Guest Post: Chinese Chaos Is The Immediate Threat To The Dollar

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Submitted by John Aziz of Azizonomics

Chinese Chaos Is The Immediate Threat To The Dollar

In twenty or thrity years, I expect future monetary historians looking back on this period of history to frequently misquote Ernest Hemingway:

How did the dollar die? First it died slowly — then all at once.

The slow death began with the dollar’s birth as a global reserve currency. America was creditor and manufacturer to the world, and the capitalist superpower. People around the globe transacted overwhelmingly in dollars. Above all else, people needed dollars to conduct trade, and they were willing to pay richly for them, and for dollar-denominated debt.

By the ’90s America began enjoying a tremendous free lunch — the world provided America with goods, resources and services, and Americans provided the global reserve currency, as well as acting as world military policing global shipping. Why manufacture at home, or produce resources at home when the world wants your currency? To get what you want, all you have to do is run your printing press — which was much easier after 1971, when Nixon ended the gold exchange standard. In a flat free-trade world, supply chains and technology agglomerated wherever the labour was cheapest, which was predominantly Asia. So America let her industrial base and her domestic supply webs degenerate, to enjoy the free lunch that the dollar brought:

The next leg of the story is that foreigners realised that actually maybe the necessity of the dollar was an illusion. With America no longer the world’s manufacturer or creditor, who needs America? If you need a consumer, there are billions of people and trillions of dollars, and trillions of dollars worth of resources in Asia, and South America, and Europe. America’s government is deeply-indebted, and its military is bogged-down in difficult conflicts around the world.

As Ron Paul noted:

We are like a man who used to be rich and is in the habit of paying for everybody’s meals and announces at a lavish dinner that he will pay the bill, only to then turn to the fellow sitting nearby and say, “Can I use your credit card? I will pay you back!”

While fund managers continue to refer to the dollar and the US treasury as a safe haven, America’s sovereign creditors seem to feel quite differently.

As Zhang Jianhua of the People’s Bank of China put it:

No asset is safe now. The only choice to hedge risks is to hold hard currency — gold.

The shift away from the dollar has quickly manifested itself in bilateral and multilateral agreements between nations to ditch the dollar for bilateral and multilateral trade, beginning with the chief antagonists China and Russia, and continuing through Iran, India, Japan, Brazil, and Saudi Arabia.

So the ground seems to have fallen out from beneath the petrodollar world order.

Yet at the same time, the powers moving away from the dollar have a lot invested in the system. The two biggest sovereign holders of US treasuries are Japan and China. China alone holds $3 trillion of US currency, and $1 trillion of debt. They have no reason to crash the value of their own assets. Their planned endgame appears to be a slow, phased and managed transition to a new global reserve currency. China wants to gradually reduce their exposure to America, transferring to harder assets.

Yet history rarely turns out how nations have planned, and China itself seems increasingly beset with domestic problems.

From Bloomberg:

China’s biggest banks may fall short of loan targets for the first time in at least seven years as an economic slowdown crimps demand for credit, three bank officials with knowledge of the matter said.

 

A decline in lending in April and May means it’s likely the banks’ total new loans for 2012 will be about 7 trillion yuan ($1.1 trillion), less than an estimated government goal of 8 trillion yuan to 8.5 trillion yuan, said one of the officials, declining to be identified because the person isn’t authorized to speak publicly. Banks are relying on small and mid-sized companies for loan growth after demand from the biggest state- owned borrowers dropped, the people said. 

 

The drying up of loan demand attests to the severity of China’s slowdown and may add pressure on Premier Wen Jiabao to cut interest rates and expand stimulus measures. The economy may grow in 2012 at its slowest pace in 13 years, a Bloomberg News survey showed last week, as Europe’s debt crisis curbs exports, manufacturing shrinks and demand for new homes wanes.

China may be a manufacturing powerhouse, and the spider at the heart of global trade, but its domestic and social order looks in a state of disarray, pock-marked with ghost citiesindustrial accidents and ecological disasters. And throwing stimulus money into an economy already recording screeching inflation will be like throwing fuel onto a fire.

