The veil is being ripped... the Shanghai stock market crash reveals what the global financial markets would not dare admit: Chinese growth has vanished. Everyone was trying to believe that the official rate of 7% was real, that we could pin our hopes on it, that it would be the engine of the global economy... Well, that belief crumbled on Monday, August 24. Rather, as far as Chinese growth is concerned, if we look at physical data such as railroad freight or power consumption, it stands at only 2-3%. We can kiss goodbye to any hope of recovery!
Political leaders and economists worry about an eventual propagation of this Chinese slowdown to their country... well, I’ve got news for them, it’s already happened! Europe and Japan didn’t wait for the Shanghai crash to occur to show zero growth, and neither did the emerging countries before they got into a crisis, nor the United States to painfully navigate a mere 2% on average.
What this crisis reveals is the blatant lie about growth being shared all over the world. Since the 2008 crisis the financial authorities keep selling us this famous “recovery” due to appear on a street corner any minute, whereas this “recovery” is being financed by “quantitative easing” in the United States, Japan and Europe, or by the building of infrastructures and real estate in China. Despite all that, this self-proclaimed growth is not gaining ground anywhere. This is the terrible truth that markets are starting to digest, while more turmoil is to be expected.
But instead of worrying about a so-called risk of global slowdown – which is already here – perhaps we should focus on other market components... China has recently devaluated its currency on several occasions, and it looks like we are entering a real currency war. No one wants to see one’s currency go up, thinking that a weak currency will bolster exports, and then growth. Only the US dollar is higher in relation to other currencies, but the Americans aren’t too keen on a strong currency, and it is possible that they try to put an end to this strength soon (the Fed could, once again, delay its formerly planned rate hike...).
And if currencies start to fail, bond holders will start to worry. It is one thing not to earn any interest, or hardly, but quite another to see the real value of one’s assets plummet. The sovereign bond market may well be the next one to tremble. If we add to that the strong and prolonged decline in the price of commodities, which brings its lot of revenue loss for exporting countries, the global economic picture is becoming quite discouraging. This stark reality is still not being perceived in full by the markets, but it will come.
When all hopes of recovery have finally vanished entirely, what will be left? Liquidity, more liquidity, of the sort created by all the different QE plans... but then, the coming crash will make much more noise than what we heard on August 24, count on it. What is happening today has its roots in the 2008 crisis, that was never resolved in depth, but only plastered over with printed money. Instead of balancing the budget by reducing public spending (not by raising taxes), instead of fighting against “crony capitalism” (especially in finance), nations chose to continue to spend and play with the currencies. From now on, it seems that all subterfuges are drawing to an end... Brace yourselves!
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Philippe Herlin Finance Researcher / Member of the Goldbroker.com Editorial Team
Philippe Herlin is a researcher in finance and a doctor in economics of the Conservatoire National des Arts et Métiers in Paris. A proponent of extreme-risk thinkers like Benoît Mandelbrot and Nassim Taleb, and of the Austrian School of Economics, he will be bringing his own views on the actual crisis, the Eurozone, the public debts and the banking system. Having written a book on gold that has become a reference (L’or, un placement d’avenir, Eyrolles 2012), he wishes to see gold play a growing role in our economies, all the way to its full re-monetization.