The China Syndrome: The Coming Global Financial Meltdown

Tyler Durden's picture

Submitted by Charles Hugh-Smith via OfTwoMinds blog,

All the phantom wealth piled up in China's boost phase is now melting down, and the China Syndrome will trigger a meltdown in global phantom assets.


The 1979 film The China Syndrome took its name from the darkly humorous notion that a nuclear reactor meltdown in the U.S. would burn straight through the Earth to China.
(wikipedia: The China Syndrome)

In today's world, the financial meltdown in China has burned straight through the global financial system to the U.S. financial markets. The mainstream financial media is delighted to promote the many links between the U.S. and Chinese economies when the two economies are feeding each other's expansion in a tightly coupled virtuous cycle.

But once China's slowdown starts impacting the American economy, the mainstream financial media trundles out the usual pundit suspects to declare that the U.S. and Chinese economies are decoupled, so a meltdown in China will have little impact on America--and vice versa.

The rationalizations for this decoupling are many--and specious. Exports are actually only 10% of China's economy, we're assured, so any slowdown in China will be modest and of little relevance to the U.S. economy.

Various experts also assure us that China's vast stash of foreign reserves and U.S. Treasuries will enable it to quickly smooth over any spot of bother in its currency (RMB/yuan) resulting from capital flight out of China.

None of these rationalizations change the fact that China is integral to the global financial markets, and so its slowdown and capital flight are toppling carry trade and other risk-off financial dominoes.

China is tightly coupled to the U.S. and global economies via capital flows and supply/demand. It's important to understand that demand drives profits on the margins: of ten sales, the first nine sales just cover production and overhead costs; only the last sale generates substantial profits.

China has provided marginal demand in everything from iron to oil to machine tools. Now that China's demand is faltering, global demand is weakening and profits are collapsing because China provided the critical marginal demand that fueled immense profits.

This decline in marginal demand is crushing commodity-based economies and triggering recessions as profits, sales and wages all decline.

The tidal wave of cash flooding out of China has provided marginal demand for high-priced real estate in Europe and the U.S. From London flats to Chateaux in France to single family homes in Vancouver B.C. and Southern California, trillions of yuan have escaped China and flowed into pricey real estate, pushing prices into the stratosphere.

Now that trillions of yuan of phantom wealth are disappearing in China, those immense capital flows into Western assets are drying up. A staggering percentage of China's household wealth is tied up in illiquid and overvalued real estate. The wealth that is yet to be lost as China's markets transmit the reality that the fuel of financialization has been consumed and the resulting losses will be in the trillions of dollars, not yuan.

The fundamental context is that China's economy has traced out an S-Curve--as have previous fast-developing nations such as Japan and South Korea.

The S-Curve can be likened to a rocket's trajectory: first, there's an ignition phase, as the fuel of financialization and untapped productive capacity is ignited.

The boost phase may last for several decades as credit-fueled production and consumption expand:

In the boost phase, investors and leaders can do no wrong. The high growth rate of credit and production overwhelms all other factors, as the virtuous cycle of expanding profits and production increases wages which then support further expansion of credit and consumption which then supports more production, and so on.

But then the fuel of financialization is consumed, and the previously fast-growing economy coasts on momentum. Depending on how much leverage, corruption and wealth has piled up in the boost phase, this phase may last a few years. This is the top of the S-Curve.

As the economy weakens, the momentum is to the downside. Everything that worked in the boost phase--every investor and leader was a genius and could do no wrong--reverses: nothing works any more. Investors lose every bet and leaders' efforts to reverse the decline are ham-handed failures.

This decline is inevitable in fast-expanding economies that play fast and loose with credit/debt and leverage. All the phantom wealth piled up in China's boost phase is now melting down, and the China Syndrome will trigger a meltdown in global phantom assets.

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Ham-bone's picture

The truth of what ails us isn't debt or interest rate suppression or so many other coping mechanisms (or a "China flu")...the nexus of our "problem" is an economic system premised on growth...but infinite growth in a finite world is a pretty tough trick to pull off.  So, it was just a matter of time before something gave out...