As the Chinese (and wider Asian) economic picture becomes bleaker, pressure will grow on politicians to take more drastic and rash measures. They may try to rally the disaffected behind them with an increasingly confrontational nationalistic attitude to America. And unable to match America militarily, their major outlet would be economic warfare — competitive devaluation, threats, tariffs, export controls, and an all-out assault on the dollar reserve standard. Additionally, American policymakers also encumbered with huge economic problems may look to economic warfare as policy — the standout example is Mitt Romney’s desire to brand China as a currency manipulator for accumulating US treasuries and impose tariffs, even while the Treasury upgrades the PBOC to primary dealer status.

This brewing firestorm suggests that rather than the gradual transition that all parties claim to desire we are likely to see a much faster and more volatile one. I don’t know which straw will break the camel’s back, but it is likely to come sooner, rather than later. First slowly — now all at once.

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Sun, 05/27/2012 - 04:39 | 2466819 Arthur Borges
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The national animal symbol is the dragon; the oldest depiction of a dragon found so far is about 8,000 years old. Other startpoints are 5,000 and 3,000 years ago. Two thousand years ago sounds more like Christianity. Take your pick.

 

Sun, 05/27/2012 - 05:29 | 2466839 falak pema
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when they joined the current NWO outsourcing experiment; the Walmart-Apple-Foxconn aliance. You know, the world we live in today. Are you still living in 1280 and Silk road of Kublai-Marco Polo days?

Sat, 05/26/2012 - 17:23 | 2466026 A Lunatic
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We can, and will, print every nation on Earth into financial oblivion. Those who do not succumb to this tactic will be subdued militarily. The U.S. has no equal in the march toward one world government and total domination.

Sat, 05/26/2012 - 18:19 | 2466118 AustriAnnie
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Hard to get the tanks rolling when you can't buy oil.

Reserve currency allows the military machine to keep going.

The military machine has in turn been used to secure access to oil, in a self-reinforcing circle that only continues until it doesn't.

Every other empire had the world's greatest military too.  On a short enough timeline, anyway.

Sat, 05/26/2012 - 18:53 | 2466176 lasvegaspersona
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Annie ..nonsense...the USA will likely find its military halted when a dollar no longer buys a liter of gas....no, it will obey the rules of finance like all other countries...it is just enjoying the last few months of glory. Soon we Americans will understand the true meaning of 'exorbitant privilege'. De gaul was right....just way ahead of his time...we did what any country given the opportunity would do...we abused that privilege....This is why the world will NEVER tolerate China or any other country having the same opportunity, nope from here on out countries will be allowed to abuse their fiats at home but very soon they will be settling their accounts with other nations in something a tad more desirable than paper or electrons.

Sun, 05/27/2012 - 06:24 | 2466854 Jendrzejczyk
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Hmmmm....No real 'Merican would say "liter of gas" or have any idea what de Gaulle said. ;)

Sat, 05/26/2012 - 19:48 | 2466256 DosZap
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Hard to get the tanks rolling when you can't buy oil.

Reserve currency allows the military machine to keep going.

 One problem with this outlook,  YOU don't need ANY currency when you have at your fingertips ALL the OIL you will ever need at HOME.

ME Oil, BRIC oil??.

Who cares, we have all we need...............and way more. Just ration to the sheeple, and you will have enough for three World wars at once.( Problem is the incomings are a bitch).

MADD never went away, it just took a breather.

Sun, 05/27/2012 - 01:32 | 2466728 BooMushroom
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So the question is then who will win the war in the USA over oil on federal lands? The right hawks or the left environazis? If SCOTUS is willing to stop water pumping for crops in the CA central valley, they may be willing to stop pumping of oil in Colorado. Especially if they have chalets in Aspen...

Sat, 05/26/2012 - 19:38 | 2466242 DosZap
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 Those who do not succumb to this tactic will be subdued militarily.

Let's see how that works on China, and Russia....................

CHECKMATE

Sat, 05/26/2012 - 20:19 | 2466309 A Lunatic
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If we screwed China hard enough with our intentionally reckless monetary policies we would bring them to their knees. 1.4 billion restless subjects can do a lot of internal damage while trying to get out from under the oppressive thumb of a government long past its prime. As for Russia, they are still trying to recuperate from years of failed economic, military and political policies which leave them holding nothing but the threat of nuclear holocaust which amounts to cutting off ones own nose to spite their face. The U.S. dollar is the modern day equivalent of smallpox infested blankets and we handed them out to everyone who had their greedy fucking hands out. The U.S. will attempt to reap what it has so patiently sown.

