A very interesting perspective - Thanks. It seems to me that we have crossed a sort of macro rubicon in 2008 (hence the title of your Substack?) Both China and the West appear to be stuck in a doom loop as the debt driven post Bretton Woods period appears to have ended with a bang at the GFC. Both China, the US and Europe are now transitioning to an economic mode of competition that relies on fiscal deficit spending combined with various protectionist measures. I wonder therefore if the commodity/dollar doom loop that you describe might now be somewhat different - As you indicate deflation in commodity prices begets falls in currencies of the producers etc which causes flight to safety of …. The USD?? But post GFC - Is the USD really safe given the increasingly apparent fiscal dominance and financial repression policies now being enacted to address the debt to GDP burden. Would the flight to safety not perhaps be increasingly likely to benefit currencies outside of the global fiat $ (fiscal domination / financial repression) doom loop? Ie.Gold and Bitcoin? Things that governments find difficult to debase and default on that are commodities/currency that are not dependent on economic demand but on financial demand for actual safe financial assets. Sorry to drop the Bitcoin bomb here :-). Thoughts?
Yep exactly, macro is dead because the natural business cycle is dominated by independent decisions to accumulate debt.
The flight to the USD is because the debt of EM countries is dominated in USD, this is not really related to the USD itself. The doom loop created by commodities/USD debt/falling local currency and the flight to the USD it creates is purely due to the fact that the debt of those countries is in USD, no other reason. As long as the US isn't in crisis itself, it will happen.
As for gold, BTC and anything else more debt = more money = higher asset prices in general. This affects all asset classes.
My two cents. Your reasoning of fiat devaluation does not contradict to USD strength. Even during fiat devaluation process, USD is still the cleanest shirt in the laundry, compared to all the other fiats.
thank you! very insightful article. is there any possibility the gold to have its own course and not to follow the commodity index? because in a scenario of low world growth and low rates the gold price could increase
Fantastic analysis! Two follow-up questions. (1) What are possible solutions to China's debt problem? Though households and local government have maxed out their leverage, the central government still has room. Then, a possible way out is for the central government taking in the bad debts and leveraging up, relieving other sectors' debt burden, just like what happened in the late 90s, cleaning up the banking system. (2) A natural conclusion I draw from your analysis would be long USDCNY, as the currency will be the relief valve sooner or later, and we are paid while waiting (positive carry). Yet, you did not mention about this. So I'm really curious. Thanks again!
1) The solution for any country in a situation of serious imbalance can only be one thing - a contraction in activity until the economy finds a level that can be maintained without having to accumulate debt. In the west, this situation was helped by having the govt accumulate debt on behalf of the private sector to soften the blow. See here: https://www.macroisdead.com/i/136107545/the-eurozone-as-an-example
Complicating the issue for China is that the banks and the SOE debt is already govt debt in a way, and the volumes are so large that the central govt would struggle to replace it. Foreign capital just isn't an option for China either.
2) Did you post this before the deval? If so, well done! I've posted about this on X a few times - CNHJPY is a concern for China, but this is balanced with a no deval policy for 2 reasons. First is to not upset the US, and second is to contain capital outflows. I can understand the immediate desire to think they want a weaker CNY, but this would have to be matched with stricter rules on getting money out of the country.
I think they recently just did tighten for credit card spending overseas. I don't think that really has an effect compared to the old invoicing methods of getting money out through companies.
I'm not sure if it's 5%, but I don't think it's 1%. The LKQ index is printing at decent levels, and I can't think of a better proxy out there given the reliance on supply side investment. The number is a bit irrelevant anyway, which is sort of the point of the article....keep analysis to things that are real.
1. Excellent way to put it!
2. Yes, and I think what ties into that is their obvious competitive streak with the US - if you "own" them and they are dependent on you then its proof that you are rising as a superpower. It's a sign of insecurity.
I'm not sure it will get to the point of taxation, that counters with the implied promise between the CCP and the people to maintain absolute power. The USSR will be a better template. China is nowhere near that point though....the fall in the USSR was preceded by years of investment far less than the depreciation of its assets, so it spent many years crumbling before things came to an end.
I have an issue with this definition of "savings". For them to be true savings, the debt (i.e. investment) that matches it must be "money good", otherwise it's all an illusion.
Any country can create savings by creating collateral in the form of investment and maintaining the interest payments through other means, which in this case is subsidies from the household sector.
Current suppression of the household is a very real tax, agree. My point was that the extra level of direct tax or suppression would be far too large to deal with the problem at hand to avoid a debt sustainability problem.
For the American the adage "you get what you pay for" is always true. The cheap TV has other not-so-visible costs associated with it.
High debt societies are always pressure cooker type environments. High asset prices relative to the value of labour and high inequality take a toll on humans.