 

Global population growth started decelerating from the bottom up in the advanced nations and soon spread across advanced and developing alike and spread from the bottom up.  Interesting to note that the 0-24yr/old population ceased growing across the OECD nation in 1982, the same year the Federal Reserve began what has been a 99.9% decline in the cost of credit and has resulted in spectacular increases in debt...all to maintain demand for a population whose growth is decelerating.

  • Japan Peak 0-24yr/old population - 1955, 0-24 population has declined 41% since
  • German Peak 0-24yr/old population - 1973, 0-24 population has declined 34% since
  • S. Korea Peak 0-24yr/old population - 1981, 0-24 population has declined 37% since

These are just some of massive declines among these nations and all are estimated to see their 0-24yr/old populations decline by 50%-60% from peak by the time we hit 2050 (and this assumes good economic growth between here and there...if things get rough, those numbers are likely to be far lower).  Ultimately, these massive declines are working there way through the entire population…depopulation is well under way from the bottom up.

 

But China, Brazil, India...they'll save us, right???

  • China Peak 0-24yr/old population - 1992, 0-24yr/old population has declined by 26% since (-152 million from peak!!!)
  • Brazil Peak 0-24yr/old population - 2006, 0-24yr/old population has declined by 9% since
  • India Peak 0-24yr/old population - Est. in 2017...and estimated to fall indefinitely thereafter.

By 2050, China and Brazil estimated to be down over 40% and India at 10% but picking up speed to the downside.

 

The above explains why central banks have seemingly gone mad...why governments worldwide are throwing dollars or Yen or Yuan or Euro's into the wind.  Depopulation is coming from the bottom up and declining demand is inevitable.  Unfortunately, central banks actions have retarded the business cycle and free money has created massive overinvestment and overcapacity which is now becoming so apparent in commodities and elsewhere (here).

 

Will Zero Hedge or any outlet ever acknowledge how simple the issue we face truly is?  They are welcome to run this story or you can read about it yourself here...(btw, this is a non-profit blog and all proceed benefit Special Olympics).

 

here

 

Of course, the solution is likely also simple but god awful in it's implications...a global bankruptcy where all bad debts (aka, somebody else's assets and future income) are cancelled.  Reset and hopefully start with an economic premise which can stand the test of time and not the desires of a few.

 

El Oregonian's picture

You mean the "Fukushima Syndrome" where 4 Reactor Cores are simultaneously melting down and cannot be located. They are past the bedrock. The world gov't's have ignored and have done almost absolutely nothing to fix, or even to warn the world of it's imminent demise...

screw face's picture

....ZeroHedge #Fukushima #Tokyo2020

 

...on another bullshit market post....http://www.marketwatch.com/story/these-charts-show-you-cant-blame-china-...

OldPhart's picture

Saw that traitorous bitch, Hanoi Jane...stopped reading right there.

That woman is going to have the greenest grave in the cemetary.

old naughty's picture

"tightly coupled..."

chi-mera, joined at the hip.

phantom meltdown:  China Goes Full Keynesian-tard: Demolishes Never-Used Just-Built Skyscraper

Burn thru the bedrock? You seen this, now you don't.

Occident Mortal's picture

But we can have infinite growth.

Transactions are contrived by the human mind.

Money is totally arbitrary.

None of it is real. We just pretend it's real because it allows us to work together.

A flick of a pen can change any law, any price, any property rights.

It's all by decree, all of it.

Ham-bone's picture

agreed we can have infinite growth in money (fiat) to pull demand forward...but absent the growth in consumers all CBs are doing is trying to force higher consumption from a declining base of consumers, not sure that's gonna work out.