Sat, 05/26/2012 - 22:30 | 2466530 thefedisscam
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"Bring China to their knees"?? LOL. You drink TOO MUCH Koolit.

Sun, 05/27/2012 - 05:22 | 2466835 Arthur Borges
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You might be right. On the other hand, the figures from the PEW Global Attitudes Survey are worth consulting: 87% of Chinese feel their country "is going in the right direction", against 30% of Americans, who are just 2% happier than Egyptians. That is actually a very good indicator of social and political stability.

Then too, the Chinese and US economies currently seem so interdependent that it is hard to see how one can go to its knees without dragging along the other down beside it.

Then you say the Government of China is past its prime. Um, so far, what I see is communists running a capitalist economy better than capitalists and capitalists unable to quite get their heads around that.

What seems past its prime is the global financial system.

 

Sat, 05/26/2012 - 19:48 | 2466254 spinone
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You may be suprised

Sat, 05/26/2012 - 20:00 | 2466281 DosZap
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You may be suprised

As  may you my friend, Russia has always had a BAD habit of lying, even better than we do.

When you still  have 3000+ ICBM's, its gonna be a bitch hitting them all,even if you did, the world is fried.

Plus, we have ZERO clue(maybe a wild ass guess) as to the numbers of Nuke subs they have developed, and like us sit 10-12 miles off each of our coasts 24/7/365.

Capable of launch to strike in less than 240 secs.

Plus, lest we forget, China now(and again thanks to Clinton), ans untold numbers of ICBM's capable of hitting your backyard.

Since we(HE) GAVE them Cray Super Computers technology, to be used against the giver perhaps one day.

Until then they MIGHT have been able to get a few on the West coast, but with Zero accuracy.

Plus, we again have even LESS a clue the numbers they have ready set go.

 Plus, with 1.2+ Billion people, we run out of soldiers WAY before they do.......................add the nukes, its damn sure Game On.

 

Sun, 05/27/2012 - 05:58 | 2466843 Arthur Borges
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Actually, even without access to classified materials, you can get a pretty sober picture of who has what. In your case, the data at the Federation of American Scientists might help you sleep more easily.

If you set aside Russia and the USA, and look at the relatively sane nuclear powers (everybody else), you'll see their arsenals stand at around 150 to 400 nuclear warheads apiece because, if your purpose is defensive, you only need to be sure of putting through to target a few dozen and causing unacceptable damage.

The two approaches are countertarget and countervalue. You advocate the ridiculously expensive countertarget approach where you take out the adversary's entire nuclear arsenal. The cheaper approach is to threaten population centers in a countervalue approach. The thought of losing all your major cities has so far been enough to make the USA need to stick to diplomacy and proxy wars.

If this still doesn't reassure you, you can always move to the Southern Hemisphere: most nuclear power plants, missiles and their targets are located in the  Northern Hemisphere and the planet's winds winds largely circulate in closed systems so that northern air stays north and southern air, south. Therefore atmospheric radiation levels will always be lower there. I recommend Argentina and Chile.

 

Sun, 05/27/2012 - 12:37 | 2467231 DanDaley
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Then there's always the great blind spot -the EMP; even better than a neutron bomb.

Sun, 05/27/2012 - 12:54 | 2467260 SIOP
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There are some caves along the pacific coast of Chile that are concidered the safest place to be. :) 

Sat, 05/26/2012 - 20:00 | 2466280 RafterManFMJ
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Hard to get the tanks rolling when you can't buy oil.

Reserve currency allows the military machine to keep going.

The military machine has in turn been used to secure access to oil, in a self-reinforcing circle that only continues until it doesn't.

Every other empire had the world's greatest military too.  On a short enough timeline, anyway.

 

 

Ha ha! You fool! You fell victim to one of the classic blunders - The most famous of which is "never get involved in a land war in Asia"

Sat, 05/26/2012 - 21:17 | 2466419 longdong silver
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Agreed

 

and the dollar is "to big to fail" ha sarc

Sat, 05/26/2012 - 17:43 | 2466055 skepticCarl
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Mr. Aziz's article is all over the map: first a review of the decline of the U.S. economy post 1971, then a discussion of the rising importance of China and other developing countries taking the mantle of reserve currency from the U.S., and finally some data that indicate a hard landing for the Chinese economy dead ahead.  He calls this "chaos", and somehow, it hurts the $US.  Seems just the opposite, given the first 2/3 of the article.

