013 turned out to be 18 months premature: it was expected at the time that US growth, which had averaged around a measly 2 percent since Q2 2009 to produce the weakest recovery on record, would somehow finally hit its potential of sustained 3 or even 4 percent expansion. Instead, the Fed discovered conclusively that 3+ percent annualized quarterly growth was unsustainable, but that it apparently wasn't necessary anyway, because even the prospect of ending QE and normalizing interest rates was enough to send hundreds of billions of offshore dollars - which had chased yields in emerging markets ever since US rates hit rock bottom in end-2008 - pouring back into US asset markets and taking stocks to new highs.
So in the latter half of 2013 and through 2014, American policymakers effectively convinced themselves that all that really mattered was their flagship market indices such as the S&P 500: it was still going up, so what could that possibly mean other than that the long-awaited true recovery was just around the corner? Unfortunately, their confidence rubbed off through virtual osmosis on their peers worldwide, leading financial institutions and firms everywhere to buy into not just the imminent recovery narrative, but more generally the supposed omnipotence of central bankers. Despite all the talk about eventually unwinding QE, the Fed gave the unmistakable impression that its extraordinary accommodative stance wouldn't in effect end until frothy asset valuations had demonstrated they could do without it: it was a seemingly unbeatable formula of sustaining the hope of global recovery as if that alone would eventually actualize it, and it was such a no-brainer that the whole rich world was now following the Fed's lead and actually diving deeper into the kool-aid of this hyper-financialism even as the Fed itself was seeking to sober up again, however long this would take.
In fact, the whole grand experiment of ultra-easy monetarism was now producing increasingly pronounced imbalances and distortions. In the US, as the rush of returning offshore dollars hit the wall of prolonged zero rates and low revenue growth, the sure way for firms to keep their stocks elevated was to issue historically cheap bonds and recycle the proceeds to buy back their own shares. Tellingly, US yields were now so low that the junk-rated debt of small to mid-size shale frackers now cost them as little as 4 to 5 percent to issue; with oil prices still in the low-$100s, the renewed black gold rush was on - with devastating implications for crude prices in due course. Even so, things were getting even more out of whack in Europe and Japan: in the former, collapsing growth and returns coupled with the ECB's reluctance to emulate the Fed's QE meant that negative interest rates had to be introduced in mid-2014 (QE had to be launched anyway the following March); in the latter, the much-vaunted "Abenomics" inaugurated at the end of 2012, reliant on the BOJ's wholesale buying of government bonds, had persistently failed to restoke the flame of inflation. And of course, even these OECD travails were nothing compared to the virtual price Armageddon that was about to hit commodities and oil exporters in late 2014.
In this environment, China with its slowdown to 7.7 percent official growth in 2013 and 7.3 percent in 2014 - where close to 10 percent had been projected before the 2012 downturn - still appeared to be a great investment. But this only fed further into the fixed-asset bubble driven by the white-hot real estate market: even as that market leveled off and began to decline, through 2014 Chinese firms were able to gorge on even more cheap dollar-denominated debt from yield-starved international investors.
By the time the Fed finally wound down its QE purchases in November 2014, it was clear that interest rate normalization would have to wait: pressures which had been building in emerging markets over the past 18 months were now truly coming to a head, and before long, even China couldn't escape the nasty effects of the drastic constriction of global dollar-denominated finance and trade flows.
The catalyst was oil, which in H2 2014 plunged from nearly $120 a barrel to little above $40; initially hailed as a boon for Western consumers and Asian manufacturers, by early 2015 signs were unmistakable that this crash, along with a much broader general bust in commodities, was quite the contrary sending a major deflationary wave across the global economy. It was at this juncture that China suddenly came to the forefront as the vortex of a disinflationary, growth-draining whirlpool from which the entire world would struggle to escape.