Omen IV's picture

I dont buy your thesis

stability in a system creates more risk taking - when you can anticipate the shape of the horizon you will make more transactions - the more volatility people see in their lives the less spent the more saved

people more and more  - with globalization  - starting with developed nations -  dont see the old metrics holding for the future so they retrench - not just with making babies but even single people  - post baby years  - are spending less who are making more than last year or ten years ago - they see the risk  / exposure in: SS / Medicare / Job Continuity / Wage Levels / Interest income / Yields on all kinds of instruments / property taxes that are greater than a mortgage payment

most of this behavior can be traced back to government policy for the world out of Washington DC.

They intentionally fucked up a stable system - no more no less

besnook's picture

close but no cigar. a stable economy does help investors.

people are not having kids because kids are a financial liability. they cost money in an industrialized economy. they are not necessary(like a car and a phone) so they only exist because of some emotional value. in other words, you have to be crazy to have kids.

the other phenomenon has some empirical backing. the depression generation were notorious tightwads. the depression changed their spending habits. they didn't buy stuff they didn't need. i am sure there are a few people here, besides me, who can tell you you extreme stories of saving money from members of that generation. it looks like the same thing is happening to the millenials. the ones i talk to don't have the material craving the boomers have. they are not near as frugal as the depression babies but they don't spend near what boomers did.

besnook's picture

now you know why young immigrants from africa nad the mid east are needed so badly in europe and young mexicans are needed in the usa.

 

economic growth is based upon population growth. that is the dirty little secret. that is why you here all the calls for japan's demise. japan refuses to pollute their population with uncivilized foreigners, not even westerners. this is the large part of the myth of japanese economic stagnation. when the reversal of population growth is inputed into japan's economic growth the economy is probably growing as fast as it can with a declining population.

this is the same reason .gov doesn't mind how big the welfare roles are. besides keeping the dumb people happy so they don't riot, welfare is .gov qe. welfare checks are suppose to increase the local economy with the velocity and multiplier effect of the money.

TradingTroll's picture

RE: economic growth is based upon population growth. that is the dirty little secret.

 

I CALL BULLSHIT

 

Exhibit A: China's continuous population growth starting 1961

https://en.wikipedia.org/wiki/File:ChinaDemography.svg

 

Exhibit B: China's GDP growth since 1952 (flat until 1979)

http://opinioncenter.li/static/3f2f28cbaa5eab0f4ebe72025ad55156.gif

 

So, what happened in 1979? Normalization of relations between China and the world, transition to market based economy. NOT POPULATION!!

On January 1, 1979, the United States changed its diplomatic recognition of Chinese government from Taipei to Beijing. In the U.S.-PRC Joint Communiqué that announced the change, the United States recognized the People's Republic of China as the government of China. The Joint Communiqué also stated that within this context the people of the United States will maintain cultural, commercial, and other unofficial relations with the people on Taiwan. Since then, the ROC has often been referred to as 'Taiwan' to avoid confusion, although the PRC government claims Taiwan as a province of China.

Shortly before the termination of diplomatic relations, on December 28 and 29, 1978, before Carter’s telegram message to the PRC, a US representative was sent to the ROC for negotiations with ROC President Chiang Ching-Kuo. The content of these meetings mainly circled around the diplomatic state between the US and Taiwan after the American diplomatic reestablishment with China. Upon arrival to Taipei, there was a great disturbance with the presence of the Americans. Understandably so, the Taiwanese people were angered by the “betrayal” of the US Government. There were several protests and the Americans, only with heavy security precautions, were able to navigate the city safely to and from meetings. The United States’ representative, following the President’s orders, attempted to negotiate four principal objectives that would, hopefully, provide a sort of compromise between the two nations. The first of these objectives was that “all treaties and agreements in force between the two countries will remain in effect after January 1, 1979, with each side retaining such rights or abrogation or termination as are provided in the treaties and agreements themselves or inherently in international law and practice.” The second objective of the negotiations was to continue operation of embassies and staff from January 1, 1979 until February 28, 1979. The third objective discussed was that the ROC and the US “will establish and put into operation … a new instrumentality … which would neither have the character of, nor be considered as, official governmental organizations.” The fourth and final objective was simply that the two nations would meet again to establish a more detailed plan regarding the future of the two nations

https://en.wikipedia.org/wiki/China%E2%80%93United_States_relations

Ham-bone's picture

at Trading Troll - you are correct China total population is still rising but it is the make-up of that growth which I am discussing...