Sat, 05/26/2012 - 18:14 | 2466109 AustriAnnie
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Not so sure.  After all, the U.S. empire grew out of a series of "responses" to chaotic events.  Each threat of chaos provided rationale for another power-grab (starting wars, forming strategic global alliances, taking us off the gold standard, etc.)

China has in the past stepped up nationalist rhetoric when the peasants get restless.  I think that is one of Aziz's major points here.  And if they had been planning for a slow shift away from the dollar, their desperation may prompt them to quicken the pace.  Is it possible that the currency reserve status is the only thing that can save them, and they know it?  Some deflation, a sudden announcement of gold-backed currency, and more non-dollar trade agreements, which would strengthen their currency, in effect soaking up stimulus inflationary pressures as they start printing?  Its quite possible that the slowdown is exactly what they need.  They know that the country with the reserve currency gets to export their inflation.

Propaganda opportunities exist also, by telling their people they are entering a "new era" where evil America will no longer dominate their trade agreements, etc etc.  The launch of gold-backing as part of this new system might keep the peasants from grabbing their pitchforks and revolting.

Question is, can they pull it off?

 

Sat, 05/26/2012 - 19:49 | 2466257 spinone
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In 20 years, yes

Sun, 05/27/2012 - 06:32 | 2466860 Arthur Borges
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The rural population is indeed the key. Historically, they are ultimately what brings down the dynasties here.

And Westerners underestimate its support for the Party. True, there was the Great Leap Forward and more, but Mao Zedong is still largely venerated there, if only because he put an end to millennia of sharecropper debt to landlords. To that you can add restoration of the country's ethnic dignity and pride in itself.

The Party knows this and the tension is between focus on developing the industrial/post-industrial economy and increasing rural living standards.

It does indeed seem, AustriAnnie, that Party and Government want the slowdown.

Sun, 05/27/2012 - 12:31 | 2467222 DanDaley
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Rickards in his Currency Wars says that the Pentagon actually war-gamed a very similar scenario (China and Russia establishing a gold backed currency) -and many in the military/government just didn't want to see it as realistic; can't happen because we don't want it to happen.

Sat, 05/26/2012 - 17:49 | 2466060 Atomizer
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The only threat to the US dollar, universal petrodollar status. If the US dollar collapse’s, fiat recoinage will prevail and the [middleman] will be holding all prior debt obligations.  

This cataclysmic event is better known as {RLCBBHSD};  riches to rags lifestyle currency broker bag holder syndrome disease. 

Sat, 05/26/2012 - 17:57 | 2466080 SPAREPARTS
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Romney tarrif idea, say 25% on all chinese goods, would be like devalueing dollar by similar amount aganist Yuan, couldnt the US just devalue dollar by that amount globally,americans share will be paid by their life changes , decisions, the big squeeze, you cant have everything attitude

 

Sat, 05/26/2012 - 19:56 | 2466270 Everybodys All ...
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Tarrifs are the only way to balance out the "free trade" we have with China. Tarrifs have been utilized for centuries and need to be instituted with countries who will not play fair. I'm all for it. In fact you could make a strong case that since all the free trade agreements the US has instituted the real loser has been the American middle class in the form of jobs being sucked overseas just as H. Ross Perot surmized.

Sun, 05/27/2012 - 06:42 | 2466863 Vlad Tepid
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Tell you what.  You learn to spell "tariffs" correctly, then come back and restate your thesis.  I'll be ready to discuss when you know enough about your main topic to spell it right.

Sun, 05/27/2012 - 06:45 | 2466865 Arthur Borges
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So why did the US enter into those FTAs?

Sun, 05/27/2012 - 06:45 | 2466866 Arthur Borges
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So why did the US enter into those FTAs?

Sun, 05/27/2012 - 06:45 | 2466867 Arthur Borges
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So why did the US enter into those FTAs?

Sat, 05/26/2012 - 18:15 | 2466110 besnook
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it really is simple. throughout history the most indebted just past peak empire gave way to the biggest creditor fast growth nation.

