Subscribe to John Mauldin's
FREE Publication:

Thoughts From the Frontline

Sign up for John’s free weekly letter and join 1 million of his closest friends.

We will never share your email with third parties

Thoughts from the Frontline

China’s Minsky Moment?

March 22, 2014

In speeches and presentations since the end of last year, I have been saying that I think the biggest macro problem in the world today is China. China has run up a huge debt, and the payments are coming due. They seem to be proactive, but will it be enough? How much risk do they pose for the global system?

This week as I travel to Cafayate I have asked my young associate Worth Wray to write up his research and our conversations on China. Worth has lived in China; and with his (and my) access to people with their fingers on the pulse of China, he has come up with some valuable insights. The hard part for him was to keep it in a single letter. China is a such a huge topic…

Discuss This

6 comments

We welcome your comments. Please comply with our Community Rules.

Comments

Ronald Nimmo

March 26, 2:37 p.m.

To Tom Dietsche:  I agree with you that much advanced technology has come from research done by government agencies and their private sector contractors. Such organizations as NASA and the AEC are examples. However, it is also true that these agencies were closely tied in with the military. Most of the astronauts, and all of the original ones, were military officers. The rockets used to send up NASA spaceships were originally ICBM’s. Later designs, such as the Saturn booster, were specifically designed for NASA but based on ICBM technology. NASA space station projects have military objectives as well as civilian research purposes in mind, even if not publicly acknowledged. I wouldn’t be surprised if NASA had been involved in the Star Wars anti-missile research program of the 1980’s. The Internet and World-Wide Web evolved out of a partnership between universities and the Defense Advanced Research Projects Agency, with defense contractor Bolt, Beranek, and Newman researchers playing a crucial R & D role. The AEC co-operated closely with the Defense Department and defense contractors in building nuclear bombs and warheads as well as with electric utilities in building nuclear reactors for energy generation.
  John’s statement is a kind of convenient oversimplification, but your comment fails to acknowledge the very complex relationship between civilian and military agencies and each of their interactions with private-sector contractors, many of which themselves were ambiguous in terms of classification into civilian or military of the type of work they performed for the government.

Tom Dietsche

March 24, 6:43 p.m.

re: “All progress comes from the creative minority. Even government-financed research and development, outside the results-oriented military, is mostly wasted.”

That is just another big right-wing LIE. Many of the advances in tech businesses in the last few decades were based on research done by NASA and other federal research agencies in the 1960’s and 1970’s. Do your research before making such stupid false claims. Dumb conservatives, your narrow-minded beliefs prevent you from examing the facts and constructing arguments based on facts. Mythology and faith won’t get you to the promised land in reality, only in your false dreams.

Ronald Nimmo

March 23, 2:34 p.m.

I don’t think China is the engine that drives growth in the world. I think it is the vacuum cleaner that sucks up growth from everywhere else and re-allocates it to itself. The collapse of the Chinese economy will lead to temporary distress for commodity- exporting countries, but it will encourage a wonderful resurgence in manufacturing in the places which were deserted in the stampede to exploit the low cost, low regulation structure of China. Production will be re-allocated more fairly and reasonably across the world, which will result in a rise in incomes for the working people of first and second world countries. The Chinese “engine” was a major means whereby wealth was concentrated in fewer and fewer hands. So the decline of this “engine” will be a financial blessing for the Main Streets of the rest of the world.

Rattan Kumar

March 22, 8:47 p.m.

Big government is in control across the world and they warp the rules to suit themselves, showing they can ‘kick the can’ a lot further down the road than anyone dreamed. So China has huge debt, suppressed interest rate, bankrupt banks, (sounds familiar?) et al. So what? Who’s going to call them out?

Yes, ‘at some point’ it will matter. ‘At some point’ we’re all dead.

Worse, I can’t quite figure out this conundrum (mind game): Japan crashes and burns (say), so Yen drops (against Euro, USD, CHF, etc.), knock on effect Euro crashes (against Yen, USD, CHF, etc.), so USD crashes, so…..
Net effect? Yen exchange rate after 3 crashes same as before crashes? Euro exch.rate same? USD exch.rate same? (Ignoring slight changes due to crash effects between currencies.)

How does this effect Main Street except for the (brief - hopefully) interval between? Worldwide recession as manufacturing and consumption drop? Isn’t that already happening? Slower in some countries / areas, faster in others? A re-set to a new (lower) ‘Normal’. Nothing which says it has to happen only country by country - could be sector by sector across countries.

Sorry if I seem dumb - I am.

mcar4u@aol.com

March 22, 2:29 p.m.

I am not sure how far I would trust with someone who quotes Carmen Reinhart and Kenneth Rogoff as authorities on any subject.

Overall though I think it comes down to politics in China. Will the government do what is necessary to maintain order. The Chinese have the money. I think that the Chinese government will come out the other end a little worse for wear but still in control.

tugboat@bresnan.net

March 22, 7 a.m.

All the while we are watching the tiger in front of us, there is a bear in the bushes behind us.  Shakespeare’s quote indeed!  After Putin’s Anschluss of Crimea, we may be focusing more on the restlessness of the “abused” Russian minorities of the “near abroad” than the insolvent banks of China.