this article outlines China...

http://econimica.blogspot.com/2015/11/chinafictional-fairytale-vs-factual.html

and this the global situation

http://econimica.blogspot.com/2016/01/central-banks-governments-treat-secular.html

besnook's picture

it is clear i no longer know how to spell. maybe dementia is the best state of mind to get through this.

ThirteenthFloor's picture

Hambone-> I hate these "it's all because of China" articles.

First, China has no external Govt. Debt. US encouraged invest in Asia via legislation such as China First, if our investors lose their ass on a China investment, so be it, that was their risk, not China's. It is the US with huge overseas debt holders, via USD world reserve status that is killing Emerging Markets, that took loans in dollars at held down rates.

Much of the US is a "blame culture" it's everyone's fault except mine. When she blows, and it most certainly will, the US debt based finance model, which requires year on year productive growth is most certainly highest on the list of causes.

Physical economy needs to be based on productive output. Not debt based paper. Perhaps the Amish have it right.

skinwalker's picture

Bought 60 tubes of Ag the other day. Looks like I may need them. 

NoWayJose's picture

You will also need some processed and unprocessed Pb.

skinwalker's picture

I got plenty of that. I justify it by calling it investing in semi precious metals. 

Occident Mortal's picture

Except if your currency is the worlds reserve currency

falak pema's picture

Well GWB and Billy Clinton sold the keys of the west to the sons of Dengxiao Ping Pong.

One day they should build in Beijing's smog land a statue to each of those two sons of the Polos, in memory of those who resuscitated the new silk road.

geno-econ's picture

Obviously not old enough to remember. It was Nixon and Kissinger who decided to stiff Soviets by opening up trade with China. Nixon family as part of deal also sold ultra high magnet technology to China which utilized rare earths.  Since then US manufacturing base has shrunk along with much application technology.  Nevertheless China now has three choices---devalue currency and start trade war, expel Western barbarians and go back to a command political/economic system or partner with Russians and other emerging markets to weaken US financial system which is based on petrodollar and reserve currency. Obviously China now has a huge manufacturing base, population/consumption base and access to raw materials with price setting advatages. In other words a Balanced Economy.   What they also require is a new financial system that does not enslave them. All this is a  direct result of Kissinger's Realpolitik policies  which has served to destabilize US economy with Keynesian nonsense.

falak pema's picture

I agree with most of what you say but Outsourcing conceived under Bush Snr, then ramped up under Clinton and GWB, using the WTO mechanism for global trades, pushed the Kissinger/Nixon/Reagan legacy much further.

And Glass-Steagall revoke did the rest.

And it was not Keynesian "nonsense" but Chicago school "Friedmanite" nonsense. All based on floating rates  anchored to petrodollar debt recycling.

momentum24's picture

Another day, another drama @ZH.

These 'meltdowns' are nothing compared to what humanity went through over millenia.

But paranoia and  fear-mongering sells well among those whose history knowledge is limited.

SuperRay's picture

I see you're taking the long view.  Nice.  Keep that in mind if you're ever Butt-raped, either literally or figuratively.  It'll make the momentary agony more bearable...

Wilcox1's picture

When AIG blew up they needed a bigger dumbfu*k patsy to swallow the risk. China was it. Now they are done for too, and so are we (again).

assistedliving's picture

actually AIG was GS patsy and the biggest patsy of all was US (as in US taxpayer)

NoWayJose's picture

A 'humorous notion' that a nuclear core could burn its way through the earth to China??? Then where is the Fukushima core? Let me guess -- it's burning its way through the earth???