A very interesting perspective - Thanks. It seems to me that we have crossed a sort of macro rubicon in 2008 (hence the title of your Substack?) Both China and the West appear to be stuck in a doom loop as the debt driven post Bretton Woods period appears to have ended with a bang at the GFC. Both China, the US and Europe are now transitioning to an economic mode of competition that relies on fiscal deficit spending combined with various protectionist measures. I wonder therefore if the commodity/dollar doom loop that you describe might now be somewhat different - As you indicate deflation in commodity prices begets falls in currencies of the producers etc which causes flight to safety of …. The USD?? But post GFC - Is the USD really safe given the increasingly apparent fiscal dominance and financial repression policies now being enacted to address the debt to GDP burden. Would the flight to safety not perhaps be increasingly likely to benefit currencies outside of the global fiat $ (fiscal domination / financial repression) doom loop? Ie.Gold and Bitcoin? Things that governments find difficult to debase and default on that are commodities/currency that are not dependent on economic demand but on financial demand for actual safe financial assets. Sorry to drop the Bitcoin bomb here :-). Thoughts?
Yep exactly, macro is dead because the natural business cycle is dominated by independent decisions to accumulate debt.
The flight to the USD is because the debt of EM countries is dominated in USD, this is not really related to the USD itself. The doom loop created by commodities/USD debt/falling local currency and the flight to the USD it creates is purely due to the fact that the debt of those countries is in USD, no other reason. As long as the US isn't in crisis itself, it will happen.
As for gold, BTC and anything else more debt = more money = higher asset prices in general. This affects all asset classes.
My two cents. Your reasoning of fiat devaluation does not contradict to USD strength. Even during fiat devaluation process, USD is still the cleanest shirt in the laundry, compared to all the other fiats.
Great as always. Thanks.
thank you! very insightful article. is there any possibility the gold to have its own course and not to follow the commodity index? because in a scenario of low world growth and low rates the gold price could increase
Gold as a precious metal definitely does it's own thing...in this case it has some exposure to China but nothing like the commodities I've mentioned.
Fantastic analysis! Two follow-up questions. (1) What are possible solutions to China's debt problem? Though households and local government have maxed out their leverage, the central government still has room. Then, a possible way out is for the central government taking in the bad debts and leveraging up, relieving other sectors' debt burden, just like what happened in the late 90s, cleaning up the banking system. (2) A natural conclusion I draw from your analysis would be long USDCNY, as the currency will be the relief valve sooner or later, and we are paid while waiting (positive carry). Yet, you did not mention about this. So I'm really curious. Thanks again!
1) The solution for any country in a situation of serious imbalance can only be one thing - a contraction in activity until the economy finds a level that can be maintained without having to accumulate debt. In the west, this situation was helped by having the govt accumulate debt on behalf of the private sector to soften the blow. See here: https://www.macroisdead.com/i/136107545/the-eurozone-as-an-example
Complicating the issue for China is that the banks and the SOE debt is already govt debt in a way, and the volumes are so large that the central govt would struggle to replace it. Foreign capital just isn't an option for China either.
2) Did you post this before the deval? If so, well done! I've posted about this on X a few times - CNHJPY is a concern for China, but this is balanced with a no deval policy for 2 reasons. First is to not upset the US, and second is to contain capital outflows. I can understand the immediate desire to think they want a weaker CNY, but this would have to be matched with stricter rules on getting money out of the country.
Thanks for your reply 👍
I think they recently just did tighten for credit card spending overseas. I don't think that really has an effect compared to the old invoicing methods of getting money out through companies.
Interesting outlook here, dunno how trustworthy the source is as I don't cover industrials, but interesting nonetheless: https://gmk.center/en/posts/chinese-steel-market-consequences-of-the-great-leap/
I'm not sure if it's 5%, but I don't think it's 1%. The LKQ index is printing at decent levels, and I can't think of a better proxy out there given the reliance on supply side investment. The number is a bit irrelevant anyway, which is sort of the point of the article....keep analysis to things that are real.
1. Excellent way to put it!
2. Yes, and I think what ties into that is their obvious competitive streak with the US - if you "own" them and they are dependent on you then its proof that you are rising as a superpower. It's a sign of insecurity.
I'm not sure it will get to the point of taxation, that counters with the implied promise between the CCP and the people to maintain absolute power. The USSR will be a better template. China is nowhere near that point though....the fall in the USSR was preceded by years of investment far less than the depreciation of its assets, so it spent many years crumbling before things came to an end.
I have an issue with this definition of "savings". For them to be true savings, the debt (i.e. investment) that matches it must be "money good", otherwise it's all an illusion.
Any country can create savings by creating collateral in the form of investment and maintaining the interest payments through other means, which in this case is subsidies from the household sector.
Otherwise agree on the general picture.
Current suppression of the household is a very real tax, agree. My point was that the extra level of direct tax or suppression would be far too large to deal with the problem at hand to avoid a debt sustainability problem.
For the American the adage "you get what you pay for" is always true. The cheap TV has other not-so-visible costs associated with it.
High debt societies are always pressure cooker type environments. High asset prices relative to the value of labour and high inequality take a toll on humans.