With US QE's end and the tightening of dollar trade triggered by plunging commodities, the Chinese central bank (PBOC) had to embark on a series of interest rate and reserve requirement ratio (RRR) cuts for the banking system simply to keep growth from falling off a cliff; but as the dollar strengthened dramatically against other currencies, the dollar-pegged yuan shot up with it. As China's oil and commodity suppliers slid into outright recession in early 2015, they were creamed by this double whammy of an ultra-strong dollar-yuan pair, but China was itself now hardly immune to the greenback's shrinkage: the yuan's appreciation against the euro and yen crimped the dollar value of exports to Europe and Japan so badly that new record exports to the US couldn't compensate. Through all of this, Chinese firms kept churning out ever cheaper goods in ever greater quantities, hammering industrial commodity prices worldwide and putting even more pressure on manufacturers across the spectrum in both developed and emerging markets; but by April and May of 2015 they were downright struggling with dollar funding and cash flow shortages to keep up with the dollar liabilities they had racked up, and PBOC now had to start draining its once nearly $4 trillion-strong chest of foreign exchange reserves to plug the gaps lest a run on the yuan force a devaluation.
That devaluation turned out to be unavoidable. In the wake of the Chinese stock market crash in late June and early July (and Beijing's botched rescue effort) against the backdrop of continued growth and trade deterioration, Chinese corporates ramped up their redemptions of yuan for precious scarce dollars so much that PBOC had no choice but to break the currency peg on August 11 with a nearly 2 percent cut of the yuan's daily fixing against the dollar. That's when hell broke loose. Capital outflows grew from a leak to a flood, forcing Beijing to run down its reserves to stop a tanking yuan sliding even faster and further, especially in the open offshore market (Hong Kong). This sudden, unanticipated nearly 4 percent decline in the tender of the world's factory floor proved too much for the global financial system to handle: beginning with an eye-popping 1,000-point intraday selloff in the Dow on August 24, US stocks suffered a massive correction over the following 3-4 weeks, which ended up liquidating over $5 trillion in market capitalization worldwide; in August and September alone, Chinese forex reserves fell by about $200 billion as PBOC scrambled to prop up the yuan.
The final nail in the coffin of the US-China global growth engine was the Fed's long-awaited first rate hike in nearly a decade in mid-December. China's woes over the summer were a rude wake-up call that the middle kingdom had indeed caught the deflationary contagion that had already devastated its commodity suppliers, and this was enough to delay a hike in September. By then, financial markets had begun in earnest to reprice risk, rate, and growth expectations: yield premiums ballooned and yield curves flattened. Despite these red flags, the Fed wouldn't waver in its commitment to get the rate normalization ball rolling at long last: its very credibility was on the line, and the most widely followed headline metrics - Chinese GDP growth along with US jobs and stock indices - seemed resilient and buoyant enough for liftoff even if they weren't exactly stellar.
The rest is history. In January and early February, global markets vociferously disagreed with the Fed's hawkishness of planning four more hikes during 2016 on top of the 25-basis point bump on December 16. The new year started with Chinese stocks crashing again, and Beijing had to introduce draconian capital controls to stem a run on the RMB trumpeted by George Soros, starting off with an all-out sweep of the offshore market on January 12 which catapulted the overnight interbank rate in Hong Kong to over 66 percent. As China struggled to keep its financial system from getting away from it, turmoil now engulfed oil and commodities afresh, and this is where Uncle Sam finally got the message: with crude plunging to barely $26 a barrel in early February (towards what some were forecasting to be as little as $10), even flagship Western investment banks were coming under threat from the prospect of massive defaults of their big plays in the oil patch. In collusion with the BOE and ECB, the Fed bailed Deutsche Bank out of a complete meltdown on February 11. That was the day Washington effectively slammed the breaks on its rate normalization schedule. It also marked the start of a provisional global collusion to stabilize the yuan against the dollar by weakening the latter against the euro and yen, which some suspect was fleshed out secretly at the G-20 meeting in Shanghai on February 26-27.
And so, here we are: China and the US have been forced into an uneasy cooperation to keep the global economy they jointly lead from falling apart. The discomfort and inconvenience of the arrangement for both sides is palpable - akin to a husband and wife who literally can't bear one another but must still share a roof for the sake of the kids.
While American pleas over Chinese overcapacity don't quite amount to the absurdity of asking China to make the world poorer by raising the cost of basic materials and components which are the building blocks of the real economy, that's because an even more sardonic twist is approaching completion. America's "free market", having succeeded so thoroughly over the past generation in enlisting the very archetype of socialist command-and-control (China) to enrich its ruling caste, now finds itself begging those communists to forestall that very "free market" from playing out globally - lest it naturally correct its gross imbalances and distortions too efficiently for said caste's psychological tolerance for losses.