Niall Of The Nine Hostages's picture

No. The reality is worse. Long before the molten core got to the centre of the earth, it would hit the water table, resulting in an explosion that would scatter radioactive fallout far and wide. 

khnum's picture

Conspiracy theory;Chinese stockmarket=Peking opera

the game is unload US treasuries.

then reveal true gold holdings

Anopheles's picture

What exactly do you think would happen to the price/value of gold if a country dumps a couple thousand tonnes of it onto the market?

The reality is gold is little different than any fiat.  It's a luxury, witnessed by the simple fact that 55% of annual production goes into jewelry.  Who's going to be BUYING jewelry or other luxuries when world markets go to shit?  No, they will be SELLING, and so goes the price/value of gold.  Into the toilet with everything else. 

DontWorry's picture

I will keep reposting the best ZH post ever from Cougar_W until you all learn it by heart.  Emphasis is mine

Hope you didn't put much money on that bet, Dawg. These fuckers are going to print hard enough to wake the dead. They'll print like mo'fos, print like mad men, print like fly pimps. Print until their eyes bleed.

They will print via the swaps, via bank bailouts and mergers, via fixed Treasury yields, via real honest-to-God negative interest rates, via loans to banks on no collateral, via payroll tax reductions, and in the end via actual fiat paper instruments which they might very well drop in bails from actual mutherfucking helicopters.

They will not give two figs what anyone thinks.

Here is why.

Because this is the Goddamned end of it my friend. There is no accounting beyond this point. There will be no history of it. No one to take notes of rates of exchange, or of the graft and violence, nobody to worry about the deficit or the GDP or the national debt of any nation large or small under the blazing Goddamned sun.

End. Of. It. Does anyone bitch about how Rome totally debased their coinage at the end? Hell no. But whoever did it had enough to hand and grabbed some land with a nice vineyard and sat back and waited for the Middle Ages to start 700 years further on.

And that's what a singularity is about. Anything that passes through is striped of all meaning. Nothing we think is important now will remain so beyond the event horizon. Nobody will remember, nobody will write about it, nobody will be held to any standard. Ever for evar.

So yeah, they'll print like the mad crazed terrorists they are. Because they have nothing to lose, and maybe something to gain. Maybe a dollar. Maybe a day. Maybe a slim chance to escape with some of the loot. Whatever the fuck advantage they see in it, for themselves and their elite crap wanking buddies, they will full-on-full-time-fucking do it to advantage.

Watch for it, Dawg. It's totally on this time, on like Donkey Kong. And when the dust is settled in a generation hence it's going to have become  another unbelievable episode among the ages of men.

Tinky's picture

I would add this one to the list of keepers. It was authored by TwoShortPlanks in 2013.


“Over the last few months I’ve tried to nail-down an underlying reality, a meaning, the ‘nature’, of both physical Gold and Fiat Currencies. Neither are obvious to the average person, and there are many, many versions as to what they both are, depending upon which camp you are in (Trader, Economist, Politician, PM Bug, Investor, Mum & Dad, Business Owner, Banker, Wanker, Central Planner, etc, etc).

My reasoning for trying to identify this is simple; I have not been overly comfortable with what the majority of people on this forum, as well as other sectors, have declared them to be.

Not knowing the true nature of Gold and Currencies manifests into a failure to understand the relationships both have in the real world. Add to that a deficiency in understanding them as a financial tool and/or investment.

I would like to share with you what I’ve come up with…and I’ve kept them simple.

CAVEAT: I refer to currencies in a general sense, not one in particular, and not one in relation to another. I do not refer to any Gold Derivatives.

Fiat Currencies are Derivatives?. Since the abolition of the Gold Standard, Fiat Currencies have become a Derivative; as they are traded in the open market they point to an economy of origin, they point to that country’s Bond and Treasury Bills, and they point to the ‘Balance Sheet’ of that country’s Central Bank. Destroy the Bonds, Treasuries, Economy or Balance Sheet and you destroy the Fiat Currency as well. This was not necessarily the case when Currencies were backed by Gold and/or conformed to a Gold Standard, as the underlying value was preserved within the physical Gold…Currencies were indeed a ‘Claim Cheque’.

