CHINA’S HARD LANDING HAS ALREADY BEGUN – w/ Richard Duncan

2:43
well just a word first thing on one macro watch that is what i do now in
2:48
writing books is is great it was a great experience i hope to write and publish
2:52
some more books going to hit but it takes a year to write a book and then
2:56
the publisher takes at least six months to to publish the thing and get it in
3:00
bookstores
3:01
so what I’m doing now is macro watching micro watches a video newsletter
3:07
I have learned a new video every couple of weeks and sell this on a subscription
3:12
basis and so this is so much more time line and writing books
3:16
so this has been going on now for about two and a half years
3:20
uh I have 25 hours with the macro watch videos from the archives and as I said a
3:26
new one is uploaded every couple of weeks so recently I’ve been doing a
3:32
series on china china’s in the headlines everyone now realizes the time it’s
3:37
really already started to have a hard landing
3:41
so I’ve done now for of videos back for watch videos that have three have been
3:49
uploaded
3:50
once about to be uploaded next week on explaining this economic crisis in China
3:55
how it came about what’s happening what’s likely to happen next
4:00
yeah the the the macro watch series is as much as I said must following for
4:07
anybody that serious but I think it’s worth the price of the script
4:10
subscription myself just for your liquidity each and your analysis on on
4:15
liquidity flows and flows that are happening which impact markets and in
4:19
that we’re not going to talk about that today but that in itself is worth the
4:24
price of admission if you would
4:25
Richard you brought some slides let’s just jump right into the man and I and I
4:29
know that that just a subset of the of what the analysis you have but i want to
4:34
i want to give our listeners just some basic understanding of what’s going on
4:38
in China and what they should be paying attention to and and then we’re going to
4:42
start with this
4:42
this imbalance this excess surplus that we have in china bee do be the
4:46
difference between production and consumption right China’s economy is
4:50
absolutely wildly unbalanced that have investors so much more than they consume
4:57
every year and in the past they were able to export this excess production
5:04
into the globally comic primarily to be us but now the US economy is so weak and
5:10
global economy is so weak that the rest of the world just can’t continue
5:15
absorbing more and more times exports every year and so between that the reef
5:22
global demand and the fact that the rest of the world is already saturated with
5:26
Chinese good thing that and the fact that per capita income in China itself
5:34
is just soloed the Chinese can afford to buy all the things that china produces
5:38
china now stop with an extraordinary luck
5:43
it has excess capacity across every industry are just a mind-boggling right
5:47
scale and it’s very they’re really facing level
5:52
let’s put it mildly very great challenges as to how they can manage
5:56
their economy now going forward
5:58
so just in this first chart then to begin with
6:02
what this shows is investment in china now that doesn’t mean other people
6:06
investing in China it means how much money is invested in all kinds of gross
6:13
fixed capital formation
6:14
what that means is not only investment in building new factories but investment
6:19
in housing office buildings
6:24
residential buildings commercial buildings all kinds of investor gross
6:29
fixed capital formation
6:31
well you can see that it expanded 50 times between 1990 and 2014
6:38
so just extraordinary explosion of investment that and that has been the
6:44
the real fuel behind china’s economy
6:48
you could say China’s followed a development strategy based on export-led
6:54
an investment driven growth so here you see the 50 fold expansion of the
7:00
investment driven growth and i’m not i’m looking at this
7:03
the things examples of this of the investment where it went into cement
7:07
production for example
7:08
that’s right so the next chart we have cement production
7:11
you can see that it has increased fight 12 times between 1990 and 2014
7:19
and by the way just in three years along between 2011-2013 china produces much
7:30
cement of the United States did during the entire 20th century
7:35
all right that is really quite incredible
7:39
but think about that that means it over the next three years that you might
7:45
china again produces the same amount of cement that will be of course again as
7:49
much as US did in the entire 20th century and the same for the following
7:54
four years in the same for the following three years but that would represent no
7:57
growth whatsoever for China that would just be zero growth in the cement
8:03
industry so it just gives you some idea of how much excess capacity and
8:08
production they’re drowning out and by the way they now have fifty nine percent
8:13
of global cement capacity and the next chart is on steel
8:18
it’s a similar story 12 fold increase the spring 1998 2014 and they now have
8:24
fifty percent of global steel production at me
8:29
problem is the world doesn’t need that much
8:34
global steel production capacity the capacity utilization for the world is
8:39
only sixty-five percent that mean
8:41
thirty-five percent of all existing capacity for steel in the world is going
8:45
on used and so that’s why it’s pointless for China build any more steel capacity
8:52
because they can’t sell the steel they’re making already but if they don’t
8:56
continue investing and they’re not going to have economic room and then and and
9:01
they’re not only economic growth job creation and with 1.3 billion people
9:06
a lot of still moving from the Royal to the urban centers looking for jobs they
9:10
