4/18/16

With all the cacophony surrounding the presidential primaries, it is easy to forget that the world around us continues to turn.

In the 1970s movie The China Syndrome, a nuclear meltdown in the US threatens China. I fear that a financial meltdown in China will threaten the world, which shockingly, if you watch Obama’s policies, includes the USA.

Over the last few weeks many articles have been published all discussing and even predicting that China is facing a very difficult financial challenge.

I attach few of these articles here but there are more, nearly every few days*.

The focus of most of these articles written by people who seem to know what they are talking about is foreign reserves and other financial tensions in the Chinese economy.

It sounds unreal that the world’s largest “hoarder” of foreign reserves—in the trillions of US Dollars—could be threatened by a currency crisis.

According to these writers, however, the rate of capital flight out of China is alarming. I am not an expert on these matters but it does seem that the concern is across the board and it does look pretty serious.

Here is what I do know:

  • You cannot beat the power of the free market. The fall of the Soviet Union after 70 years of dictatorship is the textbook case demonstrating that while you can delay the fall by cruelty and tyranny, you cannot avoid it. Indeed, it was that realization that brought China’s leadership, led by Deng Xiaoping, to adopt so much of the free market reforms starting in the late 80s early 90s that made China such an economic powerhouse over the last 30 years.
  • Even free markets go through ups and downs and the ONLY way to overcome these down times is to simply grin and push through. There are no magic formulas to overcome such down cycles. They are painful but one must go through them.
  • When a country goes through one of these painful periods of adjustment the people, the citizens, are very unhappy. No one likes to be in a recession or worse. In a democracy, when that happens the pressure that is being built amongst the population is released through democratic valves: free media, demonstrations, and the ultimate “weapon” in the democratic arsenal—elections. In a dictatorship, there are no such release mechanisms and the pressure keeps building until it erupts.
  • Understanding the “pressure” release issue leads the Chinese leadership to do everything possible to avoid serious downturns, which is why they keep trying to float their economy by using their foreign currency reserves to pump investment into the market. This does delay the inevitable outcome, but also makes it worse. The more you try to cheat free market forces the more the pain you will face at the end.

Which is why I am sure that China’s economic collapse—at the very least serious recession—is only a matter of time. I do not know how soon, but it seems that the rate of alarm in the markets is growing and, therefore, I can only assume that this is a matter of near term; maybe a year or two?

What really concerns me is what will be the reaction of the leadership in China when they run out of money to inflate its economy.

You see, the normal reaction of dictators when their domestic problems are out of their control is to try and create a false national emergency to justify these problems and take the attention of their people away from their grim domestic economic situation. How do they do that? Nationalism is the shelter of all corrupt dictators and there is nothing better than an outside enemy—and, indeed, war—to justify and turn the focus away from domestic economic failures.

The fall of the Soviet Union in the late 1980s and early 1990s was clearly triggered by the huge economic pressure brought about by the Reagan policies with the support of others, policies that worked very successfully to bring about the collapse of the Soviet Union. But the fact that it happened so peacefully was sheer luck. If either Andropov or Chernenko would have lasted as the leaders of the USSR for the normal dozen years or more, it is more than likely that the reaction of the USSR to the economic pressure on them would have been completely different and much more violent. It is very lucky for the world that Gorbachev was a much different type of leader; modern, realistic, and willing to reform. Otherwise the outcome of the economic pressure mounted by the US and others would probably have led to war. While luck was part of it, the other important part was the uncompromising strength and willingness emanating from the US to defend its position via military strength and strong belief in the morality of its case—all whole marks of President Ronald Reagan.

Unfortunately, in today’s world we lack BOTH these elements. The current leader of China, Xi Jinping, seems to be as old school dictator as they come. I see nothing in him that would indicate that he is a man “we can work with” (which was Margaret Thatcher’s assessment of Gorbachev after she met him for the first time and boy was she right, yet again. Thatcher was a very important part of the Reagan coalition, indeed a leading inspiration for Reagan, in bringing the USSR to its knees). Furthermore, and much more troubling and relevant, is the fact that the US today broadcasts its weakness and lack of resolve. It is a weakness that would tempt any dictator, let alone such a hard-core and arrogant one such as Xi.

If the forecasts of imminent economic meltdown in China are correct (and I do believe that it is time for such predictions to be right), the likely result could be a horrific international war; maybe even a world war!

*China’s Looming Currency Crisis
Four Major Risks in China – PIMCO
Trump-Sanders China Syndrome