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Du Jour

The China Syndrome

August 27, 2015

On August 24, at the open of the New York Stock Exchange, Donald Trump tweeted this: "As I have long stated, we are so tied in with China and Asia that their markets are now taking the US market down. Get smart USA." A few minutes later, Trump explained that the crashing of markets was "all caused by poor planning and allowing China and Asia to dictate the agenda."

A few days earlier, US Treasury Secretary Jacob Lew had praised China for making a "move towards a more flexible, market-determined exchange rate" and for increasing "the transparency of its exchange rate policies," later adding that the US economy was not tied directly to China's.

Once again, the overwhelmingly popular Republican candidate for president demonstrated that he knows more about the global economy than our ideology-stunted Treasury Secretary can ever hope to learn.

The ongoing stock market meltdown is just the tip of the iceberg that is the dangerously precarious China economy. The back story — the extraordinary market manipulation that has allowed the global economy to come to this potentially disastrous pass — is what few commentators have yet spelled out.

Here are some of the particulars.

Most of the trillions of fiat dollars the Federal Reserve Bank has pumped into the US economy as part of its Quantitative Easing (QE) strategy since 2009 have gone directly into the stock market, inflating the value of stocks to unsustainable levels. The Shiller Price/Earnings Ratio has reached ~28x — significantly higher than the 16.6x historical average — meaning that stocks are dangerously overvalued as their price is some 28 times higher than corporate earnings warrant.

But if 28x earnings constitutes a bubble in the US, how bad is the Chinese bubble? Six weeks ago, stock prices on the Shanghai index were estimated to be 70 times greater than the Last Twelve Month (LTM) earnings of the companies whose stock is traded on the exchange.

For the past quarter of a century, China's economy has been rising to what many analysts have claimed is a level that will challenge the US for the title of largest economy in the world. In fact, the Chinese economy, fueled by state-funded credit and money-printing, has enabled the size of the Chinese stock market to rise to dangerously overblown levels more than 50 times higher than they were only two decades ago.

The Chinese have caused a bubble so inflated out of proportion to anything the real Chinese economy could generate that, despite what the Obama administration economic apologists want us to believe, as the Chinese economy implodes, we're unlikely to be able to avoid a serious economic downturn ourselves.

China's extraordinary stock bubble has been enabled by some of the most perverse practices ever perpetrated on this planet. Among other things, in order to prevent shareholders from selling their stocks to avoid the losses that it's clear are inevitable, Chinese authorities have threatened to send police and paddy wagons around to arrest citizens who dare to sell off their investments.

Since the turn of the century, China has been on a state-credit-funded manufacturing spree that has caused the demand for commodities to spike to levels never before seen. By the mid-1990s, China's steel industry was already larger than ours, as it produced 125 million tons annually. In this century, China's production has risen to more than a billion tons of steel a year, but with global demand declining to less than half that amount, China's steel revenues will be substantially reduced.

Here's another statistic to contemplate: China's massive building splurge has led it to use 6.6 gigatons of cement. Over the past three years China has used more cement than the US used in the entire 20th century!

What does China have to show for it? Hundreds of ghost cities, filled with enormous skyscrapers, housing projects, and sports stadiums, along with superhighways to nowhere. They now stand virtually unoccupied and unused. Along the way, the Chinese building boom has driven the demand for and the prices of such things as commodities and heavy machinery through the roof. The problem is that what China has built will produce no lasting return to sustain its economy, and the resulting bust will also cause severe contractions in commodity prices and US and global suppliers' earnings.

China's 10 percent annual growth rate over the past three decades is turning out to be nothing less than one of the great frauds in global economic history. A shuttered economy whose currency is not traded against other currencies, along with a communist government that understands nothing of true capitalist principles, have resulted in what amounts to a phantom economy built on ghost cities.

When you couple China's unimaginably large and corrupt fiat economy with the fact that the United States has been following the Chinese model on a smaller scale since the crash of 2008, you have the makings of financial disaster. Indeed, in the name of bailing out the big banks involved in the 2008 financial meltdown, our own ignorant Keynesian economic poobahs have engaged in the same fiat currency printing as the Chinese. In addition, in maintaining interest rates at or near zero percent for the past half decade plus, the Fed has stolen upwards of $1 trillion in interest people should have collected on their savings over that time. In the wake of the current turmoil, the Fed is once again backing off raising interest rates.

Donald Trump is the one candidate who actually has an understanding of the consequences of our timid economic policies with regard to China. In explaining that Barack Obama should feed China's President Xi Jinping a McDonald's hamburger rather than fete him with a state dinner when Xi visits the White House, Trump repeatedly reminds us that China holds some $1.4 trillion of our debt and that there's going to be hell to pay for not standing up to the Chinese financial despots. Given the Obama administration's demonstrated unwillingness to confront our economic adversary, it's highly unlikely we'll be able to avoid being further flummoxed by yet another Chinese puzzle.



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