expect the government to create jobs
9:12
so now you’ve got this artificially high run rate and the jobs associated with
9:17
any kind of slowing could mean layoffs but it also means lack of job growth and
9:23
and that’s what they hold the government accountable 20 is
9:26
am I correct in that you are right and I’m going to put this into a bearer
9:31
perspective
9:32
China’s main goal for the last several decades has been to create jobs through
9:39
this investment driven an export-led growth and they have succeeded
9:43
brilliantly in doing that
9:46
oh they have created 390 million jobs in the last between 1980 and 2015 so this
9:56
is having a population explosion of the population is more than doubled in china
10:01
during my lifetime
10:03
they had to find these people jobs and i have so the strategy worked out really
10:08
really up until the time that the US economy went into crisis
10:13
2000a so long as the u.s. current account deficit continue to grow larger
10:20
and larger every year
10:21
that was great we’re going to us but it happened it
10:25
it’s bitch it’s actually it’s we asked about the deficit but it’s been the
10:29
deputies been shrinking so by trip is peridot up shits
10:32
it’s actually starting to strangle China because of this lack of extra funds
10:38
coming in right
10:39
is that a fair assumption that’s right so starting in up until nineteen eighty
10:44
years so the US trade was in balance under the bretton woods system trade
10:49
have to balance it was only after nineteen eighty-two us started running
10:52
these very large trade and current account deficits and by 19 by 2006 the
11:01
current account deficit groan all the way out to a hundred billion dollars
11:04
that one year long so you could call that with the international monetary
11:13
system that follow the breakdown
11:15
good system no one really gave it a name but I think it’s properly called the
11:21
doll extended so as long as the current account deficit that the u.s. is growing
11:26
then the global economy boom so that was the dollar standard boom
11:31
but after two thousand six particularly after 2008 us crying context that
11:36
corrected by about half the battle to the standard bust and that’s when
11:42
China’s troubles really began to be noticeable
11:47
they tried to keep their economy growing by allowing bank loans to explode
11:55
since 2009 bank loans have triple in China and that resulted in even more
12:03
investment and even more excess capacity but now the bank loans are not
12:08
performing and non-performing bank loans are essentially destroying the bank
12:13
deposits within the bank’s bigger reach the point now where they is
12:18
is there really running into a brick wall
12:22
if they continue having more and more credit growth this is just going to
12:25
exacerbate their problems
12:27
the more money they will Len and invest in this state to more money they lose
12:34
so that’s the measure of China’s crisis this point to always FX currency
12:39
reserves that they had from options such a great trade with with America went
12:43
into their banking system three to four trillion dollars
12:46
it goes i did reserve ratios at probably 16 and a half
12:50
let’s say 25 times that’s just an explosion of credit built all of this
12:55
production
12:56
now you says his 2000 years been a problem now we’ve had quantitative
13:00
easing and all sorts of forms in America and you know the depth of his deficit
13:05
has been shrinking in America we still producing all this credit and how has
13:10
that impacted China because I know my personally believe that credit was about
13:14
bringing demands forward which it did briefly
13:17
it’s been about this explosion supply in emerging markets nine trillion dollars
13:23
of extra funding when it went into into those countries which are big and
13:27
importers RX
13:28
where’s to China our china’s imports and china’s imports are huge
13:33
as are their exports so this business compounding itself but i’m going to
13:37
grappling with his women quantitative easing of help be helping China
13:41
well I think you get the quantitative easing the Fed is done in the u.s. they
13:46
created 3.6 trillion dollars in three rounds and yes that dramatically pushed
13:54
up us asset prices
13:56
I household sector net worth is flying now to something like eighty five
14:03
trillion dollars which is sixty percent above where it wasn’t 2009 another so
14:10
that created a tremendous wealth effect that did stimulate something in the US
14:14
and that it did pull in more enforcement would have come in otherwise allowing
14:19
China to sell more exports and it would have been able to do otherwise
14:23
but still even with the quantitative easing that hasn’t been enough to allow
14:29
China’s economy to keep growing because China’s economy is now so large
14:34
this is roughly sixty-five percent the size of the US economy now and we’re
14:40
talking about such large numbers
14:42
it’s very very difficult to make it continue growing by six or seven percent
14:47
of here which is what the Chinese authorities would like to do and you can
14:52
see some of the slowdown and some of these other charts that we have one
14:58
showing the household consumption in China that the growth rates alcohol
15:02
consumption versus the household versus the growth grade to investment in China
15:07
well investment is growing at a seventeen percent a year on average from
15:14
nineteen ninety two 2014 the consumption is only grown by thirteen percent year
15:19
on average
15:20
so consequently you have this extraordinary gap that’s formed between
15:24
how much china produces and how much it consumes just in the years between 2005
15:32
and 2014
15:33
china invested four point six trillion dollars more
15:37
it consumed and then one year alone 2012-2013 actually if they invested 900
15:46
