A Slow Bloat to China

Since the US birthed the entrance of China into the World Trade Organization in 1998 under Bill Clinton, the two nations have formed an unstable alliance of sorts.  The thinking of Western elites has been that if China did well, they would become more like the West.  They would become integrated into the global economy, and start becoming more democratic and less of a military threat to the US.

In hindsight, the whole project looks like a tragic and dangerous mistake.

For the US, our industrial elites found a source of ultra-cheap labor and an environment of minimal regulation.  Factory after factory, and job after job, was shipped to China.  As a result, US shelves were filled with less expensive Chinese goods, which helped keep US inflation down.

Politicians have loved this relationship on several levels.  The increase in the supply of inexpensive goods helped masked the inflation caused by deficits and easy money policies pursued by the Federal Reserves.  We wound up with asset price inflation, which the elites love since most of their money is in tradable securities, but subdued goods inflation.

Secondly, many American political leaders forged a close association with China and the huge money to be made.  A good example is the Bush Family. Neil Bush, the lesser-known son of the Bush Family, runs a think tank exclusively based on Chinese relations.  But Mitch McConnell, and certainly the Biden Family, are also deeply involved.  Many US political leaders are known to be knee-deep in Chinese investment and are subject to Chinese influence.

Major corporations that own media assets such as Disney (ABC News) and Bloomberg are invested heavily in China.  From the NBA to Nike shoes, many of the most “woke” corporations made their economic bed with the Communist Party of China.

What China got was economic growth necessary to support its vast population and growing military power.  The deal basically with the Chinese people was this: give up all that talk about freedom and religious expression, and we will pull you out of poverty.  Just work hard and support the Communist Party and things will keep improving, the Chinese people were told.

We have covered previously for you the bear market in China, the real estate bust, and the related banking crises.

What happens in China will be felt here.  Not only is China a huge buyer of US Treasury Bonds (although they have been big sellers of late), they are an integral part of our supply chain in critical areas such as pharmaceuticals, auto parts, plumbing supplies, and semiconductors.

Without cheap Chinese manufacturing, US inflation will likely be higher than it has been, and without recirculating the Chinese surplus in the balance of trade back into Treasury bonds, our interest rate structure will likely be higher now for years to come.

Social and economic issues, coupled with draconian Covid lockdown policies, are destabilizing the country.  Chairman Xi is more infatuated with becoming the second coming of Mao, and is more intent on gaining and maintaining power than he is on reforming the dictatorship of the party. The bargain of “give up your freedom for economic security” may fall apart if China cannot deliver the standard of living expected.

We are not suggesting that China will topple anytime soon as the government there can and will use repression.  US elites have so much at stake they will avert their eyes until conditions cannot be ignored. No use talking about human rights when the NBA needs Chinese TV viewers, right?

Although Chinese economic statistics are notoriously unreliable, economic growth is slowing significantly in China and the financial crises keep re-surfacing.

Like the US, elites in China have built a bubble economy, which is a program of government “investment” fueled by cheap credit and debt.  Like here, when things slow down, the credit pyramid becomes unstable.  It is a top-down, centralized economic policy that only gives lip service to market forces. Central planning has never worked, and it won’t work in China as well.

With debt to GDP levels already at 300% of GDP, swilling the elixir of cheap money and debt, will likely not do the job now.  The patient is already in withdrawal from an over-indulgence in credit expansion.

However, it is clear though, that China is increasingly becoming unstable and that as a supplier, they are not reliable.  Further, they are rapidly becoming a military threat.

Below are two videos that will brief you on the demographic, economic, political, and social issues now gripping China.

To some of you, this may seem like a problem that is far away and of little consequence to the US.  If you think that, you are sadly mistaken.  We are far too deep in this relationship at almost every level and the same can be said for our allies in Asia.