The strength of the American economy this decade has been remarkable. (Two-year chart of 30 year bond yields from Yahoo.)
Despite policies which seem feudal in intent, economic growth has continued, housing prices have remained stable, and the stock market has gone to new highs.
Why? China.
It has been China’s continuing willingness to recycle our trade deficit into U.S. bonds, at low interest rates, that has kept the whole world afloat. (They are also recycling our rising oil prices, at some minor cost for inflation.) Chinese leaders care about stability above everything else (wouldn’t you given the history of the last century) and have thus accepted an inherently de-stabilizing system in the hope of righting what they consider a grave injustice.
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That injustice was the colonial grip the West held on China through
most of the 19th century, and which (Chinese feel) the U.S. held in the
first half of this century. All those U.S. 30-year bonds represent
leverage. They prevent all American politicians, no matter their true
feelings, from so much as questioning Chinese policy. Despite all the
talk of wanting a lower Yuan, Chinese leaders know this could cut the
value of those bonds, eat into hard-won principal. So they keep the
machine going.
But the machine can’t keep going. The structure is inherently
unstable. American demands for both guns and butter are pushing debt
demand beyond even what the Chinese can bear. Thus interest rates have
edged upwards. That reduces the stability of the system, in part by
dropping the value of older bonds.
There’s another American force driving us to recession, of course.
The housing crisis. House prices fall quite, quite slowly until you
reach a sudden capitulation, at which point they crash. That
capitulation has not yet happened, but market players can see it
approaching, as foreclosures rise, as buyers are pressed by tougher
lending requirements and rising prices for money. (Have you noticed how
the DiTech "People are Smart" rate has climbed 50 basis points since
the commercials first started airing a few weeks ago?)
I don’t have to tell you what rise gas prices do to family budgets.
Already I find restaurants emptying out. Already stores like Wal-Mart
are reporting "soft" sales. With deaths in Iraq, floods and droughts,
plus no Happy Meals, it sure feels like a recession even if CNBC denies
it.
But there is another reason for instability. Pollution. The greatest
source of instability in China today is pollution. Have you tried to
breathe in Beijing or Shanghai lately? Don’t. Tried to swim in a
Chinese river, or by the sea? Don’t. Checked the quality of the soil
lately? Don’t.
China has a crying need to spend on technology to deal with its
pollution problem, and with the general problem of hydrocarbons. While
our War Against Oil section
has demonstrated some interesting advances, few have yet reached the
market. We don’t have what they need. Without goods to soak up Chinese
demands for spending, we have big trouble.
Thus, bond yields are finally rising. If China allows the Yuan to rise in value, the equity value of its U.S. bonds will drop still further.
The losses from this will be enormous. The end.
Even a hint of this approaching reality is going to be enough to
spook the stock market, which has a hair trigger. That’s the last
source of rising wealth in the country.
One more thing. The policy assumptions of both political parties in this country are based on continued stability. Has Hillary Clinton addressed the question of getting us out of recession yet? John Edwards? Fred Thompson? Beuller?