billion dollars more than they consume
15:48
so again in the past they were able to export all this excess production but
15:53
now the global economy is to read to allow them to keep doing that and it’s
15:58
also interesting to look at 40 channels on credit growth versus china’s gdp
16:05
growth now but one of the broader measures of credit growth in China is
16:10
called aggregate finance that includes bank loans at corporate bombs and and
16:17
and a number of other creche credit measures
16:21
so that’s one of the most preferred two measures of credit and China aggregate
16:27
financing
16:28
well it in this chart you can see that everyday financing which is the blue bar
16:35
has been slowing quite significantly from extremely high rates 2009 a great
16:42
financing in that one year increased by thirty-five percent trying to stimulate
16:47
China’s economy during the worst part of the global recession great recession but
16:53
since 2009 the credit growth has been slowing very significantly and last year
16:59
it grew by 12 points six percent which is still I number but you can notice as
17:06
credit growth slowed
17:08
so did nominal GDP grows and last year
17:11
nominal gdp growth through bio and 6.4 person roughly as much as advocates
17:16
financing so one of the things that I focus on in macro watches is credit
17:22
growth because I believe in this new world of fiat money and credit growth
17:27
drives economic growth and that’s true not only in the United States but in
17:32
China and elsewhere
17:33
– so what you can see in this chart is as credit growth has slowed down so has
17:39
the nominal gdp growth now this is even more alarming because the the in
17:47
absolute numbers
17:49
I’ve been financing is twice as large as the gdp and you’ve been
17:56
you can see that in the next chart that the absolute level up the growth in
18:02
aggregate financing last year with 15 trillion you are and with 15 trillion
18:12
you want with the flu credit they were only able to achieve four trillion quad
18:18
work with Judy Pedro
18:20
so it took almost four you can said four dollars worth of credit to generate one
18:27
dollars worth of gdp growth just not
18:31
it takes more and more credit to generate GDP growth in China showing us
18:37
that the credit is increasingly miss allocated and wasted
18:41
Richard a big part of China’s GDP is is investment its capital formation coming
18:48
into the country and we’re we’re witnessing our least the perception
18:53
perception is is tremendous capital leaving China right now
18:57
how is that impacting its ability to sustain credit growth when you’ve got a
19:01
capital by could say a capital flight going on
19:04
well you have a very interesting project let me show you one other chart first
19:08
before I answer that – just put it with this clearly the perspective how much
19:12
credit growth we’re talking about this is the one that shows credit growth in
19:16
the US vs credit growth in china now we had us credit growth was shown the blue
19:24
bar and these are all in billions of US dollars and China’s credit growth is
19:29
shown in the red bar and the numbers are actual up to 2015
19:34
but after 2015 and i extrapolate out credit growth in China based on last
19:41
year’s rate of credit growth which was 12 . six percent for here so it is
19:47
it’s amazing for the last seven years now
19:51
credit growth in China has been more than credit growth in the United States
19:55
even though the US economy is still much larger than China’s economy and notice
20:01
that it
20:02
credit growth in China continues to grow at this last year’s ray 12.6 percent
20:08
then by the year twenty twenty-one total credit growth in China that year will be
20:16
more than the peak level of credit growth in the United States in 2007 the
20:23
year leading up to the great the Great bubble that was the peak of the u.s.
20:28
bubble and we know how that ended in the United States and it certainly wouldn’t
20:34
be any better in China where income is so much lower that it makes it much less
20:40
easy for China to manage such a high level of death
20:45
so China’s China’s facing very serious challenges on a number of fronts the
20:54
first of all it’s not going to be easy to fund this kind of credit growth and
21:01
secondly even if they can fund it then it’s certainly not going to be possible
21:06
to invest that money probably
21:09
and it will just result in a higher level of performing logs which will
21:13
destroy your bank deposits now up until last year the real origin of the money
21:24
that funded China’s great economic food
21:27
it came from China’s current accounts reports the traitor
21:32
plus they also had a surplus on their financial account money coming in for
21:39
instance to build factories and up in between 1990 and 2014 that in total was
21:50
four trillion u.s. dollars and that went into China’s thanks
21:54
and through the miracle of fractional reserve banking and the money multiplier
22:00
that route 20 trillion dollars with the credit expansion during that period
22:06
looking ahead though things are going to become more difficult because in 2015
22:12
trying to experience
22:15
I happen trillion dollars of capital flight a half a trillion dollars left
22:21
China on their financial account and this happened because of fears that the
22:31
Chinese authorities were going to devalue the currency which they did on a
22:36
small scale in August
22:38
so once it became clear that the Chinese currency was no longer going to continue
22:42
appreciating every year and then it was probably going to begin depreciating
22:46
everyone trying to get their money out of China all at one time
22:49
so the money that have been doing in money flows that had been goin in and
22:54
financing the great china boom
22:56
well they they reversed and so that time liquidity conditions in China and it
