Wednesday, July 7, 2010

China on the Brink? at the Daily Bell

In reply to the Daily Bell article:

The validity of the Austrian Theory of the Business Cycle (do we really have to call it a "theory" anymore?) does not only apply to the west. China will bust because it has to.

The Chinese leadership is faced with a few options, all bad. They can certainly continue to do what they are doing (no, I don't believe there is such a thing as a soft landing when you have pumped as much as they have pumped).

They also aren't sitting around waiting for the G8 or G20 or any other "helpful" organization of the west to solve the world's (China's) problems.

They are locking up resources around the world. These contracts are likely priced in dollars -- something the Chinese have plenty of and don't want to hold. At some point, China can declare the Yuan partially backed by gold -- even 15% - 25% would be sufficient. This strengthens the Yuan and makes it easier to buy those resources now priced in cheaper dollars. Yes a) their reserves lose value (this will happen no matter what), however if these reserves still buy resources, do they care? and b) this will send China into a recession/depression (this will also happen no matter what).

What comes out the other side is a stable internal economy with a strong currency that allows the Chinese to buy commodities at favourable prices...helping to keep internal price inflation down and keeping the masses somewhat settled.

They could do this in conjunction with Russia (though not mandatory) as Russia brings additional muscle and significant natural resources. The US won't go to war over this (the DB has done a good job of pointing out the minimal chances of nuclear war in our future by nation-states).
Not a great solution, not even a good solution, but maybe the best of many bad solutions and a solution that gives the Chinese a chance post the trauma.

Yesterday the DB asked if the Chinese elite are married to the west. I think not. I think when the Chinese elite were courted, they did the "winkie-winkie," but didn't make any promises. The west, having no alternative, decided they would take the chance and hope the flirting would lead to marriage. The Chinese feel no obligation to this johnny-come-lately anglo elite -- they have been around 6000 years compared to a few hundred. They will be around long after, they figure.

My guess is China has figured out they have gained everything they are going to gain from the US, it is time to move on. No need to buy the cow, so to speak. Yes, the flirtation came at some cost -- but none long term -- and oh by the way brought a few benefits.

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