Gold has two lives (Dr Jekyll and Mr Hyde); it spends most of its live as perpetual Commodity, but every now and then it becomes ‘Flux Money’. We all know its Dr Jekyll manifestation as a metal and traded commodity, so there’s no need to elaborate on that. In its Mr Hyde manifestation (Flux Money) it phases in and out of favour throughout history under certain conditions. When things are going well Gold is almost hated for its lack of return performance and cost of storage, but when things deteriorate, that's when Gold comes out of psychological hiding. When wealth moves into Gold for safety, by virtue of its demand, it becomes the vessel of choice. Once this starts to happen, a bottle-neck appears as more and more wealth converges upon a finite Gold supply. Demand forces the value of Gold upward and this is precisely when Gold recaptures its reputation and all of the ill feelings as a non-returning commodity are forgiven. I believe the reason Gold has this ability, this power, is simple; it’s etched into the psyche of every society since every society has historically been through dark times. Also, as the saying goes “there no such thing as an atheist in a fox hole”, well, there’s no such thing as a Paper Bug in a [global] Collapse, whether that be Deflation, hyperinflation or societal.

In simple terms, Currencies are derivatives which relate to the modern economy, and Gold is both a permanent commodity and occasional safe storage.

If you can relate to this, then you can proceed with the $64,000 question; where are Currencies going and where is Gold going?

So really, the answer to this question – since currencies are a derivative – relates directly to the actions of Central Banks, Government Treasuries, and Global Consumers.

And what are we seeing? Central Bank balance sheet expansion, Government Treasury Ponzi schemes, and a protracted contraction of Global Consumption.

If you believe Central Banks will keep printing, Governments will keep Deficit Spending, and Global Consumers are on the edge, then Gold will come out of flux and solidify back into money once again.

Those who defy their intuition, those who defy the psyche of the market, will burn in a paper bonfire, should the current path be defended and this erosion continue.”

DontWorry's picture

Remember in the book "The Road" when they find the bunker, and there are a bunch of gold coins, and he pushes them aside to get to the food because gold is useless?

Like that.  Not next week, or next year.  But soon.  So enjoy everything around you while you can. We will all go through the eye of the needle soon.

Tinky's picture

Perhaps, but even if so, there will be an interim period during which gold ownership will both preserve wealth, and provide opportunities to acquire real assets that will make weathering the final storm more manageable.

NoWayJose's picture

Agreed Tinky - too many preppers think they will go to sleep one night - wake up the next day and say "time to pull out the preps". It won't happen that way, as the regime will cling to life for years.

eyesofpelosi's picture

Fantastic comment zh bro.

For you...on mobile shiitty links.

Anti flag
This is the end onyou tube

Wish I had the link, but this is for your great post and allzhers...love this site.

Thanks zh.

Quebecguy's picture

Feel the burn...rate.

williambanzai7's picture

China is Apple's single biggest market, GM, GE yadda yadda.

China's economy is as flatter than a Somali hooker in a Canton brothel

I rest my case.

Phoenix901210's picture

The British papers are not responding the same way. They are reporting truthfully on China,

Front page of the Telegraph internet today:

RBS cries sell everything as deflationary crisis nears:

http://www.telegraph.co.uk/finance/economics/12093807/RBS-cries-sell-eve...

InnVestuhrr's picture

US treasuries will SKY-ROCKET :-))))))

NEOSERF's picture

THe markets and the numbers for the S&P or the price of gold or treasury rates are simply barometers or thermometers which are easily manipulated by any of the large banks in the world.  However, much harder is it to fudge the rail, trucking, Baltic Dry Index etc without outright lies (which China seems to have always excelled at and expect it in the US soon).  Demand for gasoline declined in the latest survey while supply increased...harder (not impossible) to fudge and spin those away