23:02
will make things more difficult for the Chinese to find it extraordinarily large
23:08
amount of credit that they need to keep the economy growing if they were to
23:13
devalue the you want and I certainly a lot of sense that that is in the works
23:18
I wouldn’t that bring in new capital investment because money would be
23:25
cheaper bigger dollars coming into a smaller currency and help investment or
23:30
is that going to just say even the rumors of it stimulate more capital
23:34
flight
23:35
well sorry if they had one big one off the evaluation twenty percent then that
23:43
would make China
23:44
what’s more competitive in the global econ so their trade surplus with we grow
23:49
sharp line and that would bring in more money into China but of course
23:54
China’s trading partners would protest very loudly because already China
24:01
already has a very large trade surplus with the rest of the world
24:04
its overall current account surplus last year was about three hundred billion
24:08
dollars so to devalue further simply in order to make that very large current
24:15
account surplus very much larger would be completely out of there by anyone’s
24:20
standards and China’s trading partners would probably put up trade tariffs
24:26
because already there is a very loud backlash against three trained around
24:32
the world
24:33
now if they just tried to depreciate the currency graduate then that could call
24:40
it a different set of problems because people would realize it
24:45
the currency is going to keep losing value about Sultan war people trying to
24:49
get their money out what they can for the evaluation occurs then we have even
24:53
more capital flight
24:55
so either strategy they adopt is going to cause problems and injectable to
25:01
whatever extent the China does the value gradually or one large one off the
25:06
evaluation is going to be very damaging for the rest of the world because if
25:10
china d values then China will have less purchasing power so it will not be able
25:16
to buy as many things from other countries
25:18
so the other countries who sell commodities to China presence
25:23
well first of all the commodity prices to drop chocolate and then the currant
25:27
juice of the commodity producing countries like Australia Brazil those
25:32
currencies the least value and then the profits of the metal and mining
25:38
corporations who sell commodities their problems would take another big get
25:43
and so would be another big stock market self
25:46
that’s why there was such such such ramifications
25:51
last August and obviously you know markets result it significantly right
25:57
and now what Richard what can we read into I noticed the FX the federal the
26:04
currency reserves the current count our fault of currency reserves are falling
26:08
in many in China
26:10
they’ve been selling us treasuries not to annex a major way but they certainly
26:15
have been selling maybe more party they’re no longer a quiet acquiring
26:20
treasuries up
26:21
what should we read into the fs the currency reserves falling
26:25
that’s the last year to foreign exchange reserves well from the key which was
26:30
sometime 2014 now they followed by something like a hundred billion dollars
26:34
to now three point two trillion dollars for
26:39
China’s foreign exchange reserves are but I think the more significant thing
26:45
is that reserves have not been growing rather than the fact that they have been
26:52
shrinking
26:52
let me explain so in China’s foreign exchange reserves go up
26:57
that is because of war money is going into China that is leaving child and
27:04
that would tend to put upward pressure on Chinese of a Chinese currency in
27:09
order to prevent the upward pressure on the currency the central bank of china
27:12
pboc friends money from De Niro and buys those born currency primarily dollars
27:20
and a fixture in the air fixed exchange rate and so they accumulate foreign
27:26
reserves that way and as they accumulate more and more . exchange reserves they
27:32
need to invest those reserves in up it
27:36
so if they accumulate dollars which is the main currents they accumulate the
27:40
men need to invest those new dollar reserves back into US dollar-denominated
27:45
assets like Treasury bombs
27:49
this is that point upward pressure on the Treasury bombs and put downward
27:52
pressure on the yield and it generally gives a boost to the financial markets
27:59
in the United States
28:00
so that’s when corn exchange reserves are increasing but I don’t think it’s
28:05
add negative when they decrease
28:07
it’s just not it’s just not positive but it’s not it’s not symmetrically negative
28:12
because china central bank has to sell or exchange reserves but someone else so
28:25
they may have to sell their Treasury bombs when when the foreign exchange
28:28
reserves go down there selling treasury bonds but someone else is buying those
28:33
Treasury bonds
28:35
so for example last year I as i mentioned it was for five hundred
28:41
billion dollars
28:42
leaving China their financial account those people wanted to sell their
28:48
chinese yuan and buy dollars
28:52
so that’s what they did so with one and bought dollars but then those people
28:57
have dollars so they needed to buy us dollar-denominated assets like Treasury
29:02
bombs like the Treasury bonds that the PBOC was selling gonna start foreign
29:08
exchange reserves for following but so that’s good
29:11
complicated put the PLC was selling bonds but someone else selling you want
29:18
to buy those box because they were something you want to find dollar the
29:22
way we have noticed when Richard what I have noticed is the buyers who are
29:26
absorbing those cell phones that are being sold treasured being sold are
29:31
really people fleeing negative interest rates
29:33
