The rest of the world catches a cold.
A question hereabouts is what would trigger the next leg of deleveraging? What will end the fake bull market on Wall Street? What will cause the world to run toward the Almighty Dollar and allow the US government to print more paper?
With the seemingly endless shedding of jobs both here and abroad the Green Shoots theory of a ‘V’ shaped recession and a speedy recovery is becoming dubious. Job losses by themselves are not a particularly troubling event since businesses since the Age of Reagan have used downsizing as a way to bolster company fortunes. Even downsizing to zero employees will not harm the S&P 500 in the short term.
The terror in the bond market of inflation also seems to have subsided. Inflation is less a possibility when so many entities in the Shadow US – the fifty individual states that make up the United States – are in such deflationary hot water. Tax receipts are falling and any ‘stimulus’ emitted from Washington is cancelled by job losses and the end of benefits from state governments.
Eastern Europe still teeters at the brink with Swiss bank exposure to default threatening a Franc crisis in that country. The European real estate bubble that inflated prices and stimulated McMansion building in Spain and Ireland is also kaput, with unemployment rocketing upward. Again, there is nothing to trigger a wave of deflationary failures in the US as that property bubble has been deflating for over a year.
One place to look for an ignition of rapid deflation worldwide would be China. If China sneezes, the rest of the world will catch a cold!
China is also facing deflation with the loss of much of its export income. Its revenues are declining and its workforce does not earn enough to become passionate consumers … like their customers in the US and elsewhere were in the ‘Good Old Days’. China’s government fearing disorder has responded by ordering banks to lend and has been ‘unofficially‘ guaranteeing the loans.
China’s New Lending Surges, Fueling Bad-Loan Concerns (Update1)
By Bloomberg News
July 8 (Bloomberg) — China’s new lending more than doubled in June from a month earlier, increasing concerns bad loans and asset bubbles will emerge amid a credit boom.
New lending was 1.53 trillion yuan ($224 billion), the central bank said on its Web site today, bringing total lending this year to 7.4 trillion yuan. The calculation for new loans is preliminary, the central bank added.
The government is countering an export collapse by flooding the economy with money to fuel domestic demand. Rapid credit growth poses a risk to the nation’s lenders and a concentration of credit in some industries and businesses may damage the stability of the financial system, the banking regulator said yesterday.
The consequences of this are an increase in the amount of bad loans and overall inflation. Inflation is high in China and rising.
By staff reporter Jiang Haiyan(Caijing.com.cn) New loans issued by China’s four biggest commercial banks totaled 497 billion yuan in June, double the amount in May. On July 2, A-share stock markets bounced to a new high.
Ha Jiming, chief economist of China International Capital Corporation Ltd., said inflation expectations tend to lead to inflation.
Cycles of inflation in the United States and China have shown that inflation often arrived in three steps: first rising stock prices, then soaring housing prices and finally, rising consumer prices, he added.
The economist said that the amount of term deposits has recently peaked and already started falling while the amount of checking accounts has continued to rise, indicating that people are transferring funds to stock markets.
Michael Pettis, who lives in China and watches their economy obsessively notices that the level of indebtedness relative to their productivity is large:
Worries about rising Non- Performing Loans (NPLs) in the banking sector are often brushed off with the claim that the explosion in new lending is implicitly guaranteed by the government so there is nothing to worry about as far as the banks are concerned. Would that were so. Fitch, the ratings agency which seems to be distinguishing itself as the most prudent in its analysis of the banks, has already pointed out that the self-reinforcing relationship between bank credit quality and government credibility, and if government debt is really in the range of 50-70% of GDP, which I suspect it is, I am not sure how much room there is for an explosion in bad debt.
70% level of GDP indebtedness is very high. It puts the freewheeling debt- hog Chinese in a similar situation to the parsimonious Americans! US debt/GDP was 70% in 2008.
It’s almost 90%, now …
Consequently, the Chinese government is pondering reducing the amount of debt that will be created during the second half of the year. How this would play out on world markets is hard to figure from this perspective. But an overall shrinkage in credit inside the only really dynamic ‘appearing’ economy might ricochet through the leveraged debt universe with more unintended consequences now than under more normal conditions.
One outcome would be a failure of large Chinese companies and banks that have been living on central bank liquidity and rolling over loans. A few big failures in China would certainly shake US stock and credit markets as well as rest of the worlds’. Japan does a lot of business with China, for instance and a slowdown there would suppose greater pain for Japanese manufacturers.
At the same time, the tendency toward inflation leading to hyper- inflation would be tempered. Keep in mind that a deflationary even such as bank failures might actually trigger hyperinflation if citizens decided their only option is to spend their currency rather than watch it disappear in stocks or in bank accounts.