Not Needing US Consumers? No Chance. China Slowdown Has Arrived

The slowdown which many economists predicted would never happen is here. China’s economy is coming to a grinding halt. Today the reports on the export front signaled just how bad things have really become in China:

From the WSJ:

China’s customs agency said Wednesday merchandise exports in February plunged 25.7% from a year earlier. That is one of the biggest drops on record, and extends the 17.5% fall in January for a fourth straight monthly decline. Imports declined a slightly less dramatic 24.1%, thanks in part to government spending, which other data issued Wednesday showed picking up in February. That left a monthly trade surplus of $4.84 billion - the smallest in three years. The number - just a fraction of January’s $39.11 billion - reverses a string of record surpluses in recent months.

The monthly trade surplus figures of $4.84 billion down from January’s $39.11bbillion. These numbers are gigantic. China has been purchasing Treasury bonds from us to finance the expansion of our balance sheet. They’ve been doing this with their excess reserves. The news today is really disturbing. China has less free cash flow at their disposal to finance our debt.

Many economists had been espousing the decoupling argument. The suggestion being that Asian economies have grown large enough to “de-couple” from the US economy. In other words, we don’t need Uncle Sam’s buying power any longer. This was the “sales pitch” for many Wall St. wirehouses that was given to prospective investors when they were being advised to invest money in non-US assets to diversify their portfolios. It’s now becoming evident that nothing has really changed.

Asian and European economies NEED the US consumer. The US consumer is not spending as a result of restrictive credit policies. The rest of the world (including China) is feeling it - through reduced surpluses.

Unfortunately, the rest of the world’s problems will come back to roost in the USA. China and Japan will stop buying our bonds and we will have “hyperinflation”. Rates will skyrocket and the Fed will lose control of inflation. Gold will perform well in this environment and most other commodities will also increase in US dollar terms.

Subscribe by RSS Subscribe by Email