It's Not Just China

It's Not Just China  

The Friday-Monday stock smash was blamed on China's market crash and slowing economy. The proof, according to market commentators, was the short-lived recovery in US equities on Tuesday after the People's Bank of China "stepped up its credit-easing efforts by slashing interest rates and flooding its banking system with new liquidity, its second such combo move in two months aimed at battling a deepening economic slowdown and its worst stock-market selloff in decades." (Wall Street Journal, August 25, 2015).

The PBOC did exactly the same at the end of June and here we are. The PBOC moves should have made no difference and at the end of the day, they didn't.

To quote Jeffrey Snider, (August 25, 2015) "If you are even slightly awake and aware, you have to wonder what all the positive fuss would be about since obviously the last did nothing toward accomplishing what today's euphoria expects of the same thing. In actual context, what you see is the PBOC's desperation upon full display..." (http://www.alhambrapartners.com/2015/08/25/having-to-do-it-again-is-all-you-need-to-know/)

It seems that markets needed to bounce and this was the excuse. But it didn't even last a day.

Here is the China problem in a nutshell. The growth rate of China's Industrial Production has been falling since mid-2007.

For an export-led economy which has expanded its credit market debt from $9 trillion in 2008 to more than $26 trillion today, these production numbers amount to nothing less than a disaster. It is clear that, after the Great Recession, China and the US engaged in 'mutual stimulation', led by Fed QE which was designed to jump start the dollar economy by boosting consumption, meaning US imports of Chinese goods.

Here is the other side of the equation.

The problem with China is NOT primarily Chinese, it is American.

Market 'analysts' tell us not to worry because an economic slowdown in China will not affect the US economy. But the two economies are linked, and in any case the US economy is a big part of the problem already.

The Chinese economy invested heavily in an economic rebound based on the fact that Bernanke money printing would ignite a spending revival in America. It has not. The next shoe to drop is in the US, where the same anticipation of a Fed-sponsored economic miracle-to-come has generated a huge build up in inventory at the wholesale and retail levels. Growing inventories have contributed to a false levitation of GDP and a recovery mirage which will soon flatten, just as it has in China.

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