Debt Deflation: Is the Dragon Cornered?
“If history teaches anything, it’s that ignoring the obvious rarely ends well.” – Anonymous
What happens when the world’s second-largest economy plays chicken with a debt spiral? As of December, China’s 10-year bond yield has slipped to a jaw-dropping 1.74%, a historic low.
Beijing is pulling every lever in its arsenal—quantitative easing, currency manipulation, you name it. The goal? Stimulate growth. But here’s the question no one’s asking: at what cost?
Irving Fisher’s debt deflation theory—written nearly 90 years ago—feels disturbingly relevant today. Over-indebtedness leads to liquidation. Liquidation triggers panic selling. Panic selling crushes asset values. Deflation kicks in, and debt becomes unbearable. Rinse and repeat. Sound familiar? The bond market thinks so.
History Echoes
In 2008, yields like these preceded the financial earthquake we now call Lehman.
Fast forward to today: China’s bond market is sending a similar distress signal, but the stakes are global. Western institutional investors have abandoned Chinese equities, leaving them at their cheapest valuations in a decade.
The KraneShares CSI China Internet ETF (KWEB) is trading at levels that scream “crisis” to some and “opportunity” to others.
But here’s the kicker: this time, it’s not just about China. The world’s financial ecosystem is deeply intertwined. Could Beijing’s economic chess moves—devaluing the yuan, front-running global tariffs—be the first domino in a global economic spiral?
China’s policymakers know the stakes. A full-throttle monetary stimulus might debase the yuan, dilute tariffs, and give its export-driven economy a lifeline. But Fisher’s theory reminds us that the cure often creates its own disease. If deflation takes hold, even the mightiest dragon can stumble.
Are we witnessing the opening act of a global debt-deflation crisis? Or is this the boldest gambit in modern economic history? The answer will shape markets—and portfolios—for years to come.
👉 Read our full analysis here to uncover why the bond market is flashing red and what you can do to prepare.
Cheers,
Capitalist Exploits