 

talk about a hard landing in china til the cows come home. it may be the catalyst for the turnover. it doesn't matter. now or later, they are the next in line to inherit the world which is why japan has hitched it's wagon to them.

greater asia prosperity circle. bitchez.

Sun, 05/27/2012 - 09:26 | 2466985 onebir
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That was (almost) all under hard-currency systems. Not clear if it holds in a fiat where the indebted nation remains prime military hegemon & printer of the reserve currency. Perhaps this will buy it time to recover. (Or perhaps it's had its extra time...)

Sat, 05/26/2012 - 18:36 | 2466147 Venerability
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I posted this at Seeking Alpha:

Did you happen to see the Screechers - such Ranting and Raving, I had to turn the Volume down to the lowest possible level - about China on the Little Larry show Friday night? Little Larry himself wasn't there, and Michelle C-C, who is very smart despite being so biased, was forced into the role of Voice of Reason against her own unruly panel.

Remember, we had a similar situation on the Currency Show last week, with a substitute host who is so crazy, HIS own panel almost jumped up from their seats to throttle him.

I hope - and in fact, expect - that world leaders and more responsible market makers around the globe, especially in China, are watching these little productions very avidly and taking steps behind the scenes to thwart the ambitions - if one can call them ambitions - of the Sociopathic Nihilists who think it would be absolutely zingy to try to cause a Great Depression Worse Than the Last One, in order to extend the American-UK Empire.

MCC's panel was so insane, I fully expected them to verge into Malthusian territory any moment.

MCC: So tell us, Scott (I don't think there was a real Scott there, this is a composite), what would you do about all the Indian and Chinese and perhaps European people plunged into abject poverty by another decade like the 1930s?

Scott: Well, Michelle, there's a real silver lining in this. Human flesh is an excellent source of protein. All we have to do is designate certain marginal populations as expendable, package them, and sell them to semi-marginal populations as a delicious alternative to pork or beef.

I understand the Koch Brothers, among others, have already set up "compassionate abattoirs" to handle this entirely new manufacturing sector, in which the US will likely take the lead.

There are even hints Morgan Stanley will be lead underwriter for the first IPO in this space, to be called Human Protein Quick and Quietly, or stock symbol HPQQ.

 

Sat, 05/26/2012 - 18:51 | 2466172 williambanzai7
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The dollar is doing fine, living the fast life in Monte Carlo and the South of France with his buddy Jon Corzine.

He will die hiding from his creditors.

Sat, 05/26/2012 - 19:03 | 2466193 Atomizer
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RE: He will die hiding from his creditors

 

When his creditors ask for another US taxpayer bailout, do you think they may join others in the dirt nap of Ponzi refinancing?

 

Sat, 05/26/2012 - 19:00 | 2466188 world_debt_slave
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fickle foreigners

Sat, 05/26/2012 - 19:38 | 2466240 Pumpkin
Pumpkin's picture

The Federal Reserve is the only threat to the dollar.  Hell, they alread devalued it by 97+%!!

Sat, 05/26/2012 - 19:59 | 2466277 thesecondslowes...
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Only fly in this guys oinment is that exports to the west account for 45% of chinese gdp....tariffs, trade war, are a big short term boost to the US and a disaster short term for china.....how is that stoking domestic demand strategy working?  Not

Sun, 05/27/2012 - 07:29 | 2466885 Arthur Borges
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Yep, a lot of domestic demand is government-driven.

Sat, 05/26/2012 - 20:06 | 2466289 poor fella
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Reminds me of Bowles' comment about U.S. foreign policy,

"The U.S. has a treaty with Taiwan that we'll protect them if they're invaded by the Chinese. There's only one problem with that: We'll have to borrow the money from China to do it."

Sat, 05/26/2012 - 20:58 | 2466383 Miss Expectations
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If all you have is a printing press, everything looks like a threat.

(Apologies to B. Baruch, who also said, "I made my money be selling too soon.")

Sat, 05/26/2012 - 21:30 | 2466441 Jake88
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wwiii will save the dollar

Sat, 05/26/2012 - 23:22 | 2466602 guinea
guinea's picture

Also latest news is that Foxconn in China is going to double the wages of its factory workers to 4400 yuan a month (about $700).  This may seem like a pittance to us in the US, but it's actually higher than what most college grads in China make 10 years after graduation (and only 8% of Chinese go to college).  This will be a highly disruptive move for Chinese manufacturing.  Foxconn can probably handle it, but many of the domestic sweatshops that operate on 0.1% margins are not going to survive if labor costs double.  The Chinese real estate bubble is going to make China increasingly less competitive.

http://www.thestandard.com.hk/news_detail.asp?we_cat=2&art_id=122795&sid...