we’ve got ten point four trillion dollars where the bonds of standing
29:37
around the world that are negative interest rates primarily Europe and
29:41
rather than take a negative he’ll they’re built they’d rather buy us
29:44
treasuries even at pathetic 1.7 1.8 on the 10-year I’m because the currency has
29:51
been relatively stable they’ve been given actually making money on the
29:56
currency to because the US dollars been going up because of the money coming in
30:00
what kind of catches so I think that’s in the short term offset but i’m not
30:05
sure how sustainable that’s going to be if you have China has to continue to
30:10
sell its FX reserves and how much money it up time that money will keep coming
30:15
in especially with us having to increase its debt levels and the model is rolling
30:19
over
30:20
what you said is absolutely correct but do keep in mind that when the reason
30:26
China’s foreign exchange reserves are calling is because Chinese people want
30:31
to sell Chinese 1 and x dollars and so when they do that they have dollars and
30:41
with those dollars they want to buy Treasury bonds so the PBOC sewing
30:45
Treasury bombs but there are also a lot of chinese people now have a lot of
30:49
dollars they didn’t have before
30:51
you want to buy Treasury and they can do that they can bet there’s no capital
30:55
restrictions of leaving it they can transact those those purchases right now
30:59
without any restrictions
31:01
well it’s very hard to say what you can do and what you can’t do in China
31:04
it depends on who you are and who you know ok
31:08
the second a hat I but you could we expect capital controls in the future or
31:14
China or s capital controls
31:16
I’m and more aggressively exactly their dad we got pictures here people
31:21
believing with 70,000 american dollars wrapped around her wasted and they’re
31:26
being arrested at the airport then search because of this capital flight
31:29
but I mean more intense capital controls
31:31
well it’s not those people the seven billion problem is these large
31:37
state-owned enterprises added before just say for the largest Chinese facts
31:43
which are the four largest banks in the world now they can move money around in
31:48
the serious ways that the government either can control or chooses not to
31:54
control because after all the government controls the state-owned enterprises and
31:59
largest banks controls am at home
32:01
did you do you think there’s a devaluation of the yuan coming it looks
32:05
like there will be steady depreciation sustained appreciation vs up one up and
32:11
it’s done
32:12
IRA just going out to be more of a steady depreciation you know much of it
32:17
depends on what happens to the dollar
32:20
the whole point of the little devaluation in august and in my view
32:24
they did the PBOC the central bank devalued by about three percent
32:30
well that was a very clear warning to the bed
32:33
that is a bed continue hiking right at that point the bed was talking about
32:38
hiking interest rates they haven’t started yet
32:40
it’s a bit had highlighted in a series of interest rate highest and of course
32:46
the dollar would have continued to appreciate and because the Chinese
32:50
currency is roughly picked the US dollar that would have made the Chinese
32:53
currency continue to appreciate as well so that little devaluation with the dlc
32:59
telling the Fed very clearly that if you hide
33:03
we’re going to devalue
33:04
and so the bed didn’t hide in September as it had intended to eventually did
33:11
highlight a little bit in december but since then they have I to get him
33:15
Richard is not exactly what we’ve seen in the month of May since May first the
33:20
bullets ooo are we talking about we’re going to have a rate increases coming
33:25
maybe june july up until we had a bad labor number here or suddenly came out
33:29
the table but during that period of time when yelling they were all talking
33:33
china devalued four times in the month of make minor not but they were like
33:37
shots across the bow once against do it to America saying do not increase the
33:43
rates and drive the dollar in my reading more into those rates are those not very
33:47
clear the dollar goes up the one is going to go down and and let that’s a
33:53
problem because the more than you want goes down the cheaper Chinese goods will
33:59
become in the United States and that will increase deflationary pressures in
34:04
the united states making it more difficult for the Fed to achieve its
34:08
mandate of two percent inflation
34:11
so this is really this is this is something that the PLC is holding over
34:20
the fit some extent to prevent them from hiking rates but of course the US
34:26
economy is far too beat the pension be hiking right anyway our gdp in the first
34:32
quarter was only up 0.8 for some things are deteriorating pretty rapidly and if
34:39
no in normal circumstances these would be the sort of circumstances would see
34:43
the fifth cutting interest rates rather than hiking up
34:46
you would think so wouldn’t you we see him
34:49
it makes no sense that had it on the surface there’s other strategies go
34:54
ahead Richard
34:55
we’re running out of time but I’d like to go back how we started that is the
34:57
job through that the job creation in china and the absolute requirement to
35:02
sustain jobs
35:04
you can’t keep building ghost cities and and go smalls it etcetera to sustain it
35:11
what do you think China is going to be do we have social unrest
35:14
being in China and what do you think the government’s going to do to sustain
35:17
these job growth
35:18
well this is a child like to show you is China share of the world
35:23
Jiki investment and household consumption expenditure
35:28
so in green what the Green Line shows you that as a 2014
35:35
China’s share China’s economy its share of global gdp China’s economy made up
