The China Syndrome: The Coming Global Financial Meltdown

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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3 comments on “The China Syndrome: The Coming Global Financial Meltdown
  1. Randy says:

    But these are ALL just some phony baloney bookkeeping entries that were conjured up out of thin air!! There is no real wealth being transferred anywhere, it’s just some fictitious numbers that were created out of thin air!! How can you buy anything with bad checks or without worth fiat paper currencies?!?! You CANNOT!!


  2. If you look at the bigger picture, things are really simple:
    – interest rates on capital (business profits) have been higher than economic growth throughout history.
    – so, capital grew faster than the economy, and of course, wages, which means that wages in the end need to go down in order to give room for capital to grow.
    – this cannot work forever because who is going to buy all the stuff that this capital produces?
    – therefore, profits went down and interest rates had to go down.
    – this allowed people to go further into debt, to provide more room for capital to grow (and remember that someone’s debt is someone else’s capital).
    – we had a lot of deregulation and went of the gold standard too, so it was possible to create far more debt than otherwise had been possible.
    – But this cannot work forever.

    What we have now is too much capital and too much debt and too much reckless lending so that a financial implosion is imminent.

    The solution is to charge a tax of 0.5 to 1.0% per month on currency (cash and central bank money) and to ban charging interest on loans.
    – then it will be attractive to lend out money at zero or negative interest rates because you can evade the tax in this way.
    – the tax on money will provide the economic stimulus as the people that have a surplus will be encouraged to spend.
    – the maximum interest rate of zero will curb reckless lending because there is no reward for taking excessive risk.

    This is the solution and not promoting it could be a crime against humanity. The Great Depression caused World War II and World War III could be worse. So, it is up to you now.