Sun, 05/27/2012 - 06:48 | 2466862 Non Passaran
Non Passaran's picture

Wow that is crazy!
Sometimes I wonder if Foxconn has a plan, or is it a series of random moves.

Sun, 05/27/2012 - 00:13 | 2466676 RagnarDanneskjold
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The Death of the Dollar has been greatly exaggerated. We may be closer to the end of the dollar as reserve currency than the beginning, but it's a long game. When China talks about having a reserve currency, what the officials mean is that the yuan will be held by foreign central banks as an asset, the way dollars, euros and yen are held today. China does not want to replace the U.S. dollar as reserve currency because of the economic pain it entails. The main goal of "hostile" foreign powers is to end the military/political advantage enjoyed by the U.S. through control of the reserve currency.

Ben Bernanke is playing double-A ball next to the pros at the PBOC. When the housing bubble in China cracked in 2008, they just gunned the presses and jammed liquidity into the banking system and into the hands of state run companies. Chinese banks are entwined in property and commodity speculation, with much of their outstanding loans in speculative investments. In other words, their banking system is insolvent if there's ever a recession in China.

While the U.S. exists within a Keynesian framework, China has a Keynesian machine. American economists use models to represent the economy, Chinese politicians built a Keynes machine. Need to up G or I or C or (X-M), just pull a policy level and it happens. Now that the Chinese economy is slowing and demand, yes demand for loans fell sharply in May, China faces the prospect of another round of deflation. What's their most likely response? Take another 2008 on the chin, or follow 2008 and print like mad? The only problem this time is that the PBOC is starting to lose control of the yuan as the market is trying to force a depreciation. If they print big again, China faces the prospect of exchange rate driven inflation. 

Sun, 05/27/2012 - 01:01 | 2466716 silverdragon
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"China’s biggest banks may fall short of loan targets for the first time in at least seven years as an economic slowdown crimps demand for credit, three bank officials with knowledge of the matter said. A decline in lending in April and May means it’s likely the banks’ total new loans for 2012 will be about 7 trillion yuan ($1.1 trillion), less than an estimated government goal of 8 trillion yuan to 8.5 trillion yuan, said one of the officials, declining to be identified because the person isn’t authorized to speak publicly. Banks are relying on small and mid-sized companies for loan growth after demand from the biggest state- owned borrowers dropped, the people said. The drying up of loan demand attests to the severity of China’s slowdown and may add pressure on Premier Wen Jiabao to cut interest rates and expand stimulus measures. The economy may grow in 2012 at its slowest pace in 13 years, a Bloomberg News survey showed last week, as Europe’s debt crisis curbs exports, manufacturing shrinks and demand for new homes wanes."

WHAT A PILE OF CRAP!

Beijing isn't letting the banks loan to small and medium sized enterprises, we are all growing at fantastic rates of growing with cashflow and by emptying our personal bank accounts.  No one has any debt because the banks wont loan to anyone.

Why would you comment on China if you are unaware about the basics?

Sun, 05/27/2012 - 06:35 | 2466861 Non Passaran
Non Passaran's picture

STFU, silverdragon.
- GoldenDragon
P.S. And read comment 2466676, maybe you will learn something

Sun, 05/27/2012 - 07:41 | 2466886 Arthur Borges
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You're half right but only half so because folks here much prefer to borrow from each other. You not only save on fees & interest but interpersonal lending is also seen as an excellent way to consolidate bonding between friends and that goes back a very long way: China has a long history of natural & manmade disasters written into the DNA here and everybody knows that when the schlitz hits the fan, your personal survival depends largely on who will go to the wall for you. The answer is friends and family. The word "friend" here is not used lightly at all.

Sun, 05/27/2012 - 12:53 | 2467258 guinea
guinea's picture

Why do you intentionally spread propaganda?  Everyone knows China has a huge shadow banking system.  There are factory owners who disappear and hide like fugitives because they can't pay off the loan sharks.

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