China’s Endgame

In the last month I have — with great relish — detailed what I perceive to be the developing geopolitical collapse. On the 15th of August I wrote:

Will we ever get to see hyperinflation in America? It depends on China’s response to America’s slouch. If — as mainstream economists hope — China can be patient enough to allow America to resolve its debt problems, eradicate its trade deficit, and manufacture more at home then hyperinflation is very unlikely. America may stumble through a lost decade, before new technologies, and new business models finally pull America out of the slump. American policy makers might even have the foresight to let failed business models fail and liquidate failed businesses, allowing for new growth to take root, and avoiding Japanese zombification.

If China, on the other hand, decides that it is sick of being America’s foot stool, then America has a massive problem. Entering into a trade war with a nation that holds so much of America’s debt, and produces so much of the goods that sit on American shelves is an extremely risky proposition. A drastic fall in goods circulating in America — as the result of Chinese export tariffs, yuan flotation, or an outright export ban — could be a hyperinflation trigger. Excess reserves accumulated during QE would quickly be lent out as more and more people desperately chase fewer and fewer goods.

What I have only hinted at is the endgame that the central planners in the Communist Party — and holders of Treasuries around the globe — are seeking. Explicitly, I believe that the current world order suits China very much — their manufacturing exporters (and resource importers) get the stability of the mega-importing Americans spending mega-dollars on a military budget that maintains global stability. Global instability means everyone pays more for imports, due to heightened insurance costs and other overheads. They recognise that while America falters and struggles under the weight of its military burden, its lack of growth, and its deep debt concerns, their military strength can grow at a much faster pace thanks to Chinese domestic growth, and a high domestic savings rate. They are happy that their dollar pile — China has over $3 trillion in foreign exchange reserves — can still buy plenty — and they want its value to remain as stable as possible. But above all they want to gradually diversify out of those dollars. Continue reading