35:41
thirteen percent of the global economy but chinese investment
35:46
sorry chinese consumption of alcohol consumption
35:50
it may have only nine percent of the world’s total consumption
35:54
on the other hand chinese investment made a 24-point four percent of all the
36:01
world investment so almost a quarter of all the investment occurring in the
36:06
world occurred in China are in 2014
36:11
now that is mind-boggling
36:14
because again investment is not just investment building factories but
36:20
investment includes building all kinds of structures residential structures
36:25
office buildings commercial buildings and industrial buildings so so already
36:31
china investment is a quarter of World investment
36:35
now if they continue growing these sorts of the kind of growth rates that they
36:39
have the last two decades
36:40
then within 10 years love it
36:45
China’s growth rate of investment continues at the same rate and the world
36:49
growth rate of investment continues at the same rate within 10 years Chinese
36:54
investment will make up sixty percent world invest so clearly that’s just not
37:00
possible
37:01
that’s not going to happen so the investment is going to have to slow and
37:05
other Chinese policy makers tell us is that they’re going to move from a
37:09
strategy for growth strategy
37:11
they’re going to move from investment-driven growth to
37:15
consumption-driven growth but that’s just not possible because if you begin
37:20
laying off people who work in steel factories
37:26
then those people are going to consume or they’re going to consume less reason
37:31
consumption has been growing in China as much as it has because investment has
37:36
grown so much
37:37
now you may lay off the Chinese still manufacturing worker and that worker may
37:43
find a job in the services industry but as we know from the US experience wages
37:50
in the services industry it
37:53
wages they are much lower than in the manufacturing industry
37:56
so that’s not going to boost consumption so if they begin it investment grows it
38:02
if investments lows as it must
38:05
the consumption is also going too slow so what that means going for it is
38:12
well first of all China’s economy is going to continue slowly significantly
38:15
but in order to have any growth at all
38:20
chinese government spending is going to have to increase sharply just as it did
38:25
in Japan after japan’s great economic bubble hot in 1990 the only way to pan
38:34
is managed to avoid collapsing into the Great Depression for the last 26 years
38:38
they have very very large budget deficits sixty percent of GDP almost
38:44
every year for the last twenty secures the Japanese government debt has
38:48
increased from sixty percent of gdp in 1990 up to two hundred fifty percent of
38:53
GDP now so we’re going to see something quite similar in child
38:58
chinese government debt is going to rise very sharp keep trying to economy
39:01
problem
39:02
collapse and you have a very severe recession / depression
39:06
now in my opinion China’s hard landing has has already begun after decades of
39:13
having very rapid row and industry after industry double-digit growth rates
39:18
there’s a there’s a chart on this Chinese hard landing
39:22
I have you got you can see that all that changed in 2015
39:26
instead of growing at an annual rate of ten to twenty percent of year suddenly
39:32
industries like steel production cement production rail freight
39:37
there and building under construction
39:41
those were all negative another way through there were already in recession
39:45
now so china announced that their economy grew last year by six points
39:51
seven percent in nominal terms that group that would be six point four
39:56
percent
39:57
well maybe it did and maybe it didn’t as far as the rest of the world is
40:02
concerned it really doesn’t matter how much
40:04
China’s economy is growing by what matters for the rest of the world is how
40:09
much chinese imports are growing when chinese imports are growing as they were
40:14
for decades that make China a driver global economic growth but last year
40:19
china’s imports contracted by seventeen percent so seventeen percent contraction
40:25
and chinese imports that is a hard landing i would say by anyone’s
40:29
definition
40:30
so did the hard landing starting in 2015 and is likely to be very protracted no
40:37
matter what the Chinese government does going forward and this is going to
40:40
impact everyone around the world in fact that already has asked just ask brazil
40:47
brazil is now suffering the worst depression in 100 years because the
40:54
commodity prices the craft to the lack of Chinese demand for commodities and
40:59
that’s wrong
41:00
brazil a major market producing country into a depression
41:05
so we’re already feeling the consequences of this hard landing in
41:10
china and the longer it goes on the more serious consequences could become and
41:18
they’re beginning to become not only economic consequences but increasingly
41:21
political consequences are all around the world we’re seeing a rapid rapidly
41:28
growing backlash against free trade and the rise of strange political candidates
41:38
on both the right and the left both Donald Trump and Bernie Sanders are anti
41:44
free trade and it’s they have a lot of supporters
41:49
fully understand that position and supported entirely
41:53
so there is a growing risk that the longer
41:57
China’s economy is it is current state
42:03
struggling the greater the risk that we will have a political backlash against
42:08
free trade trade barriers could go up in that case that makes the chances of a of
42:14
a global we’re already
42:19
we already have a global recession the chances of global depression will
42:23
increase if we have a backlash against free trade protectionism advances