Indeed, Chimerica's turning out to be even more chimerical on the downside than on the upside. The real world may not be such a horrible place for it - that is, its masses of ordinary inhabitants. But it's become downright FUBAR for the ideological fundamentalists who long ago cheerfully reduced capitalism to just one thing: a black bottom line.
Sunday, June 5, 2016
"Sinicization" of US economy
Not only has China stubbornly remained Chinese and refused to "Americanize", but it's actually arguable that America has itself regressed and "Sinicized" - its financialist-corporatist ruling class has grown so fat and bloated that it now resembles the communist party in terms of central economic planning (i.e. manipulation) far more than either the Republican or Democratic party establishments would like to admit.
Zero Hedge runs an excellent piece on the sorry state of our "too big to fail" financial system, which is dominated by 5 big banks:
At over 40 percent of all assets, the big 5 (JP Morgan, Bank of America, Citigroup, Wells Fargo, Goldman Sachs) have nearly doubled their share of the banking sector since the opening of the new millennium (from ~23 percent), and have more than quadrupled it since the end of the Cold War (1990).
What's even more disturbing: this is exactly the opposite of what's happened in China, where since the early 2000s the big 5 (originally 4) state banking behemoths (Bank of China, Industrial and Commercial Bank of China, Agricultural Bank of China, China Construction Bank, China Communications Bank) have seen their share of total assets drop from over 60 to little more than 40 percent.
This means that in the single most crucial sector of the economy - indeed, the one that virtually controls all others - China and America have converged in the 21st century to roughly the same level of monopolization from the opposite directions.
You could almost hear echoes of Donald Trump: China's killing us. Indeed, our proudly "capitalist" US economy has become so socialistic and centrally manipulated and controlled - what with the nexus between Big Banking and Big Government (i.e. Wall Street and K Street) - that we're essentially becoming exactly what communist China is moving away from (at great risk and cost).
That being said, I for one don't propose the simplistic panacea of just breaking up the big boys: if they're already effectively operating with a massive albeit implicit federal government backstop, maybe it's time to just turn them into public institutions instead (like China's Big 5).
Bigness itself isn't the problem - no more than smallness itself is the solution. The bottom line is that if you're too big to fail, even though you're probably not too big to exist (a la Bernie), you're definitely too big to keep running a pre-2008 casino.
Zero Hedge runs an excellent piece on the sorry state of our "too big to fail" financial system, which is dominated by 5 big banks:
At over 40 percent of all assets, the big 5 (JP Morgan, Bank of America, Citigroup, Wells Fargo, Goldman Sachs) have nearly doubled their share of the banking sector since the opening of the new millennium (from ~23 percent), and have more than quadrupled it since the end of the Cold War (1990).
What's even more disturbing: this is exactly the opposite of what's happened in China, where since the early 2000s the big 5 (originally 4) state banking behemoths (Bank of China, Industrial and Commercial Bank of China, Agricultural Bank of China, China Construction Bank, China Communications Bank) have seen their share of total assets drop from over 60 to little more than 40 percent.
This means that in the single most crucial sector of the economy - indeed, the one that virtually controls all others - China and America have converged in the 21st century to roughly the same level of monopolization from the opposite directions.
You could almost hear echoes of Donald Trump: China's killing us. Indeed, our proudly "capitalist" US economy has become so socialistic and centrally manipulated and controlled - what with the nexus between Big Banking and Big Government (i.e. Wall Street and K Street) - that we're essentially becoming exactly what communist China is moving away from (at great risk and cost).
That being said, I for one don't propose the simplistic panacea of just breaking up the big boys: if they're already effectively operating with a massive albeit implicit federal government backstop, maybe it's time to just turn them into public institutions instead (like China's Big 5).
Bigness itself isn't the problem - no more than smallness itself is the solution. The bottom line is that if you're too big to fail, even though you're probably not too big to exist (a la Bernie), you're definitely too big to keep running a pre-2008 casino.
Friday, June 3, 2016
What happened to June 4th? China just kicked our a**
In the midst of an election season that has revealed a stunning chunk of the American electorate is attracted to quasi-fascistic rhetoric, Western elites are still asking why China's youth aren't inspired by the 1989 Tiananmen democracy movement which culminated in the June 4th massacre.
But the past 27 years of history scream out with an obvious answer: China has simply kicked us in the a** - that is, the West whose intellectual and political establishment still presumes to lecture it. Among other things, this is the harsh reality that the rise of Donald Trump openly acknowledges even as said establishment remains largely in denial of it: China has utterly killed us, so why are we even still fretting about it becoming just like us?
