Mq., I often agree with you and your unique insights.
But you are wrong about deflation, just as the Fat Panda is wrong. As a dyed-in-the-wool Marxist ideologue, he has no clue. Incidentally, I am quite happy to see that Fat Panda is requiring the top leaders of the CCP to re-read Marx and Engels. It tells me a lot.
As we are in some sort of Cold War-ish conflict with China (more accurately, the CCP), I am happy to foment Fat Panda’s mistake and to applaud it.
Deflation lowers prices, thus reducing income, thus bankrupting banks and firms, thus reducing capital projects, thus reducing production, thus reducing employment, thus reducing taxes. Rinse, wash, repeat. That’s why it is called a deflationary spiral.
All are very bad things systemically. When deflation starts, the individual initially benefits as his purchasing power temporarily increases but, if not checked, eventually it leads to depressions. The Great Depression is a terrific example of deflation run amuck.
By subsidizing state-owned enterprises, subsidizing exports, incurring huge debt, etc., China is planting the seeds for deflation. But its citizens knows better. Having been defrauded in the burst property bubble, they are not spending or investing. They are savers. All this supports deflation.
China is in a unique situation. The CCP knows that its rule can fall if expectations are not met. With 20% youth unemployment, a deflationary cast to its economy, savings destroyed in the bursting of the property bubble, etc., I don’t see how China can avoid social unrest. If a deflationary spiral takes hold, things could get very interesting.
Given deflation and demographics, which are sauced with an ideology which has been disproven time and time again, time is on the West’s side. That’s why the next 3-5 years will be perilous indeed. China will have to make a move on Taiwan while it can because delay will result in an impregnable island. The Taiwanese don’t spend enough on their own defense but there will be (and is) growing support for doing so. Particularly as its leaders increasingly recognize that Uncle Sam is not a terribly reliable ally. |
