Today's very remarkable analysis from Albert Edwards presents a stunning spin on the China-US Nash Equilibrium, concluding that wholesale tariffs with China are now inevitable: "If another round of credit-fueled investment is about to be unleashed onto a global economy, already on the verge of deflation " it will simply not be tolerated. Watch the trade data closely. Watch the US unemployment rate closely. The US public is on the verge of revolt which is increasing likely to end in across-the-board tariffs." Why has the SocGen strategist come to this conclusion? Simple - he now believes that "China is becoming a malevolent influence (my words) on the global economy and strong action is necessary." As to who gets to buy US bonds should China start a boycott or outright dumping? Who else: "Why, Mr Bernanke is just waiting for his chance."
The core if Edwards' argument is that the US public is angry. And we agree: "Some 42 million Americans were in receipt of food stamps in July, up some 18% yoy (see chart below). Make no mistake, the government isn't throwing money at people willy-nilly - those in receipt of stamps are on the poverty line, currently defined as a 2 adult and 2 children household having a net income of $22,056 p.a." And what is the global regime like in the face of this ongoing social deterioration? In a word - ugly:
Chinese foreign exchange reserves are rising at a record pace in order to maintain the yuan/US dollar peg... meanwhile the US is now running a record deficit with China on the latest data (see chart below - we run the data through Datastream's seasonal adjustment and the story is the same)... and meanwhile Chinese Premier Wen is warning that a 20% yuan rise would bankrupt Chinese companies and sharply rising unemployment would cause a major social upheaval (i.e. exactly what is happening in the US).
Obviously the last thing on China's mind is the welfare of the US consumer (when, ironically, it should be: it is after all still an export driven economy).
As if the US public wasn't enraged enough - resembling an angry bull pawing the ground and frothing at the nostrils " then surely it is best not to wave a large red rag at them. This came in the double-whammy of August#s record US trade deficit with China, and record quarterly $194bn surge in China's foreign exchange reserves to an eye-watering $2.65tr in Q3 (see chart below) - just what the matador ordered!
And something interesting happened today: from having a neutral view on China's mercantilism, Edwards has now gone very bearish.
Having completed my international economics modules at university, I have tried to follow the debate as closely as possible and there is merit on both sides of this fractious argument. But the one big surprise that has caught me out since the credit bubble burst is that the US trade deficit has not fallen further (and vice versa for the Chinese surplus). I am persuaded by recent articles by Martin Wolf in the Financial Times that China is becoming a malevolent influence (my words) on the global economy and strong action is necessary - link. But who will buy all those Treasuries I hear you ask? Why Mr Bernanke is just waiting for his chance.
Two further excellent FT columns by the highly regarded economist, Gavyn Davies (link)and my old friend Peter Tasker (link) point out that due to the currency link a MASSIVE monetary ease will be transmitted from the US to China. No wonder China hiked rates in a surprise move yesterday to counter this threat.
Edward's conclusion, not surprisingly, given the preceding, is that should China launch more of the same policies, the US will simply snap, and the result will be a collapse in two decades of globalization.
The savvy market commentator Frank Veneroso has been at the forefront in pointing out that China?s investment-led model is unprecedented in the history of industrialisation (see chart below). And therein lies the rub. If another round of credit-fueled investment is about to be unleashed onto a global economy, already on the verge of deflation ? it will simply not be tolerated. Watch the trade data closely. Watch the US unemployment rate closely. The US public is on the verge of revolt which is increasing likely to end in across-the-board tariffs.
And we completely agree with Edwards that China is suddenly woefully underappreciating the dramatic change in the global Nash Equilibrium. Now that the Chairman has gone full tilt on QE2 and monetization, the answer to the question of where the billions in new securities will come from that will need to be purchased for the Fed to fulfill its $1.5-$3 trillion UST demand mandate is suddenly crystal clear. Why the US Federal Reserve of course. Let China start dumping its ~$850 billion US bonds in retaliation - well, that's what the Fed better (and perpetual) bid is for. After all Bernanke will be the top holder of US debt within a month anyway.