42:28
now I think what is likely to happen is that we are going to have a globally
42:35
coordinated fiscal stimulus program on a very large scale
42:41
sometime after the next u.s. president takes office in January 2017
42:48
because they’re really at this point there are there are no alternative to
42:51
drive the global economy you us credit growth was too weak to drive the US
42:56
economy
42:56
China’s economy is effectively in crisis as Japan’s and Europe’s monetary policy
43:03
now has done pretty much all it can do the negative consequences to comp
43:08
quantitative easing
43:09
I’m are now almost great at the positive consequences of quantitative easing
43:16
so the added benefit of more quantitative easing is very insertive so
43:20
monetary policy is really run out of potential to drive the global economy so
43:26
that means we’re going to have to have a very large round of globally coordinated
43:29
fiscal stimulus
43:31
I think that’s what we expect in 2017
43:34
if we don’t get that then the chances are that are global recession will
43:40
become a global depression
43:42
the crowds as soon as 2018 and I think that that we were talking earlier Larry
43:47
Summers is going around the world former Treasury Secretary United States
43:51
proposing to exactly that a globally coordinated fiscal infrastructure
43:56
spending program initiative not just it coordinated but certain
44:02
in every country we’re getting more and more of that visibility I think it’s a
44:06
high probability
44:07
Japanese Prime Minister there and back at the g7 meeting recently announced
44:15
very loudly
44:16
he thought the current global crisis is a severus it wasn’t the peak in 2009 and
44:23
he called for a globally coordinated fiscal stimulus program and subsequently
44:28
he backtracked on hiking the consumption tax and which is we have been fiscal
44:36
tightening
44:37
so really ever Germany of the great cold out here
44:43
they are reluctant to have more fiscal stimulus they have a date
44:48
they have actually have a small government budget surplus which is
44:53
really the the worst possible thing you’re going to do in a world in
45:02
recession with political tensions growing and the threat of severe
45:07
severely disturbing political outcome that threat is growing by the day and
45:16
the longer the global economy remains weak
45:18
the greater the risk of a very unhappy little full outcome will be those
45:24
chances are increasing
45:26
I’m getting the sense Richard you’ve seen things go from which the financial
45:30
crisis to economic crisis that we’re soon gonna be facing political crisis
45:34
because of the follow
45:36
lack of growth and jobs slowing economy lack of confidence in government center
45:41
and I think people like Trump and Sanders that are just bellwethers of
45:47
what’s to come we can talk about Maria panting France epilepsy and in Italy
45:52
Corbin and the UK we’re seeing this all around the world right now is just
45:57
almost anti-government at the establishment because they just don’t
46:01
believe that the system is working
46:02
am I reading too much into that will certainly anti-establishment
46:05
yes I do
46:08
look the same state at the Republican Party believe has just lost control of
46:14
their part
46:15
Donald Trump thats stolen the Republican Party away from the Republican
46:19
establishment because the rank and file of the Republican Party have been
46:25
suffering under the policies advocated by the republican party elite free trade
46:31
free flow of capital around the world
46:35
deregulation and they have not benefited from any of these things back their
46:41
standard of living is not increased for decades so suddenly
46:47
Donald Trump is pointed this out to them and we have all defective to him and he
46:52
his policies are really innocence in many ways the complete opposite of what
46:56
the Republican establishment has advocated and and push forward for
47:03
decades and to be fair this much the same can be said about the democrat
47:08
party after all it was Bill Clinton past
47:12
napa and ross perot remember in the Eternal Word your bras throw and I had
47:20
shocking sound sucking sound that with also wages to fall in the US
47:26
unemployment rise and be a blow to the American middle class and that’s
47:32
certainly been the case
47:34
and so that’s why Bernice and it is so popular so the elite within the Democrat
47:40
Party are there hanging on by their fingernails
47:43
so what we’re seeing is a backlash against free trade
47:47
now the problem is i mean i can certainly sympathize with all those
47:51
people who are opposed free trade
47:54
they have good reason to be but if we put up trade barriers in the global
47:58
economy begins contracting that’s only going to make all of our problems works
48:03
so rather than going for protectionism what we need to do is find policies that
48:08
will make the demands of other countries grow rather than calling us to man
48:13
for global products to shrink so we need to be more imaginative in my first book
48:20
the dollar crisis which was published in 2003
48:24
I you can see that there was a big US housing bubble is going to pop it didn’t
48:30
take too much imagination to see what would happen the global economy when it
48:33
did pop would be much less
48:35
global demand and a severe global recession and we would need new sources
48:40
about demand we were going to ever be able to grow out the crisis
48:44
so one of the chapters and that book was called a global minimum wage which I
48:49
advocated pushing up wages in the manufacturing industries of all the
48:55
countries around the world if we could just push up wages right now to the
49:02
going wage rate the manufacturing industry
49:04
lower away is probably something like eight dollars today and there are
49:10
