SI
SI
discoversearch

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor.  We ask that you disable ad blocking while on Silicon Investor in the best interests of our community.  If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.
Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory
 Public ReplyPrvt ReplyMark as Last ReadFilePrevious 10Next 10PreviousNext  
To: russwinter who wrote (109488)1/23/2011 1:11:33 AM
From: GST8 Recommendations  Read Replies (3) of 110194
 
Assumptions can be deadly -- I have some of my own. Your posts always make me review them.

I assume that we rely on China to compensate for our current account deficit, and I assume that China has limited willingness and capacity at this point to play that role. So I assume -- and observe -- that we print money to fill the void and ship the money all over the world to keep our creditors from pulling the plug on the dollar all at once. On the other hand, the financial system on which we are so dependent -- China -- has problems of its own.

We are so accustomed to hearing stupidity like "China can't sell our bonds because they have too much at stake". But they are selling, and perhaps that trade too will gather steam.

So now we enter a new dimension -- a Chinese banking crisis. That is your thesis as I read it -- yes? And we are left to try to figure out how a Chinese banking crisis might play out. Well, it would seem that given the experience of the last few years we know one path that might be the one we go down -- more printing, only this time it could be a giant surge in RMB printing that we have not seen before. Somehow that does not seem likely -- but you never know. Perhaps more likely is higher rates and limited bank failures - enough to send a message from Beijing to speculators but not enough to topple the 'system'. This would be consistent with prior baking crises in China -- although now this emerging crisis might be too big to control in that way.

If liquidity dries up because nobody is sure which banks will be allowed to fail, then interest rates rise -- and that might explain the surge in overnight rates. That is a well established pattern. But it won't help the RMB as people will turn their back on it in light of the uncertainty.

Ok -- so what next? This would certainly put a dent in global growth -- and that would undercut our ability to finance the current account deficit from the Chinese trade surplus -- hence for ourselves we would need QE3 -- and it would need to be over a trillion-plus this time in order to allow for our surging current account deficit -- one that would likely get even worse if such a thing is possible. Is that good for the dollar? Not likely. And the poor little RMB -- what would become of it? Not much support for the RMB in a banking crisis -- China is hardly a flight to safety play.

So that leaves -- gold.

You know, I don't have the same level of fear over this that you have acquired -- but I have followed your posts for too long to ignore the possibility that this Chinese banking bust might be a nastier affair than I anticipate. My view is that China is a very complex animal and when the chips are down you will find that there is more going on in China than real estate. The question for me is whether I assume too much.

We killed our economy because real estate became the entire economy -- or almost the entire economy. I don't think that is true in China. Nor do I think that Chinese consumption is as dependent on real estate -- no HELCOs to play off to buy an SUV and vacation in Hawaii. The surge in consumer spending in China and the surge in tech industries might not offset real estate, but both will serve to limit the damage. And we all know the level of motivation in Beijing to keep the economic train on the tracks. Execute a couple of hundred bankers -- that ought to make the people happy -- would have done the same in the US if we operated that way.
Report TOU ViolationShare This Post
 Public ReplyPrvt ReplyMark as Last ReadFilePrevious 10Next 10PreviousNext  

HomeMailHotSubjectMarksPeopleMarksKeepersSettings
Terms Of UseContact UsCopyright/IP PolicyPrivacy PolicyAbout UsFAQAdvertise on SI
© 2025 Knight Sac Media.  Data provided by Twelve Data, Alpha Vantage, and CityFALCON News