As with all things Trump, there's an inevitable hyperbolic effect, but we're going to find out between now and November whether his narrative of America's decline and the West's feckless weakness on account of emasculating neoliberal political and economic orthodoxy will hold sway with the general electorate, just as it resoundingly has in the GOP primaries.
Significantly, notwithstanding the impassioned rhetoric on both sides of this debate, even the mainstream global economic view is increasingly converging on Beijing's interpretation of the upheavals of 1989. The IMF, which is set in October to induct the Chinese yuan into its exclusive club of reserve currencies, the Special Drawing Right or SDR, is itself beginning to question this neoliberal consensus that has predominated as a virtual secular religion since the end of the Cold War. It's taken a while, but China's unique brand of state-directed capitalism - or market socialism, depending on which ideology you wish to emphasize - has ever so subtly gained greater grudging respect and traction in the rich world (notwithstanding its extraordinarily difficult transition which is the subject of this blog).
That's because, nearly eight years after the global financial crisis, the West's near-total dependence on extraordinary central bank monetary policy has reached its limits. It's finally creeping up in power centers from New York and Washington to London and Brussels that a purely private credit system driving a real economy dominated by private corporations whose sole aim is private shareholder value - not the greater public good - has failed too large a segment of the developed world's population.
That's bad enough; what makes it far more ominous is the only plausible alternative: neo-Keynesian fiscal stimulus with a new emphasis on large public works and infrastructure. Anathema!
That's what makes Mr. Trump such a prophet of the current times: we're sick of paper-shuffling investment "bankers" who are really running hedge funds effectively doing a feeble "financialist" imitation of communist-style central planning (i.e. without much tangible asset investment).
And if he wins in November, it'll be a resounding affirmation that he's telling the truth about China kicking the living cr*p out of us: it'd be because Hillary simply can't defeat what he represents - or conversely, she simply can't win because (despite concessions to the Sanders wing of the Democratic party) she's still the face of a defunct world order.
But the past 27 years of history scream out with an obvious answer: China has simply kicked us in the a** - that is, the West whose intellectual and political establishment still presumes to lecture it. Among other things, this is the harsh reality that the rise of Donald Trump openly acknowledges even as said establishment remains largely in denial of it: China has utterly killed us, so why are we even still fretting about it becoming just like us?
As with all things Trump, there's an inevitable hyperbolic effect, but we're going to find out between now and November whether his narrative of America's decline and the West's feckless weakness on account of emasculating neoliberal political and economic orthodoxy will hold sway with the general electorate, just as it resoundingly has in the GOP primaries.
Significantly, notwithstanding the impassioned rhetoric on both sides of this debate, even the mainstream global economic view is increasingly converging on Beijing's interpretation of the upheavals of 1989. The IMF, which is set in October to induct the Chinese yuan into its exclusive club of reserve currencies, the Special Drawing Right or SDR, is itself beginning to question this neoliberal consensus that has predominated as a virtual secular religion since the end of the Cold War. It's taken a while, but China's unique brand of state-directed capitalism - or market socialism, depending on which ideology you wish to emphasize - has ever so subtly gained greater grudging respect and traction in the rich world (notwithstanding its extraordinarily difficult transition which is the subject of this blog).
That's because, nearly eight years after the global financial crisis, the West's near-total dependence on extraordinary central bank monetary policy has reached its limits. It's finally creeping up in power centers from New York and Washington to London and Brussels that a purely private credit system driving a real economy dominated by private corporations whose sole aim is private shareholder value - not the greater public good - has failed too large a segment of the developed world's population.
That's bad enough; what makes it far more ominous is the only plausible alternative: neo-Keynesian fiscal stimulus with a new emphasis on large public works and infrastructure. Anathema!
That's what makes Mr. Trump such a prophet of the current times: we're sick of paper-shuffling investment "bankers" who are really running hedge funds effectively doing a feeble "financialist" imitation of communist-style central planning (i.e. without much tangible asset investment).
And if he wins in November, it'll be a resounding affirmation that he's telling the truth about China kicking the living cr*p out of us: it'd be because Hillary simply can't defeat what he represents - or conversely, she simply can't win because (despite concessions to the Sanders wing of the Democratic party) she's still the face of a defunct world order.
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