hundreds of millions of people in the world who would be delighted to work for
49:13
five dollars today
49:15
I think we’re going to make globally , crow
49:18
we need those wages to go up not go down as they have been doing so
49:23
just as in the Western countries we had minimum wages now for a century in many
49:29
places around in the Western developed economies
49:32
we know how the global economy we need to find a way to make the wages in the
49:37
manufacturing sector go up to going down
49:40
so if we can reach a global accord to boost the wages of the manufacturing
49:45
industry by just one dollar a day per year
49:49
so the next year they go to nine dollars a day year after that they go to ten
49:53
dollars a day
49:54
you have about 11 and 12 / 30 within a decade or so they would double or triple
49:59
and that would increase the purchasing power of the people at the bottom of the
50:02
pyramid globally so they could buy more things
50:05
the Chinese factory workers could find more but it’s rather than less goods
50:08
that would be a way to make the global economy grow rather than resorting to
50:13
nineteen thirty style tariffs resulting in a global depression
50:19
so we need to find a way to make the global economy grow by creating more
50:23
I would get the man rather than allowing the global economy and flow through
50:27
greater protectionism but we have head winds of robotics and automation black
50:33
factories accelerator which is incredible headwinds for this to drive
50:37
up the labor costs and as more and more automation is happening in the existing
50:42
manufacturing facility so moving something to get take advantage of
50:47
Labor’s not there the same as it was before so driving up those labor cost is
50:51
going to be difficult process but we’re not talking about raising the wages in
50:54
these countries of fifteen dollars an hour
50:57
we’re just talking about raising them to $15 day and rope
51:02
robots are not going to be competitive at fifteen dollars a day for a long time
51:06
to come
51:07
at zero percent interest rates they could be very competitive terms of
51:11
investments it
51:12
no you’re absolutely right that’s all relative but Richard I could just it’s a
51:17
heck of a problem but we just have a lack of demand and we have massive
51:20
population and we have labor arbitrage and to get this in any kind of
51:25
coordinated fashion our governments have never been really good
51:28
even within a sovereign country of getting good quality ever mind having it
51:33
coordinated it it almost take a crisis to become coordinated one also yes
51:38
you’re right of me
51:39
so therefore the US could impose this unilaterally it would be nice if we can
51:44
all reach a deal to raise the wages but that probably not going to happen that
51:49
would be cheating
51:50
so the way that this can be done would be for the US Treasury secretary to go
51:57
on television and say if you cannot prove that you’re manufacturing workers
52:02
are paid nine dollars a day
52:04
we’re going to put a ten percent error on your goods and then we just we go to
52:11
nine dollars day and the next year they would go to ten dollars a day and then
52:16
if there were no cheating
52:18
the other countries would have no incentive to cheat because after all
52:21
they want their workers to have a higher income they want the global economy to
52:25
grow the US could enforce a higher global wage rate uh unilaterally since
52:30
it is the fire first and last resort
52:34
it comes to imports I will arrest the world so Donald Trump says he’s a great
52:40
negotiator
52:42
if this is this kind of deal in these negotiate not putting a train trips and
52:48
making our trading partners pay their workers more so they can find more
52:51
American girls that we will always pictured we’re way past your deadline
52:55
but I you I I just enjoyed talking to you so much and I have so many just
52:59
absolutely great in for insights
53:01
some of them i sure will be controversial with many many viewers but
53:05
but I I know how well deeply you think these things through in the logic behind
53:10
it
53:11
we need a break can you count listeners how they can subscribe to macro watch
53:15
and i know you have a special offer to write so yes well first of all I would
53:21
ask that they visit my website
53:23
Richard Duncan economics . com and at the very least sign up to get my free
53:28
blog on macro watch is based around the idea is that in this new world
53:35
fiat money credit growth drives economic growth liquidity determines which way
53:42
asset prices mood and like it or not the government does everything within his
53:47
power to make sure the credit growth and liquidity its fans so that the global
53:51
economy doesn’t collapse and those other things too many things that I monitor
53:57
and in macro wash
53:58
so if your listeners viewers will visit my website and click on the orange
54:05
subscribe button if they use discount code close then they will have a 55 and
54:15
discount
54:16
they can subscribe for 225 dollars a year instead of the normal price of five
54:23
dollars per year and with that they will have immediate access to the macro watch
54:27
archives with 25 hours of video available
54:32
watch immediately plus the new video every two weeks or so on breaking news
54:37
and breaking developments in the global economy
54:40
each video is about 20 minutes long usually contains around
54:44
supported downloadable charts and slides so i hope we’ll check it out
54:49
and as I said the beginning anybody who’s serious about understanding macro
54:53
events
54:54
you can’t do it without a subscription to macro lunch and and really getting
54:58
these in these uh these insights
55:00
Richard always a pleasure and we’ll talk to you again when you’re free

China, 2015 Stock Panic, A-Share Bubble